Should the private sector come under the corruption law?

Last Updated: Tue, Oct 30, 2012 20:00 hrs

Doing so may enforce good corporate governance but the danger of exposure to harassment remains

Former Executive Director, Securities and Exchange Board of India

The simple answer is yes. But is mere inclusion enough? No. It is only a necessary, but not a sufficient condition, unless accompanied by strong enforcement that is fair, effective, speedy, transparent and non-vindictive. In India, the tendency is to focus more on the one who accepts bribe than on the one who gives it. Empirical literature also has till recently focused on the demand side of corruption. Effectively, this implies that the bribe-givers tend to continue their practices unabashedly, as they know that they can get away easily. Daniel Triesman’s Cross National Study on Corruption (Journal of Public Economics, 2000) focusing on the demand side of corruption has provided a rather bleak outlook on the global anti-corruption campaign, but analysis based on the demand and supply sides of corruption gives reasons for optimism. Corruption cannot be dealt with by attacking public officials alone. The prime minister’s proposal to amend the Prevention of Corruption Act (PCA), 1988 to explicitly include the private sector, thus, squarely addresses this issue. It may not address the “harassment bribes” that Kaushik Basu, the former chief economic advisor, talked about.

In India, PCA 1988 is the primary law concerning bribery. The 1988 amendment to its colonial predecessor, attached criminal liability under the Indian Penal Code to the acts of both public and private sectors’ corruption and defined the term “public servant”. Though the principal focus of the Act has been the “public servant”, through Section 8, the Act can theoretically reach all Indian citizens. Abetting in the crime of bribery, both giving and taking, is a punishable offence under Section 12. However, Section 24 carves out an exception for consensual bribery — creating an ambiguity of which the bribe-giver takes advantage of to get away easily. The proposed broadening of the ambit of PCA and removing this ambiguity should correct the problem.

Corruption cannot be viewed narrowly as a “business transaction”. At first glance, it may appear that corruption is a cost-effective “high return, low risk activity” in India. But its pernicious effects measured by the long-term hidden costs and risks, are often ignored or at least underestimated.

It is recognised internationally that private sector corruption takes various forms. Insider trading, for example, is viewed as a form of corruption in the private sector. The European Commission had launched a policy package on the protection of the licit economy, which covers “Financial Market Integrity and Private Sector Corruption”, along with a directive on criminal sanctions for insider dealing and market manipulation.

There is a vicious cycle of bribery and corruption, and corporate governance can be a critical ingredient to break it. Not recognised by the private corporate sector, it needs some serious introspection. The private sector needs to be aware that coming under PCA would cast considerable onus on boards of companies to strengthen their internal controls, and on auditors and audit committees to be more vigilant because transparent accounting, which helps identify related-party transactions and off-balance sheet transactions, is a prerequisite to detect and prevent corruption. At present, not all companies and their boards have their bounden duty to install and seriously implement controls or procedures to prevent corruption, though many have wonderfully worded codes of ethics and good governance.

It is not enough to merely include the private sector in PCA. In the UK, the new anti-bribery law as of July 1, 2011 prescribes sanction for failure by commercial organisations to prevent bribery. This is expected to create incentives for companies “to design and implement controls that help address the supply side of bribery, set up appropriate procedures, regularly monitor and review their policies, conduct due diligence and train their employees”.

Including the corporate sector explicitly under the ambit of corruption and amending PCA is undoubtedly very well intended. But will the translation of these intentions into an effective law and enforced and when? That remains to be seen.

The writer is also Consultant and Member, Advisory Council, Global Corporate Governance Forum, International Finance Corporation

Senior Director, Deloitte Touche Tohmatsu India

Corruption has existed possibly as long as the businesses have existed. The roots of corruption by corporate sector in India have historically been linked to the system of numerous approvals required by organisations to set up and carry on businesses. Substantial discretion in the hands of government officials led to common practices of corrupt payments to obtain and expedite licences. The reform exercise of the 1990s included efforts to reduce the number of approvals, which resulted in reducing the touch points of businesses with government officials, and ultimately, reduced many corrupt practices.

The recently reported large scams have brought to the forefront newer and specialised form of corruption involving the corporate sector.

Prime Minister Manmohan Singh in a recent speech at the 19th conference of the Central Bureau of Investigation and state anti-corruption bureaus talking about proposed amendments in the Prevention of Corruption Act (PCA), said, “ a vast majority of cases, it is difficult to tackle consensual bribery and the supplier of the bribe goes scot-free by taking recourse to the provisions of the Act. This would be taken care of in the proposed amendments.”

We have a stringent anti-corruption legislation in the form of PCA, 1988 to prevent corruption by public servants. Lack of enforcement and speedy action has drawn fear away from this Act over the years. However, the enforcement agencies recently demonstrated that no one is above the law, by putting senior politicians behind bars in a few cases. Most importantly, there was a clear message that PCA covers the supply side of bribery also — shown by pressing charges for abatement of offence under the Act against corporate bigwigs in the 2G spectrum scam. Stringent enforcement actions along with a broader strategy are needed to combat corruption rather than just covering the corporate sector under the corruption laws by legislative changes.

Corruption emanates from absolute control over limited resources and the discretion to provide/distribute those resources. The controller of the resources in public bribery is sitting on the receipt side of corruption. So, corruption largely flourishes from the government side. It is also very important to protect bribe-givers, so that instances of bribe-giving are reported and all on the supply side of corruption become potential whistle-blowers, as Former Chief Economic Adviser Kaushik Basu had suggested.

One of the harsh realities of corruption is that in most parts of the world, a company has to pay the bribe for keeping the business alive or face the consequent loss of revenue and profits. It is difficult to understand how only a change in the legislation would help the corporate sector or society as a whole to combat corruption.

There have been many new corporate governance measures initiated for the corporate sector in India in recent years. Effective implementation and monitoring of these measures is key to enhancing integrity and accountability in the corporate sector. There is a need for monitoring implementation of good governance measures by the regulators and enforcing actions against defaulting organisations. Such measures when applied consistently across all types of organisations will ensure a level-playing field.

Another question is whether bribery in the private sector should also be covered under the anti-corruption legislation, like it does in the UK Bribery Act. The UK Bribery Act, considered the most stringent anti-corruption legislation, is also not free from criticism. Second, the level of stringent enforcement of this far-reaching legislation is yet to be seen. Even the current PCA suffers from delays in prosecution and a large number of pending cases — making it a weak legislation.

The corporate sector, in many situations, is forced to give bribes even for legitimate services. In the absence of a holistic approach to eradicate corruption from society, we might be exposing the corporate sector – already ailing from a global slowdown – to potential harassment under the garb of investigating whistle-blowing complaints. This aspect was also emphasised by the prime minister in his speech when he said, “We need to ensure that even while the corrupt are relentlessly pursued and brought to book, the innocent are not harassed.”

(These views are personal)

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