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The business community can reduce corruption risk by improving regulatory quality

Contacts with a government in the course of conducting every day business raise the risk of providing something of value to a foreign official. This risk can be minimized via appropriate controls and efforts on the part of industry groups, through collective action, to improve regulatory quality.

In an article in Ethisphere, Matteson Ellis highlights the regulatory hurdles to obtain building permits and licenses in São Paulo, Brazil, citing the lack of clarity in regulations as an opportunity for some government authorities to manipulate the rules for their own personal gain.

This isn’t a problem unique to Brazil. It’s played out in many developing markets around the world every day. To mitigate the risk companies often focus on the controls side, such as staff training, audits and monitoring, while little attention is paid to improving the quality of regulations. In other words, tightening the legislation that may promote corrupt activity.

Corporations, through their memberships in industry groups and chambers of commerce, often have the opportunity to review proposed amendments to legislation, policies and guidance by their host country government. In most cases this review is focused on the technical issues and the revised provisions that result in increased costs, such as taxes, penalties and processing fees.

Unfortunately, there is little time spent on analyzing the efficiency of the regulation and reducing the requirement for government interactions, where illegitimate tolls may be requested. These tolls can be well nuanced, such as the suggestion to use a specific contractor as part of local content requirements, where a government official or a family member is a hidden beneficial owner.

While the concept of local content is well intentioned, it has the opportunity to create substantial inefficiency within a foreign company and increase corruption risk. This happens when the implementation is rushed, not allowing enough time for capacity building of local contractors, or when there is a lack of supporting policy.

This needn’t be the case. The use of a regulatory impact assessment, as proposed by the OECD, and a corruption impact assessment, such as those used in the Czech Republic (pdf) and South Korea (pdf), can assist governments to develop more efficient legislation while removing corruption risk factors.

Again, corporations are often in a unique position, via their industry associations, to promote the use of impact assessment tools. Through this effort the message of zero-tolerance, with respect to bribery and corruption, will be clearly communicated to government. Moreover, the use of such tools will enhance the investment appeal of the host country.


Troy Charlton is a Senior Advisor with Hong Kong-based Monkey Forest Consulting. He lives in the Philippines. He can be reached via email here.

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  1. Sounds good in theory, however I would suggest that the well documented, widely reported revolving door between Government and Business does not exist to promote regulatory quality but just the opposite, to ensure a lack of regulatory quality and to reward for having provided a lack of regulatory quality.

  2. @lameslave 13 – so you are suggesting that business would reward government for maintaining a poor regulatory environment, which would reduce efficiency and stifle economic growth?

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