Corruption is an issue that adversely affects India's economy of central, state and local government agencies. Not only has it held the economy back from reaching new heights, but rampant corruption has stunted the country's development. A study conducted by Transparency International in 2005 recorded that more than 92% of Indians had at some point or another paid a bribe to a public official to get a job done. In a study conducted in 2008, Transparency International reported that about 50% of Indians had first hand experience of paying bribes or using contacts to get services performed by public offices.
Transparency International's 2017 Corruption Perception Index ranks the country 40th place out of 180 countries.
The largest contributors to corruption are entitlement programs and social spending schemes enacted by the Indian government. Examples include the Mahatma Gandhi National Rural Employment Guarantee Act and the National Rural Health Mission. Other areas of corruption include India's trucking industry which is forced to pay billions of rupees in bribes annually to numerous regulatory and police stops on interstate highways.
The media has widely published allegations of corrupt Indian citizens stashing millions of rupees in Swiss banks. Swiss authorities denied these allegations, which were later proven in 2015–2016. The Indian media is largely controlled by extremely corrupt politicians and industrialists who play a major role by misleading the public with incorrect information and use the media for mud-slinging at political and business opponents.
The causes of corruption in India include excessive regulations, complicated tax and licensing systems, numerous government departments with opaque bureaucracy and discretionary powers, monopoly of government controlled institutions on certain goods and services delivery, and the lack of transparent laws and processes. There are significant variations in the level of corruption and in the government's efforts to reduce corruption across different areas of India.
See also: Booth capturing
Corruption in India is a problem that has serious implications for protecting the rule of law and ensuring access to justice. As of December 2009, 120 of India's 524 parliament members were accused of various crimes, under India's First Information Report procedure wherein anyone can allege another to have committed a crime. Many of the biggest scandals since 2010 have involved high level government officials, including Cabinet Ministers and Chief Ministers, such as the 2010 Commonwealth Games scam (₹70,000 crore (US$11 billion)), the Adarsh Housing Society scam, the Coal Mining Scam (₹1.86 lakh crore (US$28 billion)), the Mining Scandal in Karnataka and the Cash for Vote scams.
Sole philosophy pages on all norms and guidelines to clear mess, but now placed below plates.
A 2005 study done by the Transparency International in India found that more than 92% of the people had firsthand experience of paying bribes or peddling influence to get services performed in a public office. Taxes and bribes are common between state borders; Transparency International estimates that truckers annually pay ₹222 crore (US$34 million) in bribes.
Both government regulators and police share in bribe money, to the tune of 43% and 45% each, respectively. The en route stoppages at checkpoints and entry-points can take up to 11 hours per day. About 60% of these (forced) stoppages on roads by concerned authorities such as government regulators, police, forest, sales and excise, octroi, and weighing and measuring departments are for extorting money. The loss in productivity due to these stoppages is an important national concern; the number of truck trips could increase by 40%, if forced delays are avoided. According to a 2007 World Bank published report, the travel time for a Delhi-Mumbai trip could be reduced by about 2 days per trip if the corruption and associated regulatory stoppages to extract bribes were eliminated.
A 2009 survey of the leading economies of Asia, revealed Indian bureaucracy to be not only the least efficient out of Singapore, Hong Kong, Thailand, South Korea, Japan, Malaysia, Taiwan, Vietnam, China, Philippines and Indonesia, but that working with India's civil servants was a "slow and painful" process.
Land and property
See also: Illegal housing in India
Officials are alleged to steal state property. In cities and villages throughout India, groups of municipal and other government officials, elected politicians, judicial officers, real estate developers and law enforcement officials, acquire, develop and sell land in illegal ways. Such officials and politicians are very well protected by the immense power and influence they possess. Apart from this, slum-dwellers who are allotted houses under several housing schemes such as Pradhan Mantri Gramin Awaas Yojana, Rajiv Awas Yojna, Pradhan Mantri Awas Yojna etc., rent out these houses to others, to earn money due to severe unemployment and lack of a steady source of income.
Tendering processes and awarding contracts
A 2006 report claimed state-funded construction activities in Uttar Pradesh, such as road building were dominated by construction mafias, consisting of cabals of corrupt public works officials, materials suppliers, politicians and construction contractors.
Problems caused by corruption in government funded projects are not limited to the state of Uttar Pradesh. According to The World Bank, aid programmes are beset by corruption, bad administration and under-payments. As an example, the report cites that only 40% of grain handed out for the poor reaches its intended target. The World Bank study finds that the public distribution programmes and social spending contracts have proven to be a waste due to corruption.
For example, the government implemented the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) on 25 August 2005. The Central government outlay for this welfare scheme is ₹400 crore (US$61 million) in FY 2010–2011. After 5 years of implementation, in 2011, the programme was widely criticised as no more effective than other poverty reduction programmes in India. Despite its best intentions, MGNREGA faces the challenges of corrupt officials reportedly pocketing money on behalf of fake rural employees, poor quality of the programme infrastructure, and unintended destructive effect[clarification needed] on poverty.
Hospitals and health care
In Government Hospitals, corruption is associated with non-availability/duplication of medicines, obtaining admission, consultations with doctors and receiving diagnostic services.
National Rural Health Mission is another health care-related government programme that has been subject to large scale corruption allegations. This social spending and entitlement programme hoped to improve health care delivery across rural India. Managed since 2005 by the Ministry of Health, the Indian government mandated a spending of ₹2.77 lakh crore (US$42 billion) in 2004–2005, and increased it annually to be about 1% of India's gross domestic product. The National Rural Health Mission programme has been clouded by a large-scale corruption scandal in which high-level government appointed officials were arrested, several of whom died under mysterious circumstances including one in prison. Corruption, waste and fraud-related losses from this government programme has been alleged to be ₹1 lakh crore (US$15 billion).
Science and technology
CSIR, the Council of Scientific and Industrial Research, has been flagged in ongoing efforts to root out corruption in India. Established with the directive to do translational research and create real technologies, CSIR has been accused of transforming into a ritualistic, overly-bureaucratic organisation that does little more than churn out papers.
There are many issues facing Indian scientists, with some, such as MIT systems scientist VA Shiva Ayyadurai, calling for transparency, a meritocratic system, and an overhaul of the bureaucratic agencies that oversee science and technology. Sumit Bhaduri stated, "The challenges of turning Indian science into part of an innovation process are many. Many competent Indian scientists aspire to be ineffectual administrators (due to administrative power and political patronage), rather than do the kind of science that makes a difference". Prime minister Manmohan Singh spoke at the 99th Indian Science Congress and commented on the state of the sciences in India, after an advisory council informed him there were problems with "the overall environment for innovation and creative work" and a "war-like" approach was needed.
Income tax department
There have been several cases of collusion involving officials of the Income Tax Department of India for preferential tax treatment and relaxed prosecutions in exchange for bribes.
Preferential award of mineral resources
See also: Illegal mining in India
In August 2011, an iron ore mining scandal became a media focus in India. In September 2011, elected member of Karnataka's legislative assembly Janardhana Reddy, was arrested on charges of corruption and illegal mining of iron ore in his home state. It was alleged that his company received preferential allotment of resources, organised and exported billions of dollars' worth of iron ore to Chinese companies in recent years without paying any royalty to the state government exchequer of Karnataka or the central government of India, and that these Chinese companies made payment to shell companies registered in Caribbean and north Atlantic tax havens controlled by Reddy.
It was also alleged that corrupt government officials cooperated with Reddy, starting from government officials in charge of regulating mining to government officials in charge of regulating port facilities and shipping. These officials received monthly bribes in exchange for enabling the illegal export of illegally mined iron ore to China. Such scandals have led to a demand in India for consensually driven action plan to eradicate the piracy of India's mineral resources by an illegal, politically corrupt government officials-business nexus, removal of incentives for illegal mining, and the creation of incentives for legal mining and domestic use of iron ore and steel manufacturing.
A study conducted between 2004 and 2005 found that India's driver licensing procedure was a hugely distorted bureaucratic process and allows drivers to be licensed despite their low driving ability through promoting the usage of agents. Individuals with the willingness to pay make a significant payment above the official fee and most of these extra payments are made to agents, who act as an intermediary between bureaucrats and applicants.
The average licensee paid Rs 1,080, approximately 2.5 times the official fee of Rs 450, in order to obtain a license. On average, those who hired agents had a lower driving ability, with agents helping unqualified drivers obtain licenses and bypass the legally required driving examination. Among the surveyed individuals, approximately 60% of the license holders did not even take the licensing exam and 54% of those license holders failed an independent driving test.
Agents are the channels of corruption in this bureaucratic driver licensing system, facilitating access to licenses among those who are unqualified to drive. Some of the failures of this licensing system are caused by corrupt bureaucrats who collaborate with agents by creating additional barriers within the system against those who did not hire agents.
Professor Bibek Debroy and Laveesh Bhandari claim in their book Corruption in India: The DNA and RNA that public officials in India may be cornering as much as ₹921 billion (US$14 billion), or 1.26 per cent of the GDP through corruption. The book claims most bribery is in government delivered services and the transport and real estate industries.
Bribery and corruption are pervasive, but some areas tend to more issues than others. A 2013 EY (Ernst & Young) Study reports the industries perceived to be the most vulnerable to corruption as: Infrastructure & Real Estate, Metals & Mining, Aerospace & Defense, and Power & Utilities. There are a range of specific factors that make a sector more susceptible to bribery and corruption risks than others. High use of middlemen, large value contracts, and liasioning activities etc. drive the depth, volume and frequency of corrupt practices in vulnerable sectors.
A 2011 KPMG study reports India's real estate, telecommunications and government-run social development projects as the three top sectors plagued by corruption. The study found India's defence, the information technology industry and energy sectors to be the most competitive and least corruption prone sectors.
CMS India claims in its 2010 India Corruption Study report that socio-economically weaker sections of Indian society are the most adversely affected by government corruption. These include the rural and urban poor, although the study claims that nationwide perception of corruption has decreased between 2005 and 2010. Over the 5-year period, a significantly greater number of people surveyed from the middle and poorest classes in all parts of India claimed government corruption had dropped over time, and that they had fewer direct experiences with bribery demands. Whereas in reality corruption has increased ten folds since 2010 and continues to grow relentlessly on a daily basis.
The table below compares the perceived anti-corruption effort across some of the major states in India. A rising index implies higher anti-corruption effort and falling corruption. According to this table, the states of Bihar and Gujarat have experienced significant improvements in their anti-corruption efforts, while conditions have worsened in the states of Assam and West Bengal. Consistent with the results in this table, in 2012 a BBC News report claimed the state of Bihar has transformed in recent years to become the least corrupt state in India.
Main article: Indian black money
Black money refers to money that is not fully or legitimately the property of the 'owner'. A government white paper on black money in India suggests two possible sources of black money in India; the first includes activities not permitted by the law, such as crime, drug trade, terrorism and corruption, all of which are illegal in India and secondly, wealth that may have been generated through lawful activity but accumulated by failure to declare income and pay taxes. Some of this black money ends up in illicit financial flows across international borders, such as deposits in tax haven countries.
A November 2010 report from the Washington-based Global Financial Integrity estimates that over a 60-year period, India lost US$213 billion in illicit financial flows beginning in 1948; adjusted for inflation, this is estimated to be $462 billion in 2010, or about $8 billion per year ($7 per capita per year). The report also estimated the size of India's underground economy at approximately US$640 billion at the end of 2008 or roughly 50% of the nation's GDP.
Indian black money in Switzerland
India was ranked 38th by money held by its citizens in Swiss banks in 2004 but then improved its ranking by slipping to 61st position in 2015 and further improved its position by slipping to 75th position in 2016. According to a 2010 The Hindu article, unofficial estimates indicate that Indians had over US$1,456 billion in black money stored in Swiss banks (approximately US$1.4 trillion). While some news reports claimed that data provided by the Swiss Banking Association Report (2006) showed India has more black money than the rest of the world combined, a more recent report quoted the SBA's Head of International Communications as saying that no such official Swiss Banking Association statistics exist.
Another report said that Indian-owned Swiss bank account assets are worth 13 times the country's national debt. These allegations have been denied by Swiss Bankers Association. James Nason of Swiss Bankers Association in an interview about alleged black money from India, holds that "The (black money) figures were rapidly picked up in the Indian media and in Indian opposition circles, and circulated as gospel truth. However, this story was a complete fabrication. The Swiss Bankers Association never published such a report. Anyone claiming to have such figures (for India) should be forced to identify their source and explain the methodology used to produce them."
In a separate study, Dev Kar of Global Financial Integrity concludes, "Media reports circulating in India that Indian nationals held around US$1.4 trillion in illicit external assets are widely off the mark compared to the estimates found by his study." Kar claims the amounts are significantly smaller, only about 1.5% of India's GDP on average per annum basis, between 1948 and 2008. This includes corruption, bribery and kickbacks, criminal activities, trade mispricing and efforts to shelter wealth by Indians from India's tax authorities.
According to a third report, published in May 2012, Swiss National Bank estimates that the total amount of deposits in all Swiss banks, at the end of 2010, by citizens of India were CHF 1.95 billion (₹92.95 billion (US$1.4 billion)). The Swiss Ministry of External Affairs has confirmed these figures upon request for information by the Indian Ministry of External Affairs. This amount is about 700-fold less than the alleged $1.4 trillion in some media reports. The report also provided a comparison of the deposits held by Indians and by citizens of other nations in Swiss banks. Total deposits held by citizens of India constitute only 0.13 per cent of the total bank deposits of citizens of all countries. Further, the share of Indians in the total bank deposits of citizens of all countries in Swiss banks has reduced from 0.29 per cent in 2006 to 0.13 per cent in 2010.
Domestic black money
Indian companies are reportedly misusing public trusts for money laundering. India has no centralised repository—like the registrar of companies for corporates—of information on public trusts.
2016 Evasion attempts after note ban
In Gujarat, Delhi and many other major cities, sales of gold increased on 9 November, with an increased 20% to 30% premium surging the price as much as ₹45,000 (US$690) from the ruling price of ₹31,900 (US$490) per 10 grams (0.35 oz).
Authorities of Sri Jalakanteswarar temple at Vellore discovered cash worth ₹4.4 million (US$67,000) from the temple Hundi.
- Multiple bank transactions
There have also been reports of people circumventing the restrictions imposed on exchange transactions and attempting to convert black money into white by making multiple transactions at different bank branches. People were also getting rid of large amounts of banned currency by sending people in groups to exchange their money at banks. In response, the government announced that it would start marking customers with indelible ink. This was in addition to other measures proposed to ensure that the exchange transactions are carried out only once by each person. On 17 November, the government reduced the exchange amount to ₹2,000 (US$31) to discourage attempts to convert black money into legitimate money.
As soon as the demonetisation was announced, it was observed by the Indian Railways authorities that a large number of people started booking tickets particularly in classes 1A and 2A for the longest distance possible, to get rid of unaccounted for cash. A senior official said, "On November 13, 42.7 million passengers were nationally booked across all classes. Of these, only 1,209 were 1A and 16,999 for 2A. It is a sharp dip from the number of passengers booked on November 9, when 27,237 passengers had booked tickets in 1A and 69,950 in 2A."
The Railways Ministry and the Railway Board responded swiftly and decided that cancellation and refund of tickets of value ₹10,000 and above will not be allowed by any means involving cash. The payment can only be through cheque/electronic payment. Tickets above ₹10,000 can be refunded by filing ticket deposit receipt only on surrendering the original ticket. A copy of the PAN card must be submitted for any cash transaction above ₹50,000. The railway claimed that since the Railway Board on 10 November imposed a number of restrictions to book and cancel tickets, the number of people booking 1A and 2A tickets came down.
- Municipal and local tax payments
As the use of the demonetised notes had been allowed by the government for the payment of municipal and local body taxes, leading to people using the demonetised ₹500 and ₹1,000 notes to pay large amounts of outstanding and advance taxes. As a result, revenue collections of the local civic bodies jumped. The Greater Hyderabad Municipal Corporation reported collecting about ₹1.6 billion (US$25 million) in cash payments of outstanding and advance taxes within 4 days.
Income Tax officials raided multiple branches of Axis Bank and found bank officials involved in acts of money laundering.
Business and corruption
Public servants have very wide discretionary powers offering the opportunity to extort undue payments from companies and ordinary citizens. The awarding of public contracts is notoriously corrupt, especially at the state level. Scandals involving high-level politicians have highlighted the payment of kickbacks in the healthcare, IT and military sectors. The deterioration of the overall efficiency of the government, protection of property rights, ethics and corruption as well as undue influence on government and judicial decisions has resulted in a more difficult business environment.
According to Transparency International[unreliable source?], Judicial corruption in India is attributable to factors such as "delays in the disposal of cases, shortage of judges and complex procedures, all of which are exacerbated by a preponderance of new laws". Over the years there have been numerous allegations against judges, and in 2011 Soumitra Sen, a former judge at the Kolkata High Court became the first judge in India to be impeached by the Rajya Sabha, (Upper House of the Indian Parliament) for misappropriation of funds.
Right to Information Act
Main article: Right to Information Act
The 2005 Right to Information Act required government officials to provide information requested by citizens or face punitive action, as well as the computerisation of services and the establishment of vigilance commissions. This considerably reduced corruption and opened up avenues to redress grievances.
Right to public services legislation
Main article: Right to Public Services legislation
Right to Public Services legislation, which has been enacted in 19 states of India, guarantee time bound delivery of services for various public services rendered by the government to citizen and provides mechanisms for punishing the errant public servant who is deficient in providing the service stipulated under the statute. Right to Service legislation is meant to reduce corruption among the government officials and to increase transparency and public accountability.
Anti-corruption laws in India
Public servants in India can be imprisoned for several years and penalised for corruption under the:
Punishment for bribery in India can range from six months to seven years.
India is also a signatory to the United Nations Convention against Corruption since 2005 (ratified 2011). The Convention covers a wide range of acts of corruption and also proposes certain preventive policies.
The Lokpal and Lokayuktas Act, 2013 which came into force from 16 January 2014, seeks to provide for the establishment of the institution of Lokpal to inquire into allegations of corruption against certain public functionaries in India.
Whistle Blowers Protection Act, 2011, which provides a mechanism to investigate alleged corruption and misuse of power by public servants and also protect anyone who exposes alleged wrongdoing in government bodies, projects and offices, has received the assent of the President of India on 9 May 2014, and (as of 2 August) is pending for notification by the Central Government.
At present there are no legal provisions to check graft in the private sector in India. Government has proposed amendments in existing acts and certain new bills for checking corruption in private sector. Big-ticket corruption is mainly witnessed in the operations of large commercial or corporate entities. In order to prevent bribery on supply side, it is proposed that key managerial personnel of companies' and also the company shall be held liable for offering bribes to gain undue benefits.
The Prevention of Money Laundering Act, 2002 provides that the properties of corrupt public servants shall be confiscated. However, the Government is considering incorporating provisions for confiscation or forfeiture of the property of corrupt public servants into the Prevention of Corruption Act, 1988 to make it more self-contained and comprehensive.
A committee headed by the Chairman of Central Board of Direct Taxes (CBDT), has been constituted to examine ways to strengthen laws to curb generation of black money in India, its illegal transfer abroad, and its recovery. "The Committee shall examine the existing legal and administrative framework to deal with the menace of generation of black money through illegal means including inter-alia the following: 1. Declaring wealth generated illegally as national asset; 2. Enacting/amending laws to confiscate and recover such assets; and 3. Providing for exemplary punishment against its perpetrators." (Source: 2013 EY report on Bribery & Corruption)
The Companies Act, 2013, contains certain provisions to regulate frauds by corporations including increased penalties for frauds, giving more powers to the Serious Fraud Investigation Office, mandatory responsibility of auditors to reveal frauds, and increased responsibilities of independent directors. The Companies Act, 2013 also provides for mandatory vigil mechanisms which allow directors and employees to report concerns and whistleblower protection mechanism for every listed company and any other companies which accepts deposits from public or has taken loans more than 50 crore rupees from banks and financial institutions. This intended to avoid accounting scandals such as the Satyam scandal which have plagued India. It replaces The Companies Act, 1956 which was proven outmoded in terms of handling 21st century problems.
In 2015, Parliament passed the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Bill, 2015 to curb and impose penalties on black money hoarded abroad. The Act has received the assent of the President of India on 26 May 2015. It came into effect from 1 July 2015.
Anti-corruption police and courts
The Directorate General of Income Tax Investigation, Central Vigilance Commission and Central Bureau of Investigation all deal with anti-corruption initiatives. Certain states such as Andhra Pradesh (Anti-Corruption Bureau, Andhra Pradesh) and Karnataka (Lokayukta) also have their own anti-corruption agencies and courts.
Andhra Pradesh's Anti Corruption Bureau (ACB) has launched a large scale investigation in the "cash-for-bail" scam. CBI court judge Talluri Pattabhirama Rao was arrested on 19 June 2012 for taking a bribe to grant bail to former Karnataka Minister Gali Janardhan Reddy, who was allegedly amassing assets disproportionate to his known sources of income. Investigation revealed that India Cements (one of India's largest cement companies) had been investing in Reddy's businesses in return for government contracts. A case has also been opened against seven other individuals under the Indian Penal Code and the Prevention of Corruption Act.
Civic anti-corruption organisations
A variety of organisations have been created in India to actively fight against corrupt government and business practices. Notable organisations include:
- [Bharat Swabhiman Trust], established by Ramdev, has campaigned against black money and corruption for a decade.[when?]
- 5th Pillar is most known for the creation of the zero rupee note, a valueless note designed to be given to corrupt officials when they request bribes.
- India Against Corruption was a popular movement active during 2011–12 that received much media attention. Among its prominent public faces were Arvind Kejriwal, Kiran Bedi and Anna Hazare. Kejriwal went on to form the Aam Aadmi Party and Hazare established Jan Tantra Morcha.
- Jaago Re! One Billion Votes was an organisation founded by Tata Tea and Janaagraha to increase youth voter registration. They have since expanded their work to include other social issues, including corruption.
- Association for Social Transparency, Rights and Action (ASTRA) is an NGO focused on grass-roots work to fight corruption in Karnataka.
- The Lok Satta Movement, has transformed itself from a civil organisation to a full-fledged political party, the Lok Satta Party. The party has fielded candidates in Andhra Pradesh, Tamil Nadu, and Bangalore. In 2009, it obtained its first elected post, when Jayaprakash Narayan won the election for the Kukatpally Assembly Constituency in Andhra Pradesh.
See also: Electoral reform in India
A number of ideas have been in discussion to improve the efficiency and effectiveness of electoral processes in India.
Factors contributing to corruption in India
In a 2004 report on Corruption in India, one of the world's largest audit and compliance firms KPMG notes several issues that encourage corruption in India. The report suggests high taxes and excessive regulation bureaucracy as a major cause; India has high marginal tax rates and numerous regulatory bodies with the power to stop any citizen or business from going about their daily affairs.
This power of Indian authorities to search and question individuals creates opportunities for corrupt public officials to extract bribes—each individual or business decides if the effort required for due process and the cost of delay is worth paying the bribe demanded. In cases of high taxes, paying off the corrupt official is cheaper than the tax. This, according to the report, is one major cause of corruption in India and 150 other countries across the world. In the real estate industry, the high capital gains tax in India encourages large-scale corruption. The KPMG report claims that the correlation between high real estate taxes and corruption is high in India as it is other countries including the developed economies; this correlation has been true in modern times as well as throughout centuries of human history in various cultures.
The desire to pay lower taxes than those demanded by the state explains the demand side of corruption. The net result is that the corrupt officials collect bribes, the government fails to collect taxes for its own budget, and corruption grows. The report suggests regulatory reforms, process simplification and lower taxes as means to increase tax receipts and reduce causes of corruption.
In addition to tax rates and regulatory burdens, the KPMG report claims corruption results from opaque process and paperwork on the part of the government. Lack of transparency allows room for manoeuvre for both demanders and suppliers of corruption. Whenever objective standards and transparent processes are missing, and subjective opinion driven regulators and opaque/hidden processes are present, conditions are ripe for corruption.
Vito Tanzi in an International Monetary Fund study suggests that in India, like other countries in the world, corruption is caused by excessive regulations and authorisation requirements, complicated taxes and licensing systems, mandated spending programmes, lack of competitive free markets, monopoly of certain goods and service providers by government controlled institutions, bureaucracy, lack of penalties for corruption of public officials, and lack of transparent laws and processes. A Harvard University study finds these to be some of the causes of corruption and underground economy in India.
Impact of corruption
Loss of credibility
In a study on Bribery and Corruption in India conducted in 2013 by global professional services firm Ernst & Young (EY), a majority of the survey respondents from PE firms said that a company operating in a sector which is perceived as highly corrupt may lose ground when it comes to fair valuation of its business, as investors bargain hard and factor in the cost of corruption at the time of transaction.
According to a report by KPMG, "high-level corruption and scams are now threatening to derail the country's its credibility and [its] economic boom".
Corruption may lead to further bureaucratic delay and inefficiency if corrupted bureaucrats introduce red tape in order to extort more bribes. Such inadequacies in institutional efficiency could affect growth indirectly by lowering the private marginal product of capital and investment rate. Levine and Renelt showed that investment rate is a robust determinant of economic growth.
Bureaucratic inefficiency also affects growth directly through misallocation of investments in the economy. Additionally, corruption results in lower economic growth for a given level of income.
Lower corruption, higher growth rates
If corruption levels in India were reduced to levels in developed economies such as Singapore or the United Kingdom, India's GDP growth rate could increase at a higher rate annually. C. K. Prahalad estimates the lost opportunity caused by corruption in terms of investment, growth and jobs for India is over US$50 billion a year.
For other uses, see Corruption (disambiguation).
"Corrupt" redirects here. For other uses, see Corrupt (disambiguation).
Corruption is a form of dishonest or unethical conduct by a person entrusted with a position of authority, often to acquire personal benefit. Corruption may include many activities including bribery and embezzlement, though it may also involve practices that are legal in many countries.Government, or 'political', corruption occurs when an office-holder or other governmental employee acts in an official capacity for personal gain.
It is commonplace in kleptocracies, oligarchies, Narco states and Mafia states.
The Kaunas golden toilet case was a modern real-life example of corruption.
Scales of corruption
Stephen D. Morris, a professor of politics, writes that political corruption is the illegitimate use of public power to benefit a private interest. Economist Ian Senior defines corruption as an action to (a) secretly provide (b) a good or a service to a third party (c) so that he or she can influence certain actions which (d) benefit the corrupt, a third party, or both (e) in which the corrupt agent has authority. Daniel Kaufmann, from the World Bank, extends the concept to include 'legal corruption' in which power is abused within the confines of the law—as those with power often have the ability to make laws for their protection. The effect of corruption in infrastructure is to increase costs and construction time, lower the quality and decrease the benefit.
Corruption can occur on different scales. Corruption ranges from small favors between a small number of people (petty corruption), to corruption that affects the government on a large scale (grand corruption), and corruption that is so prevalent that it is part of the everyday structure of society, including corruption as one of the symptoms of organized crime.
Increasingly, a number of indicators and tools have been developed which can measure different forms of corruption with increasing accuracy.
Petty corruption occurs at a smaller scale and takes place at the implementation end of public services when public officials meet the public. For example, in many small places such as registration offices, police stations, state licensing boards, and many other private and government sectors.
Grand corruption is defined as corruption occurring at the highest levels of government in a way that requires significant subversion of the political, legal and economic systems. Such corruption is commonly found in countries with authoritarian or dictatorial governments but also in those without adequate policing of corruption.
The government system in many countries is divided into the legislative, executive and judiciary branches in an attempt to provide independent services that are less subject to grand corruption due to their independence from one another.
Systemic corruption (or endemic corruption) is corruption which is primarily due to the weaknesses of an organization or process. It can be contrasted with individual officials or agents who act corruptly within the system.
Factors which encourage systemic corruption include conflicting incentives, discretionary powers; monopolistic powers; lack of transparency; low pay; and a culture of impunity. Specific acts of corruption include "bribery, extortion, and embezzlement" in a system where "corruption becomes the rule rather than the exception." Scholars distinguish between centralized and decentralized systemic corruption, depending on which level of state or government corruption takes place; in countries such as the Post-Soviet states both types occur. Some scholars argue that there is a negative duty[clarification needed] of western governments to protect against systematic corruption of underdeveloped governments.
Corruption in different sectors
Corruption can occur in any sector, whether they be public or private industry or even NGOs (especially in public sector). However, only in democratically controlled institutions is there an interest of the public (owner) to develop internal mechanisms to fight active or passive corruption, whereas in private industry as well as in NGOs there is no public control. Therefore, the owners' investors' or sponsors' profits are largely decisive.
Public sector corruption includes corruption of the political process and of government agencies such as the police as well as corruption in processes of allocating public funds for contracts, grants, and hiring. Recent research by the World Bank suggests that who makes policy decisions (elected officials or bureaucrats) can be critical in determining the level of corruption because of the incentives different policy-makers face.
Main article: Political corruption
Political corruption is the abuse of public power, office, or resources by elected government officials for personal gain, by extortion, soliciting or offering bribes. It can also take the form of office holders maintaining themselves in office by purchasing votes by enacting laws which use taxpayers' money. Evidence suggests that corruption can have political consequences- with citizens being asked for bribes becoming less likely to identify with their country or region.
The political act of Graft (American English), is a well known and now global form of political corruption, being the unscrupulous and illegal use of a politician's authority for personal gain, when funds intended for public projects are intentionally misdirected in order to maximize the benefits to illegally private interests of the corrupted individual(s) and their cronies.
The Kaunas golden toilet case was a major Lithuanian scandal. In 2009, municipality of Kaunas (led by mayor Andrius Kupčinskas) ordered that a shipping container was to be converted into an outdoor toilet at a cost of 500'000 litas (around 150'000 euros). It was to also require 5'000 LTL (1'500 EUR) in monthly maintenance costs. At the same time when Kaunas "golden toilet" was built, Kėdainiai tennis club acquired a very similar, but more advanced solution for 4'500 EUR. Because of the inflated cost of the outdoor toilet was nicknamed "golden toilet". Despite the investment, the "golden toilet" remained closed for years due to the dysfunctionality and was a subject of a lengthy anti-corruption investigation into those who had created it and  the local municipality even considered demolishing the building at one point. The group of public servants involved in the toilet's procurement received various prison sentences for recklessness, malfeasance, misuse of power and document falsifications in a 2012 court case, but were cleared of their corruption charges and received compensation, which pushed the total construction cost and subsequent related financial losses to 352'000 euros.
Main article: Police corruption
Police corruption is a specific form of police misconduct designed to obtain financial benefits, other personal gain, career advancement for a police officer or officers in exchange for not pursuing, or selectively pursuing, an investigation or arrest and/or aspects of the thin blue line itself, where force members collude in lies to protect other members from accountability. One common form of police corruption is soliciting and/or accepting bribes in exchange for not reporting organized drug or prostitution rings or other illegal activities.
Another example is police officers flouting the police code of conduct in order to secure convictions of suspects—for example, through the use of falsified evidence. More rarely, police officers may deliberately and systematically participate in organized crime themselves. In most major cities, there are internal affairs sections to investigate suspected police corruption or misconduct. Similar entities include the British Independent Police Complaints Commission.
Judicial corruption refers to corruption related misconduct of judges, through receiving or giving bribes, improper sentencing of convicted criminals, bias in the hearing and judgement of arguments and other such misconduct.
Governmental corruption of judiciary is broadly known in many transitional and developing countries because the budget is almost completely controlled by the executive. The latter undermines the separation of powers, as it creates a critical financial dependence of the judiciary. The proper national wealth distribution including the government spending on the judiciary is subject to the constitutional economics.
It is important to distinguish between the two methods of corruption of the judiciary: the government (through budget planning and various privileges), and the private. Judicial corruption can be difficult to completely eradicate, even in developed countries. Corruption in judiciary also involves the government in power using the judicial arm of government to oppress the opposition parties in the detriments of the state.
Corruption in the educational system
Corruption in education is a worldwide phenomenon. Corruption in admissions to universities is traditionally considered as one of the most corrupt areas of the education sector. Recent attempts in some countries, such as Russia and Ukraine, to curb corruption in admissions through the abolition of university entrance examinations and introduction of standardized computer-graded tests have largely failed. Vouchers for university entrants have never materialized. The cost of corruption is in that it impedes sustainable economic growth. Endemic corruption in educational institutions leads to the formation of sustainable corrupt hierarchies. While higher education in Russia is distinct with widespread bribery, corruption in the US and the UK features a significant amount of fraud. The US is distinct with grey areas and institutional corruption in the higher education sector. Authoritarian regimes, including those in the former Soviet republics, encourage educational corruption and control universities, especially during the election campaigns. This is typical for Russia, Ukraine, and Central Asian regimes, among others. The general public is well aware of the high level of corruption in colleges and universities, including thanks to the media. Doctoral education is no exception, with dissertations and doctoral degrees available for sale, including for politicians. Russian Parliament is notorious for "highly educated" MPs High levels of corruption are a result of universities not being able to break away from their Stalinist past, over bureaucratization, and a clear lack of university autonomy. Both quantitative and qualitative methodologies are employed to study education corruption, but the topic remains largely unattended by the scholars. In many societies and international organizations, education corruption remains a taboo. In some countries, such as certain eastern European countries and certain Asian countries, corruption occurs frequently in universities. This can include bribes to bypass bureaucratic procedures and bribing faculty for a grade. The willingness to engage in corruption such as accepting bribe money in exchange for grades decreases if individuals perceive such behavior as very objectionable, i.e. a violation of social norms and if they fear sanctions regarding the severity and probability of sanctions.
Within labor unions
The Teamsters (International Brotherhood of Teamsters) is an example of how the civil RICO process can be used. For decades, the Teamsters have been substantially controlled by La Cosa Nostra. Since 1957, four of eight Teamster presidents were indicted, yet the union continued to be controlled by organized crime elements. The federal government has been successful at removing the criminal influence from this 1.4 million-member union by using the civil process.
Corruption in religion
The history of religion includes numerous examples of religious leaders calling attention to corruption in the religious practices and institutions of their time. Jewish prophets Isaiah and Amos berate the rabbinical establishment of Ancient Judea for failing to live up to the ideals of the Torah. In the New Testament, Jesus accuses the rabbinical establishment of his time of hypocritically following only the ceremonial parts of the Torah and neglecting the more important elements of justice, mercy and faithfulness. In 1517, Martin Luther accuses the Catholic Church of widespread corruption, including selling of indulgences.
In 2015, Princeton University professor Kevin M. Kruse advances the thesis that business leaders in the 1930s and 1940s collaborated with clergymen, including James W. Fifield Jr., to develop and promote a new hermeneutical approach to Scripture that would de-emphasize the social Gospel and emphasize themes, such as individual salvation, more congenial to free enterprise.
- Business leaders, of course, had long been working to "merchandise" themselves through the appropriation of religion. In organizations such as Spiritual Mobilization, the prayer breakfast groups, and the Freedoms Foundation, they had linked capitalism and Christianity and, at the same time, likened the welfare state to godless paganism.
Corruption in philosophy
19th century German philosopher Arthur Schopenhauer acknowledges that academics, including philosophers, are subject to the same sources of corruption as the society they inhabit. He distinguishes the corrupt "university" philosophers, whose "real concern is to earn with credit an honest livelihood for themselves and ... to enjoy a certain prestige in the eyes of the public" from the genuine philosopher, whose sole motive is to discover and bear witness to the truth.
- To be a philosopher, that is to say, a lover of wisdom (for wisdom is nothing but truth), it is not enough for a man to love truth, in so far as it is compatible with his own interest, with the will of his superiors, with the dogmas of the church, or with the prejudices and tastes of his contemporaries; so long as he rests content with this position, he is only a φίλαυτος [lover of self], not a φιλόσοφος [lover of wisdom]. For this title of honor is well and wisely conceived precisely by its stating that one should love the truth earnestly and with one’s whole heart, and thus unconditionally and unreservedly, above all else, and, if need be, in defiance of all else. Now the reason for this is the one previously stated that the intellect has become free, and in this state, it does not even know or understand any other interest than that of truth.
See also: Corporate crime
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In criminology, corporate crime refers to crimes committed either by a corporation (i.e., a business entity having a separate legal personality from the natural persons that manage its activities), or by individuals acting on behalf of a corporation or other business entity (see vicarious liability and corporate liability). Some negative behaviours by corporations may not be criminal; laws vary between jurisdictions. For example, some jurisdictions allow insider trading.
Further information: Operation Car Wash
Petróleo Brasileiro S.A. — Petrobras, more commonly known as simply Petrobras (Portuguese pronunciation: [ˌpɛtɾoˈbɾas]), is a semi-public Brazilian multinational corporation in the petroleum industry headquartered in Rio de Janeiro, Brazil. The company's name translates to Brazilian Petroleum Corporation — Petrobras. The company was ranked #58 in the 2016 Fortune Global 500 list. It is being investigated over corporate and political collusion and corruption.
Odebrecht is a privately held Brazilian conglomerate consisting of diversified businesses in the fields of engineering, real estate, construction, chemicals and petrochemicals. The company was founded in 1944 in Salvador da Bahia by Norberto Odebrecht, and the firm is now present in South America, Central America, North America, the Caribbean, Africa, Europe and the Middle East. Its leading company is Norberto Odebrecht Construtora (pt). Odebrecht is one of the 25 largest international construction companies and is still lead by Odebrecht family.
The firm's executives were examined during Operation Car Wash part of an investigation over Odebrecht Organization bribes to executives of Petrobras, in exchange for contracts and influence. Operation Car Wash is an ongoing criminal money laundering and bribes related corporate crime investigation being carried out by the Federal Police of Brazil, Curitiba Branch, and judicially commanded by Judge Sérgio Moro since March 17, 2014.
Arms for cash
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"Arms for cash" can be done by ether a state sanctioned arms dealer\firm or state it's self to another party it just in regards regards as only a good business partner and not political kindred and\or allies, thus making them no better than regular gun runners. Arms smugglers, who are already in to Arms trafficking may work for them on the ground and\or with shipment. The money is often laundered and records are often destroyed . It often breaks UN, national and\or international law . Payment can also be in strange or indirect ways like arms paid for in post-war oil contracts, post-war hotel ownership, conflict diamonds, corporate shares and\or the long term post-war promises of superfus[clarification needed] future contracts between the parties involved in it, etc...
Main article: Mitterrand–Pasqua affair
In 2006 Transparency International ranked Angola a lowly 142 out of 163 countries in the Corruption Perception Index just after Venezuela and before the Republic of the Congo with a 2.2 rating. Angola was at 168th place (out of 178 countries) on Transparency International’s Corruption Perceptions Index (CPI), receiving a 1.9 on a scale from 0 to 10. On the World Bank's 2009 Worldwide Governance Index, Angola had done very poorly on all six aspects of governance assessed. While its score for political stability improved to 35.8 in 2009 (on a 100-point scale) from 19.2 in 2004, Angola earned especially low scores for accountability, regulatory standards, and rule of law. The score for corruption declined from an extremely low 6.3 in 2004 to 5.2 in 2009.
The country is regarded poorly and that corruption is wounding the economy badly despite the emerging oil industries wealth.
The Mitterrand–Pasqua affair, also known informally as Angolagate, was an international political scandal over the secret and illegal sale and shipment of arms from the nations of Central Europe to the government of Angola by the Government of France in the 1990s. It led to arrests and judiciary actions in the 2000s, involved an illegal arms sale to Angola despite a UN embargo, with business interests in France and elsewhere improperly obtaining a share of Angolan oil revenues. The scandal has subsequently been tied to several prominent figures in French politics.
“Angolagate”, which was carried out and uncovered over the course of the 1990s. 42 individuals, including: 42 people, including Jean-Christophe Mitterrand, Jacques Attali, Charles Pasqua and Jean-Charles Marchiani, Pierre Falcone. Arcadi Gaydamak, Paul-Loup Sulitzer, Union for a Popular Movement deputy Georges Fenech, Philippe Courroye (fr) the son of Francois Mitterrand and a former French Minister of the Interior, were all charged, accused, indicted or convicted with illegal arms trading, tax fraud, embezzlement, money laundering and other crimes. "
In systemic corruption and grand corruption, multiple methods of corruption are used concurrently with similar aims.
Main article: Bribery
Bribery involves the improper use of gifts and favours in exchange for personal gain. This is also known as kickbacks or, in the Middle East, as baksheesh. It is the common form of corruption. The types of favours given are diverse and may include money, gifts, sexual favours, company shares, entertainment, employment and political benefits. The personal gain that is given can be anything from actively giving preferential treatment to having an indiscretion or crime overlooked.
Bribery can sometimes form a part of the systemic use of corruption for other ends, for example to perpetrate further corruption. Bribery can make officials more susceptible to blackmail or to extortion.
Embezzlement, theft and fraud
Main article: Embezzlement
Embezzlement and theft involve someone with access to funds or assets illegally taking control of them. Fraud involves using deception to convince the owner of funds or assets to give them up to an unauthorized party.
Examples include the misdirection of company funds into "shadow companies" (and then into the pockets of corrupt employees), the skimming of foreign aid money, scams and other corrupt activity.
Main article: Graft (politics)
The political act of Graft (American English), is a well known and now global form of political corruption, being the unscrupulous and illegal use of a politician's authority for personal gain, when funds intended for public projects are intentionally misdirected in order to maximize the benefits to illegally private interests of the corrupted individual(s) and their cronies.
Extortion and blackmail
Main article: Extortion
While bribery is the use of positive inducements for corrupt aims, extortion and blackmail centre around the use of threats. This can be the threat of violence or false imprisonment as well as exposure of an individual's secrets or prior crimes.
This includes such behavior as an influential person threatening to go to the media if they do not receive speedy medical treatment (at the expense of other patients), threatening a public official with exposure of their secrets if they do not vote in a particular manner, or demanding money in exchange for continued secrecy.
Main article: Business networking
Networking can be an effective way for job-seekers to gain a competitive edge over others in the job-market. The idea is to cultivate personal relationships with prospective employers, selection panelists, and others, in the hope that these personal affections will influence future hiring decisions. This form of networking has been described as an attempt to corrupt formal hiring processes, where all candidates are given an equal opportunity to demonstrate their merits to selectors. The networker is accused of seeking non-meritocratic advantage over other candidates; advantage that is based on personal fondness rather than on any objective appraisal of which candidate is most qualified for the position.
Abuse of discretion
Main article: Abuse of discretion
Abuse of discretion refers to the misuse of one's powers and decision-making facilities. Examples include a judge improperly dismissing a criminal case or a customs official using their discretion to allow a banned substance through a port.
Favoritism, nepotism and clientelism
Main article: Nepotism
Favouritism, nepotism and clientelism involve the favouring of not the perpetrator of corruption but someone related to them, such as a friend, family member or member of an association. Examples would include hiring or promoting a family member or staff member to a role they are not qualified for, who belongs to the same political party as you, regardless of merit.
Some states do not forbid these forms of corruption.
Corruption and economic growth
Corruption is strongly negatively associated with the share of private investment and, hence, it lowers the rate of economic growth.
Corruption reduces the returns of productive activities. If the returns to production fall faster than the returns to corruption and rent-seeking activities, resources will flow from productive activities to corruption activities over time. This will result in a lower stock of producible inputs like human capital in corrupted countries.
Corruption creates the opportunity for increased inequality, reduces the return of productive activities, and, hence, makes rentseeking and corruption activities more attractive. This opportunity for increased inequality not only generates psychological frustration to the underprivileged but also reduces productivity growth, investment, and job opportunities.
Causes of corruption
According to a 2017 survey study, the following factors have been attributed as causes of corruption:
- Higher levels of market and political monopolization
- Low levels of democracy, weak civil participation and low political transparency
- Higher levels of bureaucracy and inefficient administrative structures
- Low press freedom
- Low economic freedom
- Large ethnic divisions and high levels of in-group favoritism
- Gender inequality
- Low degree of integration in the world economy
- Large government size
- Low levels of government decentralization
- Former French, Portuguese, Belgian or Spanish colonies have been shown to have greater corruption than former British or Dutch colonies
- Resource wealth
- Political instability
- Weak property rights
- Contagion from corrupt neighboring countries
- Low levels of education
- Low Internet access
R. Klitgaard postulates that corruption will occur if the corrupt gain is greater than the penalty multiplied by the likelihood of being caught and prosecuted:
Corrupt gain > Penalty × Likelihood of being caught and prosecuted
The degree of corruption will then be a function of the degree of monopoly and discretion in deciding who should get how much on the one hand and the degree to which this activity is accountable and transparent on the other hand. Still, these equations (which should be understood in a qualitative rather than a quantitative manner) seem to be lacking one aspect: a high degree of monopoly and discretion accompanied by a low degree of transparency does not automatically lead to corruption without any moral weakness or insufficient integrity. Also, low penalties in combination with a low probability of being caught will only lead to corruption if people tend to neglect ethics and moral commitment. The original R.Klitgaard equation has therefore been amended by C. Stephan into:
Degree of corruption = Monopoly + Discretion – Transparency – Morality
According to Stephan, the moral dimension has an intrinsic and an extrinsic component. The intrinsic component refers to a mentality problem, the extrinsic component to external circumstances like poverty, inadequate remuneration, inappropriate work conditions and inoperable or overcomplicated procedures which demoralize people and let them search for "alternative" solutions.
According to the amended Klitgaard equation, limitation of monopoly and regulator discretion of individuals and a high degree of transparency through independent oversight by non-governmental organisations (NGOs) and the media plus public access to reliable information could reduce the problem. Djankov and other researchers have independently addressed the important role information plays in fighting corruption with evidence from both developing and developed countries. Disclosing financial information of government officials to the public is associated with improving institutional accountability and eliminating misbehavior such as vote buying. The effect is specifically remarkable when the disclosures concern politicians’ income sources, liabilities and asset level instead of just income level. Any extrinsic aspects that might reduce morality should be eliminated. Additionally, a country should establish a culture of ethical conduct in society with the government setting the good example in order to enhance the intrinsic morality.
Enhancing Civil Society Participation
Creating bottom-up mechanisms, promoting citizens participation and encouraging the values of integrity, accountability, and transparency are crucial components of fighting corruption. The implementation of the ALACs “Advocacy and Legal Advice Centres (ALACs)” has led to a significant increase in the number of citizen complaints against acts of corruption received and documented and also to the development of strategies for good governance by involving citizens willing to fight against corruption.
See also: List of anti-corruption agencies
The Foreign Corrupt Practices Act (FCPA, USA 1977) was an early paradigmatic law for many western countries i.e. industrial countries of the OECD. There, for the first time the old principal-agent approach was moved back where mainly the victim (a society, private or public) and a passive corrupt member (an individual) were considered, whereas the active corrupt part was not in the focus of legal prosecution. Unprecedented, the law of an industrial country directly condemned active corruption, particularly in international business transactions, which was at that time in contradiction to anti-bribery activities of the World Bank and its spin-off organization Transparency International.
As early as 1989 the OECD had established an ad hoc Working Group in order to explore "...the concepts fundamental to the offense of corruption, and the exercise of national jurisdiction over offenses committed wholly or partially abroad." Based on the FCPA concept, the Working Group presented in 1994 the then "OECD Anti-Bribery Recommendation" as precursor for the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions which was signed in 1997 by all member countries and came finally into force in 1999. However, because of ongoing concealed corruption in international transactions several instruments of Country Monitoring have been developed since then by the OECD in order to foster and evaluate related national activities in combating foreign corrupt practices.
In 2013, a document produced by the economic and private sector professional evidence and applied knowledge services help-desk discusses some of the existing practices on anti-corruption. They found:
- The theories behind the fight against corruption are moving from a Principal agent approach to a collective action problem. Principal-agent theories seem not to be suitable to target systemic corruption.
- The role of multilateral institutions has been crucial in the fight against corruption. UNCAC provides a common guideline for countries around the world. Both Transparency International and the World Bank provide assistance to national governments in term of diagnostic and design of anti-corruption policies.
- The use of anti-corruption agencies have proliferated in recent years after the signing of UNCAC. They found no convincing evidence on the extent of their contribution, or the best way to structure them.
- Traditionally anti-corruption policies have been based on success experiences and common sense. In recent years there has been an effort to provide a more systematic evaluation of the effectiveness of anti-corruption policies. They found that this literature is still in its infancy.
- Anti-corruption policies that may be in general recommended to developing countries may not be suitable for post-conflict countries. Anti-corruption policies in fragile states have to be carefully tailored.
- Anti-corruption policies can improve the business environment. There is evidence that lower corruption may facilitate doing business and improve firm’s productivity. Rwanda in the last decade has made tremendous progress in improving governance and the business environment providing a model to follow for post-conflict countries.
See also: Kleptocracy Tour
In some countries people travel to corruption hot spots or a specialist tour company takes them on corruption city tours, as it is the case in Prague. Corruption tours have also occurred in Chicago, and Mexico City
Though corruption is often viewed as illegal, there is an evolving concept of legal corruption,[original research?] as developed by Daniel Kaufmann and Pedro Vicente. It might be termed as processes which are corrupt, but are protected by a legal (that is, specifically permitted, or at least not proscribed by law) framework.
Examples of legal corruption
In 1977 the USA had enacted the Foreign Corrupt Practices Act (FCPA) "for the purpose of making it unlawful... to make payments to foreign government officials to assist in obtaining or retaining business" and invited all OECD countries to follow suit. In 1997 a corresponding OECD Anti-Bribery Convention was signed by its members.
17 years after the FCPA enacting, a Parliamentary Financial Commission in Bonn presented a comparative study on legal corruption in industrialized OECD countries As a result, they reported that in most industrial countries even at that time (1994) foreign corruption was legal, and that their foreign corrupt practices had been diverging to a large extent, ranging from simple legalization, through governmental subsidization (tax deduction), up to extremes like in Germany where foreign corruption was fostered, whereas domestic was legally prosecuted. Consequently, in order to support national export corporations the Parliamentary Financial Commission recommended to reject a related previous Parliamentary Proposal by the opposition leader which had been aiming to limit German foreign corruption on the basis of the US FCPA. Only after the OECD Anti-Bribery Convention came into force, did Germany withdraw the legalization of foreign corruption in 1999.
Foreign corrupt practices of industrialized OECD countries 1994 study
The Foreign corrupt practices of industrialized OECD countries 1994 (Parliamentary Financial Commission study, Bonn).
Belgium: bribe payments are generally tax deductible as business expenses if the name and address of the beneficiary is disclosed. Under the following conditions kickbacks in connection with exports abroad are permitted for deduction even without proof of the receiver:
- Payments must be necessary in order to be able to survive against foreign competition
- They must be common in the industry
- A corresponding application must be made to the Treasury each year
- Payments must be appropriate
- The payer has to pay a lump-sum to the tax office to be fixed by the Finance Minister (at least 20% of the amount paid).
In the absence of the required conditions, for corporate taxable companies paying bribes without proof of the receiver, a special tax of 200% is charged. This special tax may, however, be abated along with the bribe amount as an operating expense.
Denmark: bribe payments are deductible when a clear operational context exists and its adequacy is maintained.
France: basically all operating expenses can be deducted. However, staff costs must correspond to an actual work done and must not be excessive compared to the operational significance. This also applies to payments to foreign parties. Here, the receiver shall specify the name and address, unless the total amount in payments per beneficiary does not exceed 500 FF. If the receiver is not disclosed the payments are considered "rémunérations occult" and are associated with the following disadvantages:
- The business expense deduction (of the bribe money) is eliminated.
- For corporations and other legal entities, a tax penalty of 100% of the "rémunérations occult" and 75% for voluntary post declaration is to be paid.
- There may be a general fine of up 200 FF fixed per case.
Japan: in Japan, bribes are deductible as business expenses that are justified by the operation (of the company) if the name and address of the recipient is specified. This also applies to payments to foreigners. If the indication of the name is refused, the expenses claimed are not recognized as operating expenses.
Canada: there is no general rule on the deductibility or non-deductibility of kickbacks and bribes. Hence the rule is that necessary expenses for obtaining the income (contract) are deductible. Payments to members of the public service and domestic administration of justice, to officers and employees and those charged with the collection of fees, entrance fees etc. for the purpose to entice the recipient to the violation of his official duties, can not be abated as business expenses as well as illegal payments according to the Criminal Code.
Luxembourg: bribes, justified by the operation (of a company) are deductible as business expenses. However, the tax authorities may require that the payer is to designate the receiver by name. If not, the expenses are not recognized as operating expenses.
Netherlands: all expenses that are directly or closely related to the business are deductible. This also applies to expenditure outside the actual business operations if they are considered beneficial as to the operation for good reasons by the management. What counts is the good merchant custom. Neither the law nor the administration is authorized to determine which expenses are not operationally justified and therefore not deductible. For the business expense deduction it is not a requirement that the recipient is specified. It is sufficient to elucidate to the satisfaction of the tax authorities that the payments are in the interest of the operation.
Austria: bribes justified by the operation (of a company) are deductible as business expenses. However, the tax authority may require that the payer names the recipient of the deducted payments exactly. If the indication of the name is denied e.g. because of business comity, the expenses claimed are not recognized as operating expenses. This principle also applies to payments to foreigners.
Switzerland: bribe payments are tax deductible if it is clearly operation initiated and the consignee is indicated.
US: (rough résumé: "generally operational expenses are deductible if they are not illegal according to the FCPA")
UK: kickbacks and bribes are deductible if they have been paid for operating purposes. The tax authority may request the name and address of the recipient."