Bribery in International Business Transactions and the OECD Convention: Benefits and Limitations

Business Economics, Oct, 2000 by Wayne Hamra

This article reviews common reasons why multinational firms have given questionable payments to foreign officials, noting that unsavory business practices have been extremely difficult to change. In-depth interviews with academics and executives examine the anticipated impact of the OECD's Convention on Combating International Bribery of Foreign Public Officials in International Business Transactions on the flow of these illicit payments and the pact's likely effects on American firms' foreign operations. The paper also gleans strategies that firms have used to handle requests for corrupt payments and explores ways that governments and international bodies might help them cope more effectively with these issues.

International bribery assumes many guises, but wherever the practice occurs, it inhibits economic development and distorts competition. It disrupts distribution channels, destroys incentives to compete on quality and price, undermines market efficiency and predictability, and ultimately denies many people the right to a minimal standard of living (The Problem, 1996). It creates non-tariff barriers to foreign trade and causes economic deadweight losses that reduce firms' and nations' long-term competitiveness. One of bribery's most sinister features is its corrosive effect on the public's respect for the rule of law and therefore on the entire structure of a society. It can swiftly undermine a government's legitimacy, and it often destabilizes the fragile process by which democratic ideals and institutions develop (Stop the Rot, 1999).

Robert McNamara, former president of the World Bank, observes that the democratization of countries, their citizens' growing intolerance of illicit payments, and increased media scrutiny have produced a climate more conducive to seriously addressing the international bribery issue than at any time in the past 40 years (Ettorre, 1994). US executives who deal with foreign nationals in developing countries report that many members of the emerging middle class are adopting a new attitude toward bribery. These educated people--many of whom are urging political liberalization in their home countries--regard it as a wasteful practice that wreaks havoc with the economy (Ettorre, 1994). In addition, firms that have resisted paying bribes for either ethical or legal reasons have put increased pressure on their own governments to have the practice stopped.

This change in political climate has led angry crowds impatient with lethargic reforms to take to the streets in countries as varied as Bulgaria, Zimbabwe, Indonesia and Venezuela (A Global War, 1999). Within the past few years, a sea change of opinion has forced heads of state from office in Brazil, Pakistan, Venezuela and Zaire because of their perceived involvement in corrupt practices. In South Korea, two former presidents and numerous business leaders have been convicted of bribery, and in India several former cabinet members have been indicted. Corruption scandals have shaken industrial countries in recent years as well, resulting in resignations and sometimes jail terms for prominent politicians and businessmen in Belgium, France, Japan, Germany, Italy and Sweden (Gopinath, 1996).

One of the consequences of this increased concern is the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the OECD Convention). This study examines the impact that academics and practitioners anticipate that the OECD Convention will have on U.S. multinational firms. It also reviews the main reasons why multinational firms have found it necessary to make questionable payments and why corrupt practices have been so difficult to eradicate.

Nature and Importance of the Problem

The following definitions are used throughout this paper for the terms bribe and facilitating payment.

Bribe--an inducement that influences a public official to perform his/her duties in a manner contrary to the course that would otherwise be adopted. These include:

* "Kickbacks"--cash or expensive gifts--given to officials so a multinational firm would receive contracts that it would not otherwise have been awarded

* Cash or gifts given to public officials to prevent a multinational firm from being punished for violating local laws; e.g. dumping wastes into a river

* A multinational firm pays customs officials so they will not levy the required import duty on inbound shipments of materials

Facilitating Payment--an inducement that causes a public official to expedite performance of a legal public function

* A multinational firm pays more than the required fee for telephone lines so it doesn't have to wait for 6 months to get them

* A multinational firm gives cash to immigration officials so they will promptly grant legitimate visa requests for their expatriate employees

* A multinational firm pays customs officials so shipments won't be delayed by spurious demands for additional import duty

Why international bribery has become important.