Tackling the problem of corruption

Published in MEED, 1 July 2015 The region’s policies to weed out malpractice and fraud are rarely seen as effective.

In March, Germany’s Commerzbank agreed to pay $258.7m in a settlement with the Office of Foreign Assets Control (OFAC), the arm of the US Treasury that enforces economic sanctions. The details of the agreement released by OFAC set out how the German bank had been processing transactions from Iran while disguising the involvement of Iranian banks.

It was just the latest in a long line of institutions that have paid fines to the US authorities in recent years for breaking the rules. In 2014, the US’ Bank of America and France’s BNP Paribas both agreed settlements; in previous years it had been the turn of the UK’s HSBC and Standard Chartered, the US’ JPMorgan Chase, and Swiss lender Credit Suisse, to name just a few.

Deeply embedded

Overall, the US Treasury has extracted more than $3.8bn from sanctions busters in 145 settlements since 2009. Such figures lend weight to the notion that fraud, corruption, bribery and rule-breaking are rife within the financial sector. But banks are far from the only culprits. The arrests of senior Fifa officials in late May at the instigation of US prosecutors investigating corruption around football World Cups show how deeply embedded such vices are in some corners of the sporting world too.

In a Middle Eastern context, there are plenty of allegations of bribery around Qatar’s winning bid for the 2022 Fifa World Cup. While Doha has always stoutly denied them, the growing scandal could yet fatally undermine the country’s hopes of staging the event.

The wider business world is often both victim and culprit when it comes to corruption. In a May survey carried out by the UK’s EY, some 51 per cent of respondents said they believed bribery and corruption were widespread in their country.

The survey was conducted with 3,800 people in 38 countries across Europe, the Middle East, Africa and India. It covered most areas of economic activity, from financial services to extractive industries, consumer goods, healthcare, life sciences and the public sector.

Included among them were participants in Egypt, Oman, Saudi Arabia and the UAE, and, although the sample size of 100 people from each country is small, the insights the survey offers tally with other, larger surveys of corruption. Overall, some 35 per cent of respondents to the survey in the Middle East said they thought bribery or corrupt practices were widespread in the local business community.

The UAE had the best score within the region, with only 24 per cent saying the problem was widespread. In comparison, Oman had a score of 36 per cent, Saudi Arabia was at 44 per cent and Egypt was the worst at 64 per cent.

However, these results are coloured by the fact that Middle East businessmen and women are either not always aware of what constitutes dubious practices, or they are more tolerant of things that are not acceptable in other parts of the world.

Within the Middle East, 49 per cent said that offering gifts to win business is justifiable to help a company survive - higher than for any other region in the survey other than India, where it was 52 per cent. The same number also thought cash payments were a justifiable way of winning business, which is well above the rate in other parts of the world.

In addition, 34 per cent of respondents in the Middle East said the financial performance of companies in their market was often overstated, but they do not always seem to view that as fraud. Oman stands out in this regard. Some 99 per cent of Omanis said their company had manipulated its financial performance in the past year, compared with the 36 per cent who said corrupt practices were widespread in their country.

There are similar disconnects in the UAE, where 24 per cent said corruption was widespread, but 40 per cent knew their company had been cooking the books.

In Egypt, the results point in the other direction, with 32 per cent saying their company had been manipulating its financial performance, which is half the number who thought corruption and bribery were widespread. In Saudi Arabia, the figures were more evenly matched – 43 per cent said there had been some manipulation of their company’s performance in the past year, against the 44 per cent who thought bribery and corruption were widespread.

Causative factors

The motivations for such financial fraud are many, but it can become more tempting when times get tough. For some managers, the pressure to hit targets that were set before political instability became a problem or before oil prices had fallen can increase the likelihood that they will engage in fraud.

There are many ways in which such fraud can happen. Costs could be under-reported or revenues booked earlier than they should be. Other common ways of manipulating a company’s results include negotiating retrospective rebates, bonuses or discounts from suppliers, or requiring customers to buy unnecessary stock.

Corruption in the business world can have harmful consequences, but when it happens within the public sector it can be even more corrosive, undermining trust in the state and harming the prospects of the poorest and weakest in society. The extent to which it takes place around the region as a whole is hard to gauge, but the performance of countries from the

Middle East and North Africa (Mena) region in Germany-based non-governmental organisation Transparency International’s annual Corruption Perceptions Index suggests it is pervasive in many places.

Corruption index

The index ranks 175 countries on a score ranging from zero for highly corrupt to 100 for highly clean. The UAE comes out best with a score of 70 points, putting it 25th in the world, followed by Qatar in 26th place with a score of 69 points. However, all the other countries have a score of less than 50 points. Sudan is the worst performer from the region, with just 11 points and a ranking of 173rd, with only North Korea and Somalia below it in the table.

As those statistics indicate, poor and unstable countries often have the worst record of corruption. That is also apparent from Transparency International’s Corruption Barometer Survey, which asked 114,000 people in 107 countries for their views on corruption, including 11 countries around the Middle East.

The most recent survey is from 2013 and it showed that, on average, 53 per cent of people thought that corruption had increased over the past two years in their country. However, there were higher figures from people in Egypt, Iraq, Lebanon, Morocco, Tunisia and Yemen - with responses ranging from 56 per cent in Yemen to 84 per cent in Lebanon.

Most people think their government’s efforts to tackle corruption are ineffective. Lebanon again topped the regional table in this regard, with 77 per cent saying government policies were failing. It was closely followed by Algeria, where 75 per cent thought this to be the case, and Morocco with 71 per cent. It was only in Sudan where a majority thought that government action was proving to be effective.

The figures are scarcely much better when it comes to asking employees if their bosses are committed to weeding out corruption in their workplace. According to the EY survey, only 45 per cent of Egyptians think the senior management in their company is strongly committed to anti-bribery or anti-corruption policies. The figures for the UAE, Oman and Saudi Arabia are not much better, ranging from 51 to 55 per cent.

Around the world, political parties are often deemed to be the most corrupt institutions, followed by the police force and the judiciary. In the Middle East, where political parties often do not exist or are irrelevant, there are frequently different targets to blame.

Sources of corruption

In Algeria, it is the private sector and the judiciary that are most frequently cited as corrupt, according to Transparency International. In Egypt, it is the media and police; in Libya it is civil servants; in Morocco it is the medical services and the police, while in Sudan, it is religious bodies. However, political parties are named as the most corrupt in Iraq, Palestine, Tunisia and Yemen.

One thing that can help prevent or reduce corruption is a free media. But the region has a woeful track record in this regard too. According to the Press Freedom Index compiled by France-based non-profit organisation Reporters Without Borders, the best country in the region is Kuwait, but it is ranked 90th out of 180 states.

Tackling corruption will require action by both the government and the private sector. Right now, the region does not look very well-equipped to deal with the challenge.