EY: Economic growth in emerging markets still facing corruption-related challenges

Anca Alexe 17/12/2018 | 12:58

In the past five years, emerging markets have seen significant changes and a strong development, having become centres of economic strength and stimulating global development. However, changes in regulation and a more intense fight against corruption are changing perspectives when it comes to risks, according to an analysis by Simona Radu, Associate Partner, Forensic & Integrity Services at EY Romania.  

Organisations must take these challenges into account: although emerging markets are very promising and offer a wealth of opportunities, the increasing risks related to fraud, bribery and corruption continue to be potential obstacles in the way of growth.

Bribery and corrupt practices perceived as more widespread in emerging markets

According to an EY study that surveyed perception of fraud in emerging markets, including Romania, 42 percent of respondents believe that fraud and corruption are among the biggest risks to their businesses, compared to 29 percent of respondents in developed markets.

Over 52 percent of those questioned say that corruption practices are more widespread on emerging markets, compared to just 20 percent on developed markets.

The perceived levels of bribery and corruption on emerging markets have doubled compared to those in developed markets since the 2012 edition of the study. Considering the increased regulation level and the efforts of applying and following compliance on emerging markets, it is worrying that this divide has not shrunk.

16 percent of respondents in emerging markets said that “bribery is a usual practice for gaining contracts”. In this context, the survey finds that there are many situations where organisations, employees or representatives think a type of stimulation for third parties is necessary to guarantee the company’s survival. High-risk activities include obtaining licenses, acquisitions, billing, and payments for materials and consumables. A bribe can vary from a small amount of money to facilitate the release of merchandise from the border to hundreds of thousands of dollars to win a public tender for a major infrastructure project.

The risk of criminal prosecution for companies goes beyond their own employees’ activities related to corruption in the relation with third party representatives, extending to distributors, agents or partners.

Furthermore, the EY report shows that there are still many managers who believe making cash payments in exchange for commercial advantages is an acceptable practice. 19 percent of respondents in emerging markets said this could be justified, compared to just 6 percent on developed markets.

In many countries, cultural traditions like dinners, gifts or entertainment are not considered an  integral part of business relations. However, these types of practices have been used much less in recent year, especially on developed markets. In emerging markets, the attempts to obtain a commercial advantage through such hospitality measures before closing an important deal are opening companies and their managers to the potential risk of being considered responsible for bribery under the current anti-corruption legislation.

The study also identified a series of economic factors that can lead to fraud cases. In most emerging markets, there is a significant difference between the incomes of private and public sector employees, and the temptation for those in the public sector to obtain a personal gain can be significantly higher.

The impact of legislative changes

In general, corporate managers on emerging markets say they’ve only seen a slight improvement in the business environment when it comes to fraud and corruption in the past four years. Some countries have seen significant perception changes related to fraud and corruption practices. For example, in Romania this perception has decreased from 46 to 34 percent, while in India it has dropped from 67 to 40 percent.

Therefore, an important approach that multinational companies operating on emerging markets must support is the more rigorous assimilation and application of local anti-corruption legislation in internal and external procedures.

Legally, most countries, including emerging markets, have had anti-corruption policies in their legislation for many years and have been applying them in increasingly rigorous manners. Some of them have signed the UN Convention against corruption and many have also signed the OECD’s anti-corruption convention as well.

Shrinking the gap between intention and behavior

In an increasingly competitive environment, where we’re seeing technology being used as a facilitator of immoral conduct, the role of management is becoming vital in redefining the ethics agenda and upgrading compliance programmes based on data analytics, in order to minimize integrity errors, so that technology will only be used in detecting and preventing illegal acts.

At the same time, companies should ensure they’ve implemented appropriate reporting procedures, including mechanisms to signal wrongdoing which can support the process of responding to accusations of fraud by employees and other third parties.

In conclusion, although states have been introducing more and more anti-corruption provisions into their legislation and organisations have been investing more into their compliance programmes, the fight isn’t yet over.

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