Corruption: A Stubborn Pitfall of Doing Business in LATAM

The publication of Transparency International’s 2013 Global Corruption Barometer offers a stark reminder of the stubborn persistence of one of the principal pitfalls of doing business in Latin …

The publication of Transparency International’s 2013 Global Corruption Barometer offers a stark reminder of the stubborn persistence of one of the principal pitfalls of doing business in Latin America. The country topping the list for private sector corruption will come as a surprise to many. Chile is one of only two Latin American countries to rank in the top 20 for Transparency International’s (TI) Corruption Perception Index, yet 65% of respondents rated its private sector as corrupt or extremely corrupt.

The countries that follow, though, are depressingly familiar. Venezuela obtained the second worst score for private sector corruption, with 63%, followed by Mexico with 51%, Peru with 50%, and Argentina with 49%.

According to TI, the forms of corruption rife in the private sector are bribery, undue influence, fraud, money laundering and collusion. “Companies often pay bribes or rig bids to win public procurement contracts,” TI states on its website. “Many companies hide corrupt acts behind secret subsidiaries and partnerships. Or they seek to influence political decision-making illicitly. Others exploit tax laws, construct cartels or abuse legal loopholes.”

Transparency International is calling on governments to enforce international anti-bribery laws and conventions to protect companies across borders and down supply chains.

Losing Bids for Not Having Bribed

Around the world, almost a fifth of surveyed company executives claim they have lost business to a competitor who paid bribes, while a third felt corruption was getting worse. The impact can be devastating on both the economy and on public institutions. “Corruption distorts markets and creates unfair competition,” states TI.

Within Latin America, by far the most common reason for paying bribes was to “speed things up,” although in Chile, Colombia, Mexico, Venezuela, and Peru around a third of respondents who said they had paid a bribe had done so because “it was the only way to obtain a service.”

Of those services, the biggest issue among business concerns was dealing with registry and permit services.  In Venezuela, 48% of people who had come into contact with registry and permit officials had to pay a bribe. It is also a major issue in Mexico where 27% reported having to pay a bribe, and Bolivia with 22%.

Also of particular concern was the number of people who had to bribe tax, revenue, and customs officials. Mexico topped the list with 16% of people having to pay bribes, followed by Bolivia with 14% and Colombia with 12%.

While it may be tempting to write off private sector corruption as a local issue, examples of large multi-nationals engaging in corrupt practices in Latin America are far from rare. In recent years, there have been a number of scandals, from Ralph Lauren bribing Argentine customs officials, to Lufthansa subsidiary Bizjet securing government contracts with pay-offs in Mexico and Brazil. Perhaps the most infamous case involves Walmart, which greased palms to the tune of an estimated $24 million to circumvent building regulations as it established itself as one of the biggest companies in Mexico.

Greasing Palms

According to TI, corruption does not pay. “Hefty fines, damaged reputations and jail sentences – recent scandals prove that corruption in business doesn’t always bring profits,” its website states.

Sign up for our Nearshore Americas newsletter:

However, prosecutions remain rare, and fines for those that caught are often a fraction of the profits gained through corruption. Even the record $1.9 billion settlement with UK bank HSBC over accusations it facilitated laundering of drug trade profits for Mexican cartels represented a fraction of the company’s annual profits and was dwarfed by the mind-boggling sums involved, which totaled $60 trillion of transactions.

The future does not look promising. When respondents were asked if they felt corruption had improved or worsened over the last two years, the most popular answer in every Latin American country but two was that corruption had “increased a lot.”

Of the two, where the most popular answer was “stayed the same” – Brazil and Peru, the former has been rocked by the Mensalao political scandal which has taken down a host of leading political figures and is still edging ever close to popular former President Luiz Inacio Lula da Silva, while the latter is currently seeing no less than three former presidents facing corruption investigations,

However, TI at least, is not giving up the fight. The group’s private sector team is calling for companies to tighten their own internal procedures with specific anti-corruption measures and a zero-tolerance policy towards bribery and corruption. On the other side, TI is calling on governments to enforce international anti-bribery laws and conventions to protect companies across borders and down supply chains.

According to the survey results, they should not be alone. Nearly nine out of ten respondents around the world said they were willing to act against corruption.

“Bribe paying levels remain very high worldwide, but people believe they have the power to stop corruption and the number of those willing to combat the abuse of power, secret dealings and bribery is significant, “ said Huguette Labelle, the Chair of Transparency International.

Tags