On the Prevention of Corruption from a Board Governance Perspective

Contents:

0. Legal Disclaimer

1. Introduction
1.1. Definition
1.2. Negative Aspects
1.3. Motivation and Research Objective

2. Causes and Areas of Special Attention
2.1. Common Causes
2.2. Rules, regulations and taxes
2.3. Four Categories
2.4. Sociological Aspects
2.5. Final Remarks

3. Legal Situation
3.1. Overview
3.2. Case Analysis: Germany
3.2.1. The Criminal Code
3.2.2. The Act on Regulatory Offences
3.2.3. Other Laws
3.2.4. Further Aspects to Consider

4. Corruption Methods and Practices
4.1. Different Methods at Different Levels
4.2. Payment Methods

5. Prevention Methods and Mechanisms
5.1. Introductory Comments
5.2. Social Media Marketing Approach
5.3. Questions to Ask
5.4. Defining Clear, Precise and Unambiguous Goals
5.5. Review Process
5.6.Further considerations
5.7. Gifts and Benefits
5.8. Training
5.8.1. Training Plan for Employees in Less Corrupt Countries or Business Areas
5.8.2. Training Plan for Employees in Corrupt Countries or Business Areas
5.8.3. Training Plan for Employees in Highly Corrupt Countries or Business Areas
5.8.4. Training Plan for Board Members
5.8.5. Training Plan for Senior Managers

6. Interpretation of the Survey Results
6.1. General Comments
6.2. Analysis of the Results
6.2.1. Causes
6.2.1.1. Important Factors
6.2.1.2. Incentives for Corruption
6.2.1.3. Corruption Under Special Circumstances
6.2.2. Methods
6.2.2.1. Common Methods
6.2.2. . Least Risky Methods
6.2.3. Prevention
6.2.3.1. Effective Guidelines
6.2.3.2. Effective Social Media Marketing Strategies
6.2.3.3. Effective Prevention Measures

7. Master Guidelines for the Board of Directors
7.1. Directly Contact Public Decision-Making Entities
7.2. Consulting Contracts
7.3. Employee Training
7.4. Guidelines
7.5. Compliance Departments and Officers
7.6. Internal Control for Compliance Departments and Officers
7.7. External Control for Compliance Departments and Officers
7.8. Whistleblower-Program
7.9. External Ombudsman
7.10. Consistency

8. Closing Remarks
8.1. Key Findings
8.2. Benefits of the Study
8.3. Limitations of the Study
8.4. Suggestions for Further Research

9. Appendix

Legal Disclaimer:

The information presented in this book is for general guidance on matters of interest only. Since the application as well as the impact of laws can vary based on the facts involved, the information provided is meant to encourage and stimulate an academic debate only. Considering the fact that laws, rules and regulations change continuously, the author hereby points out that there could be delays, omissions or inaccuracies in the information presented in this book. Hence, the author hereby explicitly states that he is not providing legal, accounting, tax or other professional advice or services in this book. Therefore, the author hereby explicitly states that this book should not replace a detailed consultation with competent advisers. The author recommends that you contact Teichmann International AG (St. Gallen, Switzerland) before making any decision or taking any action.

While the author has made a strong effort to provide accurate information in this book, he hereby explicitly states that he is not responsible for any errors or omissions. Furthermore the author is not responsible for any results obtained from the use of the information provided in this book. The author will not be liable to you or anyone else for any decision made or action taken in reliance on the information provided in this book.

Furthermore the author does not endorse, warrant, promote or recommend third party

contents mentioned in this book. If any provision of this legal disclaimer is held to be

illegal, invalid or unenforceable, in whole or in part, under any applicable enactment or

rule of law, such illegality, invalidity or unenforceability shall not affect the remaining parts of this legal disclaimer, and the involved parties shall in good faith attempt to substitute a legal, valid and enforceable provision which achieves to the nearest extent possible the same effect as would have been achieved by the illegal, invalid or unenforceable provision.

1. Introduction:

1.1. Definition

Corruption can be defined as “any attempt whether successful or not to persuade someone in a position of responsibility to make a decision or recommendation on grounds other than the intrinsic merits of the case with a view to the advantage or advancement or him or herself or another person or group to which he or she is linked through personal commitment, obligation, or employment or individual, professional or group loyalty” (Cragg, 1998: pg. 652-653). Corruption often involves the violation of obligations (Schuchter, 2012: pg. 58). It can involve any private or public agent (Carvajal, 1999: pg. 339). The act of corruption may include an appropriation or incorrect use of public or private goods (Argandona, 2001: pg. 63).

1.2. Negative Aspects

The negative effects of corruption include but are not limited to a lack of justice, efficiency and trust. It frequently involves a misuse or waste of public resources and discourages the development of new enterprises. Furthermore it has been associated with political instability and policy restrictions (McMullan, 1961: pg. 182-183). Hence, it has been outlawed by both national and international legislators.

The positive correlation between corruption and a lack of investment is significant in both a statistical and an economic sense (Mauro, 1995: pg. 683). Therefore it can be argued that short- term gains for enterprises are outweighed by long-term losses for society (Maurer, 2011: pg. 1). Unfortunately, many multinational companies still engage in corruption, especially when they operate in foreign countries (Kaufmann, 2004: pg. 98). This abuse of power for personal gain or for the benefit of a company can become very expensive (Kindra & Stapenhurst, 1998: pg. 2). In fact, both civil claims and criminal charges can result. Hence, it can be considered in a company’s very best interest to invest in the prevention of corruption. Therefore the board of directors should take action. While doing so, personal limitations and perspectives of the decision-maker should be taken into account. The author is also conscious of his own limitations and Western perspective, and realizes that this topic could be approached in alternative ways.

1.3. Motivation and Research Objective

The author has chosen to write this paper in an attempt to draw greater attention to corruption and its negative effects on both companies and society. As son of a chief investigator for white collar crime of the German police forces, the author has been interested in this topic for multiple years. Famous cases, such as the Siemens and the Volkswagen corruption scandals, emphasize the relevance of this topic for the board of directors of multinational corporations.

It is the objective of this paper to develop a profound understanding of the causes and methods of corruption in multinational corporations. Ultimately, a tool kit for board members shall be developed. This tool kit is meant to provide the board of directors with the most important means to prevent corruption in their companies. It is the authors believe that such a tool kit can only be effectively developed and applied if a profound understanding of the causes and methods has been developed.

2. Causes and Areas of Special Attention:

2.1. Common Causes:

Corruption has been explained in many ways. Commonly mentioned causes include bad laws or bad men, economic need and job dissatisfaction, a lack of powers or knowledge and ineffective control systems. Some also refer to an inefficient bureaucracy and a protection of self-interest for certain groups or individuals (Carvajal, 1999: pg. 340-343). In addition, one could also add weak institutions, poor governance or ineffective economic policies (Kaufmann, 1997: pg. 116).

Furthermore it has been observed that bribes are frequently paid for access to scarce benefits, such as licences or permits, avoidance of costs, such as taxes or toxic waste disposal, or to prevent others from enjoying certain advantages and to impose costs on them. This might help to get rid of competitors. Furthermore companies appear to be willing to pay for insider information and decisions that require discretion by a state official (Kindra & Stapenhurst, 1998: pg. 8). If public officials have discretionary power over these public goods, they might want to collect bribes from multinational corporations (Shleifer & Vishny, 1993: pg. 600).

Furthermore two major categories of corruption are commonly identified. One refers to underpaid civil servants, who ask for bribes in order to be able to pay for basic needs. If a public official’s family is starving, he is very unlikely to abstain from engaging in corrupt behavior.

However, the second category is a bit less intuitive. It regards what is commonly referred to as “high-level” or “grand” corruption. High-ranking public officials ask for large sums of money by abusing their discretionary power (Kindra & Stapenhurst, 1998: pg. 9). Especially, large projects tend to be affected by this phenomena. Even a few percentage points of a muli-million governmental project can be very tempting (Tanzi & Davoodi, 1998: pg. 46 ff).

Some areas of interaction between public officials and private enterprises appear to be particularly vulnerable to corruption. Public procurement and contracting, licensing and rezoning of land are probably the most relevant ones for multinational corporations (Kindra & Stapenhurst, 1998: pg. 9). It is obvious that manufacturing companies, for instance, would like to sell their products to the government. They also tend to need licenses for their activities, and if they want to build factories they will have to engage with the land rezoning department. Furthermore tax departments, police and customs agencies have been observed to be special attention areas when it comes to corruption (Klitgaard & Klitgaard, 1988: pg. 4-6). This is particularly critical for multinational corporations which carry out import or export activities in corrupt countries.

Resource-rich countries might be more affected by corruption than resource-poor countries. This is due to the fact that entrepreneurs who make excess-profits are particularly willing to pay bribes. For example, the cost of extracting oil or diamonds is far below its market price. Hence, entrepreneurs are willing to pay bribes in order to obtain the right to extract and export raw materials (Ro, 1998: pg. 11).

Corruption also seems to be facilitated by the heritage of a totalitarian regime, economic collapse and political instability leading to the inefficiency of state institutions and an overall weakness of civil society. This phenomena can be strengthened by a lack of democratic political traditions and a weakness of the judiciary. For example, Russia fulfilled all of these criteria during the 1990s (Levin & Satarov, 2000: 128 ff.). In addition, the “A bribe is always necessary” believe can re- enforce such phenomenas (Varese, 2000: pg. 107 ff.). On the other hand, highly developed countries with well-established democracies, many women in government, a free and widely read press that have been open to international trade for decades tend to be less corrupt (Treisman, 2007: pg. 241). These differences should be kept in mind for the development of training programs during later sections of this paper.

It has been argued in the past there are three preliminary conditions required for persistent corruption, namely discretionary power, economic rents and weak institutions. This makes sense since there is no point in paying a bribe to someone who does not have the power to influence the desired outcome. In addition, the outcome must have at least some sort of economic rent since a multinational corporation could not be rationally expected to pay a bribe if there is no expected economic gain. In addition, weak institutions must allow for corruption to occur. If there was strong and efficient persecution of bribery it would become very hard to corrupt officials (Aidt, 2003: pg. 633). Both the legal and the judicial system must provide low probabilities of detection since otherwise companies or their employees would abstain from engaging in corruption (Jain, 2001: pg. 77).

2.2. Rules, regulations and taxes

Obviously, rules and regulations play a very important role when it comes to explaining the causes of corruption. If a company wants to open a store or build a factory, it needs permits. If laws are ambiguous and open to multiple interpretations, public officers tend to have more discretionary power. Companies or their employees need to engage in multiple activities when developing their business in foreign countries, including but not limited to driving car, getting visas or obtaining foreign exchange. Hence, they need to interact with offices which frequently abuse their power (Tanzi, 1998: pg. 566-567).

Furthermore, taxation schemes can cause corruption. For example, if the laws are difficult to comprehend and open to multiple interpretations, officers might abuse their mandates. Companies might have an interest in the provision of tax incentives, determination of tax liabilities or avoidance of costly audits and litigations. Furthermore low paid tax officers might want to improve their personal income (Tanzi, 1998: pg. 566-568).

2.3. Four Categories

Furthermore one could sub-divide corruption into four categories in order to further understand why it occurs. There appears to be efficient corruption, corruption with a benevolent principal, corruption with a non-benevolent principal and self-reinforcing corruption. Efficient corruption is probably most relevant for multi-national corporations. It facilitates trade between at least two parties which would otherwise not have occurred. Thereby it presumably helps to achieve allocative efficiency and allows agents in the private sector to make up for governmental failures (Aidt, 2003: pg. 633). According to this view, one could even consider corruption a positive phenomena. However, while it might have some positive sides, one may not ignore the large social costs associated with this crime, such as slow growth of resource-rich economies (Da Cunha Leite & Weidmann, 2001: pg. 31).

In fact, the other three categories focus mainly on negative aspects of corruption. In the case of corruption with a benevolent principal, decision-making power is delegated to a malevolent agent. Potentially even worse, in case of corruption with a non-benevolent principal government officials might introduce inefficient policies on purpose in order to extract frequently unjust rents from private citizens or enterprises (Aidt, 2003: pg. 633). Unfortunately, cross-country comparisons of determinants of corruption have emphasized that the phenomena is often the result of confusing and contradictory rules and regulations (Ali & Hisse, 2002: pg. 462). Furthermore a public official might order his subordinated to ask for bribes in order to get a part of the payoffs (Carvajal, 1999: pg. 338). This is particularly problematic for multinational corporations since it forces them to choose between being driven out of business or paying a bribe.

Furthermore one should not underestimate the importance of self-reinforcing corruption. This form frequently occurs due to historical reasons, and can be considered a form of group- dynamics. If everybody else is corrupt, it becomes quite hard for individuals or corporations to be honest and law-abiding (Aidt, 2003: pg. 633). For instance, if all other companies pay bribes, it is almost impossible to be competitive without engaging in corruption. This can be considered a major cause for multinational organizations’ corrupt behavior.

Intuitively, the fact that self-reinforcing corruption is a prevalent cause for multinational corporations’ corrupt behavior can be explained by three major observations. First of all, it tends to be more difficult to successfully audit corrupt officials in societies where corruption is prevalent. Furthermore human behavior tends to be shaped by past experience. If corrupt individuals have successfully interacted with other corrupt individuals, and perhaps even extracted significant economic rents from such behavior, their openness towards change will be rather limited. Also, the payoff of bribes tends to be quite high in societies where they are very common (Aidt, 2003: pg. 646-647). Last but not least, one should not ignore psychological factors. For example, shame plays an important role in many African cultures. Standing out might create shame. Hence, group dynamics are re-enforced (De Sardan, 1999: pg. 46).

From a sociological point of view, three dimensions of the normalization process of corruption can be identified, namely rationalization, institutionalization and socialization. During the rationalization phase, individuals who participate in bribery use common societal norms in order to justify their activities. The socialization phase helps to teach corrupt norms to new members, and institutionalization helps to transform corrupt practices into subconscious routines (Dombois, 2009: pg. 136 ff.).

The rationalization of corruption can be sub-divided into further elements, namely the denial of injury, victim and responsibility as well as to social weighting, appeal to higher loyalties and the metaphor of the ledger. A denial of responsibility is often justified by the assumption that the actor has no other choice, and can hence not be held accountable for his actions (Anand et al., 2004: pg. 41). For example, the CEO of a multinational company might argue that since all his competitors are bribing public officials in Africa, he has no choice but to bribe as well in order to be able to do business in certain countries.

A denial of injury means that the actors believe that nobody is harmed by their actions (Anand et al., 2004: pg. 41). For example, the CEO of a multinational company might argue that both his firm and the public official benefited from the bribe and its consequences. He might further argue that even the public benefitted from this illegal arrangement, since a major project would not have been realized otherwise. However, these arguments obviously ignore the massive social costs caused by corruption.

In addition, a denial of victim means that the actor believes that the harmed party actually deserved the outcome (Anand et al., 2004: pg. 41). If the CEO of a multinational company paid a bribe to impose a cost on someone else, he might argue that his competitor had misbehaved in the past and hence deserved these additional costs. Obviously, this cannot be acceptable and should be avoided.

Social weighting is also commonly used to rationalize corruption. Actors simply argue that other actors are even worse, and hence their own actions are socially acceptable (Anand et al., 2004: pg. 41). This problem is particularly severe in very corrupt societies. For example, the CEO of a multinational company might argue that while his own actions might not be legal, other companies’ CEOs engage in even worse illegal activities. Hence, he will consider his own actions as morally acceptable.

Another technique frequently used to rationalize corruption is the appeal to higher loyalties. Actors argue that they need to break the law in order to achieve a higher good (Anand et al., 2004: pg. 41). For example, the CEO of a multinational construction company might argue that by bribing public officials in Ghana in order to procure the order of a public building, he is actually helping the country to economically develop. Obviously, this argument might make sense in the short-term but ignores social costs associated with corruption.

Last but not least, the metaphor of the ledger is used to rationalize bribery. In this case, the actors believe that they are allowed to engage in certain behaviors due to their status and achievements (Anand et al., 2004: pg. 41). For example, the CEO of a multinational company might argue that he does not have to respect his companies anti-corruption policy due to his seniority. However, if he does not lead by example, his employees are more than likely to ignore the anti-corruption policy as well.

2.5. Final Remarks

In conclusion, it can hence be established that there are multiple reasons why multinational companies engage in corrupt behavior. They range from reducing tax rates to obtaining goods, services or transfers from the public sector. Corruption might help to avoid certain duties and obtain undeserved rights (Argandona, 2001: pg. 165). Furthermore it must be noted that public officials having discretionary power, ambiguous laws, weak institutions, a lack of transparency and low “costs” (consequences) if one is caught further facilitate this phenomena (Argandona, 2001: pg. 166). In addition, several sociological and psychological aspects help to explain why corruption remains a massive concern for multiple enterprises.

Furthermore it should also be considered that in order for corruption to occur, individuals must be in the right position or function, have the understanding and skills to carry out bribery, be sufficiently confident and coercive and in most cases be an effective lyer as well as relatively immune to stress (Schuchter, 2012: pg. 76). An employee that can only tell the truth when questioned by his superiors, who does not have access to cash and needs signatures from the compliance and the legal department for major contracts will have to overcome serious obstacles in order to be able to bribe a public official. This also highlights the relevance of the internal control system. Corruption is far more likely to occur, if the internal control system is weak.

Therefore it could be stated employees must have the technical skills to bribe someone as well as either incentive or pressure. In certain cases incentive and pressure can be substituted by a lack of awareness (Schuchter, 2012: pg. 170 ff.). The ability to bribe someone appears to be an easy skill. However, it should not be underestimated. While small bribes might be feasible even for less skilled employees in low-ranking positions, larger bribes require both functionary power and technocratic expertise. Drafting a false consulting contract is not an easy task. Organizing five million US $ in cash for illegal purposes in a multinational listed company can attract the attention of both internal control and external assurance firms.

External pressure might contain psychological elements, such as mobbing, shame or trust (Schuchter, 2012: pg. 173). Incentive might be constituted by debt, opportunity, greed, a desire for luxury, challenges or success. Money appears to be a key driver (Schuchter, 2012: pg. 178). Assuming that people consciously commit bribery, they are presumably motivated by either incentive or pressure, and in certain cases by both. One should not ignore these aspects when discussing the causes of corruption.

3. Legal Situation

3.1. Overview

Corruption has received a great deal of attention from legislators and non-governmental- organizations all over the world. The most important points of reference include the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the United Nations Convention Agains Corruption, the 1997 EU convention on the Fight against Corruption, the 2003 EU Framework on Combatting Corruption in the Private Sector, the Council of Europe Conventions of Corruption, the Inter-American Convention Against Corruption, and the African Union Convention on Preventing and Combating Corruption (Business Anti-Corruption Portal, 2013). While all of these conventions deserve a great amount of attention, this text will focus on one national case analysis in order to provide the reader with a general idea about the potential legal consequences of bribery. Although this paper aims to address the phenomena on a global scale, it is not possible to summarize legal aspects in all relevant jurisdictions in this study. On the other hand, it is very difficult to illustrate the importance of the issue to the board of directors of multinational corporations without at least providing a small overview of potential legal consequences. Hence, the author has decided to describe the legal situation in Germany as an example. This choice has been made due to Germany‘s well-developed legal system, the author‘s personal ties to his home country as well as the large number of multinational corporations located in Germany.

3.2.1. The Criminal Code

The German criminal code (StGB) makes multiple references to corruption. Articles 108b and 108e are less relevant for multinational corporations, since they refer to the bribery of voters or delegates However, it should be noted that a member of the parliament who accepts a bribe does not necessarily violate the German penal code (Bohlander, 2013). In fact, only active bribery is explicitly mentioned while passive acts of corruption appear to be tolerated. This could be interpreted as a sign of the relatively recent modifications of the law. In fact, until the late 1990s bribes paid by German companies abroad were even deductible for tax purposes.

Articles 299 StGB and 300 StGB are already far more relevant for multinational companies. In fact, they deal with active and passive acts of corruption in the business world. Section 299 states that “(1) Whosoever as an employee or agent of a business, demands, allows himself to be promised or accepts a benefit for himself or another in a business transaction as consideration for according an unfair preference to another in the competitive purchase of goods or commercial services shall be liable to imprisonment not exceeding three years or a fine. (2) Whosoever for competitive purposes offers, promises or grants an employee or agent of a business a benefit for himself or for a third person in a business transaction as consideration for such employee’s or agent’s according him or another an unfair preference in the purchase of goods or commercial services shall incur the same penalty. (3) Subsections (1) and (2) above shall also apply to acts in competition abroad.” (Bohlander, 2013). Part (3) is particularly relevant since the majority of corrupt acts by German companies is carried out outside of Germany. However, it should also be considered that the individual punishment for corruption mentioned in part (1) is not extraordinarily high. In fact, the potential consequences for companies can be far worse than for their employees. This is true even for aggravated cases for giving bribes in commercial practice as stated in Section 300, which prescribes imprisonment ranging from three months to five years (Bohlander, 2013). Furthermore under Section 301 corruption is only prosecuted upon request, partly explains why it is frequently tolerated, ignored or at least undetected (Bohlander, 2013).

At least Section 302 states that confiscatory expropriation orders and extended confiscation under Sections 43a and 73d shall apply for goods presumably acquired as a result of illegal acts (Bohlander, 2013). These punishments can be particularly relevant for employees who have a lot to lose. However, they might be less relevant for officially indigent employees who know how to hide their assets. For example, it would be very hard for German authorities to confiscate assets in Vietnam, Shanghai or even Dubai.

Sections 331 and 332 also refer to corruption but focus on the consequences of taking bribes for persons entrusted with public duties, such as public officials, judges and arbitrators. They are hence less relevant for multinational corporations but should not be ignored since they put the company’s actions in context. However, Section 333 states that “(1) Whosoever offers, promises or grants a benefit to a public official, a person entrusted with special public service functions or a soldier in the Armed Forces for that person or a third person for the discharge of a duty shall be liable to imprisonment not exceeding three years or a fine. (2) Whosoever offers promises or grants a benefit to a judge or an arbitrator for that person or a third person in return for the fact that he performed or will in the future perform a judicial act shall be liable to imprisonment not exceeding five years or a fine.” (Bohlander, 2013). Section 334 deals with the act of giving bribes in order to incentivize someone to violate his official duties, and section 335 deals with aggravated cases. Hence, it could be concluded that at least from a company perspective under the German Criminal Code corruption has been sufficiently outlawed. In addition, Sections 336 and 338 also deal with the omission of official acts and confiscatory expropriation orders and extended confiscations respectively (Bohlander, 2013).

3.2.2. The Act on Regulatory Offences

However, when analyzing the legal aspects of corruption in Germany one should not simply focus on the German Criminal Code but also take the Act on Regulatory Offenses into account. In particular, one should pay attention to Section 30 which states that “(1) Where someone acting 1. as an entity authorized to represent a legal person or as a member of such an entity, 2. as chairman of the executive committee of an association without legal capacity or as a member of such committee, 3. as a partner authorized to represent a partnership with legal capacity, or 4. as the authorized representative with full power of attorney or in a managerial position as procureholder or the authorized representative with a commercial power of attorney of a legal person or of an association of persons referred to in numbers 2 or 3, 5. as another person responsible on behalf of the management of the operation or enterprise forming part of a legal person, or of an association of persons referred to in numbers 2 or 3, also covering supervision of the conduct of business or other exercise of controlling powers in a managerial position, has committed a criminal offense or a regulatory offense as a result of which duties incumbent on the legal person or on the association of persons have been violated, or where the legal person or the association of persons has been enriched or was intended to be enriched, a regulatory fine may be imposed on such person or association. (2) The regulatory fine shall amount 1. in the case of a criminal offense committed with intent, to not more than one million Euros, 2. in the case of a criminal offense committed negligently, to not more than five hundred thousand Euros.“ (Mussett, 2013). Hence, it becomes evident that corruption is not only unethical and socially irresponsible, but can actually cost a company large fines. Not only individuals can be held liable, but also enterprises. This means that an enterprise has a vested interested to ensure that its employees abstain from engaging in corrupt behaviors.

In addition, companies should also take Section 130 of the Act on Regulatory Offenses into account. It states that “(1) Whoever, as the owner of an operation or undertaking, intentionally or negligently omits to take the supervisory measures required to prevent contraventions, within the operation or undertaking, of duties incumbent on the owner and the violation of which carries a criminal penalty or a regulatory fine, shall be deemed to have committed a regulatory offense in a case where such contravention has been committed as would have been prevented, or made much more difficult, if there had been proper supervision. The required supervisory measures shall also comprise appointment, careful selection and surveillance of supervisory personnel.

(2) An operation or undertaking within the meaning of subsection 1 shall include a public enterprise. (3) Where the breach of duty carries a criminal penalty, the regulatory offense may carry a regulatory fine not exceeding one million Euros. Where the breach of duty carries a regulatory fine, the maximum regulatory fine for breach of the duty of supervision shall be determined by the maximum regulatory fine imposable for the breach of duty. The second sentence shall also apply in the case of a breach of duty carrying simultaneously a criminal penalty and a regulatory fine, provided that the maximum regulatory fine imposable for the breach of duty exceeds the maximum pursuant to the first sentence.” (Mussett, 2013). This suggests that companies do not only have an interest but also an obligation to invest in adequate compliance and supervisory activities. In addition, this duty to prevent corruption extends to a company’s activities abroad.

3.2.3. Other Laws

In fact, under Article 2, Sections 1, 2 and 3 of the Act on Combatting International Bribery (IntBestG) the German legislator extends the applicability of Sections 334, 335, 336 and 338 subsection 2 of the Criminal Code to foreign judges and public officials as well as members of the German armed forces. Section 2 specifically outlaws bribery of foreign Members of Parliament in connection with international commercial activities and most importantly, Section 3 states that German law shall apply to the above mentioned offences regardless of the place of commission (IntBestG, 1998). Furthermore Article2, Sections 1, 2 and 3 of the European Anti Corruption Law (EUBestG) are also applicable (EUBestG, 2004). Hence, German companies can be held liable if their employees commit acts of bribery in foreign countries.

3.2.4. Further Aspects to Consider

In addition, one should also consider fiscal effects. Consulting contracts, for example, tend to be categorized as tax deductible while bribes are not (anymore). However, if consulting contracts are abused in order to pay bribes, they should not be accounted for as a tax deductible expense. However, they can also not be accounted for as bribes as this would lead to an investigation and a public relations disaster. Hence, companies may feel tempted to account for them as tax deductible consulting contracts. This implies not only that they become guilty of tax evasion but also that their financial statements are false and need to be corrected in case of an investigation. Depending on where a company is listed, the fact that it has published false financial statements can have massive sanctionary consequences.

Last but not least, one should also consider that bribes are frequently paid in cash. This implies the necessity of establishing unofficial cash deposits or black funds, which according to the German Federal Court is also illegal (Az. 2 StR 587/07). This is partly due to the fact that once the black fund has been established, it can become very difficult for a firm to find its own money.

Hence, in conclusion it can be established that Germany has strictly outlawed all forms of corruption. German companies are not allowed to bribe anyone in Germany or abroad. Employees engaging in acts of bribery can be held personally liable. In addition, companies can be held liable and should hence establish an appropriate compliance system in order to prevent their employees from engaging in bribery. This will help them to avoid paying fines and engaging in costly lawsuits.

4. Corruption Methods and Practices

4.1. Different Methods at Different Levels

As previously mentioned, one can differentiate between “petty” (low-level) and “grand” (high- level) corruption methods and practices. The latter one includes for example ministers abusing their discretionary power in exchange for money or other benefits. It also refers to political parties which ask multinational companies for large amounts of money in return for prospective government contracts. Officials have been known to either take percentages on government contracts, or ask for consulting fees and scholarships for their children (Kindra & Stapenhurst, 1998: pg. 8 ff.).

Petty corruption practices are frequently less sophisticated. They include officers extorting citizens. For example, fiscal officers might ask for excessive taxes or police officers might randomly stop cars and ask for fines. Officers might also ask for monetary contributions in order to speed up bureaucratic processes, such as the procurement of licenses or visas. This can be problematic for multinational companies if they need to transport materials or finished goods, or send their foreign employees to corrupt areas. Sometimes superiors also pressure their subordinates to collect a certain amount of bribes during a specified period of time (Kindra & Stapenhurst, 1998: pg. 8 ff.).

4.2. Payment Methods

Both grand and petty corruption methods can be further subdivided into several categories. Namely, one should differentiate between briber-initiated and bribee-initiated, predictable and arbitrary, and cash and non-cash corruption (Tanzi, 1998: pg. 565). Arbitrary corruption is less systematic than predictable bribery, and hence potentially more dangerous. It cannot be viewed as an additional cost a company can include in its calculations, and can hence have detrimental effects on projects and even society as a large. Cash corruption appears to be particularly popular but also difficult to implement for multi-national corporations, since they finde it hard to create large black funds in cash. Some non-cash payment methods include corruption agencies, consulting contracts and scholarships.

Apparently, many multinational companies have attempted to solve their cash issues through corruption agencies. This method allows companies to pay bribes without using cash. They simply pay a fee to an agent, who then bribes a public official. This is mainly used for grand corruption. In exchange for the bribe, the agent receives a government contract, which is then passed on to the multinational company (Carvajal, 1999: pg. 338). This method has the major advantage for companies that it does not have to worry about procuring large amounts of cash.

Agents frequently do not find it difficult to procure the necessary cash payments, since they are mostly registered in off-shore destinations and do not have to be audited by an assurance firm. However, this method still remains illegal.

Another rather sophisticated corruption method consists in selling goods at a large discount. For example, perfectly fine goods could be sold at terms and conditions as if they were defective (Carvajal, 1999: pg. 349). This is a rather feasible method for multinational companies, since goods that have been sold and delivered can hardly be checked upon by assurance firms. Hence, investigations are rather unlikely. Obviously, these transactions are illegal and employees might reveal the truth. The main challenge of corruption for multinational companies is that, unlike taxation, it must be kept secret (Shleifer & Vishny, 1993: pg. 612)

Alternative corruption methods also include false consulting contracts for either public officials or third parties, sponsoring of events, vouchers and other benefits, such as free access to yachts or private planes. Prestige, for example through the award of honorary doctoral degrees, might also be employed. However, it should be mentioned that cash appears to be by far the preferred corruption method, since it is probably also among the least risky ones. This will be further discussed in the empirical part of this essay.

Last but not least, one should also highlight the difference between two major areas of corruption: Procurement and “follow up” corruption. Before becoming active in a corrupt country, multinational companies frequently pay bribes in order gain access to certain markets or be awarded government contracts. This part qualifies as procurement corruption. However, bribery does not end there. Once the access has been gained or the contract has been awarded, follow-up corruption is frequently employed in order to fulfill contractual obligations. Transportation and visas are just two examples.

5. Prevention Methods and Mechanisms

5.1. Introductory Comments

Obviously, multinational corporations do not have to engage in classical anti-corruption methods, such as strengthening political institutions or improving moral and political values of society, in order to do their fair share (Jain, 2001: pg. 82-83). However, corporate governance can still be critical when it comes to fighting corruption (Wu, 2005: pg. 168). While excessive bribes might be easy to detect, since they become known to friends, family and colleagues, more regular forms of corruption require more attention (Shleifer & Vishny, 1993: pg. 609). It is in multinational companies’ very best interest to make a strong effort to fight corruption. The costs of being prosecuted for bribery can outweigh the potential economic gains from such activities. Furthermore reputational damages can be massive. Therefore the board of directors, which can also be held liable if it tolerates bribery, should implement certain structures to prevent the occurrence of corruption within its company.

5.2. Social Media Marketing Approach

One possible way of addressing corruption consists in applying certain social media marketing strategies. First of all, multinational companies could attempt to raise its employees awareness of the costs of corruption to countries, organizations, citizens and society (Kindra & Stapenhurst, 1998: pg. 13). For example, companies might distribute flyers, offer presentations and training videos and host anti-corruption events. Employees could therefore learn more about the negative consequences of bribery. This strategy would help to demonstrate the company’s commitment to fight corruption and make it socially inacceptable. The board of directors could send a strong message by employing such social media means.

Another important social media marketing strategy that could be employed by a board of directors to fight corruption within a multinational company consists in increasing the understanding of causal factors as well as the large diversity of forms of bribery among public officials (Kindra & Stapenhurst, 1998: pg. 13). This could be integrated with lectures, flyers and videos mentioned in the previous paragraph. If people understand the big picture, and the causal factors of certain phenomena, they might be more willing to fight them. It is generally very hard to mobilize employees for an initiative they do not really understand. Hence, this strategy should be employed in conjunction with the previous one.

The third social media marketing strategy that should be considered by the board of directors of multinational companies in the fight against corruption involves a direct confrontation with corrupt or presumably corrupt individuals (Kindra & Stapenhurst, 1998: pg. 13). This could be particularly effective if these individuals are not very immune to stress. They could be directly addressed, interrogated and warned. It would be particularly helpful if members of the board carried out these activities for high-ranking managers in order to ensure an abundance of authority. Furthermore it highlights the board of directors’ commitment to the company’s anti- corruption policy.

During these conversations, the board member needs to create awareness of and interest in the anti-corruption policy. In many companies this might also include creating awareness of a recent change in values, if corruption had been tolerated or even encouraged in the past. Subsequently, the employee needs to be persuaded that the policy is right and motivated to participate in the change movement. He or she should be supported in taking action. Ideally, the board member should check in once in a while to ensure that the agreed changes are going to be maintained (Kindra & Stapenhurst, 1998: pg. 14).

Further communication strategies should be taken into consideration. For example, creating a sense of fear or guilt might be helpful (Kindra & Stapenhurst, 1998: pg. 15). Employees could be informed about massive sanctions and punishments for bribery. They could be taught about both civil and criminal proceedings. Ideally, employees would be informed about their colleagues actions and appropriate steps taken by the company. Furthermore moving stories might be published on the company intranet in order to create a sense of guilt.

Furthermore consistency can be a very valuable tool when eliminating corruption from a multinational company (Kindra & Stapenhurst, 1998: pg. 15). This is very intuitive since employees will only take a policy seriously if they observe that it is consistently enforced. If they see that exceptions are being granted, or leaders are not “walking the talk” they will be far more inclined to deviate from the policy.

Authority is particularly important at early stages of an anti-corruption campaign (Kindra & Stapenhurst, 1998: pg. 15). Obviously, it is far more credible if the chairman of the board with the presence of the other board members as well as the CEO and the CFO makes an announcement, than if the head of the legal apartment sends out a memo. This highlights that anti-corruption policy, being a very important, complex and far-reaching issue requires the presence and active involvement of the board. It is both a control and a strategic issue, since appropriate strategies in order to fight this phenomena need to be developed and employed in multinational companies.

Peer-influence should also not be underestimated. It can have a large impact on different target groups (Kindra & Stapenhurst, 1998: pg. 15). At this point one should not forget about group dynamics as an important causal factor of corruption. Peers might be far better able to reach each other than external speakers. While the involvement of board members and other symbols of authority might be important at the beginning of the process in order to attract attention, peer influence should subsequently be used as a complementary method.

Further methods include the use of celebrities, humour and benefits (Kindra & Stapenhurst, 1998: pg. 15). Celebrities could help to attract attention and raise awareness of the problem.

Humour might allow to reach more employees. However, this tool should only be used with great care since corruption is a very serious issue and may not be ridiculized. Benefits, such as a compliance bonus, might become vital monetary instruments for incentivizing employees to respect and live up to the anti-corruption policy.

5.3. Questions to Ask

Before the board decides to intervene, it should first critically assess the situation (Kindra & Stapenhurst, 1998: pg. 26). This means that it should ask itself whether corruption is a serious concern for its company. The following questions should be asked:

- Do we have operations in countries that are perceived to be very corrupt? The Transparency International Corruption Perceptions Index could help to answer these questions. A multinational company operating mostly in Denmark, New Zealand, Finland, Sweden, Norway, Singapore and Switzerland will have to be less concerned than one operating mainly in Somalia, North Korea, Afghanistan, Sudan, Libya, Iraq, Uzbekistan and Venezuela.
- Do we already have a solid Internal Control System in place? If the company already has a very strong internal control system in place, corruption is probably a less predominant phenomena. On the other hand, if the audit committee has mentioned in its last report that the internal control system has displayed significant weaknesses and needs urgent improvement, corruption is likely to be more common.
- Do our employees know that we do not tolerate corruption? If this question can be answered with an honest and immediate “yes”, the company is already on a very good path. On the other hand, if board members are hesitant to positively reply to this question, or even answer it with a straightforward “no”, a lot of work has to be done. This means that significant resources need to be allocated to such a project. However, it must be noted that even a straightforward “no” can be a positive sign. It at least suggests that the board is honest and really wants to do something about the situation.
- Do our customers know that we do not tolerate corruption? If even the customers of a multinational corporation are aware of the fact that this enterprise does not tolerate corruption, they are less likely to ask for or offer bribes. At this point the two sides of corruption need to be highlighted. The board of directors does not want its employees to offer bribes, but it also wants them to abstain from accepting bribes, for example in exchange for more convenient sales terms and conditions. Generally speaking, it is a very good sign if even customers know that a company does not tolerate bribery. However, it must also be acknowledged that it may be very difficult for the board of directors to accurately assess how the company is perceived by its customers from this point of view. This is due to the fact that multinational companies operate in many different countries, and the members of the board of directors cannot be familiar with the perception of their company in all different nations. Therefore they should seek assistance by demanding reports from local managers. These demands for information need to emphasize the importance of truthfulness and accuracy, and outline sanctions in case of inaccurate answers.
- Do other stakeholders know that we do not tolerate corruption? If even other stakeholders,
such as non-governmental organizations and suppliers, know that this company does not tolerate corruption, the policy might only need some fine-tuning. The overwhelming majority of the anti- corruption and compliance program appears to be working well. However, the board of directors should still carefully answer the other ten assessment questions and not allow itself to arrive at premature conclusions.
- Are our employees sufficiently trained to avoid corruption? Employees can only effectively avoid corruption if they are trained to do so. One simply cannot expect a multinational company’s employees to be perfectly prepared for fighting bribery. Employees might not be aware of the large social costs of this phenomena, and tend to underestimate the potential legal, financial and reputational consequences.
- Are our compliance efforts sufficiently documented? Compliance efforts should be strictly
documented for multiple reasons. First of all, even the best anti-corruption policy can be violated by individual employees. This might be motivated by greed, ignorance or other factors. In these cases it is important that the company is able to show that it has made every possible effort to avoid and prevent corruption. Furthermore it is important to highlight the relevance of this issue to the board of directors. If employees know that there are no loopholes, that all actions are documented and that a report about the anti-corruption activities is regularly discussed by the board of directors, they are more likely to take the policy seriously. On the other hand, if they realize that documentation is not taken seriously, it might lead them to believe that the entire policy is rather messy.
- Have past incidents of corruption been discovered? Whether or not past incidents of corruption have been discovered, largely depends on the current internal control system and compliance department. Obviously, there are two sides of the coin. If past incidents have been discovered, it suggests that corruption has occured but at least shows that the internal control system or compliance department are being somehow effective.

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