Jacques Marnewicke

Corruption ranks amongst the biggest threats to global economic prosperity. The negative and prejudicial impacts of corruption always outweigh any perceived benefits. And, the unfortunate reality is that corruption too often occurs where there is an opportunity and unscrupulous individuals are present. It is, therefore, no surprise that fighting corruption has become one of the most challenging issues facing the business community today. 

Organizations must protect themselves by accurately assessing the corruption risk attached to any new ventures and implementing effective measures to mitigate the risk. The risk assessment should not ignore the fact that an organization’s own approach to corporate governance may pose as big a corruption risk as the perceived exposures within the market it wants to enter.

It is generally believed that emerging and developing markets pose a greater corruption risk due to weaker regulation and a number of other factors believed to be unique to those markets. A proper corruption risk assessment must examine if this assumption is indeed true for the specific market in which an organization intends to invest.  A thorough consideration of all external and internal factors impacting the company’s conduct in that market is required. 

External risk factors
The external factors relevant to a particular emerging or developing market refer to the drivers of the supply and demand sides of corruption.  These may include the regulatory environment, culture of the communities, stakeholder expectations, needs of the community and industry practices.
 
Organizations should investigate the merits of common assumptions when assessing the external risk factors in a particular market, such as:

• Investing or conducting business in emerging and developing markets poses challenges with respect to corruption that differ completely from those faced at home or in developed markets.
• The approach to addressing corruption risks must be different in emerging and developing markets.
• Corruption is more likely to occur in emerging and developing markets than in developed markets, as the former are generally less regulated.
• The cultures of societies in emerging and developing markets are inherently prone to corruption.
• Less regulation in societies believed to be inherently corrupt leaves investors in emerging and developing markets with no alternative but to engage in corrupt practices.
• Investments by large foreign organizations in emerging and developing markets ultimately benefit society in those markets, so minor indiscretions, such as bribery and other forms of corruption, may be ignored for the greater good.

These perceptions cannot be applied as a general rule to all emerging or developing markets.  A main purpose of risk assessment is to determine which perceptions are warranted in a specific market in order to guide the organization’s investment decision.

Some assumptions should be challenged from the outset. An over-emphasis on the level of regulation presupposes that regulation alone will prevent ethical failure. Of course, this is not true. Even where sophisticated corporate governance measures are legislated, the possibility of ethical failure cannot be excluded. The notion that emerging and developing markets are inherently prone to corruption is overly simplistic and, in any event, only accounts for the demand side of corruption. The supply side of corruption can often be traced to organizations from developed countries.

The due diligence exercise suggested above should serve as a general point of departure for all organizations considering investment or operations in a specific emerging or developing market. A consideration of the regulatory environment, cultural practices and general market practices are important factors in considering the final decision to invest. It may very well be that based on these factors alone an organization may decide not to enter a particular market. But there are also other considerations for investing, including internal factors related to a company’s conduct in a market.

Internal risk factors
Internal factors refer to an organization’s own standards and codes that essentially form its value system. Conduct in any market, including emerging and developing markets, should primarily be driven by the organization’s value system. Regulatory requirements set standards for conduct and provide critical guidance, but the internal governance framework of a company truly determines if it is an ethical one or not.

Organizations should carefully and honestly consider the following questions as part of its investment evaluation process:

• What is the real motivation for a planned investment in a particular emerging or developing market?
• Is the conduct required to succeed in the chosen market reconcilable with the organization’s own internal governance framework and value system?
• Would the intended conduct in the chosen market offend regulators in the organization’s home jurisdiction and, if so, why?
• What is the potential impact of the organization’s intended conduct on all of the different stakeholders in the market it is considering entering?

Organizations will increase their exposure to corruption in a particular market if the investment decision is not based on sound principles. A decision to enter a specific market based on an opportunity to exploit a weakness in the regulatory environment is one made for the wrong reason. The same applies to a decision to profit from conduct prohibited by regulators in an organization’s home jurisdiction. The risk of prejudice is also increased where the organization’s decision to invest in another country fails to have full regard for its own value system and the interests of stakeholders in the target market.

Organizations that decide to enter an emerging or developing market after careful consideration of all the external and internal factors are not immune to the risk posed by corruption. However, they will have the comfort of clearly understanding their value system and will be able to seek out like-minded partners to engage in fighting corruption in such markets. 

There are numerous plausible initiatives to fight corruption in emerging and developing markets, and it should not be difficult to find willing partners in almost any market. The challenge is to form a group of truly dedicated organizations that are genuinely committed to honest practices and the eradication of corruption. It is only once such a group is formed that collective action against corruption will start to be successful. 

No organization on its own will succeed in driving corruption from any given market, but it does take individual organizations to initiate and energize the effort. Is your organization willing to take responsibility and actively support new and existing anti-corruption initiatives?

Jacques Marnewicke is Head of Group Forensic Services for the Sanlam financial services group, responsible for the formulation and implementation of a financial crime combating strategy for the group. He is currently the Convenor of the Standing Committee on the Financial Intelligence Centre Act and money laundering control of the Life Offices’ Association of South Africa (LOA) and also represents the LOA on the Money Laundering Advisory Council (MLAC).  He is one of the representatives of Business Unity South Africa on South Africa’s National Anti-Corruption Forum (NACF).  He is certified member of the Compliance Institute of South Africa. Jacques graduated with BA (Law) and LLB degrees from the University of Stellenbosch.