Aleksander Godhe, Research Associate (Dispute Resolution) at the Centre of Construction Law & Dispute Resolution, King’s College London
“Corruption remains one of the biggest obstacles to international trade and the transition towards sustainability”
Corruption remains one of the biggest obstacles to international trade and the transition towards sustainability. Although it can be difficult to define, it takes many forms, ranging from bribery and embezzlement to the misuse of public office for private gain.
From a business perspective, corruption significantly impacts the ease of doing business. It creates roadblocks to clearing customs or obtaining business permits fairly, while adding ongoing uncertainty about the legal protections in place and their enforcement. Furthermore, corruption can drive up legal and compliance costs, potentially making certain ventures unprofitable. It can also distort competition, or even shut businesses out of key markets and contracts altogether.
In short, corruption is bad for business and directly contradicts the principles of transparency, accountability and equitable growth that are key to long-term sustainability.
In today’s increasingly interconnected world, corruption has become a transnational issue, driven by the integration of global economies, the digitisation of finance and malicious actors taking advantage of open borders to export their corrupt practices abroad. This transnational corruption means an issue in one region can have ripple effects globally.
There are numerous examples of transnational corruption negatively impacting international trade. Take the Petrobras scandal (Operation Car Wash) in Brazil, as an example. This massive corruption case involving the state-owned energy company Petrobras revealed a vast network of kickbacks and embezzlements. High-level executives, politicians and contractors were implicated. The scandal led to political instability in Brazil and disrupted regional and global energy markets, given Petrobras’ significant role in the oil industry. There are many other similar stories, implicating both multinational companies as well as SMEs.
Some countries have adapted their anti-corruption laws to address this growing risk. The UK Bribery Act 2010 applies its anti-corruption laws globally, meaning that the actual corruption need not have occurred in the UK itself for the law to apply. For example, the UK’s Serious Fraud Office recently charged the Swiss oil giant Glencore with seven counts of bribery, for corrupt practices tied to its operations in Africa and South America. Glencore was ordered to pay £280 million, becoming the first company prosecuted under the Act’s anti-bribery provisions. Germany, France, China, Brazil, and many other legal systems have also implemented similar, extraterritorial anti-corruption laws.
What can companies do about it? Since corruption often leaves little direct evidence, it can be incredibly challenging for businesses, especially smaller subcontractors in larger supply chains, to detect corrupt activities.
One practical solution is to stay alert to circumstantial evidence or so-called ‘red flags’ of corruption. Recognising these warning signs and integrating them into your internal due diligence processes is best practice. Several lists of red flags have been published, with the ICC Guidelines on Agents, Intermediaries and Other Third Parties being among the most highly regarded. These Guidelines encourage businesses to be particularly cautious when dealing with intermediaries or consultants hired to facilitate transactions. Red flags include:
- The Third party has a close personal or family relationship, or business relationship, with a public official or relative of an official
- The Third party does not reside or have a significant business presence in the country where the customer or project is located
- The Third party does not reside or have a significant business presence in the country where the customer or project is located
- The Third party requests an increase in an agreed commission in order for the Third party to “take care” of some people or cut some red tape.
The ICC Guidelines also urge companies to pay attention to broader circumstances, such as whether the operation takes place in a country known for corrupt practices. Other published lists of red flags that vary in scope and level of detail include those published in the World Economic Forum Good Practice Guidelines on Conducting Third-Party Due Diligence or the Financial Action Task Force.
It is important to note that these red flags are not exhaustive, and their purpose is to encourage companies to adopt an anti-corruption culture and engage in appropriate due diligence. By extension, the mere presence of red flags does not necessarily mean that corruption is taking place – they are nothing more and nothing less than warning signs that should be taken seriously and subject to further investigation.
By staying vigilant to these red flags and implementing proper due diligence, companies can proactively mitigate the risk of corruption in international trade. Building strong systems of transparency, accountability and cooperation is key to securing sustainable and resilient value chains across borders.