Entries in Red Tape (24)
The International Finance Corporation and the World Bank released their new Doing Business Index this week. It's the 11th annual report measuring business regulations for local firms -- how easy or hard it is to do business in the countries surveyed. It focuses on small and medium-size companies operating in the largest business city of an economy.
Nearly half of Vietnam’s companies said they have had to bribe officials in order to do business, according to a survey released last month by the Vietnam Chamber of Commerce and Industry.
There's a wonderful article in the May 14 edition of the New Yorker by James Surowieck about foreign bribery, the FCPA, and so-called 'good bribes.'
India and China are among the world's worst countries for red tape. But their economies are growing. How? Bribery. So to beat bribery, let's kick red tape in the trash can of history.
Corruption may have been a cause of the night club fire last week in the Russian city of Perm that killed 113 people. Alexander Fridman, an entertainment producer there, told the Christian Science Monitor, “Fire inspectors found violations of the regulations a year ago, yet they didn’t come back to check whether corrections were made. Why was that? There were hundreds of people gathering at that club every night, yet they never closed it down. The basic lesson is that fire inspectors should not take bribes.”
Russia's red tape is terrible. The country ranked 182 out of 183 on the World Bank's 2010 Doing Business Index in the category of "Dealing with Construction Permits." It takes an average of 704 days to obtain the permits needed to build a warehouse in Russia; the OECD average is 157 days. Such extreme bureaucratic delays mean petty corruption is the only way to keep things moving.
The Christian Science Monitor said, "Amid Russia’s decaying infrastructure and often jury-rigged new construction, the potential for accidents [such as the nightclub fire] abound because laws are not enforced, experts say." A professor at Moscow's Institute of Architecture said most public buildings are hazards. “As long as we have this practice of paying bribes rather than making the needed improvements," he said, "nothing will change."
The story said 18,000 Russians die each year in fires, several times the rate in most developed countries. The U.S., with twice Russia's population, had 3,500 fire fatalities in 2008.
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More on the indictment of Joel Esquenazi and Carlos Rodriguez (reported here). The two Florida residents were identified by the DOJ as the president and a former vice president respectively of "Company X." The company is Terra Telecommunications Corp., formed in Nevada on July 1, 1996 and domesticated in Florida in 2002. A copy of its Florida business registration can be downloaded here. Thanks to the U.S. readers who provided this information.
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Women in Kabul marched against corruption. As reported by the LA Times and others, hundreds of women on Wednesday held a peaceful but noisy street protest. They want President Karzai to remove from his government anyone connected to corruption and the drug trade. "These women are being very brave," said the protest leader, her face hidden by a burka. "To be a woman in Afghanistan and an activist can mean death. We want justice for our loved ones!" The protest group called itself the Social Association of Afghan Justice Seekers. A spokesperson said "our people have gone into a nightmare of unbelieving" because of the disputed election and the fact that "the culture of impunity" still exists despite Karzai's vow to eliminate it.
A seven-man, five-woman federal jury in LA on Friday began deliberating the fate of the husband-and-wife movie producers accused of bribing a Thai official. Gerald Green, 77, and his wife Patricia, 52, were tried for conspiracy to violate the Foreign Corrupt Practices Act and violating the FCPA. Other charges included money laundering and illegally transporting money-laundering proceeds, obstruction, and filing false tax returns. They're facing up to five years in prison for each FCPA charge, up to 10 years for each tax count, and up to 20 years for the money-laundering and obstruction charges.
Prosecutors said the Greens paid the former governor of the Tourism Authority of Thailand Juthamas Siriwan more than $1.8 million in bribes. In return, she allegedly awarded them contracts to stage the Bangkok Film Festival worth about $13.5 million.
View prior posts about the Greens here.
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Plea bargaining in Britain? As noted by PBS / Frontline here, the U.K. Mail reported on September 5 that military equipment supplier BAE has been given until the end of the month by the Serious Fraud Office "to avoid a criminal trial for paying bribes in the Czech Republic, Tanzania, and South Africa." The pressure on BAE is a turnaround for the SFO. It caused an uproar in December 2006 by dropping an investigation into allegations the company bribed members of the Saudi Arabian government in exchange for the sale of Typhoon jet fighters. The SFO said it had to stop the investigation after Saudi Arabia threatened to end anti-terrorism cooperation with the British government.
The U.S. Justice Department, meanwhile, is reportedly still investigating BAE's payments to Saudi Prince Bandar bin Sultan of about $2 billion. He was formerly ambassador to the United States. Some of the payments allegedly passed through U.S. bank accounts he controlled.
In the same deal, BAE also delivered an Airbus 340. When interviewed by Frontline's Lowell Bergman earlier this year, the prince's lawyer, former FBI Director Louis Freeh, said the jetliner was a military aircraft and not his client's private plane. But Frontline said it had been directed to "statements by then British Secretary of State for Defense, Des Brow, who in a written answer to a parliamentary inquiry in June 2007 stated that:
Since 1 July 2006, aircraft HZ 124 has landed 15 times at RAF Brize Norton. The aircraft operated in accordance with the MOD regulations for civil aircraft use of military airfields. The regulations also cover the applicability and level of landing, housing, parking and insurance fees charges. The regulations have been adhered to for each flight."Frontline said Airbus HZ 124 is registered to the Saudi Arabia Ministry of Defense and Aviation and was used for over a decade by Prince Bandar, who had it painted in the colors of his favorite football team, the Dallas Cowboys.
View prior posts about BAE and Prince Bandar here.
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Naming and shaming in Moscow. Most companies try to solve corruption problems in Russia quietly, but not Ikea. Earlier this year, it loudly suspended a store-opening outside Moscow. It said local bureaucrats imposed a last-minute requirement that its new building be able to withstand winds nearly twice as strong as the most powerful gusts ever recorded at the store's location (here). Now, the New York Times' Andrew Kramer has written about another alleged bureaucratic shakedown of the global furniture retailer, this one in 2000 (here).
What's unusual is that the story is based on Ikea's own disclosures "to the New York Times last month, saying that it hoped publicity might compel the Russian authorities to investigate."
Here's an excerpt from Friday's article:
Weeks before the opening of its flagship store outside Moscow in 2000, Ikea was approached by employees of a local utility company. If the Swedish retailer wanted to have electricity for its grand opening, it had to pay a bribe.
Instead, Ikea rented diesel generators large enough to power a shopping mall. The generators roared to life in a loud rebuke to the corrupt executives who thought they had the retailer cornered, and soon the utility turned on the power. . . .
The board of Ikea’s operating company, which is based in the Netherlands, has concluded that the Russian executive hired to manage the generators was taking kickbacks from the rental company to substantially inflate the price of the service. Ikea said that such a fraud could cost it about $196 million over two years.
Ikea canceled the contract and sought redress in Russian civil court. But in rulings over the last two weeks, Ikea has lost another 5 million euros in damages that the judges awarded the generator rental company for breach of contract. . . .
“We have encountered something here that is outside the scope of what we normally encounter,” Mr. Thordson said, describing the global retailer’s situation in Russia. “I have never experienced anything like this. . . . .
When they met in July, Presidents Obama and Medvedev not only dressed alike, they created a Bilateral Presidential Commission. They'll chair it and Secretary of State Clinton and Foreign Minister Lavrov will act as coordinators. Working groups under the commission's umbrella will include energy, security, environment, arms control, counter-terrorism, cultural exchanges, and -- the reason we're talking about it -- business development. That group will be headed by Secretary of Commerce Gary Locke and Minister of Economic Development Elvira Nabiulline.
The press offices at the White House and Kremlin didn't provide other details. But Reuters talked to the head of the U.S.-Russia Business Council, a Washington-based group that helps American companies do business in Russia. Edward Verona said he thinks the new presidential commission will increase U.S. - Russia trade, which at $36 billion in 2008 was the same as U.S. trade with Thailand.
"The commission is very important and I don't think you can do deals without some government involvement and the blessing of both governments," Verona said. "Corruption, the rule of law and bureaucracy are easier to address through this channel . . . instead of individual companies going to the press and announcing that they may be suspending their investment in the country," he said.
Russia ranks near the bottom of the World Bank's Doing Business Index (here). Endless red tape and stories about bureaucratic shakedowns discourage foreign investors.
Earlier this year, for example, Swedish furniture retailer Ikea loudly suspended a store-opening outside Moscow. It acted after local bureaucrats imposed a last-minute requirement that its new building be able to withstand winds nearly twice as strong as the most powerful gusts ever recorded at the store's location.
Secretary Clinton will travel to Moscow in the fall for the commission's first coordinator meetings.
Our subject is usually corruption overseas. But it's impossible to ignore the news these days from New Jersey. Arrested earlier this month -- 44 people, including three mayors and two state legislators. So what's the cause of all that alleged home-grown graft?
There are lessons from the Third World. The International Finance Corporation has said, "Cumbersome entry procedures are associated with more corruption, particularly in developing countries. Each procedure is a point of contact—an opportunity to extract a bribe. Analysis shows that burdensome entry regulations do not increase the quality of products, make work safer or reduce pollution. Instead, they constrain private investment; push more people into the informal economy; increase consumer prices; and fuel corruption."
The same goes for New Jersey. The Wall Street Journal's William McGurn said this week:
Sandy McClure, co-author of the book The Soprano State: New Jersey’s Culture of Corruption, agrees that big government is a big reason behind the state’s corruption problem. “You have all these little authorities that everyone has to go to for permission,” she says. “Too much government means too many opportunities for officials looking to cash in. And there’s no way that the press can keep track of it all.”William McGurn's full column is here.
Ms. McClure is right: The more extensive government’s reach, the more opportunities the governing class has to steal from and shake down the productive class. . .
When government gets too big and complicated for businesses to get their permits and approvals and funding honestly, the dishonest prosper. And the honest get fed up and flee.
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Apropos of who-knows-what, we enjoyed this thought from Eric Hoffer's Truth Imagined:
"Sheep never get used to life. They view anything that comes in sight as something outlandish and unprecedented. Though they are undeniably silly, there is something remarkably human about them. Their fear of loneliness is pathetic. One cannot help thinking that, like sheep, human beings herd together in tribes and nations and follow a leader because of their fear of life and their feeling of being eternal strangers in this world."
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Last week the World Bank announced that Siemens will pay $100 million over the next 15 years to settle corruption charges involving a project in Russia. The money is supposed to go to anti-corruption groups, for compliance training and education programs, as well as helping governments recover assets stolen by crooked leaders.
What would we do with the money?
Simple: Cut red tape. As the World Bank's own International Finance Corporation has said, "Cumbersome entry procedures are associated with more corruption, particularly in developing countries. Each procedure is a point of contact—an opportunity to extract a bribe. Analysis shows that burdensome entry regulations do not increase the quality of products, make work safer or reduce pollution. Instead, they constrain private investment; push more people into the informal economy; increase consumer prices; and fuel corruption."
Translation: Nothing good comes from too many regulations. Bureaucrats use them to shake down the public. And usually the poorest people are most victimized.
What can be done? The U.N.'s 2008 report, Tackling Corruption, Transforming Lives, describes low-cost tools that work. Here are two of them:
Case No. 1. In the 1990s, the Hyderabad (India) Metropolitan Water Supply and Sewerage Board consolidated applications for new connections – previously a major source of corruption. Customers can now skip their local district office and go directly to the Board’s headquarters, to a "Single Window Cell." The Board posts the fee schedule in its office and in the press. Customers rarely leave without an "application token number," the equivalent of a receipt for acceptance of the application.
Case No. 2. In Korea, the Seoul Metropolitan Government uses a public online application system for licenses and other permits. Launched in 1999, OPEN -- the Online Procedure Enhancement for Civil Applications -- covers 54 common procedures. Officials responsible for corruption-prone areas, such as permit or approval procedures, now have to upload reports and documents to enable citizens to monitor the progress of their applications.
We've said before that support for similar initiatives around the world would be a nice adjunct to corporate compliance programs. Opportunities abound. Even Russia's leaders get it. Minister of Mass Communications Igor Shchegolev said in a recent article posted on FutureGov, “An e-government will rid our citizens of the need to visit different offices. I certainly hope it gets somewhere -- for one thing, I can’t think of a surer way to stifle corruption than to increase the number of rules-based computer interactions between citizens and government."
The World Bank said Siemens has "agreed to co-operate to change industry practices, clean up procurement practices and engage in collective action with the World Bank Group to fight fraud and corruption." Supporting transparency programs that really help people by cutting red tape would be a good place to start.
Russia -- the world's largest country by land mass, with 11 time zones and 142,000,000 people, one of five permanent members on the UN Security Council, member of the Group of Eight (G8) industrialized nations, and possessor of the largest stockpile of nuclear weapons on the planet -- yes, that Russia, ranks 120th on the World Bank's Doing Business Index (here). That's low, but in the narrower category of dealing with construction permits, it sits at a subterranean 180th, just one spot above last-place Eritrea. There's no doubt, then, that Russia is the modern world's undisputed red-tape colossus.
Just what that means for foreign investors who take compliance seriously was illustrated by a recent story from the AP via the Moscow Times.
The background: Global furniture retailer Ikea -- privately held and based in Sweden -- opened its first store in Russia in 2000 and has since opened 10 more. Its country investment, it says, amounts to more than $3 billion and its workforce in Russia has grown to 7,000.
According to the AP report, Ikea has always had a tough time dealing with Russian red tape and corruption. "On several occasions the company had to delay openings of its stores as regional authorities raised issues with store construction and design, safety or environmental features." As bad as past problems were, however, they may be getting a lot worse.
A store-opening in Samara in the Volga River region is now more than a month late and counting. Local bureaucrats imposed a last-minute requirement that the building be able to withstand hurricane-like 30-meter-per-second winds, even though the strongest winds recorded there have never exceeded 17 meters per second. Ikea now says there's no timeline for the opening.
And authorities last month began investigating whether the company violated anti-monopoly laws. They allege Ikea urged tenants in a mall it runs outside Moscow to buy services from certain vendors. Ikea says the allegations are false.
The company used to be an outspoken critic of bribery and corruption in Russia. It dropped that approach and now uses softer words, like "gray areas." Does the change in vocabulary signal a change in compliance policies? Who knows? But for now, at least, Ikea has put all further Russian expansion on hold. And it's not clear how it intends to deal with the current pressures.
A Western business person in Russia said, "For a foreign company that is still dependent on a lot of different ministries to do their work to go on [an aggressive anti-corruption] campaign ... tends to be a bad idea. If they want to have a future in a country, they can't make enemies."
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From Frederic Bourke's Trial. The defense needed a shot in the arm and got it on Friday, big time. Bourke's friend George Mitchell took the stand for four hours in the federal criminal trial in Manhattan. That's a lot of face time from the former Democratic Senate majority leader and current special envoy for President Obama to the Middle East.
Mitchell's message? Bourke, who recommended the Azeri privatization deal, never suggested bribes were being paid. An while Mitchell now regrets his $200,000 investment in Viktor Kozeny's crooked scheme, he trusted Bourke then and still trusts him today.
Read all our posts about U.S. v. Kozeny and the prosecution of Frederic Bourke here.