Corporations and SMEs: Finding a middle ground

Shipping containers at the Dar es Salaam Port in Tanzania. An increasingly trade-connected world raises the issue of how large multinational corporations and the small and medium-sized enterprises align their systems and practices to combat bribery and corruption. Photo by: Rob Beechey / World Bank / CC BY-NC-ND

Blockbuster trade deals currently under negotiation will be a boon for global business as goods and services move more freely across oceans and continents. A major priority for businesses and governments is to ensure that the commerce they promote is carried out cleanly and transparently.

In an increasingly trade-connected world, this brings up the issue of how large multinational corporations and the small and medium-sized enterprises that they do business with align their systems and practices to combat bribery and corruption.

Deals such as the recently agreed Trans-Pacific Partnership and the pending Trans-Atlantic Trade and Investment Partnership will inevitably lengthen global value chains and deepen commercial ties between international businesses. And in the process, likely tack on several percentage points to the global gross domestic product.

But with great opportunities also come large risks. Bribery, graft and corruption — public enemy number one for many developing economies — are ever-present risks to any booming business environment. Be it public officials pocketing funds or businesses siphoning off supply contract revenues, the cost of corruption can run as high as 5 percent of global GDP, according to the World Economic Forum. With many developing countries across Latin America and Asia-Pacific party to the TPP, those risks will remain prevalent.

“If you have increased trade in developing markets, there will be an increasing number of companies who either deliberately or inadvertently run afoul,” said Erich Grosz, an attorney with Debevoise and Plimpton who specializes in foreign corruption. “Any agreement — whether TPP or otherwise — that increases international trade and business activity is going to boost the need for compliance activity.”

It is a generally understood good practice to synchronize anti-corruption systems across companies doing business. But so far it is hardly an exact science to carry out. Small and midsized companies often run into problems with compliance costs, have limited resources or are simply unaware of their legal obligations.

Not so black and white

Among its many guidelines for internal controls and ethics, the Organization for Economic Cooperation and Development encourages its members to promote a culture of compliance in which companies inform their business partners of their internal anti-bribery and anti-corruption policies and, in turn, hold them to a similar standard.

Such guidelines, however, are not meant to define the issue into a black-and-white divide between what some may characterize as ethically superior Western governments and bribery-prone developing countries.

In many regards, the OECD guidelines exist precisely because so many North American and European multinationals have been the guilty party in corporate bribery scandals. As a result, companies have developed sophisticated due diligence systems and rigid compliance procedures to monitor bribery and fraud. This involves scrutinizing the practices of SMEs to minimize the risk of partnering with suppliers who lack strong anti-bribery systems.

However, holding counterparties to high standards often translates into what SMEs, particularly in developing countries, interpret as top-down pressure to increase their focus on compliance.

The standards can be stringent even for industrialized countries. Klaus Moosmayer, chief compliance officer of the German industrial giant Siemens recalled that when his company introduced a code of conduct for suppliers in 2007 in the wake of a huge bribery scandal, there was strong pushback even from German associations.

“They said we were demanding too much, but in the meantime, it is an accepted standard,” he told Devex.

The risks are indeed high for multinational corporations. Depending on the nature of the business relationship, if a smaller supply company engages in an improper transaction, the larger corporation can also be implicated and subject to massive fines levied by laws such as the U.S. Foreign Corrupt Practices Act. The ensuing damage to its brand and reputation can be enormous. Anti-corruption laws are not as old in the European Union and United Kingdom and in both jurisdictions there are calls to increase levels of transparency and accountability.  

“In as many ways as possible, we try to make clear to our suppliers what our expectations are for compliance on child labor, sustainability and corruption,” Moosmayer said. “When we interact with business partners we have all the clauses in place and enforce them. We do business partner audits and if we conclude that they don’t want to open their books despite signing an audit clause, or we if we find red flags, we terminate the relationship.”

The textbook case in which multinational corporations get implicated, experts say, typically involves the use of a local third party agent to secure business. The agent or joint venture partner acts on behalf of the foreign company to bid on contracts or procurement opportunities, but the penalties for any improper transactions are born by the foreign company. Very often foreign companies are required by law and local content regulations to establish these types of partnerships.

It was this kind of arrangement that contributed to the massive bribery scandal that embroiled Siemens, costing the company more than $1 billion in penalties and fines.

Practical measures

Still, many SMEs don’t have formal anti-bribery and corruption programs because of the time and resource constraints required to create them.  

It is perhaps an unreasonable ask to expect a family-run small or medium-sized business to adopt the same levels of internal auditing or sophisticated transaction testing as a giant multinational such as Siemens, Grosz said.

“But your program should be tailored to your own risk profile, appropriate for your size and level of resources” said Grosz, whose firm was among those hired by Siemens to conduct internal investigations amid the scandal. “Doing nothing is not an option.”

The type of steps that SMEs can take to ensure that their compliance practices are satisfactory for global companies are relatively straightforward, according to Grosz.

A basic starting point, he said, is to have clear written procedures that are communicated and distributed to employees. And, as a next step, to implement some sort of training and monitoring protocol to ensure that employees are complying with the codes of conduct.

SMEs can also shy away from adopting formal anti-bribery and anti-corruption programs because many are simply unaware of their obligations, said Susan Cote-Freeman, head of the business integrity program at global watchdog Transparency International.

Anti-corruption principles are etched in many agreements and national policies, but translating them into practical guidelines that inform SMEs on how to avoid running afoul is still not the norm. The TPP, for example, has a chapter specifically dedicated to transparency and anti-corruption that commits party countries to adopt, maintain and enforce anti-corruption laws and regulations.  

The anti-corruption practices of large multinationals are fairly standardized and well-known because the risks they face are so great, but also because they are a much smaller cohort. The vast majority of businesses in the world are SMEs, making it a more difficult task to advocate for such a broad constituency, Cote-Freeman said.

Civil society, country-level associations and government entities can play a major role in overcoming that hurdle. Local chambers of commerce, export credit agencies, transparency watchdogs and local trade missions can all be involved in informing SMEs of the best anti-corruption practices and designing custom-fit compliance programs. For multinational companies, the same agencies can provide effective due diligence on local agents to avoid common pitfalls.

Anti-corruption efforts have gained attention on the global development agenda as both a key target of the sustainable development goals and a major agenda item of the November G-20 Summit in Turkey. In the coming months the OECD expects to update its anticorruption guidelines. As more megatrade deals take shape, the issue of aligning compliance practices among international business partners will also likely become an increasing priority within the development industry.

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About the author

  • Naki B. Mendoza

    Naki is a former reporter, he covered the intersection of business and international development. Prior to Devex he was a Latin America reporter for Energy Intelligence covering corporate investments and political risks in the region’s energy sector. His previous assignments abroad have posted him throughout Europe, South America, and Australia.