Corruption

What Is Corruption?

Corruption is dishonest behavior by those in positions of power, such as managers or government officials. Corruption can include giving or accepting bribes or inappropriate gifts, double-dealing, under-the-table transactions, manipulating elections, diverting funds, laundering money, and defrauding investors. One example of corruption in the world of finance would be an investment manager who is actually running a Ponzi scheme.

Understanding Corruption

There are many situations in which a person can be considered corrupt. In the financial services industry, chartered financial analysts and other financial professionals are required to adhere to a code of ethics and avoid situations that could create a conflict of interest. Penalties for being found guilty of corruption include fines, imprisonment, and a damaged reputation. Engaging in corrupt behavior may have negative long-lasting effects for an organization. In 2015, five prominent investment banks were fined a cumulative total of approximately $5.5 billion for rigging the foreign exchange market between 2007 and 2013.

When corruption occurs within an organization, unflattering media coverage typically follows, which may result in customers losing trust in the company's business practices and products. A comprehensive public relations campaign is often required to limit reputational damage and restore trust. This requires valuable resources, such as time and money, which may result in other critical areas of the organization being deprived. As a result, inefficiencies that lead to financial losses can occur.

Real World Example

In 2016, the Securities and Exchange Commission (SEC) ordered software company PTC Inc. to pay a combined $28 million in fines for attempting to bribe Chinese officials by providing approximately $1.5 million in recreational travel through two PTC China-based subsidiaries. As the case became increasingly public, PTC Inc. has needed to strike a delicate public relations effort to restore its reputation. Organizations that have been known to engage in corruption find business development difficult. Investors and shareholders are reluctant to commit if an organization has a history of corruption, or bribes and favors are part of normal business conduct.

Corruption Prevention

Corruption unchecked can increase criminal activity and organized crime in the community. A number of steps can, however, help to manage corruption. There must be a strong focus on education, which must reinforce best business practices, and alert managers and employees where to look for corruption. This can be achieved by introducing mandatory education such as anti-money laundering (AML) courses. Senior executives and management must set a strong culture of honesty and integrity by leading by example.

Corruption is likely to be reduced with accountability mechanisms in place; this in turn is likely to reinforce a culture that fosters strong ethical behavior while holding those to account who violate the norms. Corruption can further be reduced by making it easy to report, whether by managers, employees, suppliers, and customers. A robust control environment also reduces the risk of corruption as do thorough background checks before hiring or promoting employees.