Media's Role In Reporting Corruption - Public Opinion Survey 2009
CEE Corruption Report 2009
Transcript of CEE Corruption Report 2009
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Business, corruption and economic crime in Central and
South-east Europe
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Published by Control Risks, Cottons Centre, Cottons Lane, London SE1 2QG. Control Risks Group Limited ('the Company') endeavours to ensure the accuracy of all
information supplied. Advice and opinions given represent the best judgement of the Company, but subject to Section 2 (1) Unfair Contract Terms Act 1977, the Company shall
in no case be liable for any claims, or special, incidental or consequential damages, whether caused by the Company's negligence (or that of any member of its staff)
or in any other way. Copyright: Control Risks Group Limited 2009. All rights reserved. Reproduction in whole or in part prohibited without the prior consent of the Company.
This report was written by Kristof Gosztonyi and John Bray,Control Risks’ lead anti-corruption consultants.
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Business, corruption and economic crime in Central and
South-east Europe
Introduction 1
Key findings 1
Recommendations for international companies 1
Patterns of corruption 3
The scale of the problem 3
When does corruption occur? 3
Corruption in public sector contracts 4
Corruption in private sector contracts 5
Speeding up the work of government officials 6
Applying for official permits 7
Securing essential services 8
Extortion by public officials and politicians 9
Patterns of economic and organised crime 10
Potential impacts on business 10
Local companies’ links with organised crime 10
Extortion of money by criminal gangs 12
Violence as a means of doing business 12
Industrial espionage 13
Product counterfeit 14
Stock theft 14
Preventative measures 16
Internal compliance measures 16
Policy on ‘facilitation payments’ 17
Training, compliance statements and hotlines 18
Dealing with business partners 19
Joint-venture partners and suppliers 19
Withdrawal from relationship in cases of suspected corruption 19
Employment of agents 20
Outlook: is it possible to conduct business successfully without corruption? 21
Appendix: survey sources and methodology 22
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PAGE 1BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
The post-socialist transition process in Central and South-east Europe has been accompanied by
widespread allegations of corruption and economic crime. In recent years, considerable progress
has been made in Hungary, Poland and the Czech Republic, which joined the EU in 2004.
However, the European Commission has issued a series of reports criticising Romania and –
more strongly – Bulgaria, which joined the EU in 2007 but have failed to implement adequate
institutional reforms to combat economic crime. In July 2008 the EU suspended €500m worth of aid to Bulgaria and, although it decided to unfreeze €115m in May 2009, this is at best a modest
indication of progress. Meanwhile, questions remain about Serbia, whose new government has
now formally expressed a desire to enter the EU, but which has a long-standing record of corruption
and organised crime.
The public debate on these issues raises questions about the impact on business. How far do
corruption and crime impede economic development? What are companies doing to resist corruption?
And what should they do?
Key findings
This report is based on a survey of senior executives from 244 international companies operating
in three countries in Central Europe (the Czech Republic, Hungary and Poland) and three inSouth-east Europe (Bulgaria, Romania and Serbia).1 Four key points stand out:
• The report points to a sharp disparity between the three Central European countries and their
South-east European counterparts. Bulgaria stands out as the country where respondents were
most likely to report first-hand experience of corruption in public-sector contracts, as well as
demands for bribes to speed up official government transactions.
• A distinctive feature of the survey is that it asked respondents about both their perceptions of
the scale of corruption, and the extent of their personal experience. Here the findings give
grounds for cautious optimism. Fewer respondents reported concrete knowledge of actual
corruption cases than might have been expected.
• When asked about their personal knowledge of corruption, many respondents cited incidents
involving the public sector. However, almost as many referred to ‘private to private’ corruption,for example when suppliers pay kickbacks to their private-sector clients.
• Overall, some 40%-50% of respondents ‘rather’ or ‘definitely’ agreed with the view that
organised crime could have a serious impact on international companies. In practice,
the most acute problems appear to apply in Bulgaria and, to a lesser extent, Serbia.
Failures of information security leading to loss of confidential information constitute one
of the most serious threats.
Recommendations for international companies
Changes in the global legal environment mean that no international company can afford to be
complacent about the risks from corruption and economic crime and – despite recent
improvements – our survey points to continuing risks in this area.
However, our respondents varied in the extent to which they had introduced effective ethics and
compliance programmes. The survey shows that US-based international companies were the
most likely to have such programmes. Western European companies and – to an even greater
extent – their Central and South-east European counterparts lag behind. For example, they were
much less likely to have anti-corruption training programmes or hotlines where employees can
report suspected ethics problems.
The overall findings of the survey are positive: an overwhelming majority of respondents
either ‘definitely agreed’ (47%) or ‘rather agreed’ (38%) with the statement that ‘it is possible
to conduct business successfully without corruption’ in their countries of operation. Control
Risks shares that optimism as long as companies have effective counter-measures in place.
1 See the appendix for further details on the sample and methodology.
Introduction
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PAGE 2 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
These include:
• A code of ethics forbidding bribes and kickbacks paid either directly or indirectly. The code
should be translated into local languages and distributed widely.
• An implementation programme, including awareness-raising at all levels of the company and
training for those who are likely to be most exposed to corruption risks.
• Ethics hotlines.
• Regular audits and reviews.
• Procedures for conducting due diligence integrity reviews of business partners.
A well-designed ethics and compliance programme is an essential requirement for all companies
operating in the region, not an optional extra.
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The scale of the problem
When asked an open question about the most critical risks for business, most respondents mentioned
mainstream commercial issues such as competition (18%), fiscal and economic policy (13%), and
market-related risks (8%). Some 13% of respondents mentioned legal issues. Perhaps surprisingly,
only 3% cited crime, and none brought up corruption spontaneously.
A rather different picture emerged when they were asked whether corruption was relevant to their
business. Overall, 18.8% said that corruption was ‘very relevant’ or ‘highly relevant’, representing
scores of four and five on a five-point scale. The most striking feature of the responses was the sharp
divide between the companies in the three South-east European countries and their Central
European counterparts.
Respondents stating that corruption was “very relevant” or “highly relevant” to their business
Overall, 33.1% of respondents said that someone had tried to obtain a bribe – either in money or
favours – from their company during the previous year. Some 31% believed that their company had
failed to win a contract or gain new business because a competitor had paid a bribe during the past
year, and 40% believed that they had failed to win a contract for this reason in the past five years. It
is clear that – for a significant minority of companies – corruption remains a significant obstacle to
business in the region.
When does corruption occur?
Overcoming corruption requires a detailed understanding of how and when companies
are most vulnerable to demands for bribes. Respondents were asked a series of questions
about the frequency of corruption in five situations. These included cases where companies
were:
• Competing for public-sector contracts.
• Competing for private-sector contracts.
• Applying for official permits.
• Wanting to speed up the work of public officials, for example during customs procedures.
• Securing essential services, such as power supply.
The overall results suggest that the worst problems concerned tenders for public-sector contracts
and demands for ‘speed money’. Just over 40% thought that corruption occurs ‘often’ and
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Patterns of corruption
0%
5%
10%
15%
20%
25%
30%
35%
40%
35.9%
5%
28.6%
35%
2.3%
7.5%
Bulgaria Romania Serbia Czech Republic Hungary Poland
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PAGE 4 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
‘always’ when companies are seeking public contracts. More than one-third thought that it
occurred ‘often’ or ‘always’ when they sought to speed up the work of public officials.
When does corruption occur?
While these perceptions are valid as a general truism, a more nuanced analysis emerges from a
closer analysis by country and sector, and especially when respondents are asked about the
extent of their ‘concrete knowledge’ of corruption. This was defined as knowledge ‘coming from
your own experience or the experience of a reliable source such as friends and colleagues’.
Corruption in public-sector contracts
When the results for public-sector corruption are analysed by country, two cases stand out: the Czech
Republic and Bulgaria. In these two countries the percentage of respondents stating that corruption
in public-sector contracts occurs ‘often’ or ‘always’ is almost the same – 55% and 53.8% respectively.
Percentage of respondents from each country reporting that corruption takes place “often” or
“always” when companies compete for public sector contracts
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Public
contracts
Often/always
Sometimes
40.4%
31.8%
33.5%
14.6%
26.9%
38%
34.3%
32.2%
6.3%
18%
Private
contracts
Official
permits
Speed
money
Essential
services
Concrete knowledge
Media/hearsay
0%
10%
20%
30%
40%
50%
60%
38.4%
15.4%
15.8%
42.5%
25.6%
22.6%
27.5%
37.2%
55%
25%
53.8%
7.5%10.5%
12.5% 11.6%
5%
35%
42.5%
Bulgaria Romania Serbia Czech Republic Hungary Poland
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PAGE 5BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
However, a closer examination of the figures shows that the number of respondents with concrete
knowledge of corruption – whether from their own experience, or that of friends and colleagues –
is significantly higher in Bulgaria. By contrast, 42.5% of Czech respondents saying that corruption
in public-sector tenders occurs ‘often’ or ‘always’ report that their knowledge comes from the
media or hearsay. There is a similar contrast between concrete knowledge and hearsay/media in
the other four countries.
Three factors help to explain the apparent disparity between perceptions and concrete knowledge:
• The first and probably most important issue is that media and academic attention has focused
more on public-sector corruption than on private-sector bribery. People tend to give higher
estimates of public-sector corruption because they are more sensitised to the issue, even if it is
outside their direct experience.
• Secondly, many of the respondents are – by the nature of the industries in which they work – less
exposed to public-sector corruption. This is borne out by other survey findings. For example,
only 12.5% of retail respondents report direct knowledge of corruption in public-sector contracts
occurring ‘often’ or ‘always’, compared with 21.2% of respondents from the construction sector.
• A third possibility is that some respondents may have been reluctant to admit to concreteknowledge – even though our survey was confidential – because this could be taken to imply a
degree of ‘guilt by association’.
Corruption in private-sector contracts
The survey results for corruption in private-sector contracts point to both similarities and contrasts.
Again Bulgaria stands out: 35.9% of respondents say that that they have concrete knowledge of
private-sector corruption occurring ‘often’ or ‘always’. However, the figures for Romania, Serbia, the
Czech Republic and Hungary are much lower, and they are lowest of all in Poland.
Percentage of respondents from each country stating that corruption takes place “often” or
“always” when companies compete for private sector contracts.
The greatest contrast with the public sector figures concerns the much lower percentage of
respondents reporting a high incidence of private-sector corruption on the basis of ‘the media or
hearsay’. This reflects the current priorities both of the media and international anti-corruption
initiatives. For example, the US Foreign Corrupt Practices Act (FCPA) focuses specifically on
bribery of public officials, as does the Organisation for Economic Co-operation and
Development (OECD) anti-bribery convention.
Concrete knowledge Media/hearsay
0%
10%
20%
30%
40%
50%
60%
35.9%
17.9%
2.6%
20%
9.5%
5%
7.5%
13.2%
53.8%
7.5%10.6% 10%
10%
7.1%
2.4%
2.5%
5%
12.5%
Bulgaria Romania Serbia Czech Republic Hungary Poland
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PAGE 6 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
The focus on bribery of officials is justified from a policy perspective in that this kind of corruption
often involves large amounts of money in connection with major projects financed by the taxpayer.
There is therefore a clear public interest in combating it. Nevertheless, from a business perspective,
there is a danger that companies may underestimate the legal and commercial risks associated
with corruption in private-sector contracts.
An analysis of the incidence of public and private sector corruption by industry offers further
insights. The three sectors with the largest samples in our survey are construction, manufacturing
and retail. Again, the findings for these sectors show a marked disparity between perceptions and
concrete knowledge.
Percentage of respondents from three sectors stating that corruption occurs “often” or “always”
when companies compete for public and private sector contracts
It is no surprise to find that more respondents from the construction sector report concrete knowledge
of public-sector corruption because they – by the nature of their work – have more dealings with
government officials. By contrast, manufacturing and retail companies are less likely to bid for
government contracts, though they too report direct knowledge of public-sector corruption in a
significant minority of cases.
Companies from all three sectors report less concrete knowledge of corruption in the private sector,
but certainly not to the extent that the problem can be downplayed or ignored.
Speeding up the work of government officials
Overall, 34.3% of respondents reported that corruption occurred ‘often’ or ‘always’ when companies
wanted to speed up the work of government officials (for example, in customs procedures), and
32.2% said that this occurred ‘sometimes’.
Concrete knowledge Media/hearsay
0%
10%
20%
30%
40%
50%
60%
21.2%
27.3%
38.7%
18.4%
40.6%
3.1%
9.4%
46.7%48.5%
12.2%
8% 6.4%
12%
12.5%
28.1%
6.3%
6%
18.2%
C o n s t r u c t i o n
p u b l i c
C o n s t r u c t i o n
p r i v a t e
M a n u f a c t u r i n g
p u b l i c
M a n u f a c t u r i n g
p r i v a t e
R e t a i l p u b l i c
R e t a i l p r i v a t e
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Percentage of respondents from each country stating that corruption occurs “often” or “always”
when companies want to speed up the work of public officials, for example customs procedures
A breakdown by country again shows that the problem is most widespread in South-east Europe,
with 35.9% of Bulgarians and 42.5% of Romanians reporting – on the basis of concrete knowledge
– that this kind of corruption takes place ‘often’ or ‘always’.
Romania-based businesspeople interviewed by Control Risks report that they often give officials
small gifts – such as bouquets of flowers or bottles of wine – as a matter of courtesy when
engaged in routine administrative transactions. Somewhat less frequently, interviewees mentionedgiving small monetary enticements (typically ranging from some €20 to €100) to officials, and
said that these payments were often facilitated by lawyers.
Small payments to speed up ‘routine governmental actions’ are – following US usage – frequently
known as ‘facilitation payments’. The US Foreign Corrupt Practices Act (FCPA) excludes facilitation
payments from its definition of the foreign bribery offences that it covers. However, such payments
are illegal under most countries’ domestic laws and, as will be seen in the preventative measures
section, more and more international companies are banning them outright.
Against this background, it is encouraging to note that the Czech Republic and Hungary in particular
are achieving a degree of success in curbing demands for facilitation payments, though they
have yet to eliminate them. On the other hand, even if the payments are relatively small, it is
disturbing to see that the practice still appears to be widespread elsewhere, especially in
Romania and Bulgaria.
Applying for official permits
The pattern of corruption when companies apply for official permits is similar. Overall, 29.6% of
respondents said that such demands took place ‘often’ or ‘always’, while 38% said that they
‘sometimes’ occurred.
PAGE 7BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Bulgaria Romania Serbia Czech Republic Hungary Poland0%
10%
20%
30%
40%
50%
60%
70%
35.9%
7.7%
7.7%
27%
15%
14%
17.5%
30%
37.8%
51.3%
42.5%
10.8%7.5%
7.5%
9.3%
4.7%
12.5%
20%
62.5%
Concrete knowledge
Media/hearsay
Refusal/don’t know
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PAGE 8 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Percentage of respondents believing that corruption occurs “often” or “always” when companies
apply for official permits
Official permits – for example, applications for planning permission or production licences – are
often essential requirements for companies, and this means that corrupt officials are in a strong
position to demand bribes in return for granting them. Again, the practice seems to be most
common in South-east Europe, particularly Romania and Bulgaria (the Bulgarian respondents
who refused to reveal their source of knowledge may have been motivated by a reluctance to
imply that they had paid such bribes).
Securing essential services
Encouragingly, a relatively low proportion of respondents reported that corruption was likely to
occur when companies were applying for essential services such as power. Overall, 6.1% saidthat such corruption occurred ‘often’ or ‘always’, and 18% said that it happened ‘sometimes’.
Again, Bulgaria stands out as the country where companies were most likely to report that this
problem occurred ‘often’ or ‘always’, but even there the figures were low.
Percentage of respondents from each country stating that corruption occurs “often” or “always”
when companies want to secure essential services such as power supplies
The relatively low instance of bribery in essential services reflects greatly increased professionalismin the post-socialist period. This in turn is often the result of privatisation of services such as power
supplies, which were formally the domain of the state.
Bulgaria Romania Serbia Czech Republic Hungary Poland0%
10%
20%
30%
40%
50%
15.4%
7.7%
23.1%
10%
2.5%
25% 25.6%
12.5%
2.5%
27.5%
20%
31%
10% 7.5%
15%
14%
11.6%
12.5%
9.5%
42.5%
Concrete knowledge Media/hearsay Refusal/don’t know
Concrete knowledge Media/hearsay Other sources
Bulgaria Romania Serbia Czech Republic Hungary Poland0%
2%
4%
6%
8%
10%
12%
14%
7.7%
2.6%
2.6%
2.6%
7%
5%
7.5%
5%
2.6% 2.5%
4.7%
2.3%
2.5%
5%
12.9%
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Extortion by public officials and politicians
The final question in this section concerned the extortion of bribes by public officials and politicians.
The question overlaps with earlier ones in that demands for payment in return for permits or
essential services can amount to a form of extortion. However, in the worst case officials or politicians
may erect artificial obstacles – often in open disregard of the law – to force companies to pay bribes.
Percentage of respondents from each country stating that public officials and politicians “often” or
“always” use extortion to obtain bribes
At first sight, the ‘lead’ country is the Czech Republic, where some 27.5% of respondents stated that
public officials and politicians abuse their positions in this way ‘often’ or ‘always’. If true, this is a
damning indictment. However, a closer look at the figures shows that 15% of Czech respondents
base their judgments on ‘media and hearsay’, while only 10% – still a large figure – claim to have
direct knowledge of such extortion. The country where most respondents state that they have
concrete knowledge of such extortion is Bulgaria.
Concrete knowledge Media/hearsay Other sources
Bulgaria Romania Serbia Czech Republic Hungary Poland0%
5%
10%
15%
20%
25%
30%
35%
40%
20.5%
23.1%
2.5%
10%
15%15%
2.5%
27.5%
14%
12.5%
17.5%
4.8% 5%
10%
2.3%
11.6%
5%
4.8%
9.5%
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PAGE 10 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Since the beginning of the transition process there has been widespread concern about the
expansion of organised crime. Throughout Central and South-east Europe, Control Risks has
encountered stories of entrepreneurs who financed their original businesses through activities
such as cigarette- and alcohol-smuggling, or even the drugs trade, prostitution and human-trafficking.
A number of these early entrepreneurs have now invested their profits in legitimate businesses
while still retaining their links with the criminal underworld. Yet others have almost completelysevered their links with organised crime and abandoned criminal activity.
The risks to international companies are clear. When they operate in transition economies, it is
particularly important to understand the backgrounds and current connections of their business
partners. If they fail to do so, they risk reputational damage, and even unwitting involvement in
money-laundering scams. In the most extreme cases they may expose themselves to attacks,
blackmail or even infiltration by criminal elements.
Potential impacts on business
Overall, some 40%-50% of the respondents in our survey ‘rather’ or ‘definitely’ agreed with the
view that organised crime could have a serious impact on international companies.
Respondents “rather” or “definitely” agreeing that organised crime can have serious impact on
international companies
Levels of concern about this potential risk were greatest in the Czech Republic, followed by the
three South-east European countries and – to a lesser degree – Hungary and Poland. However,
this may be another case where sensitivities in the Czech Republic have been heightened by
widespread media discussion rather than first-hand experience. Responses to questions regarding
concrete knowledge of links between local companies and crime pointed to a much clearer divide
between Central and South-east Europe.
Local companies’ links with organised crime
Respondents were asked two related questions:
• How often were local companies financially linked to the criminal sector (for example, in terms
of financial dependency)?
• How often did personal ties exist between local companies and the criminal sector?
Patterns of economic and organised crime
0%
10%
20%
30%
40%
50%
60%
46.2%
55%
42.9%
47.5%
34.9%
32.5%
Bulgaria Romania Serbia Czech Republic Hungary Poland
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PAGE 11BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Overall, 36.1% said that local companies ‘sometimes’ had financial links with organised crime,
while 7% said that such links existed ‘often’ or ‘always’. However, the regional breakdown shows
that there were hardly any Central European respondents who thought that criminal links with
local companies were commonplace. By contrast, some 20% of Bulgarian respondents said that
local companies ‘often’ or ‘always’ had financial links with organised crime.
Respondents believing that local companies in their countries “often” or “always” have financial
links with the criminal sector
Similarly, 28.3% of the overall sample said that local companies ‘sometimes’ had personal
links with crime, while 8.6% said that such links existed ‘often’ or ‘always’. Again, more South-east
Europeans reported that companies ‘often’ or ‘always’ had personal links. In Bulgaria 10.3% of respondents reported concrete knowledge. Another 2.6% refused to cite their source of information,
suggesting that they too had first-hand experience but were reluctant to acknowledge this, even
in a confidential survey. Similarly, 10% of Serbians thought that local companies ‘often’ or
‘always’ had financial links with organised crime. Of these, 5% cited concrete knowledge of such
cases as the source of their knowledge, while another 2.5% refused to mention their source of
knowledge.
Respondents believing that local companies in their countries “often” or “always” have personal
links with the criminal sector
Media/hearsay
Other sources
Refuse
Bulgaria Romania Serbia Czech Republic Hungary Poland
Concrete knowledge
0%
5%
10%
15%
20%
25%
20.5%
23.1%
23.1%
23.1%
2.5%
2.5%
2.5%
2.5%
2.5%
0%
10%
4.8%
5%
9.5%
9.5%
0%
Media/hearsay
Other sources
Refuse
Bulgaria Romania Serbia Czech Republic Hungary Poland
Concrete knowledge
0%
5%
10%
15%
20%
5.1%
12.9%
2.6%
2.6%
2.6%
5%
2.5%
5%
5%
0%
12.5%
5%
16.7%
16.7%
2.5%
5%
2.5%
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PAGE 12 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
These findings correspond with Control Risks’ practical experience advising clients in the region:
links to organised crime appear relatively frequently in Bulgaria, to a lesser degree in Serbia, and
only rarely in the remaining countries of Central and South-east Europe. In particular, it is the
high degree of infiltration of the legal economy by organised crime that poses a risk to investors
in South-east Europe.
Extortion of money by criminal gangs
Extortion – for example, in the form of demands for protection money – is a common tactic used
by criminal gangs. Overall, 38.5% of respondents thought that this was ‘sometimes’ an issue for
international companies operating in their country, and 22.5% thought that it was ‘often’ an issue,
though none said that this was ‘always’ the case.
Percentage of respondents from each country stating that extortion by criminal gangs is “often” a
problem for international companies
In all countries, a significant proportion of companies had concrete knowledge of the problem,
with the highest figures in Serbia (22.5%) and the Czech Republic (17.5%).
Violence as a means of doing business
Particularly in the early stages of the transition, organised criminal groups were known to resort
to violence in support of their business activities, for example when seeking to cancel or redefinecontracts. Overall, 25% of respondents in our survey thought that this still happened ‘sometimes’.
The countries with the highest percentages of respondents reporting concrete knowledge were
Bulgaria and the Czech Republic.
Media/hearsay
Don’t know
Bulgaria Romania Serbia Czech Republic Hungary Poland
Concrete knowledge
0%
5%
10%
15%
20%
25%
30%
35%
12.7%
23.1%
6.1%
3.7%
2.5%
5%
10%
2.5%
30%
17.5%
11.6%
4.7%
16.3%
30%
22.5%
11.9%
21.4%
9.5%
5%
15%
2.5%
7.5%
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Percentage of respondents from each country stating that violence is “sometimes” used as a
means for doing business, for example to redefine or cancel contracts
Only a very small percentage of respondents 5.7% said that such violence occurred ‘often’ or
‘always’. Of these, only a handful had first-hand experience of the problem: one each in Bulgaria,
Serbia and Poland, and two in Hungary. Even if these numbers are small, they serve as a warning
against complacency.
Industrial espionage
Several factors mean that industrial espionage is a significant risk in the transition economies.
During the socialist period, each of the countries under review maintained large, well-trained
secret services. After the end of the Cold War substantial numbers of former operatives soughtnew employment, in many cases adapting their old skills to meet new objectives, whether in the
private sector or organised crime. Moreover, the extent of civilian oversight of the official secret
services varies, and international companies operating in industries that are considered to be
‘strategic’ may be classified as intelligence targets.
Against this background, some 25% of respondents thought that industrial espionage posed a
‘severe’ or ‘serious’ threat to international companies in their countries of operation, and 34%
thought that it was a medium-level threat.
Respondents’ assessment of the threat from industrial espionage
PAGE 13BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Media/hearsay
Other sources
Bulgaria Romania Serbia Czech Republic Hungary Poland
Concrete knowledge
0%
10%
20%
30%
40%
50%
17.9%
43.6%
17.9%
7.7%
10%
5%
7.5%
30%
22.5%
7%
4.7%
16.3%
22.5%
7.5%
16.7%
16.7%
22.5%
27.5%
5%
Severe
threatSerious
threatMedium
threat
Lesser
threat
No threat
at all
Don’t
know
8%
25%
11%
5%
34%
17%
0%
10%
20%
30%
40%
50%
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PAGE 14 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
There were no significant regional differences, but there were some clear trends regarding industry
sectors: the most severely affected sector is public works and construction (21% believe industrial
espionage to be a ‘severe’ risk, and another 21% believe it to be a ‘serious’ risk), followed by
manufacturing (12% and 17% respectively). The most likely explanation for the prominence of
these sectors is that the respondents were referring not so much to loss of technical secrets or
specialist expertise, but rather to information leaks in connection with contract bids or confidentialinformation on customers. In Control Risks’ experience, these are the most common forms of
information loss in the region.
In summary, companies active in Central and South-east Europe are advised to take the risks of
industrial espionage seriously, and implement strict preventative measures, including comprehensive
information security policies throughout their operations.
Product counterfeit
Overall, 85% of respondents took the view that product counterfeit was a problem in their countries.
In a follow-up question, they were asked how far this applied to their own businesses, and 30%-40%
of South-east European respondents ‘rather’ or ‘definitely’ agreed that it presented a serious
problem. The figures for Central Europe were lower but still significant.
Respondents “rather” or “definitely” agreeing that product counterfeiting is a serious threat to
their business
As might be expected, the most seriously affected sector is retail (45%), followed by manufacturing
(38%), and information and communications technology (ICT) (35%).
Stock theft
Only for a minority of companies – an overall average of 14.2% – does theft of stock pose a ‘serious’
or ‘severe’ problem. However, a regional breakdown of cases is revealing.
Rather agree
Bulgaria Romania Serbia Czech Republic Hungary Poland
Definitely agree
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
31%
8%
39%
13%
10%
13%
3%
9%
12%
21%
38%
25%
17%
12%
29%
13%
23%
10%
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PAGE 15BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Companies viewing stock theft as a severe or serious problem
In Bulgaria 28% of respondents reported ‘severe’ or ‘serious’ problems, followed by 19% in Romania.
As might be expected, retail is the worst-affected sector, with 24.2% of retail respondents assessing
the stock theft problem as ranging from ‘serious’ to ‘severe’.
Serious
Refusal
Bulgaria Romania Serbia Czech Republic Hungary Poland
Severe
0%
5%
10%
15%
20%
25%
30%
13%
15%
28%
3%
10%
8%
8%
5%
12%
16%
3%5%
14%
7%
26%
8%
11%
17%
3%
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PAGE 16 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Internal compliance measures
Avoiding corruption and economic crime demands hard work. The first step is to implement an effective
internal compliance programme. We asked respondents whether their companies had instituted five
key compliance measures. These were:
• A clear policy statement banning bribes to obtain business.
• A ban on ‘facilitation payments’.
• Anti-corruption training.
• Annual compliance statements by senior management stating that they had abided by the company’s
anti-corruption requirements.
• Hotlines for employees to report suspected corruption or other integrity problems.
Percentage of respondent companies with established internal anti-corruption compliance measures
A clear majority of companies had statements banning bribes. However, less than half of the
companies had adopted other key compliance measures. Perhaps most importantly, there were
significant variations according to the country in which the company was headquartered.
The non-Western European samples were relatively small,2 but it was nevertheless possible toidentify a clear pattern: US companies were significantly more likely to have effective compliance
programmes. The Western European companies came second overall, followed by their counterparts
in Central and South-east Europe.
2 By far the largest proportion of respondents (155 out of 245) represented companies headquartered in
Western Europe. However, there were also 25 US-based companies, as well as 12 from Central Europe, 36
from South-east Europe and 16 ‘others’.
Preventative measures
0%
10%
20%
30%
40%
50%
60%
70%
80%
69.8%
25.7%
47.8%
29.8%
23.5%
No bribes No facilitation
payments
Training Annual declarations
by senior management
Hotlines
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PAGE 17BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Implementation of internal compliance measures according to headquarters’ country
.
These results echo similar findings in the 2006 International Business Attitudes to Corruption survey
by Control Risks and Simmons & Simmons.3 US practice reflects the fact that the US authorities
enforce the FCPA vigorously, and companies also have to take account of the Sarbanes-Oxley
Act on corporate governance. Since the 1997 OECD Anti-Bribery Convention, all Western
European countries have introduced extra-territorial anti-corruption legislation similar to the
FCPA. However, enforcement has so far been uneven, and this is reflected in company practice.
Central and South-east European practice lags further behind, though this may change in the
future. It is interesting to note that 28% of the South-east European companies had training
programmes to help their executives to avoid bribery. This is likely to reflect a combination of the
relatively high-risk environment, and a desire to do something about it.
Policy on ‘facilitation payments’
In recent years, the problems associated with ‘facilitation payments’ – small payments to speed
up routine governmental transactions – have moved up the international anti-corruption agenda.
In the 1990s, campaigners focused on ‘grand bribery’ to secure government contracts. However,
Transparency International (TI), the International Chamber of Commerce (ICC) and the World
Economic Forum (WEF) now agree that facilitation payments count as ‘small bribes’, and that
companies should not pay them.
These changing views are reflected in the 2006 International Business Attitudes to Corruption
survey , which showed that 88% of US-based international companies had banned facilitation
payments outright, as had 77% of our combined sample of Western European companies (from
France, Germany, the Netherlands and the UK).
By contrast, the findings from the present survey point to an apparent disparity between the policies
laid down at headquarters and the feedback of respondents in subsidiary and branch offices in
Central and South-east Europe: only 60% of US companies and 49% of Western European
companies in these regions reported bans on facilitation payments.
3 The survey is available on www.control-risks.com.
0%
20%
40%
60%
80%
100%
8 8 %
5 2 %
6 0 %
6 0 %
7 2 . 3
%
4 9 %
2 7 %
2 6 . 5
%
2 3 . 9
%
7 5 %
1 6 . 7 %
1 6 . 7 %
8 . 3
%
0 %
4 7 . 2
%
3 8 . 9
%
2 7 . 8
%
1 1 . 1
%
5 . 6
%
6 0 %
US Western Europe Central Europe South-eastern Europe
No bribes No facilitation payment Training Annual declarations Hotlines
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PAGE 18 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
US and Western European company policies banning facilitation payments at the international
level, and in Central and South-eastern Europe
*Source: 2006 International Business Attitudes to Corruption survey
*Source: 2007 CE and SEE Businesss Survey
A combination of three different factors explains this apparent contradiction:
• First, our respondents were frontline businesspeople, not company lawyers: they may simply
have been unaware of their companies’ policies at the international level. If this is true, it
represents a significant failure in their internal compliance programmes.
• A second possibility is that the results reflect investment patterns: the most reputation-sensitive
companies with the strictest compliance policies have chosen to stay away from environments
such as South-east Europe, which are perceived to incur high risks. However, while this may
have been the case in the earlier years of transition, we think that it is less likely today because
most of the big multinational companies are already present in the region.
• A third factor is that our samples from Western Europe are not strictly comparable: the sample
from the present survey contains a number of companies from Austria and other parts of Western
Europe that were not covered in the International Business Attitudes to Corruption report .
Whichever explanation applies, international companies operating in Central and South-east
Europe appear to have adopted a more ‘pragmatic’ approach. In doing so, they may incur both
legal and operational risks. Facilitation payments are illegal under most countries’ domestic law.
Moreover, if companies demonstrate a willingness to make small payments, they may find itharder to resist demands for larger bribes.
On a more positive note, it seems that the amounts being paid are relatively low. The companies
that permitted facilitation payments were asked what was the highest amount that might be
acceptable. There were only 30 replies in total. Of these, 15 (50%) said that €10 would be the
highest acceptable amount, while a further nine (30%) said that amounts up to €50 might be
paid. Only one respondent went as high as €500.
Training, compliance statements and hotlines
Ethics codes are an important first step in combating corruption, but it is essential to back them
up with training and compliance programmes. In this respect the companies in the survey had
some way to go. Only 29.8% had programmes to train executives in ways of avoiding corruption. A quarter had instituted the practice whereby senior executives are required to sign annual
compliance statements, while only 23.5% had company ‘hotlines’ that executives could use to
report suspected cases of malpractice.
88%
49%
60%
77%
US International* US in C&SE Europe** W. European
International*
W. European in
C&SE Europe**
0%
20%
40%
60%
80%
100%
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Failure to back up statements of principle with practical compliance measures could in the worst
case leave companies more exposed to corruption and economic crime. If employees see a
disparity between policy statements and actual practice, they are likely to become more cynical,
and more likely to cross the boundary between ethical and unethical behaviour.
In Control Risks’ recent experience, ‘hotlines’ where employees can both report suspectedmalpractice and appeal for guidance (‘helplines’) are particularly important. The 2006 International
Business Attitudes to Corruption survey pointed to a significant increase in the introduction of
such hotlines since a previous survey in 2002. For example, 42% of UK companies and 38% of
Dutch companies surveyed had these facilities. Our Central and South-east Europe survey
suggests that international companies operating in that region are still lagging behind.
Dealing with business partners
Effective internal compliance measures are essential. However, in Control Risks’ experience, the
greatest challenges that companies face concern their relationships with business partners.
There are three sets of problems. First, although companies are in principle able to control the
activities of their own executives, they may have limited influence over their partners’ style of business. Secondly, some companies have deliberately used local partners as proxies, permitting
or even encouraging them to pay bribes on their behalf. Thirdly, as noted above, there is a particular
risk in transition economies that companies could – wittingly or unwittingly – find themselves
dealing with partners associated with corruption, economic crime or even organised crime.
Joint-venture partners and suppliers
As with other aspects of the fight against corruption, prevention is better than cure. Overall, 56%
of the respondent companies have specific procedures to review the integrity of potential joint-
venture partners before entering a commercial relationship, and a somewhat higher number,
62%, have procedures for checking suppliers. While these figures are encouraging, they also
point to the need for a further tightening of business practice. Procedures to review the integrity
of business partners before major deals should be regarded as essential, not optional.
Withdrawal from relationship in cases of suspected corruption
It is harder and more costly to withdraw from a commercial relationship once it has been set up.
Nevertheless, a total of 20% of respondents reported that their company had withdrawn from an
existing relationship with a specific commercial partner because of concerns about corruption.
The findings are broadly similar to those of the 2006 International Business Attitudes to Corruption
survey, where 19% of respondents had pulled out of existing commercial relationships because
of concerns about corruption.
Companies who had withdrawn from an existing relationship with specific commercial partners
because of concerns about corruption
PAGE 19BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
18%20%
14% 15%
30%
25%
Bulgaria Romania Serbia Czech Republic Hungary Poland
0%
5%
10%
15%
20%
25%
30%
35%
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PAGE 20 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Companies in Hungary were most likely (30%) to report withdrawals from existing commercial
relationships, followed by Poland (25%) and the Czech Republic (20%).
At first sight, this appears to contradict the other findings of the report: corruption levels appear to
be higher in South-east Europe, and yet companies are more likely to pull out of existing
relationships in Central Europe. The explanation may be that, even though overall levels of corruptionare lower in Central Europe, companies there are taking the problem more seriously.
As with other compliance measures, US companies were more likely to pull out of existing
relationships than their counterparts in Western, Central or South-east Europe.
Percentage of companies that had “withdrawn from an existing relationship with a specific
commercial partner because of concerns about corruption.” By headquarters country or region
Again, this finding underlines the greater sensitivity of US companies to corruption, in large
measure because of the greater risk of prosecution under the FCPA.
Employment of agents
The employment of commercial agents and consultants is a sensitive issue in the wider international
debate on business corruption because of a widespread perception that they are often used as
a conduit for bribes. This issue appears to be less important in Central and South-east Europe.
Only just over a quarter of companies (26.1%) said that they used commercial agents or consultants
to help them to win business. Part of the reason for this low figure may be that international
companies are most likely to use agents when entering a country for the first time, or operating
in a region with which they are unfamiliar. By contrast, our respondents all represented companies
with established operations in their respective countries.
Only 4.5% of respondents believed that agents offered bribes on behalf of international companies
‘a lot’ or ‘all the time’ – a much lower set of results than in the 2006 International Business
Attitudes to Corruption survey . Perhaps partly because of this relaxed view of the risks, only 50%
of the companies that use commercial agents have a formal procedure to check their integrity.
Of the companies that used agents, 84% stated that the intermediaries’ identity was ‘known in
the market place’. Much of the wider international debate about the use of agents has focused
on the international defence sector, where it has been common practice to use commercial
intermediaries whose identity is not widely known – thus raising obvious concerns about
transparency and accountability. However, none of the companies in this survey came from the
defence sector, and the practice of employing agents without revealing their identities seems to
be rare in Central and South-east Europe.
32%
21%
8% 8%
US Western Europe Central Europe South-east Europe0%
5%
10%
15%
20%
25%
30%
35%
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PAGE 21BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
The overall findings of the survey give grounds for cautious optimism. Corruption remains a
significant problem. Nevertheless, an overwhelming majority of respondents either ‘definitely
agreed’ (47%) or ‘rather agreed’ (38%) with the statement that ‘it is possible to conduct business
successfully without corruption’ in their countries.
Respondents “definitely” or “rather” agreeing” that it is possible to conduct business in their countries without corruption
A mere 3% took the hardline view that it was ‘definitely not’ possible to conduct businesssuccessfully, while 11% thought that it was ‘rather not’ possible. Bulgaria is the country with the
largest proportion of pessimists: 23% ‘rather disagreed’ with the view that it was possible to conduct
business without corruption, and as many as 10% thought that it was ‘definitely’ not possible.
Control Risks agrees with the optimists: it is possible – indeed essential – to conduct business
successfully in both Central and South-east Europe without resorting to graft. However, success
requires both business and government to engage with the problem, not to ignore it. At times this
may seem like a constant struggle, with inevitable setbacks on the way.
Companies have a commercial, legal and moral requirement to put their own houses in order
through effective ethics and compliance measures. Governments need to support them by
strengthening public institutions and the rule of law. In the last two decades, both regions have
made major progress in these respects. However, the European Commission is correct in its view
that – notably in Bulgaria and Romania – there is a pressing need for further progress.
Outlook: is it possible to conduct business successfully without corruption?
Rather agree
Bulgaria Romania Serbia Czech Republic Hungary Poland
Definitely agree
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
31%
33%
64%
96%
85%
40%
45%
56%
86%
30%48%
48%
62%
83%
21%
83%
55%
38%
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PAGE 22 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE
Appendix: survey sources and methodology
The survey was carried out in 2007 using four locally based research institutes: PRM in the Czech
Republic and Poland; Vitosha Research in Bulgaria; Forsense Kft. in Hungary; and Szonda Ipsos
in Romania and Serbia. Between them, they conducted a total of 244 interviews in six countries:
Poland (40), Czech Republic (40), Hungary (43), Romania (42), Bulgaria (39) and Serbia (40).
The survey interviews were carried out by phone using a questionnaire prepared in English byControl Risks and translated into each country’s national language. The respondents were senior
managers of international companies, and included both locals and expatriates. In Romania and
Bulgaria, it proved difficult to make up the target quota of 40 international companies: 19 (45.2%)
respondents in Romania and 16 (38.1%) represent joint ventures between international and local
companies, or fully local companies.
The survey questions were designed to elicit both perceptions of the scale of the problems
associated with corruption and organised crime, and the extent of concrete knowledge based on
the respondents’ own experience or of the experience of colleagues and close acquaintances.
Some respondents may have been reluctant to admit to concrete knowledge of some of the more
sensitive issues in case this implied that they were personally implicated. This consideration may
have influenced the responses from Romania and Serbia in particular.
Respondents were told that the survey had been commissioned by Control Risks. However, the
local research institutes did not record the identity of individual respondents and their companies.
We are not able to trace specific responses back to individual companies.
Respondents came from five main sectors as summarised in the following chart:
With regard to size, 115 respondents came from companies with fewer than 250 employees in
the country concerned; 68 represented companies with between 251 and 750 employees; and 63
were from companies with more than 750 employees.
31%
45%
56%
48%
62%
38%
Public works
&
constructionManufacturing Oil & gas
Telecoms
& ITRetail Other Total
Bulgaria 3 (7.7%)
8 (20%)
4 (9.3%)
8 (20%)
8 (19%)
2 (5%)
33 (13.5%)
12 (30.8%
18 (45%)
17 (39.5%)
8 (20%)
8 (19 %)
13 (32.5%)
76 (31%)
4 (10.3%)
1 (2.5%)
2 (4.7%)
7 (17.5%)
6 (14.3%)
1 (2.5%)
21(8.6%)
4 (10.3%)
2 (5%)
3 (7%)
2 (5%)
4 (9.5%)
4 (9.5%)
27 (11%)
8 (20.5%)
2 (5%)
4 (9.3%)
9 (22.5%)
8 (19%)
3 (7.5%)
34 (13.9%)
7 (18%)
8 (20%)
11 (25.6%)
6 (15%)
7 (16.9%)
8 (20%)
53 (17.5%)
39 (15.9%)
40 (16%)
43 (17.6%)
40 (16%)
42 (17.2%)
40 (16%)
244 (100%)
Romania
Serbia
Total sample
Czech
Republic
Hungary
Poland
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