Confronting Corrupt Practices: Maintaining a Moral Compass in International Business

Unlike the colonialism of a former era, modern globalization comes at a time when international businesses operate under legal pressure to avoid both initiating and acquiescing to corrupt practices. Moral pressures to avoid corruption have also mounted as the economic and social effects of corruption are ever more convincingly documented. In countries all over the world, corruption has staggering negative impacts on gross domestic product, greatly exacerbating poverty and suffering.

Like other businesses, therefore, law firms opening branches or just doing business in foreign countries risk considerable embarrassment as well as legal penalties if they fail to properly train their staff and local affiliates to comply with home-country and foreign anticorruption laws.

The United States can justly take pride in having started the wave of fair business legislation that has gradually, in varying degrees, begun to clean up international business dealings in at least the world's major trading regions. The Foreign Corrupt Practices Act of 1977 ('FCPA') criminalized acts of foreign bribery as well as compliance with extortion ' albeit with a troublesome ill-defined exception for 'facilitating or expediting payments.'

By putting U.S. businesses at a competitive disadvantage overseas, the FCPA generated constructive pressures for wider reform, which led to the Anti-Bribery Convention of the Organization for Economic Cooperation and Development ('OECD'). With implementing legislation by more than 30 countries, including the United States, the OECD Convention has substantially levelled the playing field for international business competitors. This contrasts sharply with the previous trade environment, in which bribery was regarded as so unavoidable that it was often tax deductible.

Regional Challenges

While the standards for U.S. businesses have risen, the endemic corruption of many foreign business environments has not abated.

The Chinese business environment is particularly confusing because of a profound difference in the way business is customarily done within and outside of guanxi (pronounced gwan-sea) networks. Mutual trust, generous reciprocity, and promise keeping are the very foundations of business and personal relationships within one's network. But as China commentator Robert M. March (with his coauthor Su-Hua Wu) explains, the flipside of the guanxi concept is captured by the expression Shang chang ru zhan chang, meaning 'The marketplace is a battlefield.' That maxim is used to support the widespread belief in China that trade outside one's guanxi network is a realm for hard bargaining and price gouging, supplemented as expedient by deception, fraud, bribery, and intimidation tactics.

As March describes the situation in China, many of the U.S. firms that made major investments there during the 1990s have retreated in dismay. While some outsiders have indeed prospered and a very few have been welcomed into guanxi networks, tales abound of extraordinary problems, ranging from severe difficulties with entrusting cash to local handlers, to enormous bribe requests, to schemes that have startled even Chinese 'foreigners' from Taiwan.

March tells, for example, of a Taiwanese businessman whose trustworthy old school friend helped him establish a highly profitable partnership with a mainland manufacturer. While on vacation back in Taiwan, the businessman learned from his mainland partner that an organized crime syndicate had muscled its way into the business and even put out a contract on the Taiwanese businessman's life! When his old school friend confirmed that the partner had actually shown him documentary evidence of these unsavory developments, the Taiwanese businessman reluctantly agreed to the partner's offer to buy out his interest in the company for far less than its true value. Only later did it emerge that the mainland partner had fabricated the entire crime story and manipulated the mutual friend by showing him forged documents.

Business practices vary considerably from country to country, of course, as do the economic and cultural impediments to compliance with anticorruption initiatives. At one extreme, bribery and extortion are reportedly infrequent in Singapore, where they are capital offenses. Compliance with Japan's strict rules, by contrast, was long undermined by wrist-slapping penalties.

In many countries on several continents, graft on the part of government officials correlates with the inability of those countries to pay those officials a living wage ' or, often, to pay them at all.

Extortion is especially hard for locals to resist if they traditionally have more deference to authority than we do. In some regions, Confucian or other traditional systems that place great weight on respect for authority have been 'reinforced,' in this respect, by one or more generations of totalitarian governments that engendered respect in less philosophical ways. The result is a problem faced by anticorruption compliance trainers. A World Bank report on private sector anticorruption initiatives in East Asia cites a training class in which every student discussion group selected a roundabout compromise to a clear-cut example of extortion that was supposed to elicit a 'just say no' response.

As the preceding example suggests, the nontrivial challenge of training U.S. nationals in FCPA compliance and other anticorruption measures is far exceeded by the difficulty of ensuring that local partners and agents in some other countries also comply.

Institutional Intiatives

Progress is being made on several fronts, ranging from organized student anticorruption movements to NGO and intergovernmental initiatives. Leaving aside its recent leadership distractions, the World Bank has been doing valuable anticorruption work for some time, and its reports on the progress of governmental and private sector initiatives provide valuable insights.

The World Bank and others have recognized that compliance is getting at least somewhat easier thanks to such innovative services as pre-screening of local partners by the TRACE Institute of Transparency International, Inc. The business ethics of pre-screened local partners cannot be guaranteed, of course.
But diligent pre-screening is helpful in the same way as credit screening is. Perhaps an even more apt analogy is certification of manufacturing supply-chain vendors by the Inter-national Standards Organization. Vendors with ISO-9000 and related certifications are much more likely to be reliable suppliers than vendors that mainly talk a good game.

For a clear conception of how to implement an anticorruption program at a law firm, see Alexandra Wrage's February 2006 A&FP article, 'Building a State-of-the-Art Anti-Bribery Program.' Wrage founded and heads Trans-parency International.

Hearts and Minds

Notwithstanding improvements in trade law and the support of creative new international trade institutions, commentators agree that the key ingredient for success in battling corruption is the integrity and commitment of individual business people ' and the support of their executives and boards of directors back at home.

Organizations need strong anticorruption policies, and it's important that top leaders endorse those policies in training videos and the like. But the rubber doesn't really meet the road until an individual employee or agent is asked for a questionable 'facilitation payment' or confronted with an opportunity to win a commercial competition by employing a dishonest stratagem. Will that individual, his or her manager, and the firm's ethics hotline adviser all arrive at a legally and morally defensible response?

This returns us to the issue raised at the start of this article. The realistic challenge in our diverse society is for organizations and individuals to have and maintain 'a' moral compass ' not 'the' moral compass that some religions and ideologies insist they can provide. Yet, as was proposed decades ago in the Common Core of Legal Systems project, it's very often the case that superficially disparate legal systems converge on essentially the same concept of a just result.

(To be sure, there are also textbook cases in which different value-system compasses point in different directions. A denominational issue within Christianity, for example, has been a difference in views on whether 'mental reservations' can make some kinds of deception excusable.)

I suggest that individuals and organizations need to ground their ethical business stances on more than pledging allegiance to a noble statement of honest business principles that somebody else wrote. Compliance training programs should encourage participants at all appropriate organizational levels to:

• Articulate their own ideals;
• Broaden their social consciousness;
• Respectfully explore differences;
• Inquire rather than just guess about stakeholder interests; and
• In general become more fluent ethical actors who can be trusted to represent the organization responsibly.

Story Time

There are numerous ways for promoting such exploration. One good method, if sensitively implemented, is to ask training group participants to spend some time in advance trying to recall traditional, personal, or literary stories about honesty or integrity that they personally found memorable and inspiring, and to share those stories with other participants. Often such stories stress some individual's going beyond the letter of the law ' Abraham Lincoln walking 20 miles to return a borrowed dollar, for example. But equally important are stories about those who showed moral courage by simply adhering to the letter of the law.

Sorting traditional and personal stories by their value themes is a way to strengthen connections, and also makes it easier to identify additional useful meanings. One story theme, for example, relates to showing respect for the 'meeting of minds' that went into a bargained transaction, by not taking advantage of an error-based windfall. A classic example of this is the Talmud's story of an impoverished sage who insisted on returning a precious jewel found in the saddle of a donkey purchased for him by his students.

Such traditional stories very likely played a part in an anecdote related by my friend Yonah Jaffe, concerning how a successful retiree he knew got started in business. This man had originally earned a meager living as a peddler, going door to door to buy and sell used clothing. At one prominent residence he purchased a man's suit from the butler. When he got home he discovered the suit had a diamond stickpin in it, so he immediately brought the jewel back to return it. The wealthy owner generously said he appreciated the gesture but felt that his careless loss should properly be the buyer's windfall gain. The peddler insisted on the return, however, saying he had 'paid for an old suit, not for a diamond.'

Eventually the peddler felt he was ready to open a regular business and went to the town bank to apply for a loan. Just as the bank officer was explaining to him that a loan without collateral was not feasible, the owner of the stickpin came into the bank and recognized the peddler. A major client of the bank, he walked straight over to the lending officer and volunteered that he could personally vouch for the applicant's complete trustworthiness. The loan was immediately granted.

That anecdote came to mind recently when I read the statement of a major U.S. corporate leader quoted by the World Bank. He said he realized his company would lose a substantial amount of business in the short term by refusing to cut corners on anticorruption measures abroad. He claimed to believe, however, that those competitors who won bids through corrupt practices would eventually put themselves out of business.

It's unlikely that anyone will ever statistically demonstrate that the greatest long-term profitability flows to individuals and firms with the best moral compasses. Besides, most of us would prefer to do the right thing on principle. But true stories such as the preceding provide a motivational boost, and in corrupt environments where integrity and success may not be clearly correlated, every little bit of motivation helps.

Joe Danowsky is the editor-in-chief of this newsletter.

Hide a dagger in a smile. Murder with a borrowed knife. Loot a burning house. If you cannot anticipate these and the other classic 'Thirty-Six Stratagems' that are widely studied and practiced in China, you may be perilously unprepared to pursue business, including legal business, in the world's largest market. And while China may be an extreme example, analogs of these deceptive and sometimes corrupt practices appear in other cultures worldwide.

Decent business people need to understand corrupt business tactics for defensive purposes, but those who focus only on 'learning to play the game' face a severe moral hazard. They may well find themselves characterized by Nietzsche's epigram: becoming a dragon in the process of fighting dragons. To avoid that fate, you and your organization need to have a moral compass to begin with, and you need to take steps to keep it true.

Rising International Standards

Unlike the colonialism of a former era, modern globalization comes at a time when international businesses operate under legal pressure to avoid both initiating and acquiescing to corrupt practices. Moral pressures to avoid corruption have also mounted as the economic and social effects of corruption are ever more convincingly documented. In countries all over the world, corruption has staggering negative impacts on gross domestic product, greatly exacerbating poverty and suffering.

Like other businesses, therefore, law firms opening branches or just doing business in foreign countries risk considerable embarrassment as well as legal penalties if they fail to properly train their staff and local affiliates to comply with home-country and foreign anticorruption laws.

The United States can justly take pride in having started the wave of fair business legislation that has gradually, in varying degrees, begun to clean up international business dealings in at least the world's major trading regions. The Foreign Corrupt Practices Act of 1977 ('FCPA') criminalized acts of foreign bribery as well as compliance with extortion ' albeit with a troublesome ill-defined exception for 'facilitating or expediting payments.'

By putting U.S. businesses at a competitive disadvantage overseas, the FCPA generated constructive pressures for wider reform, which led to the Anti-Bribery Convention of the Organization for Economic Cooperation and Development ('OECD'). With implementing legislation by more than 30 countries, including the United States, the OECD Convention has substantially levelled the playing field for international business competitors. This contrasts sharply with the previous trade environment, in which bribery was regarded as so unavoidable that it was often tax deductible.

Regional Challenges

While the standards for U.S. businesses have risen, the endemic corruption of many foreign business environments has not abated.

The Chinese business environment is particularly confusing because of a profound difference in the way business is customarily done within and outside of guanxi (pronounced gwan-sea) networks. Mutual trust, generous reciprocity, and promise keeping are the very foundations of business and personal relationships within one's network. But as China commentator Robert M. March (with his coauthor Su-Hua Wu) explains, the flipside of the guanxi concept is captured by the expression Shang chang ru zhan chang, meaning 'The marketplace is a battlefield.' That maxim is used to support the widespread belief in China that trade outside one's guanxi network is a realm for hard bargaining and price gouging, supplemented as expedient by deception, fraud, bribery, and intimidation tactics.

As March describes the situation in China, many of the U.S. firms that made major investments there during the 1990s have retreated in dismay. While some outsiders have indeed prospered and a very few have been welcomed into guanxi networks, tales abound of extraordinary problems, ranging from severe difficulties with entrusting cash to local handlers, to enormous bribe requests, to schemes that have startled even Chinese 'foreigners' from Taiwan.

March tells, for example, of a Taiwanese businessman whose trustworthy old school friend helped him establish a highly profitable partnership with a mainland manufacturer. While on vacation back in Taiwan, the businessman learned from his mainland partner that an organized crime syndicate had muscled its way into the business and even put out a contract on the Taiwanese businessman's life! When his old school friend confirmed that the partner had actually shown him documentary evidence of these unsavory developments, the Taiwanese businessman reluctantly agreed to the partner's offer to buy out his interest in the company for far less than its true value. Only later did it emerge that the mainland partner had fabricated the entire crime story and manipulated the mutual friend by showing him forged documents.

Business practices vary considerably from country to country, of course, as do the economic and cultural impediments to compliance with anticorruption initiatives. At one extreme, bribery and extortion are reportedly infrequent in Singapore, where they are capital offenses. Compliance with Japan's strict rules, by contrast, was long undermined by wrist-slapping penalties.

In many countries on several continents, graft on the part of government officials correlates with the inability of those countries to pay those officials a living wage ' or, often, to pay them at all.

Extortion is especially hard for locals to resist if they traditionally have more deference to authority than we do. In some regions, Confucian or other traditional systems that place great weight on respect for authority have been 'reinforced,' in this respect, by one or more generations of totalitarian governments that engendered respect in less philosophical ways. The result is a problem faced by anticorruption compliance trainers. A World Bank report on private sector anticorruption initiatives in East Asia cites a training class in which every student discussion group selected a roundabout compromise to a clear-cut example of extortion that was supposed to elicit a 'just say no' response.

As the preceding example suggests, the nontrivial challenge of training U.S. nationals in FCPA compliance and other anticorruption measures is far exceeded by the difficulty of ensuring that local partners and agents in some other countries also comply.

Institutional Intiatives

Progress is being made on several fronts, ranging from organized student anticorruption movements to NGO and intergovernmental initiatives. Leaving aside its recent leadership distractions, the World Bank has been doing valuable anticorruption work for some time, and its reports on the progress of governmental and private sector initiatives provide valuable insights.

The World Bank and others have recognized that compliance is getting at least somewhat easier thanks to such innovative services as pre-screening of local partners by the TRACE Institute of Transparency International, Inc. The business ethics of pre-screened local partners cannot be guaranteed, of course.
But diligent pre-screening is helpful in the same way as credit screening is. Perhaps an even more apt analogy is certification of manufacturing supply-chain vendors by the Inter-national Standards Organization. Vendors with ISO-9000 and related certifications are much more likely to be reliable suppliers than vendors that mainly talk a good game.

For a clear conception of how to implement an anticorruption program at a law firm, see Alexandra Wrage's February 2006 A&FP article, 'Building a State-of-the-Art Anti-Bribery Program.' Wrage founded and heads Trans-parency International.

Hearts and Minds

Notwithstanding improvements in trade law and the support of creative new international trade institutions, commentators agree that the key ingredient for success in battling corruption is the integrity and commitment of individual business people ' and the support of their executives and boards of directors back at home.

Organizations need strong anticorruption policies, and it's important that top leaders endorse those policies in training videos and the like. But the rubber doesn't really meet the road until an individual employee or agent is asked for a questionable 'facilitation payment' or confronted with an opportunity to win a commercial competition by employing a dishonest stratagem. Will that individual, his or her manager, and the firm's ethics hotline adviser all arrive at a legally and morally defensible response?

This returns us to the issue raised at the start of this article. The realistic challenge in our diverse society is for organizations and individuals to have and maintain 'a' moral compass ' not 'the' moral compass that some religions and ideologies insist they can provide. Yet, as was proposed decades ago in the Common Core of Legal Systems project, it's very often the case that superficially disparate legal systems converge on essentially the same concept of a just result.

(To be sure, there are also textbook cases in which different value-system compasses point in different directions. A denominational issue within Christianity, for example, has been a difference in views on whether 'mental reservations' can make some kinds of deception excusable.)

I suggest that individuals and organizations need to ground their ethical business stances on more than pledging allegiance to a noble statement of honest business principles that somebody else wrote. Compliance training programs should encourage participants at all appropriate organizational levels to:

• Articulate their own ideals;
• Broaden their social consciousness;
• Respectfully explore differences;
• Inquire rather than just guess about stakeholder interests; and
• In general become more fluent ethical actors who can be trusted to represent the organization responsibly.

Story Time

There are numerous ways for promoting such exploration. One good method, if sensitively implemented, is to ask training group participants to spend some time in advance trying to recall traditional, personal, or literary stories about honesty or integrity that they personally found memorable and inspiring, and to share those stories with other participants. Often such stories stress some individual's going beyond the letter of the law ' Abraham Lincoln walking 20 miles to return a borrowed dollar, for example. But equally important are stories about those who showed moral courage by simply adhering to the letter of the law.

Sorting traditional and personal stories by their value themes is a way to strengthen connections, and also makes it easier to identify additional useful meanings. One story theme, for example, relates to showing respect for the 'meeting of minds' that went into a bargained transaction, by not taking advantage of an error-based windfall. A classic example of this is the Talmud's story of an impoverished sage who insisted on returning a precious jewel found in the saddle of a donkey purchased for him by his students.

Such traditional stories very likely played a part in an anecdote related by my friend Yonah Jaffe, concerning how a successful retiree he knew got started in business. This man had originally earned a meager living as a peddler, going door to door to buy and sell used clothing. At one prominent residence he purchased a man's suit from the butler. When he got home he discovered the suit had a diamond stickpin in it, so he immediately brought the jewel back to return it. The wealthy owner generously said he appreciated the gesture but felt that his careless loss should properly be the buyer's windfall gain. The peddler insisted on the return, however, saying he had 'paid for an old suit, not for a diamond.'

Eventually the peddler felt he was ready to open a regular business and went to the town bank to apply for a loan. Just as the bank officer was explaining to him that a loan without collateral was not feasible, the owner of the stickpin came into the bank and recognized the peddler. A major client of the bank, he walked straight over to the lending officer and volunteered that he could personally vouch for the applicant's complete trustworthiness. The loan was immediately granted.

That anecdote came to mind recently when I read the statement of a major U.S. corporate leader quoted by the World Bank. He said he realized his company would lose a substantial amount of business in the short term by refusing to cut corners on anticorruption measures abroad. He claimed to believe, however, that those competitors who won bids through corrupt practices would eventually put themselves out of business.

It's unlikely that anyone will ever statistically demonstrate that the greatest long-term profitability flows to individuals and firms with the best moral compasses. Besides, most of us would prefer to do the right thing on principle. But true stories such as the preceding provide a motivational boost, and in corrupt environments where integrity and success may not be clearly correlated, every little bit of motivation helps.

Joe Danowsky is the editor-in-chief of this newsletter.