Bribery is a two-way street

There’s lots of business and economics news to be angry about, if you choose to be angry. But one story in particular has my attention, and my ire: the news that Siemens paid over $1.4b in bribes to foreign officials to win government contracts. Bribery was a regular part of business practice at Siemens – employees brought suitcases to a cash desk, where they could be filled with up to a million euros to bribe officials. Until 1999, Siemens claimed tax deductions for these bribes, listing them as business expenditures. At least 4,283 bribes were paid, according to the SEC.

Siemens has pled guilty to accounting offenses, though not bribery in US and German courts, agreeing to pay $1.6 billion in fines. Had Siemens been found guilty of offering bribes, they’d have been blacklisted by the US government, which would have cost them billions of dollars in business. Now, reassured by Siemens executives that they’ve put the “black period” of corruption behind them, they continue to be eligible for lucrative contracts.

Many of the payments made occurred in developing nations like Bangladesh, where Siemens admits “it spent more than 5.3 million dollars to win a 40.8-million-dollar mobile phone infrastructure development project.” Needless to say, Bangladeshi authorities are now trying to figure out who received these bribes. It would be a good thing to see that government crack some heads – Bangladesh ranks as one of the most corrupt nations in terms of perception by the global business community.

My friend Fernando Rodrigues argues that indexes like the Transparency International corruption perception index, cited above, miss the point and punish nations where corruption is openly discussed and combatted – he’s got a good point, but perceptions matter as well as companies choose where and how to do business. In countries widely perceived to be corrupt, businesses are more likely to offer a bribe when doing business.

But it’s way too easy to let companies off the hook by arguing that this is simply how business is done in developing nations. Yes, officials in some nations ask for bribes in considering contracts. But Siemens’ behavior reveals that some companies approach contracting with the assumption that they will pay bribes and well-established systems for doing so. It takes two to tango.

For the past decade or so, international aid from the US has focused heavily on “governance”, which includes effort to root out government corruption. Nations that show progress in eliminating corruption are eligible for money via pools of funds like the Millenium Challenge Account – those who don’t are not. This is a worthwhile policy. Corruption damages poor people in multiple ways. When contractors are overpaid to build infrastructure or government systems, ultimately taxpayers pay for those systems. Government officials who take bribes from international contractors ask for bribes from citizens as well, including those least able to pay. Local firms, which already have a tough time competing against international firms, can face insurmountable odds when the foreign firm has access to a million-dollar cash desk… and when local firms don’t get contracts, they don’t employ local employees.

But governance issues need to focus on combatting corruption from international contractors as well. Transparency International maintains a well-known corruption perceptions index… and a much less well-known index: the Bribe Payers Index. Germany registers as the 5th least corrupt on this index, suggesting that Indian, Mexican, Chinese and Russian corporations may be throwing around even more cash in seeking contracts. (Again, this is a perceptions index, and there are all sorts of methodological reasons to be cautious about reading too much into these numbers.) The BPI is a good move towards ensuring that countries and their corporations take some responsibility for their role in corruption in developing nations. So are transparency efforts, like this one at the World Bank where bribe payers are named, shamed and banned on a public webpage.

Daniel Kauffman, a scholar of governance at the World Bank and the Brookings Institution, argues that we’ll only see the elimination of corruption when penalties and incentives line up. “What truly raises the cost of bribing will matter, in contrast with PR-friendly measures that are useless in raising the cost of corruption.” He suggests that successful prosecutions of a firm like Siemens are worth many times more than all the codes of ethical corporate behavior multinational firms have signed. I’d suggest that making sure stories like this are well discussed, and don’t fall off the news radar, is key as well.

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2 Responses to Bribery is a two-way street

  1. jonah84 says:

    Hello Ethan, good topic. In terms of Bribe Payer Index, I don’t have extensive data but from single incident in an Africa country- one of my fellow co-workers was shocked by how blatantly a Chinese company representative was bribing managers-namely bringing stash of cash to office. The representative made no attempt at being low-key about it or any sort qualm about what he was doing.

    Not justifying the German company’s behavior but I guess they feel they have to pay to play…

  2. BRE says:

    In Germany the Siemens bribery scandal has been viewed by much of the German public as the ‘cost of doing business abroad’, especially suitable for countries in the developing world where bribery and corruption are a matter-of-fact in the minds of people all across Europe.

    Of course I disagree, believeing that this German industrial giant should have been ‘taken down’ a long time ago by the U.S. Justice Department and the SEC. But it don’t work that way in the geopolitical world of dealmaking between allied governments, does it?

    The governments of Germany and the U.S.A. need one another in solving other pressing problems around the globe___ such as the ongoing Global Financial Crisis with its rotten roots deeply embedded in New York City and Washington D.C. The corruption and bribery scandal at Siemens AG pales in comparison.

    People who follow news about Africa and other parts of the developing world know that corruption and bribery kills the poorest and robs the rest of a prosperous future. We also know that corruption affects everybody, rich and poor people alike.

    Siemens is/was a big supplier of services and industrial technology to the Government of Sudan under the murderous regime of President Omar al-Bashir. The company’s contacts/contracts in Sudan have had an impact on humanitarian decisions Made in Berlin. The German government’s reluctance under Kanzler Gerhard Schroeder (SPD) and Kanzlerin Angela Merkel (CDU) to impose harsh sanctions on the regime in Khartoum or do anything of real consequence in helping to reign in the violence and genocide in Darfur is probably influenced by German heavyweights like Siemens AG and other major firms with business and investments in Sudan (working through 3rd parties and front companies).

    Of course Siemens’ operations in Sudan is just a drop in the bucket compared to the bribery and corruption the company has practiced for more than five decades all across the African continent. The pisser (irony) in this huge corruption scandal is that Siemens AG is also one of the founding sponsors of Transparency International (headquartered in Berlin). As a matter of fact Transparency International is presently advising Siemens on how to come clean and get through these ‘dark days’ in the company’s history.

    Have a look at how the German magazine Der Spiegel has been reporting the story over the past several months and then compare their coverage with what you have read in the English and American press. See the difference? I do, and how.

    Spiegel Online (English edition)
    Siemens Expected to Settle with the US – 12/15/08
    http://www.spiegel.de/international/business/0,1518,596511,00.html

    PBS Frontline/World Dispatches – Dec 20, 2008
    At Siemens, Bribery Was Just A Line Item by Siri Schubert and T. Christain Miller (see video interview)
    http://www.pbs.org/frontlineworld/blog/2008/12/siemens_bribery.html

    Above article also published at The New York Times and the International Herald Tribune.

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