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Mike Scher: Let’s hang together to fight graft

When a company suspects a competitor is going to pay bribes, the temptation is to do the same thing. Bribe takers encourage a bribery bidding war. They want the biggest bribe to win the business, not the best price, product or service.

The way to stop the bribery arms race is for all of the competitors to refuse to pay the bribes. This collective action is the key to fighting local and global graft.
 
Acting collectively to resist corruption takes trust and leadership. Where will these ingredients come from? Here are a few sources.

Recently I was lucky enough to learn more about collective action at the International Center for Collective Action at the Basel Institute on Governance. Gemma Aiolfi, head of the ICCA and a facilitator of collective action projects, has said building up trust is often the hard part. But with a lot of patience it works when a neutral mediator guides the competitors toward their common interest.

The founder of the Basel Institute, Professor Mark Pieth, recently released a collection of essays that is the best guide to the achievements and challenges of the collective action movement. To understand this field, start with Collective Actions: Innovative Strategies to Prevent Corruption. Pieth has been at the center of all important  collective action initiatives since the beginning.

In the 1990s, a founder of Transparency International, Peter Eigen, convinced major worldwide construction companies to agree to stop paying bribes. Eigen tells his story in this amazing TED video.

New media spreads information and helps build a compliance community. Eigen’s TED video inspired Richard L. Cassin, the founder and editor of the FCPA Blog. Cassin’s work and the passion of the FCPA Blog’s readers have motivated me.

The Siemens Integrity Initiative is an over $100 million fund set up to run for fifteen years to find, nurture and grow collective action initiatives. Run by Sabine Zindera, a former founding member of Siemens Venture Capital Fund, the Siemens Integrity Initiative is in the second round of creating and funding collective action projects. Implementing 30 projects in more than 20 countries, Siemens is “witnessing evidence of impact: the much needed change of rules, policy and behavior to enable clean business. Through impact evaluation, you are capturing the difference a project makes on the fairness of the market conditions, on the business environment and ultimately also in people’s lives.”

The B20 (a working group under the G20) is recommending collective action by business and government in new partnerships to incentivize and reward anti-corruption actions. Brook Horowitz, a leader of the B20 anti-corruption working group, runs the NGO IBLF Global, that works to “create the necessary consensus for action — collective action.”

A big test for collective action will be Walmart’s settlement of pending bribery investigations. Will the world’s largest retailer embrace collective action to protect its new commitment to bribe-free business?

Finally, education is a core element of collective action. The International Anti-Corruption Academy (IACA) in Vienna, Austria, brings all kinds of professionals together, including compliance officers, prosecutors, government regulators, the media and auditors.

The IACA’s founder and dean, Martin Kreutner, told the participants at the collective action conference in Basel that when the IACA brings all kinds of professionals around the table and lets them talk, good things will happen.

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When Benjamin Franklin was about to add his signature to the Declaration of Independence of 1776, he said “We must all hang together, or assuredly, we shall all hang separately.”

Franklin was warning the quarrelling Americans that unless they united, they would be hanged by the British, one by one, for treason. We know what happened. They acted collectively and created a new republic that still stands.

There’s a lesson in this for the compliance and ethics profession. We can all hang together by acting collectively or we can lose, one by one, to the bribers and corrupters.

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This post is adapted from an essay I contributed to the IACA alumni newsletter.

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Michael Scher is a senior editor of the FCPA Blog. He has over three decades of experience as a senior compliance officer and attorney for international transactions. He can be contacted here.

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4 Comments

  1. Great article, Mike! Your articles are always thought provoking excellently written.

  2. Thank you, Michael. Clearly, no one of us can combat corruption. It takes collective action and practical partnerships. Together we can make a difference.

    There are models and exemplars from which we can draw strength. The Philippines, under President Aquino, have embarked on a series of actions that, taken together, evidences progress. The arrest of former President Arroyo on corruption charges, and the impeachment of the chief justice of the Supreme Court, evidence of a commitment to address public sector malfeasance. The SEC has required that all large cap public corporations be rated by a consortia of review bodies regarding governance. President Aquino will once again keynote in September at the 4th annual Ethics Summit, where over 2,000 SMEs have signed ethics pledges. As a result, capital has been flowing into The Philippines, GDP is growing at 7%+, the country has received investment grade ratings, and the country Transparency International rating has fallen dramatically. For sure, more work remains, but the collective action in this emerging market country shows impressive gains from public-private partnerships and action.

  3. It's a classic Prisoner's Dilemma game: If participants believe everyone is corrupt, then it's a race to see who can get there first with the most and get the deal. Costs are higher for everyone because of the corruption so it's a suboptimal outcome even if you don't consider the risk of getting caught. The optimal collective outcome is a fair market: if no one is corrupt, everybody wins (except the corrupt officials) in the sense that competition is fair and costs of doing business are reduced. Unfortunately, what makes effective collective action so difficult is that if participants believe *anyone* is corrupt, it's the equivalent of the "everyone corrupt" scenario. As long as there is uncertainty about any "other prisoner's" strategy, there is incentive to defect.

    So as long as that uncertainty exists — and it will never go away — we can't rely only on rational decision-making and incentives to get the job done. Collective action is necessary, helpful, laudable and will make a difference. If only it were a complete answer.

  4. My thanks to the readers who commented above. My intention is to create dialogue through posts; it's gratifying when readers can take the time to present their points of view. I encourage others to join in frequently.

    Keith Darcy's example of current collective actions in the Philippines illustrates how it is indeed possible and practical for business entities to work closely in partnerships with government officials, including regulatory agencies, to achieve change. There are benefits to both sides of that partnership and for the public as well. – a rising tide lifts all the boats. It's good to have models of the multiple, positive outcomes that can come from a well-planned collective action partnership.

    My thanks to Scott Killingsworth for alerting readers to the fundamental principle of the Prisoners Dilemma and its application to collective action. There is fortunately a new and rapidly growing body of research about behavioral decision-making, especially how our emotions override rational thinking despite incentives. Killingsworth's articles explaining how this research applies to compliance problems is highly recommended, in particular his papers for the Rand Center compliance conferences. (They can be found through my posts on RAND or by web search.) Some collective action projects build in a neutral party to enforce the competitors' agreement not to cheat. This may help on the uncertainty problem he raises. The multiple forms of collective action projects are explained in the essays by Pieth and via the Basel IACA , as noted in the post.


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