Resource Curse May Be Insidious Plague
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Resource Curse May Be
Insidious Plague
Adam R. Tanielian
The ubiquitous resource curse is also associated with legal and social phenomenon such as human
rights abuses and corruption. Nations with poor economic growth are generally also nations with
elevated levels of corruption and abuse of rule of law principles. This paper reviews legislative
framework for anti-corruption initiatives, financial and operating statistics from selected extractive
industry corporations. Corruption is present in all countries, yet OECD national corporations are
probably the majority of the sources of illicit payments in foreign territory. OECD national
dependence on foreign energy and resources are considered a factor creating a larger responsibility
on the part of OECD nations when compared to non-OECD nations in reducing and preventing
corruption and enforcing laws with primarily OECD corporations. The corruption problem is
examined from a psychological and social perspective. Relevant initiatives, trade groups, standards,
and plans of action are noted and supported. A corporate offender registry is suggested to
stigmatize the offences and disseminate specific, accurate information. Ultimately it is found that
human will limits or creates success in eradicating corruption.
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Resource Curse May Be Insidious Plague
Adam R. Tanielian
INTRODUCTION
Several researchers have found that natural resource wealth is either negatively
correlated with economic growth or not positively correlated thereto . Though there has been
no formal causal relationship between resource wealth and poor economic growth in mining
countries1, the resource curse is a commonly known term in economics. The worlds least
corrupt countries are, coincidentally or not, also wealthier countries with diversified
economies, while more corrupt countries are those with lower GNI per capita and less diverse
national economies2
.
Worldwide, annual bribery payments are estimated at more than US$1 trillion3
.
Hundreds of corporations have been charged with bribery in the past few decades since
corruption became a global issue. Extractive industry companies, being some of the first
foreign investment projects in the developing and third world, sometimes engage in illicit
activities to secure contracts and security. High profile cases like Rio Tinto in China4
are
only a part of the larger systemic corruption problem, which former UN Secretary General
Kofi Annan called an insidious plague and an evil phenomenon5
.
Developing and third world countries which lack macroeconomic policy, and thus
adequate tax revenue, without strong government infrastructure, where mining and resources
1 Monika Weber-Fahr, Treasure or Trouble? Mining in Developing Countries, World Bank and InternationalFinance Corporation (2002)2 Transparency International, Corruption Perceptions Index (2010)3 OECD, Working Group on Bribery (2010); UNODC & World Bank, Stolen Asset Recovery (StAR) Initiative:
Challenges, Opportunities, and Action Plan (2007); World Bank, The Costs of Corruption (2004)4 David Barboza, China sentences Rio Tinto employees in bribe case, New York Times (2010)5 United Nations Convention Against Corruption, foreword (2003)
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are dominant or crucial to economic livelihood, are subject to public and private corruption,
especially involving international firms which have the funds and power to provide relatively
large benefits. Global 500 companies are almost exclusively headquartered in OECD nations6
, and thus while bribery may represent a larger threat in the developing and third world, the
overwhelming majority of the funds are likely coming from the wealthier nations, which are
then perceived as less corrupt by their inhabitants who may be largely ignorant of the
activities of their people outside of their borders, though the wealthier nations are no less
involved in corruption as sending nations than are receiving nations.
In conducting some exploratory research into this topic, various questions have been
raised, such as: What are some key indicators in the worlds extractive industry in recent
years? Which countries are producing and consuming more or less of what? Who are the big
resource companies and what have their performances been in recent years? How have
nations and business addressed the issue of bribery and corruption? Aside from legislation
and policy, what are some cases of violations? What are the effects of corruption? What can
be done about the corruption problem?
Corruption is not a victimless crime, and thus this research is undertaken with a legal
positivist approach. Given the criminal nature of bribery and general corruption, no benefits
to these activities are considered to exist. A review of business, government, and other
private and publicly sponsored literature is made. Statistical analysis of trade data is
provided. Conclusions support the position that the majority of the burden of compliance
rests on the private companies and their personnel, though further government action is
required. Some budgetary and policy recommendations are made.
6 CNN, Global 500 (2011)
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EXTRACTIVE INDUSTRY ACTIVITY7
In resources, bigger companies generally do
better. Resource extraction is a capital and energy
intensive endeavor. Modern mines and wells are
staffed by highly skilled professionals who use
expensive technology. Mines are typically located
in remote rural areas, which often have little or no
electrical or sewer service prior to the mine
opening. Access roads and other infrastructure
may need to be built by the company working the
site. The industry is one of giants. SMEs have little opportunity to bid on land rights, recruit
top experts, and purchase the best equipment.
Bigger companies
have great strengths in
their enormous budgets,
though those same
monetary resources can
become a weakness and
threats when bribery and
corruption enter into the
equation. Companies like
BP and Chevron operate
in a competitive market where margins and efficiencies are important to turn a profit. Cost-
7 Table 1: BP,Annual and Corporate Reports 2001-2010; Table 2: Chevron,Annual and Corporate Reports2003-2010
Table 1: BP
Oil (milbarrels)
Gas(bil cf)
2001 704.82 3,150.68
2002 736.57 3,178.42
2003 774.17 3,143.75
2004 923.82 3,103.60
2005 935.13 3,074.76
2006 903.38 3,072.21
2007 881.11 2,972.20
2008 876.37 3,041.91
2009 925.28 3,097.032010 866.51 3,066.37
% change 22.94 -2.68
Table 2: Chevron
Oil & NatGasLiquids('000barrels)
NaturalGas (milcub ft)
Oilequivalent('000barrels)
2002 1,897 4,376 2,626
2003 1,808 4,292 2,523
2004 1,710 3,958 2,509
2005 1,669 4,233 2,517
2006 1,732 4,956 2,667
2007 1,756 5,019 2,619
2008 1,649 5,125 2,530
2009 1,846 4,989 2,704
2010 1,923 5,040 2,763
% change 1.37 15.17 5.22
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cutting is essential, but to some degree bribery can be absorbed due to market economic
phenomenon. Prices for oil and gas are more volatile than for any other mineral and
agricultural commodity, with short-term elasticity of demand low8
, so a company could
raise prices
in the short-term
to generate
additional
revenues to
recover the costs
of corrupt
payments at the
expense of the
consumer whose demand will not change much in the short-term after the price increase.
Economies of scale help balance the market forces and benefit consumers. As the
resource giants9
expand their production and distribution, their costs fall, so then they can
forestall extreme
price increases
even as the
limited supplies
are reduced.
Increases in production at the big companies actually increase market efficiency and help
keep prices within reach of the average consumers. To some large extent, regardless of
8 Jeffrey Frankel, The Natural Resource Curse: A Survey, Harvard Kennedy School Faculty Research Working
Paper Series (2010)9 Table 3: Exxon Mobil,Annual and Corporate Reports 2003-2010; Table 4: Rio Tinto,Annual and CorporateReports 2004-2010
Table 3: Exxon-Mobil
Crude oil& liquidgas ('000barrel)
%nonUS
Naturalgas (milcub ft)
%nonUS
Oil eq('000barrels)
2001 927,830 72 3,751,835 75 1,553,075
2002 911,040 73 3,814,980 77 1,546,870
2003 918,340 76 3,693,435 78 1,534,095
2004 938,415 78 3,600,360 80 1,538,4752005 920,895 81 3,376,615 81 1,483,725
2006 978,565 85 3,406,910 83 1,546,505
2007 954,840 85 3,425,160 84 1,525,700
2008 877,825 85 3,319,675 86 1,431,165
2009 871,255 84 3,384,645 86 1,435,180
% change -6.10 16.67 -9.79 14.67 -7.59
Table 4: Rio Tinto
China N America EU (not UK) JapanOtherAsia
2008 18.8 22.4 20.7 15.2 11.1
2009 24.3 23.1 14.4 13.5 13.22010 27.8 15.6 14.9 14.4 14.4
% of Rio Tinto gross sales revenues in select destinations
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corrupt or other criminal practices the big extraction industry firms have employed, they are
essential10
.
In the past several years, the worlds
resource economy has gone through
unprecedented changes. We now see big
companies like ExxonMobil and Rio
Tinto with the vast majority of their
operations and revenues outside of their
home nation. Companies that have not
negotiated wide-reaching projects across
the globe have seen limitations on their
production capacity and growth potential, and reduction in output.
Given current and future forecasted consumption rates
compared to apparent and suspected supplies of energy resources
and other minerals, those companies which fail to engage the world
trade aspects of extraction, thereby failing to establish internal
economies of scale, significantly decrease their potential for
longer-term successes. The situation that ethical businesspeople
and smaller companies are placed in regarding the pressures to
provide improper benefits for contracts, land use rights, protection,
and other essentials during operations is paradoxical but it must
then also be managed and exposed rather than covered-up and
accepted as a normal, rational, acceptable condition.
10 Table 5: Codelco,Annual and Corporate Reports 2001-2009; Table 6: Peabody Energy,Annual andCorporate Reports 2003-2010
Table 5: CodelcoCopper(metrictons)
Molybdenum(mft)
2001 1,698,978 24,238
2002 1,630,056 19,901
2003 1,673,606 23,173
2004 1,840,035 32,324
2005 1,831,183 36,567
2006 1,783,038 27,204
2007 1,664,600 27,857
2008 1,547,705 20,525
2009 1,781,604 21,556
% change 4.86 -11.07
Table 6:Peabody
Revenue(blnUS$)
2001 1.926
2002 2.719
2003 2.815
2004 3.631
2005 4.644
2006 5.2562007 4.574
2008 6.593
2009 6.012
2010 6.86
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The extraction industries are special in that they are not the
subject of much media exposure, yet are crucial11
. Mining is the
slow giant, the consistent source of food on the table in mountain
and rural villages, the quiet moneymaker which is more often
featured in folk music than on the evening news. Mine workers
are primarily male, middle to lower class, and proud of their work.
Mining is one of the worlds oldest economic functions. High
profits and large scale production are relatively new features.
Mining is an industry thick with culture and history, and some
habits apparently die hard. It was no doubt once a standard in the industry that for-profit
miners would grease the wheels of justice, or pay extortion
fees, and occasionally literally kill the competition. More
recently, however, a new class and breed of miner and mining
company have evolved out of the post-colonial period, and
ethical business practices are the only theoretical standard
today, regardless of the de facto rules. Gunslingers are subject
to prosecution today, as are corrupt politicians and company
men though obviously plenty get away with the white collar
crimes in this age.
The multinational aspects of the mining and moreover the corporate global economic
structure make compliance difficult to establish within and among organizations, and privacy
laws restrict government access to daily operations where violations occur. Subsidiaries and
foreign locations are subject to different laws and regulations than home nation facilities.
11 Table 7: Petronas,Annual and Corporate Reports 2002-2010; Table 8: Xstrata,Annual and CorporateReports 2003-2010
Table 7:Petronas
Revenue(RMbln)
2001 73.42002 67.2
2003 81.4
2004 97.5
2005 137
2006 167.4
2007 184.4
2008 223.1
2009 264.2
2010 216.4
Table 8: Xstrata
AttributableProfit (US$bln)
2002 0.14
2003 0.28
2004 1.03
2005 1.7
2006 3.4
2007 5.4
2008 4.7
2009 2.8
2010 5.2
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Language, religion and culture can interfere with translation, transfer and implementation of
corporate policy. Albeit a short-sighted tendency, many investors and other stakeholders
concern themselves only with the profitability and growth of the company, paying little to no
attention to various civil and criminal abuses the company may partake in during its pursuit
of capital.
Given the increases in production and revenues at companies featured in this section of
this report12
, its easiest to informally conclude that these companies engaged in bribery to
procure rights and contracts, and that bribery has been among the trade secrets at these and
other companies to a far greater extent than the court dockets and news media have portrayed
the issue. However, in law we need evidence to make formal conclusions, and implicit
evidence alone is insufficient to establish any proof. Our instincts and hunches are fallible.
What we can conclude today, given the facts, reports, and evidence made available to the
public, is that: A) corruption is a worldwide problem; B) the actual levels of corruption are
impossible to pinpoint though the modest estimates from the World Bank are remarkably
12 Table 9: BHP Billiton,Annual and Corporate Reports 2002-2010
Table 9: BHP Billiton
Oil (mil
barrels)
NatGas(billioncubic
ft)
Energy(Thermal)Coal ('000
tonnes)
Metallurgical(Coking)Coal ('000
tonnes)
Alumina&Aluminum('000
tonnes)
IronOre('000
tonnes)
Gold('000
ounces)
Diamonds('000
carats)
Silver('000
ounces)2002 78.52 283.47 82,840 35,400 4,932 67,910 289.76 40,750
2003 65.89 281.17 81,700 34,620 5,160 73,730 207.88 4,340 41,130
2004 58.03 324.34 83,882 35,360 5,480 84,220 115.60 5,482 42,652
2005 50.84 345.68 87,416 37,303 5,512 96,745 125.40 3,617 50,046
2006 45.87 360.44 85,756 35,643 5,549 97,072 216.50 2,561 46,476
2007 45.17 356.82 87,025 38,429 5,800 99,424 176.10 3,224 36,565
2008 57.44 366.54 80,868 35,193 5,852 112,260 161.50 3,349 43,487
2009 66.33 362.80 66,401 36,416 5,629 114,415 176.20 3,221 41,341
2010 84.39 368.57 66,131 37,381 5,082 124,962 141.90 3,050 45,362
%change 7.47 30.02 -20.17 5.60 3.04 84.01 -51.03 -29.72 11.32
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high at over 1% of global GDP; C) the mining (extraction) industry may have a higher rate of
corruption than other industries; D) the very same people and organizations who officially
condemn corrupt activity are some of those engaged in it; E) a vast number of ancillary
institutions and organizations are involved in hiding the illicit money; F) there is an urgent
need for action resulting in drastic reduction of improper payments.
OECD RESPONSIBILITY TO PROTECT MARKETS
Not only are the overwhelming majority of Global 500 companies from OECD nations,
thus placing the burden of enforcement on OECD nations given again that bribery is
something that SMEs cannot afford to engage in at the US$1 trillion dollar annual level, but
OECD nations are also the biggest consumers of resources, consistently dependent upon
foreign supplies, thus creating the impression of desperation and exaggerated
unscrupulousness in the habit of bribery in foreign territory. If we may be so bold as to liken
the OECD nations to a drug addict, and natural resources to a drug, we may then find a
suitable comparison for the lengths which the addict may go in pursuit of the drug.
Table 10: Petroleum 2001 2002 2003 2004 2005 2006 2007 2008 2009
OECD petrol demand 48.00 48.00 48.70 49.50 49.90 49.60 49.30 47.60 45.40
% of world 61.86 61.30 60.95 59.71 59.33 58.28 56.99 55.35 53.60
OECD petrol supply 21.70 21.80 21.50 21.00 20.10 19.80 19.50 18.70 18.80
% of world 27.96 28.17 26.81 25.15 23.73 23.16 22.81 21.59 22.12
% diff b/t supp/demand -121.20 -120.18 -126.51 -135.71 -148.26 -150.51 -152.82 -154.55 -141.49
non-OECD petroldemand 29.60 30.30 31.20 33.40 34.20 35.60 37.20 38.40 39.30
% of world 38.14 38.70 39.05 40.29 40.67 41.83 43.01 44.65 46.40non-OECD petrolsupply 23.40 24.50 25.50 26.60 27.20 27.80 28.20 28.50 29.00
% of world 30.15 31.65 31.80 31.86 32.11 32.51 32.98 32.91 34.12
% diff b/t supp/demand -26.50 -23.67 -22.35 -25.56 -25.74 -28.06 -31.91 -34.74 -35.52
Tot world demand 77.60 78.30 79.90 82.90 84.10 85.10 86.50 86.00 84.70
Tot world supply 77.60 77.40 80.20 83.50 84.70 85.50 85.50 86.60 85.00% diff b/t supp/demand 0.00 -1.16 0.37 0.72 0.71 0.47 -1.17 0.69 0.35
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The statistics in tables 10-1413
clearly show that the OECD and developed world
consume far more than they produce, thus making them dependent upon foreign supplies,
thus increasing their potential to initiate and otherwise engage in bribery. Central/South
American and African regions show surpluses in energy, which suggests that domestic
and regional-based bribery in those nations is likely less than bribery coming in from North
America, Europe, and Asia. OECD national firms have a comparative advantage in extractive
industries over non-OECD national firms due to access to technological and capital
resources, so again we can deduce that the primary players in the markets are also the usual
suspects. China shortfalls are relatively small, and given the nature of their economy it can be
13
Table 10: International Energy Agency, Oil Market Report Annual Statistical Supplement(2010); Table 11:US Energy Information Administration, World Energy Statistical Tables 1990-2009; Tables 12-14: BritishGeological Survey, World Mineral Production Statistics 2001-2009
Table 11: Energy 2001 2002 2003 2004 2005 2006 2007 2008
NA tot prod 99.44 100.09 98.66 99.04 98.53 100.51 100.93 101.72
NA tot cons 116.02 117.92 118.77 121.32 122.03 121.68 123.88 121.94
% diff -16.68 -17.82 -20.39 -22.49 -23.85 -21.06 -22.74 -19.87
USA tot prod 71.88 70.93 70.25 70.37 69.61 70.96 71.59 73.42
USA tot cons 96.81 98.48 98.73 100.98 101.04 100.48 102.51 100.58
% diff -34.68 -38.84 -40.53 -43.49 -45.16 -41.60 -43.20 -36.99
C/SA tot prod 25.92 25.24 25.66 27.03 28.01 29.04 28.99 29.56C/SA tot cons 21.11 21.10 21.57 22.41 23.15 24.30 24.61 25.76
% diff 18.55 16.40 15.94 17.09 17.36 16.33 15.12 12.85
Europe tot prod 51.20 50.98 50.32 50.32 48.61 47.34 46.34 46.49
Europe tot cons 82.49 82.22 83.88 85.40 85.84 86.44 85.84 85.74
% diff -61.12 -61.29 -66.70 -69.72 -76.59 -82.58 -85.24 -84.44
Africa tot prod 28.05 28.02 30.17 32.05 34.71 35.43 36.52 37.47
Africa tot cons 12.62 12.71 13.35 13.96 14.54 14.62 15.16 16.13
% diff 55.01 54.65 55.75 56.45 58.10 58.73 58.48 56.96
Asia/Oceania tot prod 82.55 88.20 96.01 108.20 115.11 120.37 125.10 134.33
Asia/Oceania tot cons 109.77 116.41 125.50 140.72 148.54 156.11 163.49 N/A
% diff -32.97 -31.98 -30.72 -30.06 -29.04 -29.69 -30.69 N/A
China tot prod 37.51 42.85 49.44 59.38 64.45 66.78 71.55 79.11
China tot cons 38.41 43.91 51.16 62.92 68.25 72.89 78.00 85.06
% diff b/t supp/dem -2.42 -2.48 -3.46 -5.96 -5.89 -9.14 -9.01 -7.52
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reasonably
estimated that
their energy
consumption in
production of
goods for export
accounts for the
deficit, and thus
we can attribute
their deficit to
nations to which
China exports
products, most notably in the North American and European regions. Henceforth, we should
Table 12: % of world production
USA Canada China AustraliaSAfrica
Crude
Petroleum (milbarrels) 0.05 3.6 5.1 0.01
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accept that OECD nations, Europe and North America have a level of responsibility for
reducing corruption and enforcing anti-corruption policies which is disproportionately high
when compared to nations in other regions and groups.
Table 14: Coal
% ofworldproduction(2009)
% of worldconsumption(2009)
% changeinproduction('90-'09)
% change inconsumption('90-'09)
World 100 100 43.64 43.9
N America 15 14.2 3.7 10.9
USA 13.9 13.2 4.2 10.6
Canada 0.9 6.9 -7.9 -3.6Europe 9.6 12.5 -44.2 -36.3Asia &Oceania 63.6 64.5 172.8 174.5
China 43.8 45.9 182.4 209.1
Australia 5.7 1.9 95.2 86.7
S Africa 3.5 2.6 41.1 43.1
The general responsibility to protect the integrity and function of markets has not gone
unnoticed by the OECD group, its individual members and partners. The Convention on
Combating Bribery of Foreign Public Officials in International Business Transactions
considered bribery as a widespread phenomenon in international business transactions
which undermines good governance and economic development, and distorts international
competitive conditions14
. The Convention requires all parties to criminalize bribery, to
prosecute nationals for domestic and foreign offenses, to implement accounting laws and
regulations designed to reduce potential for hiding corrupt payments, and to disseminate
information and engage the public on the issue.
14 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions,preamble (1997)
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Legislation implementing the Convention includes: Australias Criminal Code
Amendment15
(Bribery of Foreign Public Officials) Bill , which provides for up to 10 years
imprisonment and/or fines for offenses; Canadas Corruption of Foreign Public Officials
Act16
, which provides penalties of up to 5 years for bribery and up to 10 years for possession
of property obtained via corrupt practices; Chiles Criminal Code Amendments17
, which
provides minimum short-term imprisonment and a fine for violations; South Africas
Prevention and Combating of Corrupt Activities Act18
, which provides up to life
imprisonment for serious offenses; the UKs Bribery Act
19
, which provides up to ten years
and/or a fine for violations; the USAs Foreign Corrupt Practices Act20
, which provides up
to 5 years imprisonment and/or a criminal fine, and also creates potential for civil penalties.
The USA, as the nation with the most Global 500 corporations, has interest in providing
opportunities for whistleblowers and protecting the rights of informants. The Whistleblower
Protection Program prohibits any person from discharging or retaliating against employees
who exercise rights under the Occupational Health and Safety Act21
. The Dodd-Frank Act22
authorizes government officials to offer rewards to whistleblowers of 10-30% of sanctions .
ROOTS, FRUITS, AND CURES FOR CORRUPTION
In the foreword to the United Nations Convention against Corruption, Kofi Annan stated
that corruption feeds inequality and injustice, discourages foreign aid and investment, is a key
15 Australia Criminal Code Amendment (Bribery of Foreign Public Officials) Bill 70.2 (1999)16 Canada Bill S-21 (Corruption of Foreign Public Officials Act), 46-47 Elizabeth II, Chapter 34(3)(2)17 Chilean Criminal Code, Law No. 19,829 Article 250 bis A-B (2002), available via OECD,http://www.oecd.org/dataoecd/13/21/33656015.pdf18 South Africa Law No. 12, Prevention and Combating of Corrupt Activities Act, Chapter 5 (2003)19 United Kingdom, Bribery Act Chapter 23 11 (2010)20 15 U.S.C. 78dd-1, et seq., Foreign Corrupt Practices Act (1977)21
OSHA Act, 11(c) Whistleblower Protection Program, available athttp://www.whistleblowers.gov/(lastvisited October 2011)22 US Dodd-Frank Wall Street Reform and Consumer Protection Act 748
http://www.oecd.org/dataoecd/13/21/33656015.pdfhttp://www.oecd.org/dataoecd/13/21/33656015.pdfhttp://www.whistleblowers.gov/http://www.whistleblowers.gov/http://www.whistleblowers.gov/http://www.whistleblowers.gov/http://www.oecd.org/dataoecd/13/21/33656015.pdf -
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element in economic underperformance, and a major obstacle to poverty alleviation and
development. General Assembly resolution 58/423
called corruption a threat to the
sustainable development of people. The Convention called for a comprehensive and
multidisciplinary approach to prevention, requiring international cooperation in prevention
and enforcement. Party nations are required to enact domestic laws criminalizing corrupt
practices which include bribery of public officials and in the private sector, misappropriation,
trading in influence, abuse of functions, illicit enrichment, laundering, concealment,
obstruction, and accessory. Parties shall also provide civil and administrative remedies for
violations. Preventative policies and practices are mandated, including participation with
society, enhancement of integrity, transparency and accountability. Conflicts of interest shall
be prevented among party nations, meaning that public officials may not have ties in the
private sector which could unreasonably prejudice the interests of the general public.
Property obtained illicitly may be frozen, seized, or confiscated, and witnesses must be
protected .
The insidious plague of corruption is a pandemic, and as industry grows, so do the costs
of corruption. There is no great diagnostic test for this affliction, and the infection has
infiltrated the immune system, so to speak. Those charged with protecting markets and
societies may turn back and violate their own codes, only exacerbating the scale and behavior
of the problem. The same companies and industries which make a goal of development are
also delaying and preventing their own cause from taking fuller course. The corruption
pandemic is not without its self-defeatist, ironic, self-loathing elements.
Self-help is the course of action with the highest probability of success. Companies can
use the government regulations as a guide and reduce corrupt practices from within.
23 United Nations Convention against Corruption, GA resolution 58/4 of 31 October 2003
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Governments can audit and track bank transactions more, investigate account records, and
supervise officials more to increase the likelihood of catching corrupt agents.
Vales board chairman announced the launch of its Code of Conduct for suppliers in
2009, which encourages external organizations to adopt principles of transparent and ethical
behavior that Vale24
officially supports . In 2010 Gazprom25
, though thought to be shackled
by corruption , committed itself to development of its business ethics framework and
corporate governance system such that it will comply with generally accepted international
standards .Newmonts Code of Conduct26
is designed to guide employees toward behaving
with integrity, trust, honesty, respect and teamwork , all of which help prevent corruption.
Corporate social responsibility (CSR) movements support policy and action intended to
reduce incidence of corruption. Rules made and enforced from within the corporations have
direct influence and binding nature on employees. All of the businesses featured in this report
offer ethics statements, CSR policies, business conduct regulations or other policies with the
same effect.
Industry groups have sprung up with the intention of combating corruption, which is
rational and logical considering that paying bribes at home or abroad can become rather
costly, regardless of whether or not price inelasticity of demand can be exploited to transfer
that cost onto the consumers in the short term. BHP Billiton, BP, Chevron, ExxonMobil,
Newmont, Rio Tinto, Vale, Xstrata and scores of their competitors and counterparts
committed to support the Extractive Industries Transparency Initiative27
, which is based on
12 principles affirming ethics, rule of law, sustainability, transparency, accountability, and
good practices .
24 Vale,Annual and Sustainability Reports 2000-201025
Gazprom,Annual and Corporate Reports 1999-201026 Newmont,Annual and Corporate Reports 2005-201027 Extractive Industries Transparency Initiative (2011), available athttp://eiti.org/supporters/companies
http://eiti.org/supporters/companieshttp://eiti.org/supporters/companieshttp://eiti.org/supporters/companieshttp://eiti.org/supporters/companies -
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The United Nations Global Compact is an initiative based on voluntary compliance with
and support for ten principles which affirm the value of human rights, business ethics,
sustainability, rule of law, fairness, transparency, accountability, and good practices.
Corporate participants include BHP Billiton, BP, Newmont, Rio Tinto, and Xstrata. Business
associations such as the Ghana Chamber of Mines, the Ecuadorian Council of Responsible
Mining, Philippines Chamber of Mines, Argentine Chamber of Mines in San Juan, Argentine
Petroleum and Gas Institute, the Bulgarian Chamber of Mining and Geology, Ukrainian
Association of Gas Traders, Brazilian Oil and Gas Workers Association, American
Hightowers Petroleum Company, and British International Petroleum Industry Environmental
Conservation Association28
.
The World Economic Forums Partnering against Corruption Initiative29
lays down a
similar groundwork for development of policy, strategy, procedure, tactics, actions, and
vision for combating the plague. BP, Chevron, ExxonMobil, Gazprom Neft, Newmont, and
Rio Tinto are partners.
Corruption is a persistent nuisance, however, and it is clear that despite the official
participation in interest groups, and regardless of the theoretical commitments to anti-
corruption ideology and legally compliant practices, companies like government officials are
consistently involved in bribery scandals. Be they mere allegations of bribery like those
against Chevron in Cambodia30
, or investigations like those involving BHP Billiton in
Iraq31
and ExxonMobil in Libya32
, or warnings from government officials like that issued
28 United Nations Global Compact Office, Ten Principles (2004-2011)29 World Economic Forum Partnering against Corruption Initiative (2011)30
Marwaan Macan-Markar, Chevron Silent on Bribery Allegations, IPS (2009)31 Cosima Marriner,BHP Billiton embroiled in Iraq oil-for-food scandal, The Guardian (2006)32 Joe Palazzolo, SEC eyeing ExxonMobils ties to Libyan sovereign fund, Wall Street Journal Blogs (2011)
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to BP after a Russia deal33
, or implicit confessions in resignations of executives amid
corruption allegations like that at Codelco34
, or explicit confessions and settlements such as
those with BHP Billiton in Congo and Cambodia35
and Chevron in Iraq36
, reports and cases
show the same companies which are supposed to reject corruption actually support it too.
The effects on a company of exposure in corruption or other criminal scandals are
localized too, so beyond a tangible fine levied against an offender, there is little impact other
than on perhaps image and morality perceptions held by a sect of the population. For
example, Newmonts stock price did not show any negative effects after a corruption probe in
Indonesia37
.
We can thus conclude that the insidious plague is capable of mimicking healthy cells,
and it may be difficult to tell the difference between the genuine and infected parts. By
imitating the clean units, this infection can then operate covertly, gaining acceptance and
support of the healthy parts, and continue to infect others without their knowledge of any
illness being transferred. The resulting lack of trust and transparency in the group further
stalls healing, barricades the corporations and public offices and seals them off from outsiders
who have not been corrupted or infected. After sufficient time has passed in quasi-isolation,
and the disease has strengthened itself against internal and external efforts to eliminate it, the
plague can then survive perpetually as it becomes the norm to label only the truly well as the
ailed and to accept corruption as a constant. We must also accept that in the end, the body
may not have the requisite will to heal itself, as sadism and masochism are often found
33 Mail on Sunday,Beware of corruption, Labour MP warns BP after deal with Russian company (2011)34 Business News America, Codelco VP resigns in midst of corruption allegations (2008)35 Francesca Steele,Mining giant BHP Billiton admits it may have bribed foreign officials, The Sunday Times(2010)36
Securities and Exchange Commission, Chevron to pay $30 million to settle charges for improper payments toIraq under UN oil for food program (2007)37 Nasdaq,Newmont Sparkles at $78 Despite Indonesia Probe (2011)
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together, especially in austere ascetic sects such as those in the rural developing and third
worlds.
Considering that there is no substitute for most resources, and the substitutes that are
available are not in adequate supply to threaten significant portions of the market share of
primary resources like petroleum and iron, for example, there is a monopolistic effect to the
international resource market. A nations resources are considered public property, and so
state-ownership of mining or heavy state involvement is standard, resulting in 25-30%+ of
government revenues coming from extractive industries in some countries38
. The access to
and control over the resources which public officials wield creates opportunity to create
problems. Companies, especially wealthy foreign ones, are subject to the supply-side
economics in locations where they desire to harvest resources, considering again that there
are insufficient substitutes for those resources, and also that there is elevated competition to
gain rights to acquisition and development of lands containing such resources. Peak
production theory and the absolutely limited supply nature of the resource trade further
enhance competition in the short-term, when price elasticity is low not only at the point of
sale after first acquisition, but also likely at the initial sale of rights. Officials can merely raise
the price of access by requiring a bribe, and companies may face a the dilemma of payment
of the bribe or loss of rights, especially if they have a habit of paying bribes, since once the
cycle starts it is hard to break and there may be no legal agents willing to help when the
corrupt company finally wants to stop.
Factors including poverty, an uneducated general population, low local or national
development, and certain cultural and personality traits may sway otherwise decent
individuals to exploit their powers for personal gain, including at the cost of the public. A
38 Monika Weber-Fahr, Treasure or Trouble?, World Bank and IMF (2002)
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better me than them attitude may also be inseparable from impoverished locales where
government is synonymous with corruption. Competition not only for resources, but also for
bribes is likely a feature of various locales, and then we may boldly compare the corrupt
officials to a drug addict as we have with persons attempting to procure resources, and there
are few limits to the lengths people will go to obtain the substance of their addiction, be it
money or resources or some other drug. This complicated, integrated and suspiciously strong
virus has no cure today, nor in the foreseeable future, and in the transitional meantime up to a
point when a vaccine can be theorized and practically administered, treatment and
management is the only realistic option. This plague, unfortunately, fiercely resists treatment.
PSYCHOLOGICAL AND SOCIAL THEORY
Corruption may be a mental health issue. Participants in bribery, kick-back, and other
corrupt schemes most often exhibit coherent speech, and are rarely the subject of violent
criminal court proceedings. However, there are milder forms of mental illness which
businesspeople and public officials may be suffering from while associated with criminal
activity.
Narcissistic Personality Disorder39
may be the most common form of mental illness
afflicting corrupt personnel. Attitudes and thoughts of such persons may be exaggerated, and
they may have a classic grandiose sense of self-importance, or be preoccupied with fantasies
of success and power. They may believe they should have exclusively high-status people or
institutions in their life. They may require excessive admiration, or have a sense of
entitlement to favorable treatment. They may exploit other people to achieve their own ends.
They may lack empathy for others, or be envious of others or believe others are envious of
39 American Psychiatric Association,DSM-IV-TR 301.81
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them, and they may show arrogant, haughty behaviors or attitudes. They may very easily fit
the diagnostic criteria for the disorder.
Such personnel may suffer from Antisocial Personality Disorder40
. In receiving or
giving bribes, they fail to conform to social norms with respect to lawful behaviors.
Deceitfulness by repeated lying may accompany unethical or criminal behaviors, for which
they may lack remorse. Impulsivity, reckless disregard for safety of self or others, irritability,
and consistent irresponsibility may also be present in such persons, who may have developed
such habits in adolescence.
If criteria are not met for Antisocial Personality Disorder, Conduct Disorder41
may be
present. Persons suffering from Conduct Disorder exhibit a persistent pattern of behavior in
which the basic rights of others are violated. Such people also act aggressively toward other
people or animals to the extent that they may bully, threaten or intimidate others, or initiate
physical fights, or steal from others, or force another into sexual activity. Such aggression
toward people is not absent in dysfunctional military or police organizations. Persons with
Conduct Disorder may destroy the property of others, and or invade someone elses home or
car. They may lie to obtain goods or favors, and exhibit other traits which significantly impair
their occupational functioning.
If criteria for Antisocial Personality Disorder or Conduct Disorder are not met, corrupt
actors may be suffering from Oppositional Defiant Disorder42
. Such mentally ill persons
exhibit a pattern of negativistic, hostile, and defiant behavior as indicated by losses of temper,
arguments, defiance of rules or refusal to comply therewith, deliberately annoying others,
40
American Psychiatric Association,DSM-IV-TR 301.741 American Psychiatric Association,DSM-IV-TR 312.842 American Psychiatric Association,DSM-IV-TR 313.81
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blaming others for his or her own mistakes, touchiness or is easily annoyed by others, general
angry and resentful demeanor, or spitefulness or vindictiveness.
Diagnostic criteria for Obsessive-Compulsive Personality Disorder43
include
preoccupation with details or schedules to the extent that the major point of the activity is
lost; perfectionism that interferes with task completion; excessive devotion to work and
productivity to the exclusion of leisure activities and friendships; over-conscientiousness,
inflexibility about matters of morality, ethics, or values; overly strict standards; miserly
spending style toward both self and others as money is viewed as something to be hoarded for
future catastrophes; rigidity and stubbornness. Perhaps this diagnosis may better suit the
public official side of corrupt arrangements, but several points concerning excessive
strictness and preoccupation with work to the detriment of other relationships may also apply
to private company men and women.
Some cases may involve persons who are suffering from Delusional Disorder44
.
Corrupt persons or participants in schemes may have delusions involving real life situations,
such as about being followed or under surveillance. Persons suffering from delusions may
show no remarkable impairment or bizarre behavior, and the disturbance is not due to the
direct effects of a substance. Delusions of being under surveillance may seem like good sense
among corrupt persons.
Within an office, corrupt activity may be allowed to continue due to simple passive
aggressive tendencies among coworkers. Procrastination, passing the buck, making excuses,
lying to save face, intentional inefficiency, letting a problem escalate, and self-depreciation
43 American Psychiatric Association, DSM-IV-TR 301.444American Psychiatric Association,DSM-IV-TR 297.1
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are all signs of passive aggression45
. In extremely dysfunctional organizations, individuals
may be induced into depressive internal states where external cooperation toward compliance
is not an option.
Corrupt organizations, as legal persons, exhibit a variety of ill pathologies46
but
businesses are inorganic, and are not humanper se. A growing number of experts have
approached the corrupt organization from both the external and internal, and conceptualized
organizations as collections of individuals. The corrupt organization may then be perceived
as an organization of corrupt individuals
47
.
There may exist a sense of being protected under the corporate persona or a sense of
anonymity as a corporate employee, which fosters ideation analogous to invincibility, or at
least that there is no danger in engaging in or supporting or ignoring corruption. Within the
corporate fortress, manifest violations of law and ethics policy may become the norm. A lie
may spread across an entire organization and become amplified as it feeds back into and
through the organizations personnel who fail to halt its progress and apparent validity.
Myriad systemic faults within the corporate structure can contribute to escalation of
deception such that it becomes the norm48
.
People who may have been otherwise law-abiding and compliant may develop deviant
tendencies at work where rationalization of criminal acts is standardized into the business
model, where corruption is valorized and seen as a mere part of doing business. Processes of
socialization within certain corporations may include convincing newcomers that corruption
45 Psychology Today Magazine, Passive Aggression (2011)46 Sergio Alvarado, Organizational Pathology, 26th International Conference of the Institute of ManagementSciences (1984)47 Jonathan Pinto, Carrie Leana, and Frits Pil, Corrupt Organizations or Organizations of Corrupt Individuals?,
Academy of Management Review, pp.685-709 (2008)48 Peter Fleming and Stelios Zyglidopoulos, The Escalation of Deception in Organizations, Journal of BusinessEthics, pp. 837-850 (2007)
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is permissible or even desirable. Once at the organizational level, corruption can continue
despite the turnover of its prior or initial practitioners. Within the system where individuals
and the collective are mutually reinforcing, otherwise decent people may be able to
consistently and routinely engage in corruption without feeling remorse or experiencing
conflict49
.
Crime has been considered a type of social deviance50
, and it has been argued that
deviance is established in social roles51
. When ones identity is structured around ones
place at work or occupation, demands made by others at work, even non-binding social
demands, may compel people toward deviance and thus crime. When people are rewarded for
deviant behavior, such as being awarded contracts which in turn leads to intangible rewards
of acceptance and admiration among a group of coworkers, the deviant behavior may seem
more justifiable and desirable than conforming behavior, which may provide negative
consequences such as losing contracts and being alienated from a group of peers, or
termination of employment52
.
Negative consequences associated with conforming behavior may easily lead to a sense
of victimhood and rejection of formal legal and ethical rules as being counterproductive or
damaging. A group of individuals in a work situation may find unity in defiance of public
policy, especially in cases involving bribery of public officials. The rivalry between the
corrupt and the formal legal institution may produce an ironic effect wherein the socially
deviant behavior which was established and reinforced in social roles is perpetuated by the
49 Blake Ashforth and Vikas Anand, The Normalization of Corruption in Organizations, Research inOrganizational Behavior, pp. 1-25 (2003)50 Charles Tittle and Raymond Paternoster, Social Deviance and Crime: An Organizational and Theoretical
Approach (2000), abstract available athttp://www.ncjrs.gov/App/publications/abstract.aspx?ID=18445651 EM Lemert,Human Deviance, Social Problems, and Social Control (1972), abstract available at
http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=759152 RL Akers,Deviant BehaviorA Social Learning Approach (1973), abstract available athttp://www.ncjrs.gov/App/publications/abstract.aspx?ID=27692
http://www.ncjrs.gov/App/publications/abstract.aspx?ID=184456http://www.ncjrs.gov/App/publications/abstract.aspx?ID=184456http://www.ncjrs.gov/App/publications/abstract.aspx?ID=184456http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=7591http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=7591http://www.ncjrs.gov/App/publications/abstract.aspx?ID=27692http://www.ncjrs.gov/App/publications/abstract.aspx?ID=27692http://www.ncjrs.gov/App/publications/abstract.aspx?ID=27692http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=7591http://www.ncjrs.gov/App/publications/abstract.aspx?ID=184456 -
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same forces which are directed at its elimination . Deviant behavior may then be further
magnified by stigmatization of the corporate employees, as stigmatization by others or
association with a stigmatized group has been shown as a cause of deviant behavior53
.
DISCUSSION
Effects of corruption are largely economic and thus can be considered theoretical,
indirect, or intangible, though significant work has been done which also considers the other
side of the economic costs argumentthat they are measurable and real. The Stolen Assets
Recovery Initiative considers corrupt payments and other illicitly obtained property as
outright theft of public assets, and the true cost of corruption as far exceeding the value of the
assets . Collateral damage is not without real value, and represents a moral loss of greater
social magnitude. Stolen assets are often hidden in financial centers in developed countries,
meaning the money which probably came from a developed-nation corporation returns again
to the developed world, magnifying the impact on the underdeveloped nations and distorting
the market function in the first world.
The resource curse likely has bilateral effects as corrupt payments and globalization take
thicker roots. Nations whose economies are more dependent upon resource trades suffer from
classic niche development and widespread poverty with the added newer component of
multimillion or multibillion dollar annual bribery activity, and nations whose economies are
expansive and dependent upon foreign supplies suffer from a reciprocal influence as
corporations move most of their assets abroad, employ more people abroad than
domestically, and as the corporate culture shifts from a more isolationist, protectionist and
nationalist one to one more inclusive of and dominated by developing and third world
mentality. Machiavellian axioms such as the ends justify the means proliferate as goods and
53 Erich Goode,Deviant Behavior(2000), abstract available athttp://www.ncjrs.gov/App/Publications/abstract.aspx?ID=193747
http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=193747http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=193747http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=193747 -
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people move freely across borders, and the once-developed high-class personality historically
frequently associated with the Western world is relegated to that of a glutton, a conquistador,
an imperialist, a neo-colonial neo-slave master. In the global market, the zero-sum game
produces inefficiencies that guarantee only losers.
Human rights abuses are constants in nations with high corruption, whether a causal
relationship or mere correlation exists between the two. Nations who have implemented
legislation in conformance with international norms, and those which have ratified either the
International Covenant on Civil and Political Rights or the International Covenant on
Economic, Social and Cultural Rights see their official policy and political will compromised
by rogue actors who engage in corrupt practices54
. Authoritarian regimes, military
dictatorships, nations with weak judicial systems and socialized industry are breeding
grounds for corruption, human rights abuses, and diminishment of the importance of
individual freedoms, all of which are associated with weak economies, though the association
between democracy and economic growth can be on the positive and negative side . In
poorer, more corrupt countries a cyclical phenomenon is noticed, and a chicken oregg
paradox results after pondering ing whether corruption is a result of underdevelopment or if
underdevelopment is a result of corruption55
.
Ethnocentrism and subjective perceptions clearly influence acceptance of corruption and
inaction against it. Authors have found that what people in the West see as corruption,
Africans, for example, view as normal politics. In Russia and China, bribery may be
considered a mere cost of doing business, especially for foreign firms56
(2005). Isolated
54 Kenny Feng, The Human Rights Implications of Corruption: An Alient Tort Claims Act Based Analysis,Wharton Research Scholars Journal (2004)55 John Quinn, The effects of majority state ownership of industry or mining on corruption: A cross-regional
comparison (2004)56 Steven Myers,In Russia, bribery is the cost of business, New York Times (2005); Zhang Yan,Bribery caseson the rise in China, China Daily (2010)
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regions where extraction facilities are located are often populated by tribal peoples who are
inherently distrusting of foreigners or domestic outsiders, which becomes an opportunity to
bribe, solicit, or extort to gain short-term cooperation and some resemblance of trust perhaps
by appeasing the fiery gods of superstition, yet another dimension of the resource curse and
insidious plaguewhich are largely indistinguishable from one another57
.
During the gold standard ages and in other systems where there was a limited quantity
medium of trade it was probably more rational and necessary to compete outside of the
ethical and moral rules, but today we have virtual money, binary credits, and an unlimited
supply currency which is not exclusively valued upon any tangible non-renewable resource,
but is at the core actually based on faith and other psychological factors in the common
market. Todays corrupt officials and businesspeople are more harmful and less emotionally
intelligent than those from 100 years ago and further back in time. Yields on corruption are
higher today than previously, both in the amount of resources obtainable in short periods of
time and in the spot bribe prices, and so corrupt actors are greedier today than in the past.
Prosecutors handle more corruption cases today than previously, and investigations,
inquiries, and oversight are more common today than before, so persons engaged in corrupt
activities are more fearless and unscrupulous than they were previously, meaning they risk
more, and pose a greater threat to themselves and others. More private individuals,
academics, officials, organizations and business groups are involved in activities designed to
combat, reduce, prevent, and eradicate corruption today than ever before, yet it is likely a
growth market, meaning that the situation is more complicated now than before, and its
participants are more entrenched into positions of high power.
57 Lowell Bergman and Jane Perlez, PeruThe Curse of Inca Gold, PBS (2005)
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CONCLUSION
Managing the effects of corruption today includes paying attention to local, provincial,
state, regional, national, and global initiatives, regulations, and agendas. The United Nations
and OECD have offered business and public officials various pieces of literature that can be
used to reduce the propensity for corrupt activities internally and externally58
. Corporations
report great ideas and officially hold ethics and community responsibility very highly. The
action plans and rhetoric are only part of the puzzle, obviously. Today many of us are keenly
aware of the differences between theory and practice outside of the natural sciences, and the
difference between de facto and official laws, and compliance therewith.
The secret ingredient in the recipe for success has been and always will be individual and
collective will. We need to integrate micro and macro paradigms, to transcend the individual,
group, and collective whole to find a unified vision and set of goals. Goals and procedures
must be communicated effectively from individuals to other individuals, from the collective
to individuals, and from individuals to the groups of varying sizes, and people need to have
the integrity to go about their private lives with the fundamentals in mind. This, of course, is
the part where human nature has been consistently considered an absolute limiting factor, and
where individuals and groups have essentially given up on eliminating the problem, and thus
have directly and indirectly enabled the problem. We need better psychometrics, better
recruiting, better monitoring, and better human resources. We need a great deal of faith too.
A corporate offender registry may help in exposing organizations which are guilty of any
criminal offenses. Corporations which are required to notify their suppliers and customers of
their criminal history, and publicly acknowledge and perhaps apologize for their criminal
58
OECD Working Group on Bribery, Annual Report(2010); UN & Transparency International,ReportingGuidance on the 10th Principle against Corruption, UN Global Compact Office (2009); UN Global CompactOffice (2004, 2006, 2010)
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behavior have greater incentive to cease criminal activity and assist authorities in enforcing
laws and preventing corporate crime. Exposure of corrupt and otherwise criminal
organizations may effectively stigmatize and increase the salience of the behavior, thereby
reducing such behavior and perhaps making it more noticeable and easier to talk about in the
community. An easily accessible user-friendly online database of all corporate criminal and
civil activity, including investigations, charges, and settlements would increase public
awareness of the issue and help stakeholders clarify certain issues and acquire specific
knowledge of the legal proceedings. Treatment options for the mentally ill are also necessary.
Bank records need to be more accessible so concealment of illicit income is not so easy.
At the end of 2010, about 89% of total assets at BIS reporting banks were external assets59
.
Although the ratio of local to foreign claims has come up in recent years, foreign investment
represents a very significant portion of emerging market activity60
, making concealment
fairly simple for experts with access to certain personnel at certain banks which do not report
59
BIS, Statistical Annex: The international banking market, BIS Quarterly Review (2011)60 Patrick McGuire and Philip Wooldridge, The BIS consolidated banking statistics: structure, uses and recentenhancements, BIS Quarterly Review (2005)
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to the public their transfers data, offshore data, and national data sufficiently to eliminate
opportunities for rogue bankers to provide ancillary services for some fee.
Discretionary spending can be reallocated to projects dealing with 21
st
century issues like
corruption from those dealing with 20th century issues like drugs and adult prostitution.
Revenues from tax evasion cases, which would increase with further relaxation of banking
secrecy laws and codes, can be put to good use in policing corporate criminalsby far the
most financially and economically devastating criminals on any street anywhere. Without a
will, unfortunately for all, there is no possible way to beat this peculiar plague or to bind this
evil curse.
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