Peter Michaelis

Power, corruption and lies

Peter Michaelis

Bribery and corruption take an estimated $1.5 to $2 trillion off the global economy every year, roughly 2% of the world’s GDP.

This is money siphoned away in bribes and lost tax revenue and can have corrosive results, including stunted growth and sustained poverty. It also skews the playing field so companies can be successful by being the best at bribery rather than superior operators in their particular field.

Despite wide-ranging and substantial improvements to corporate behaviour in recent years, bribery and corruption continue to present a major challenge to sustainable development. Addressing corruption has become increasingly urgent, with growth and employment prospects in many countries still subdued by this illegal activity and a number of high-profile cases fuelling moral outrage.

There is also a growing consensus that corruption is macro-critical, as it can seriously undermine inclusive economic growth across developed and developing countries.

It is important not to underestimate the potential impact of corruption, and it should not be dismissed as merely ‘greasing the bureaucratic wheels’. Nigeria, for example, has been one of the world’s major oil producers for 50 years and yet the country’s GDP per capita is just a little under $2,000, ranking 137th according to 2017 International Monetary Fund figures.

In the Congo, meanwhile, huge international companies have acquired major mining concessions for billions of dollars but little of this money has reached state coffers. The Congolese state is estimated to have lost out on at least $1.36 billion, equivalent to twice the country’s health and education budgets combined – and there are countless more examples out there.

Bribery and corruption typically occur where there is a combination of weak governance and a concentration of resource wealth. It requires a means to transfer ownership from the state and then launder the proceeds: anonymous companies, tax havens and weak regulation facilitate both aspects.

Such activity is therefore rife in sectors such as oil and gas, mining, forestry, shipping and banking, but there are plenty of issues outside these areas. TeliaSonera (a Swedish listed Telecommunications company), for example, is alleged to have paid a $300m bribe to the daughter of the President of Uzbekistan for a licence to do business in the country, eventually paying close to $1bn to settle the matter.

Transparency International has published the Corruption Perceptions Index (CPI) since 1995, annually ranking countries by their perceived levels of corruption. Many of the UK’s largest companies operate in these areas and the stock market has so far turned a blind eye to the involvement of the oil majors, miners and multi-national banks in corrupt activities.

We believe change is coming, however, with several regulatory developments seeking to reduce corruption. Since 2010, we have seen the passing and implementation of the US Foreign Corrupt Practices Act 2011, the UK Bribery Act and the OECD’s Anti-Bribery Convention. The UK is also creating a public register in an attempt to end anonymous companies, with the EU and US poised to follow suit.

Certain developments also reveal a changing corporate landscape in the highest-risk sectors, with global oil giants Eni and Shell standing trial in Italy over allegations of corruption in Nigeria. The case involves the purchase of an offshore oil block in Nigeria for $1.3bn (£1bn) in 2011 and the companies deny any wrongdoing, claiming they acquired the rights in accordance with Nigerian law.

We have also seen greater transparency and communication around corruption, with whistle-blowers and leaks such as the Panama Papers uncovering large-scale bribery. On a smaller scale, initiatives such as help to expose dishonesty in everyday transactions.

Finally, there is also much greater focus on the sustainability of supply chains, with companies such as Apple working hard to show ethical sourcing in areas such as minerals. Apple recently issued its annual Conflict Minerals Report for 2017, noting the removal of 10 smelters and refiners that failed to participate with third-party audits in a timely manner.

From our perspective, bribery and corruption is an important engagement area, albeit one that by its very nature is often hard to define and quantify. In terms of our wish list, at a basic level we are aiming to ensure companies are not involved in bribery and corruption, to make the case that better business does not engage in illicit activity and to highlight the risks in sensitive sectors of ignoring corruption. To achieve this, we continue to screen our portfolios for sectors and countries that are particularly sensitive to corruption: ultimately, increases in transparency and regulation mean the profits of companies engaged in this illicit activity are at risk.


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Tuesday, June 5, 2018, 4:31 PM