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International business transactions and corruption

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Igor Osyka


I. INTRODUCTION……………………………………………………………………………2


BUSINESS TRANSACTIONS…………………………………………………………….…...3

A. Definition of corruption

B. Causes, costs and consequences of corruption

1. Causes of corruption

a. Socio-political

b. Economic

2. The costs and consequences of corruption.

a. Non-economic

b. Economic

c. Commercial


BUSINESS TRANSACTIONS…………………………………………………………………...9

A. Legal Instruments

1. Foreign Corrupt Practices Act

2. The OECD Anti-Bribery Convention

3. Inter-American Convention


5. Criminal Law Convention on Corruption

6. Civil Law Convention on Corruption

B. Measures Taken by International Organizations

1. United Nations

2. European Union

3. The World Bank

4. International Monetary Fond

5. International Chamber of Commerce

6. World Trade Organization.

7. Transparency International.


V. CONCLUSIONS……………………………………………………………………………..30


After collapse of the communism in the Central and Eastern European countries, in modern conditions of economic growth, globalization, and new developments in technology, possibilities of doing business around the world have tremendously increased for American businesses. But at the same time and in the same conditions serious obstacles for business activities at the global level have increased too. These obstacles include development of organized crime and corruption in countries with transition. As discussed later in the paper, high level of corruption and criminalization of economy have negative influence not just at countries itself but at foreign and multinational corporations, which have intent to do business in those countries as well. This situation has attracted the attention of the international business community to problems of corruption in international business transactions and demanded some actions, including legislative ones.

For attorneys who are going to practice law in the sphere of international business, it is very important to know about measures taken by the international community and the United States government in fighting and preventing corruption in international business transactions as well as recommendations developed by international organizations in this field. Moreover, the existence of the Foreign Corrupt Practices Act requires an attorney to be aware of corruption everyday in every single transaction especially when dealing with highly corrupted countries. As usual, American companies are trying to avoid conflicts with FCPA and the attorney in the majority of cases has the burden to deal with this.

This paper intents to familiarize attorneys with: modern international concept of corruption and its influence at international business transactions; provisions and effects of FCPA on American businesses in foreign countries; measures taken at the international level to reduce corruption in international business transactions; and some possible practical solutions for doing business in highly corrupted countries.

Part II of this paper briefly analyses general issues of corruption: definition, causes, costs and consequences both for emerging economies and international corporations. The main idea is that corruption mostly effects developing countries in political, social and economic aspects but at the same time it has a very strong influence on foreign businesses too.

Part III describes measures taken at international level to reduce influence of corruption at international business transactions. It includes analysis of international conventions to which United State is a party, FCPA, and measures taken by the main international organizations to reduce corruption in international business transactions.

Part IV of the paper investigates practical solutions of doing business in conditions of highly corrupted environment.


A. Definition of corruption

There are a lot discussions devoted to the understanding of corruption. Different authors express different approaches in defining corruption. The narrowest approach contains definition of corruption as use of public office for private gain. 1

The broad approach contains abuse of not only public office but private or commercial one too. Based on these approaches authors distinguish three big groups of corruption: political, personal and commercial. The basic difference is in the office, power and position, which are abused, and aim of abuses. Political corruption may include bribery, use of governmental offices for private enrichment and substitution of particularistic for universalistic norms of public decision-making2. Personal corruption may include violations of fiduciary duty, mendacity for private gains among friends and insider trading.3 Commercial corruption takes place when a supplier bribes a purchasing agent to induce a sale, a customer pays off an airline clerk to obtain access to first class, a firm’s public relations department pays a reporter to write a favorable story or managers at the top levels of a corporation might be paid to provide inside information on upcoming deals to investors and stock brokers.4

Corruption could have a lot of manifestations, which could be divided into two groups: criminal and civil. Criminal forms usually contain: bribery, extortion (exacting money coercively), fraud (an act of deception deliberately practiced with the view of gaining unlawful advantage), trafficking, embezzlement, (appropriating fraudulently to one's own use what is entrusted to one's care). Civil forms are different kinds of clientelism or patron-client relationships (where individuals use their public offices for personal aggrandizement or to gain favorable advantages for themselves or their friends, relatives).5 The main difference between these two forms is existence of criminal liability for acts of corruption. It’s clear, that corruption is anti-social phenomenon but it is not always a crime.

Some authors look at corruption like at system but not a single act. Such approach considers two analytical points. First, corruption may be represented as following a formula: C = M + D - A. Corruption equals monopoly plus discretion minus accountability. For instance, “whether the activity is public, private, or nonprofit, and whether it is carried on in Ouagadougou or Washington, one will tend to find corruption when an organization or person has a monopoly power over a good or service, has the discretion to decide who will receive it and how much that person will get, and is not accountable.”6 And second, corruption is a crime of calculation, not passion. “There are both saints who resist all temptations and honest officials who resist most. But when bribes are large, the chances of being caught small, and the penalties if caught meager, many officials will succumb”.7

Here we need to distinguish system of corruption and systematic corruption, which some authors discuss too.8 While system of corruption discusses a nature of corruption, “systemic corruption” illustrates the scale of corrupted activity.

A lot of authors don’t pay attention to the distinction between bribery and corruption, what is wrong. Bribery as we can see is narrower then corruption and it’s not always the same. I need to pay attention to this and distinguish bribery from other forms of corruption because major legal documents that will be discussed later contain term “bribery” but not corruption. Bribery, as an act of corruption, always deals with obtaining of illegal payments with abuse of public or commercial office.9 The payment need not always involve the exchange of money (could be other gifts or advantages, such as membership of an exclusive club or promises of scholarships for children, special favors or influence). 10

As an act, despite the form it takes, corruption is always a two-way transaction; it requires a supply side (the briber) and a demand side (the one who receives the bribe). 11

Different degrees of corruption could be highlighted too. Like, for example "petty" corruption and "grand" corruption. “Petty” corruption usually involves small sums paid to low level officials to "grease the wheels" or cut through bureaucratic red tape. Correspondingly “grand” corruption takes place when large multinational companies paying millions of dollars to government leaders or politicians to obtain lucrative business contracts. But, in the author’s opinion this distinction does not mean that some forms of corruption are worse than others. “Indeed, petty corruption which can interfere with the delivery of basic education and healthcare programs, can have very serious consequences, even to the extent of causing many more years of grinding poverty for the world's economically disadvantaged.” 12

B. Causes, costs and consequences of corruption

1. Causes of Corruption

In general, it’s very difficult to deal with things if you don’t understand where they come from and why they exist. That’s why before starting a discussion about measures against corruption it’s important to understand its roots13 It’s like in medicine, before starting a treatment, a doctor must diagnose the patient.

The other important point I have to make is that when we are talking about roots of corruption we mean developing countries where a business is to be done by American corporation. Of course societies in each country with emerging economy are different as well as cultures, governments, mentality of people. An attorney should bear these diversities in mind when dealing with particular country. And it is very good idea to look at specific country’s custom before take some actions. For purposes of this paper, there is no need to go in deep and discuss each developing country separately. I’m taking broad approach and just name causes of corruption in developing countries. Such conditions could cause corruption in any country, not just developing, but for today the majority of these factors or all of them do exist in developing countries.

Causes of corruption could be divided into two big groups: socio-political and economic.

a. Socio-political causes of corruption are following: (a) weak governance of a country; (b) dysfunctional government’s budgets; (c) delays in the release of budget funds, especially when this involves pay; (d) closed political systems dominated by narrow vested interests; (e) use of public office for private gain by senior officials and political leaders; (f) divergence between the formal and the informal rules governing behavior in the public sector; (g) weak accountability, eroded ethical values, inoperative financial management systems resulting in no formal mechanism to hold public officials accountable for results; (h) low and declining civil service salaries and promotion unconnected to performance and a public service long dominated by patron-client relationships, in which the sharing of bribes and favors has become entrenched; (j) civil services receive inadequate supplies and equipment; (k) adequate legislative controls are lacking (a lack of protection for those who resist corruption and special anti-corruption bodies turned into partisan instruments whose real purpose is not to detect fraud and corruption but to harass political opponents); (l) unenforced rules of conduct and conflict of interest with ineffectual watchdog institutions such as ombudsmen, auditors, and the media or absent; (m) international sources of corruption associated with major projects or equipment purchases.14

b. Economic causes of corruption are closely connected with political ones. They are following: (1) existence of trade restrictions leads to payments to governmental officials in order to get import licenses which are in limited quantity; (2) existence of a big number of government subsidies regulate industrial policy, governmental officials strongly involved in price controls; (3) existence of multiple exchange rate practice and foreign exchange allocation schemes leads to attempts to gain the most advantageous rates by bribing governmental officials; (4) low wages in civil services leads to extortion bribes by civil servants to improve their financial situation; (5) natural resources endowments leads to bribes of governmental official to get the best prices in avoidance of government regulations.15

2. Costs and consequences of corruption.

Corruption has very strong effect at political, social and economic life of a country where it takes place. The existence of corruption in this case puts some costs and some benefits of political, judicial, and bureaucratic actions to different members of the society.16

In the field of International business transactions the corruption has an impact at both sides: countries where corruption takes place and foreign companies, which are doing or trying to do business in those countries. Correspondly the country is suffering social, political and economic loses and business suffering from commercial loses. Losses of countries could be divided into two big groups: economic and non-economic.

a. Non-economic losses are following: (a) it undermines democracy by effecting rights of ordinary people and small entrepreneurs; (b) it causes harm to the environment; (c) it retards development; (d) it erodes the moral fabric of every society; (e) it leads to contempt for the rule of law; (f) it is often connected with trans-border criminal activity, including drug trafficking, organized crime and money laundering.

b. Economic loses are following: (1) corruption lowers investment and retards economic growth to significant extent17; (2) it reduces the effectiveness of aid flows through the diversion of funds; (3) it leads to loss of tax revenue and to adverse budgetary consequences; (4) it leads to lower quality of infrastructure and public services; (5) it may distort the composition of government expenditure;18 (6) distorts the allocation of resources and undermines competition in the market place; (7) it harms consumers and taxpayers, develops a threat to taxpayer confidence; (8) country credit ratings drop; (9) it lessens trade with other countries; lowers growth.

c. Commercial loses for the U.S. companies and others because of high level of corruption are following: (A) entrepreneurs suffer higher risks and increased costs of doing business; (B) international bribery results in tens of billions of dollars in lost exports for those who by the rules and seek to win contracts through fair competition; it the ability of businesses to operate in a transparent, honest and predictable environment; corruption hurts suppliers of exporters and impedes international trade. It is estimated that US$ 100 billion is paid out in bribes worldwide every year which is equivalent to nearly twice New Zealand's GDP and it may be just the tip of the iceberg.19


In such conditions of globalizing economy the most important international organizations both political and economic ones started to pay close attention to the problems of corruption. In the period between 1996 and today a lot of legal steps were taken to reduce corruption in international business transactions at international and domestic level. The most important of them will be discussed now.

^ A. Legal Instruments

1. Foreign Corrupt Practices Act.

An attorney working for a firm seeking to do business in foreign markets must be familiar with the Foreign Corrupt Practices Act20. (Further FCPA). In general, the FCPA prohibits American companies from making corrupt payments to foreign officials for the purpose of obtaining or keeping business. Congress enacted the FCPA to bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system. FCPA was amended in 1988 and in 1998.21

The FCPA's basic anti-bribery prohibition makes it unlawful for a firm (as well as any officer, director, employee, or agent of a firm or any stockholder acting on behalf of the firm) to offer, pay, promise to pay (or even to authorize the payment of money, or anything of value, or to authorize any such promise) to any foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. A similar prohibition applies with respect to payments to a foreign political party or official thereof or candidate for foreign political office. It is prohibited by the act to make bribes directly or by intermediaries. The subject of the act is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship that has its principal place of business in the United States or that is organized under the laws of a state of the United States, or a territory, possession, or commonwealth of the United States (referred in the Act as “domestic concern”). It is also unlawful to make a payment to any person, while knowing that all or a portion of the payment will be offered, given, or promised, directly or indirectly, to any foreign official (or foreign political party, candidate, or official) for the purposes of assisting the firm in obtaining or retaining business. "Knowing" includes the concepts of "conscious disregard" or "willful blindness."

The Department of Justice is responsible for all criminal enforcement and for civil enforcement of the anti-bribery provisions with respect to domestic concerns. The Securities and Exchange Commission (SEC) is responsible for civil enforcement of the anti-bribery provisions with respect to issuers (issuers of registered securities and issuers required to file periodic reports with the SEC). The Office of General Counsel of the Department of Commerce also answers general questions of U.S. exporters concerning the FCPA's basic requirements and constraints.

Violations of FCPA could result in criminal and/or civil penalties. The Criminal penalty for a legal person is a fine of up to $2 million. Penalties for natural persons depend on his/her position. Officers, directors, and stockholders are subject to a fine of up to $100,000 and imprisonment for up to five years; employees and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. The firm may not pay fines imposed on individuals.

The civil penalties are in the jurisdiction of the Attorney General or the SEC. As appropriate, these agencies may bring a civil action for a fine of up to $10,000 against any firm as well as any officer, director, employee, or agent of a firm, or stockholder acting on behalf of the firm, who violates the anti-bribery provisions. In addition, in an SEC enforcement action, the court may impose an additional fine not to exceed the greater of the gross amount of the pecuniary gain to the defendant as a result of the violation, or a specified dollar limitation.

Aside criminal and civil penalties government can take other actions against violators of the Act. Under guidelines issued by the U.S. Office of Management and Budget, a person or firm found in violation of the FCPA may be barred from doing business with the U.S. government. Indictment alone can lead to suspension of the right to do business with the government. In addition, a person or firm found guilty of violating the FCPA may be ruled ineligible to receive export licenses; the SEC may suspend or bar persons from the securities business and impose civil penalties on persons in the securities business for violations of the FCPA; the Commodity Futures Trading Commission and the Overseas Private Investment Corporation both provide for possible suspension or debarment from agency programs for violation of the FCPA; and a payment made to a foreign government official that is unlawful under the FCPA cannot be deducted under the tax laws as a business expense.22

FCPA has received a lot of criticism. First of all, the FCPA is not ideal as a law: its enforcement is difficult; it is inappropriate considering the structure of today’s global market, it constitutes moral imperialism and over reaches into the sovereignty of individual states23. As a result, the FCPA has failed to have any serious impact at bribery as well as other domestic laws.24 “According to figures cited by David Hess and Thomas Dunfee in their recent Zicklin Center paper, between 1977-95 the Department of Justice prosecuted only 16 bribery cases under the FCPA. A Control Risks Group survey reported last year at the OECD Development Center Washington conference noted that 95 percent of the respondents believed that U.S. companies "regularly" or "nearly “always" use "middlemen" to "get round the FCPA."25 It also leads to economic losses by U.S. business, especially in transitional economies26, which are very difficult to recover.27 For example, in very first year of FCPA existence United States had $ 1 billion in lost trades opportunities28. But for instance, in 1997 it was affected in international contracts worth almost $30 billion by foreign firms, which are not bound by anti-bribery laws in their home jurisdictions.
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International business transactions and corruption iconMinistry of education and science, youth and sports of ukraine transcarpathian state university international Business and International Law Faculty International Business and World Policy

International business transactions and corruption iconMinistry of education and science, youth and sports of ukraine transcarpathian state university international Business and International Law Faculty International Business and World Policy

International business transactions and corruption iconIsbn 5-85178-053-3 ббк 88. 2Aнгл-9
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