December 9

Rebecca Regan-Sachs

Slaying the Dragon: How Small Businesses Can Fight Corruption in the Developing World (Part 2)

This two-part series contains highlights from an interview conducted with experts from the Center for International Private Enterprise (CIPE): Aleksandr Shkolnikov, Director for Policy Reform, and Marc Schleifer, Program Officer for South Asia. One of the four core institutes of the National Endowment for Democracy, CIPE works to strengthen democratic institutions worldwide through private enterprise and market-oriented reforms. Special thanks to Oscar Abello for facilitating these discussions. Click here to read the first part of the interview.

Rebecca Regan-Sachs, NextBillion: You have mentioned that CIPE works frequently with business associations to find ways to fight corruption. However, in many developing countries, a large segment of the business sector is informal. If these “shadow economy” enterprises don’t have official association representation, how can they defend themselves against corruption?

Alex Shkolnikov: We’ve actually seen in a number of countries that informal sector associations emerge spontaneously to defend the rights of small business. They act as a self-defense mechanism. So if inspectors come in, you have an association that basically provides protection. They also provide market information, of goods and prices and stuff like that, but they really emerged as kind of a self-defense mechanism.

RRS: But isn’t it risky for undocumented businesses to openly confront government officials?

Alex Shkolnikov: It is. The way I look at it, though, it’s still more difficult to deal with an association than it is to deal with an individual business. If you’re a small vendor, there’s likely nothing you can do to combat corruption, whether it’s public officials, public corruption, or private corruption-some group that does racketeering for instance, just extorting a bribe in order for you to have a market stall.

But it’s a lot more difficult for you to deal with an association because it has a voice. If you think of a market with 200-300 vendors, it’s much more difficult to come in and try to take them out, because it’s the voice of 200-300 people. And that’s why we tend to work with associations, because at the end of the day there’s usually more power in numbers.

But the other way of dealing with corruption is encouraging formalization of business. This is a dual problem. The first problem is actually making official registration of business a process that’s easier to go through, reducing legal and regulatory barriers to becoming formal. But another problem is obviously legal education for small business, because a lot of times people don’t know about the laws, they don’t know what’s involved in complying with the laws, they don’t know where to go to register. So there are two types of things you can do: defend them, and help them formalize.

RRS: How do you address corruption problems that arise with international corporations doing business in developing countries?

Alex Shkolnikov: With multinationals, they have a slightly different set of corruption pressures. With larger companies, you place a lot of attention on internal compliance programs…if you have 100,000 employees, how do you make sure that at least one or two of those employees doesn’t pay bribes? So what a lot of multinationals are really concerned with is making sure internally that they have the right governance compliance and monitoring procedures to ensure that bribery doesn’t take place. So it takes place on the level of education-making sure your employees know the rules and procedures-and investigations: going to your subsidiaries and countries and looking at the financial numbers and making sure you don’t have some [illegal] transactions. So a lot happens on that level.

We are increasingly seeing multinationals more interested in [institutional] changes. However, it’s more difficult for them to do. A lot of companies are somewhat cautious about not getting engaged in politics. Because in a lot of countries when you’re dealing with corruption, you end up dealing with politics, and it’s not something you want to do as a corporation; that’s not your mandate.

Marc Schleifer: The other thing you have to remember about large companies and corruption is that if you have any dollar of transactions that flows through the United States, you’re subject to the Foreign Corrupt Practices Act. And this administration has become increasingly aggressive about FCPA enforcement. There have been a lot of conferences and discussions around the world because a British company with a listing in New York can basically go down for something that a Kazakh subsidiary does while they’re on a business trip in Turkmenistan. So there are incentives for international companies to tighten enforcement.

But when it comes to major corruption, grand-scale corruption, in a lot of countries where we’re seeing the possibility of change is at the local level. It’s administrative pressure on small and medium enterprises, because that’s where you’re able to get something done.

At least with our Russia program, we’re not going to be taking on oil and gas, we’re not going to be taking on national-level political figures. Because first of all, that comes with risk, but second of all it’s harder to have leverage, it’s much harder to actually get stuff done. You have to build from the ground up. If you can get change at the local and regional levels, then you can start building pressure for that grassroots push for reform. So that’s another reason why we sort of don’t deal with major corruption in big international companies.

RRS: What are some success stories of enterprises in developing countries successfully fighting corruption?

Alex Shkolnikov: In Colombia, we worked with the Colombian Federation of Chambers of Commerce on reforming the national procurement law. Now one of the challenges [frequently] is getting the private sector consensus to fight corruption, because at the end of the day, as an individual company, you may benefit from engaging in corrupt transactions. At the same time, as an individual company, there’s nothing you can do. Because if you stand up and you say, “I’m not going to pay bribes in this procurement transaction” but everybody else does, well, somebody else will get the deal and you don’t get anything in return.

So the Colombian companies, through the Federation of the Chambers of Commerce, realized that corruption was a problem in procurement transactions. They basically went out and tried to reform the national law, and they successfully did so. For instance, one of the changes introduced during the reform process was that the bids had to be independently reviewed by the chamber of commerce. So it wasn’t just companies and governments dealing with each other, you had a third party who was sort of a monitor in the process. But one of the things that happened is that they reformed the system-so it put all the companies in a more competitive position.

One of the other more successful programs that we’ve done is reforming public sector administrations in relation to the customs and judiciary in Serbia. What we did there was to work with a local think tank [to identify] what creates opportunities for corruption. So for instance, what they found in the customs agency was that customs officials did not actually know the laws and rules and regulations. So they would make it up as they went along. And the second interesting thing was that there were a lot of processes that weren’t very automated. So there was a lot of paperwork and discretion of public officials.

So two of the things that they’ve done are retraining all the officials within the customs administration on what the rules and the laws and the procedures are, and they also introduced some computer technology, making sure that you don’t deal on the level of a customs official writing on a piece of paper-it’s all automated, it’s all on the computer, and you can follow things through. You know who submitted the paperwork, where it is, when you’re supposed to make a decision. And again, that reduces opportunities for corruption.