Hook on a graph.

Compliance and Corruption: How Dishonesty Harms the Economy

By Ryan Whitney, Kayla Teune

November 27, 2018

Many people don’t consider that telling a lie could hurt the economy. Some even believe it is necessary to achieve success, that honest people do not and cannot get ahead. These people may be surprised that the data does not support this belief – and, in fact, suggests the opposite.

First of all, what is corruption? Corruption is a broader form of dishonesty, which includes embezzlement, bribery, nepotism, bid rigging, fraud, money laundering, and other illegal practices.[i] Corrupt practices do not reward individuals for what they produce in the economy. Corruption rewards manipulation and deception, absent of results.

The level of a nation’s lack of corruption is positively correlated to that nation’s economic growth and well-being. The Corruption Perceptions Index ranks 180 countries by public perception levels of corruption.[ii] While perceptions do not always reflect reality with 100% accuracy, perceptions matter to business people and investors who can chose where to put their investment dollars. The least corrupt countries possess some of the world’s strongest economies. They are as follows:

  1. New Zealand
  2. Denmark
  3. Finland
  4. Norway
  5. Switzerland
  6. Singapore
  7. Sweden
  8. Canada
  9. Luxembourg
  10. Netherlands
  11. United Kingdom
  12. Germany
  13. Australia
  14. Hong Kong
  15. Iceland
  16. Austria
  17. Belgium
  18. United States
  19. Ireland
  20. Japan

This is not to suggest that by simply eradicating corruption, a nation will have a top tier economy. But low levels of corruption are one facet of a healthy economy. Compare the economic outlook of the countries above with those in the bottom 20 of the corruption index:

  1. Democratic Republic of the Congo
  2. Republic of Congo
  3. Tajikistan
  4. Chad
  5. Eritrea
  6. Angola
  7. Turkmenistan
  8. Iraq
  9. Venezuela
  10. Equatorial Guinea
  11. Guinea-Bissau
  12. North Korea
  13. Libya
  14. Sudan
  15. Yemen
  16. Afghanistan
  17. Syria
  18. South Sudan
  19. Somalia

As of March 2018, the United Nations has classified half of these countries as Least Developed Countries (LCDs).[iii] Those not on the LCD list but near the bottom of the Corruption Index include Haiti, Zimbabwe, and Venezuela, none of which boast strong economies.

But the trend does not just correlate at the extremes. Take EU member nations for example. Northern and central European nations have thriving economies both today and historically. Their southern neighbors have often lagged behind. Spain and Greece both report unemployment numbers above 15%; Italy holds at 10.9%.[iv] Most of the old Soviet Block trails behind Western Europe in economic growth measures. These nations also rank significantly higher on the Corruption Index than their northwestern neighbors. The Transparency International map shows the difference between the two regions.

Russia offers a grim example of the impact corruption and dishonesty can have on an economy. Some 80% of Russia’s market capitalization is housed in firms linked to public officials.[v] This does not end with businesses. Simply to enter a well-regarded institution of higher education, families must fork out between $10,000 – $15,000.[vi] Estimates vary between $2 billion to $5 billion in annual bribes to professors for grade inflation at Russian colleges.[vii] It should be no surprise that Russia ranks 135 out of 180 on the Corruption Index. Consequently, Russia lacks technological innovation and foreign direct investment (FDI).[viii] According to World Finance, lack of FDI inflows comes from “…an ageing workforce and widespread corruption [which] make it difficult to attract support from businesses abroad.”[ix] It is important to understand that countries, much like Russia, may face stagnant economies for reasons beyond corruption. In Russia’s case it is an aging workforce. In others it may be drought, natural disasters, or prolonged civil war.

But while these other factors may plague an economy, adding corruption to the mix only makes matters worse and unlike natural disasters or weather patterns, corruption is within human control. The Organization for Economic Co-operation and Development (OECD) estimates that corruption can cost a nation more than 5% of its GDP.[x] In United States (US) dollars, that equates to $2.6 trillion each year. The OECD found 5% less investment in countries with high levels of corruption and the World Economic Forum estimates that business costs generally rise 10% in such countries.[xi]

Anti-Corruption Legislation

Financial stagnation and, in some cases, contracting economies have led both developed and developing countries to recognize the need to establish anti-corruption legislation to prevent dishonesty, bribery, and other nefarious practices. Take the United Kingdom (UK) for example. The UK enacted the Bribery Act of 2010 (the Act) to facilitate bribery prosecutions and to promote honesty in business transactions. Since its enactment in 2011, several countries and organizations proclaim this act as the international gold standard for corruption prevention.[xii] Additionally, the corruption perceptions index has recognized the UK as one of several countries that significantly increased their index score since 2012.

The overarching goal of the UK Bribery Act is to promote economic development and fair trade in the global economy. In some capacities, it has similarities with the US’ Foreign Corrupt Practice Act (FCPA), but it differs in the range of scope and severity in penalties.[xiii] Unlike the FCPA, the Act is not solely concerned with the bribery of public officials, but with the bribery of any person in the public or private sector. [xiv]

With the expanded scope, the UK has heightened expectations for corporations to proactively fight corruption and dishonesty. In fact, the Act calls for the prosecution of any business that fails to prevent bribery in their business transactions. If a corporation is found guilty, it will be debarred from public contracts and fined up to 400% of the value gained from the illegal conduct.[xv] Nevertheless, an organization will have a full defense if it can demonstrate that it had adequate and effective procedures in place to prevent the persons accused with committing the prohibited bribery. The UK government facilitated this change in legislation by offering a guidebook, thus giving clarity to corporations on the general principles they should apply in their anti-corruption policies. The UK’s success demonstrates that established policy is an important piece of achieving integrity in business.

Private Sector Compliance

The private sector also plays an integral role in preventing acts of dishonesty and corruption alongside the public sector. Although creating an anti-corruption compliance program may seem overwhelming, the “Anti-Corruption Ethics and Compliance Handbook for Business” provides a great place for a business to start an anti-corruption program. The handbook provides recommendations and tools for creating and maintaining an effective anti-corruption compliance program. Management’s first major step is to identify risk factors and schemes that are applicable to the particular enterprise. Once management identifies and documents relevant risks, they must define controls to mitigate the risk for these vulnerabilities. This process should be ongoing; companies must modify their anti-corruption policies as they grow.[xvi]

The Role of the Individual and the Case for Honesty

With that said, modern economies require more than just reliable laws and low corruption to thrive. Reliable, cooperative, and honest individuals also aide a nation’s economy and businesses within that economy.[xvii] Global, national, and even local economies hinge on business transactions amongst strangers which require cooperation and pools of financial resources/investment from many individuals – far more than can possibly know each other.[xviii] Economist William Easterly coined the phrase “radius of trust” when referring to how far the trust among individuals will expand. The radius of trust varies from country to country, region to region, and even neighborhood to neighborhood.

Sometimes the radius does not extend beyond the family unit.[xix] In these cases, businesses cannot expand beyond the family radius. If a company cannot trust non-familial employees for fear of theft or fraudulent practices, the business remains limited by the size of the family. This often limits and even stagnates economic growth. This means that the effect of your individual decisions to act ethically and honestly actually extends beyond your own moral presuppositions. Each time you notice that the cashier forgot to ring an item up and you return to the store to correct the error, the community’s economy benefits. When you refuse to inflate your department’s projected budget needs, you help your company and by extension the greater economy. It may be comforting to know that it’s not just government bureaucrats and compliance officers who can combat corruption. Everyday choices by everyday individuals whose actions are then observed – and in many cases modeled – by other individuals can have significant impacts on communities, cities, and even whole nations.

As for those who think otherwise, they will often find their dishonest efforts stymied in market economies where consumers, once fooled, rarely buy again. Even multi-million-dollar scams like Enron come to an end. Within a year of posting record high stock prices, the company filed for bankruptcy and many top executives landed in jail. Markets tend to reward production of goods and services that provide actual value. When that promised value fails to materialize, the scheme crumbles. Economically speaking, it pays a lot more to be honest.

[i] Yermo, J., & Schroeder, H. (2014). The Rationale for Fighting Corruption. Retrieved August 23, 2018, from https://www.oecd.org/cleangovbiz/49693613.pdf
[ii] “Corruption Perceptions Index 2017.” Transparency International – The Global Anti-Corruption Coalition, 21 Feb. 2018, www.transparency.org/news/feature/corruption_perceptions_index_2017.
[iii] “Development Policy and Analysis Division Department of Economic and Social Affairs.” United Nations, Mar. 2018, www.un.org/development/desa/dpad/wp-content/uploads/sites/45/publication/ldc_list.pdf.
[iv] “Unemployment Rate in EU Countries 2018 | Statistic.” Statista, June 2018, www.statista.com/statistics/268830/unemployment-rate-in-eu-countries/.
[v] Sowell, Thomas. Basic Economics: a Common Sense Guide to the Economy. 5th ed., Basic Books, 2015. 396.
[vi] Id.
[vii] Id.
[viii] Ballard, Barclay. “Russia’s Stagnating Economy.” World Finance, 18 July 2018, www.worldfinance.com/markets/russias-stagnating-economy.
[ix] Id.
[x] Yermo, J., & Schroeder, H.
[xi] Id.
[xii] Venkatesan, R. (2015). Confronting Corruption. Retrieved September 6, 2018, from www.mckinsey.com/business-functions/organization/our-insights/confronting-corruption.
[xiii] Gauci, Geoffrey, and Jessica Fisher (2011). The UK Bribery Act and the US FCPA: the Key Differences. Retrieved September 7, 2018, from www.acc.com/legalresources/quickcounsel/UKBAFCPA.cfm.
[xiv] Boggs, Squire Patton (2011). “Bribery Act 2010: Section 7 Guidance.” Anti-Corruption Blog, Retrieved September 10, 2018 from https://www.anticorruptionblog.com/uk-bribery-act/bribery-act-2010-section-7-guidance/
[xv] “Corporate Penalties | The Bribery Act 2010.” Taylor Wessing Website, Retrieved September 10, 2018 from www.taylorwessing.com/bribery/i_penalties_corp.html.
[xvi] “Bribery and Corruption – OECD, Anti-Corruption Ethics and Compliance Handbook for Business.” OECD, UNODOC, the World Bank. Retrieved September 6,2018 from www.oecd.org/corruption/anti-corruption-ethics-and-compliance-handbook-for-business.htm.
[xvii] Sowell, Thomas. Basic Economics, 404-05.
[xviii] Id.
[xix] Id.