Archive for May, 2011

Bribes and Non-Profit Organisations: A Follow-up

Thursday, May 5th, 2011

Last autumn, we published a comment on “Corruption and NPOs” on this web site. Meanwhile, we have learned from Mr. Gary James, Senior Editor of the Journal of Accountancy (JofA), that the international arena for the fight against bribery would change seriously in July 2011. The Bribery Act of 2010 will come into force in the UK in July this year, requiring all companies to comply with this law, which have a representation in the UK.

“Bribery undermines democracy and the rule of law and poses very serious threats to sustained economic progress in developing and emerging economies and to the proper operation of free markets more generally. The Bribery Act 2010 is intended to respond to these threats and to the extremely broad range of ways that bribery can be committed,” explains the guide, issued by the Ministry of Justice of the UK.

“The new U.K. law sets rules for two general offenses”, writes Gary James in JofA (25 April 2011), “covering the offering, promising or giving of a bribe (active bribery) and the requesting, agreeing to receive or accepting of a bribe (passive bribery). It expands the scope of regulation to include commercial bribery, not just bribery of government officials. And it also makes companies liable for the actions of subsidiaries and agents with whom they do business.”

Yes, the law is aimed at companies [1]. Only companies? What about non-profit organisations?  Are they immune against these temptations?

Usually, bribes are paid in order to achieve an advantage for an individual or a firm. It is the profit motive and the logics of the “survival of the smartest” that make bribe payments so common. “It is safer for me to cross the road on a red light together with the pack, than to go alone on a green light”, as a business man in Moscow explained this logic in a very expressive way. When the costs of behaving legally are higher than the costs of behaving illegally, the rational homo economicus would opt for the latter one. Who can deny this: There are good individual reasons to pay bribes in a corruptive surrounding, although the overall outcome for society is disastrous.

 

Is this setting the same for non-profit organisations? It is not. There is – by definition – no profit motive in non-profit organisations. This reduces the incentives to pay bribes – in the perspective of the organisation. However, this does not mean that NPOs are immune to active bribe payments. The illness comes back through other, different channels.

Managers who pay bribes in order to achieve a personal advantage can also be found in NPOs. However, it might be – and this is the more sophisticated variation – that the bribe is paid for the sake of the organisation. What form does this take? Let’s imagine that you work in a nasty dictatorship. Is the following position morally correct?  “We do not pay taxes to this corrupt regime. We do not feed a budget that is not controlled. It is better, if we pay a direct personal payment to the tax inspector: This makes the regime even more corrupt, and also we can save funds for the overall sake of our organisation. After all, our organisation works for society, the regime does not!”

In other words: bribes come back as altruism.

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Some Remarks about Facilitation Payments

The Ministry of Justice of the UK published a guidance for the new law. The guidance is very helpful. I mean, it is helpful not only for organisations which are directly affected by this law (because they have a representation in the UK), but also because of the normative power of this new law. There are many features inside this law that could also serve as an ethical guideline in other legislations, even if the law does not directly affect you.

Most interesting for me was the way how facilitation payments are treated:

“Facilitation payments, which are payments to induce officials to perform routine functions they are otherwise obligated to perform, are bribes,” says the guidance of the Ministry of Justice.

We can say from experience that it happens quite often that NPOs pay a second salary to government officials.

Example 1: A Western NPO is engaged in health care for handicapped children in country F. Health care is an activity that only state organs are allowed to carry out. The NPO is prevented from working directly in F. The NPO elects to pay a second salary to the state employees in hospitals “in order to boost their poor official salaries”. In practice, this scheme allows them to influence the health policy in the institution in an indirect way.

Example 2: A human rights organisation works under difficult conditions in country R. Policemen receive “allowances” for training sessions, in order to make them more open to human right issues, which they usually do not like to hear.

Of course, formally, the persons receive a payment for services that they are expected to carry out anyway: The health care employees have to take care of the handicapped children anyway, the policemen have to comply with laws in the country anyway, and so on.

However: Where is the advantage in this case? Okay, the government employees have an advantage. But is this balanced by an advantage for the funding organisation? In many cases, there will be a benefit in a very common sense (for example: policemen would know more about human rights and legal minimum standards). But this advantage is so general, that it would not be covered by the bribes definition of the Act. You can say it also in this way: The facilitation payments are done not to optimize a profit, but to facilitate civil society. However, I must admit that with this argumentation, you can legitimate each and everything. It is a kind of catch 22 for NPOs.

The mere fact that the policemen receive an subsistence allowance for a training is not a bribe. Interesting side questions are: Are the government officials allowed to receive a second salary? Are the allowances higher than the state norm? Is the additional income declared as taxable income? Are the officials informed and pushed to declare their second income? Do government officials have to deduct the access income over a certain threshold?

The cases that are described in Linda Polman’s “War Games: The Story of Aid and War in Modern Times” are more difficult. Ms. Polman describes how charities pay “fees” to warlords in order to get their aid on the ground. Is this a bribe in the definition of the Bribery Act of 2010? The plot is simple: consideration is given, and there is an advantage for the charity – they could not perform without it. I would say that this is an argumentation that is worth thinking about. At least, it would be interesting to hear a defense, why “fees” to warlords should not be considered as a bribe.

Comments are, as always, welcome.

***

The new law also puts other interesting accents on certain subjects, which we can only mention here, but not discuss in depth.

For instance, the harsh rejection of the normative power of local customs [2] (unless not codified in written law) shows – if I am not mistaken – the long-standing experience of the British with these kinds of problems. I would love it if German businessmen, for instance, had the same clear-cut approach.

Also, the defense or duress, offered in the new law, is of particular importance[3] for NPO workers in civil war regions.

Even if you are not directly affected by this new law, I think, it is worth analyzing the Bribery Act. It sharpens our understanding of what would be okay or not okay, even in other cultural circumstances.

There is this inherent risk in the anti-bribe discussion that we aim too high and do not get the measures to the ground. The non-profit world can give a healthy impetus to this discussion: What is needed here are finance experts who hold the soul in higher esteem than a short-term convenience and who are able to translate an ethical standard into another language. I am convinced that they exist in the NPO world.

Because of the nature of the problem, you can also leave an anonymous comment. We would not disclose your e-mail address or name, in case you do not want this (see also NOPA guidelines in the drop down menu on the right).

 

Frank Fabel, CPA



[1] The guidance explicitly states that charities are also in the scope of the law: “So long as the organisation in question is incorporated (by whatever means), or is a partnership, it does not matter if it pursues primarily charitable or educational aims or purely public functions. It will be caught if it engages in commercial activities, irrespective of the purpose for which profits are made”(Art. 35 of the Guide). This may simply be a problem of UK parlance, I suppose: “Companies” in the understanding of the act also cover organisations of all kind.

 

[2] Art. 19 of the guide explains: “… any local custom or practice must be disregarded – unless permitted or required by the written law applicable to that particular country.”

 

[3] Art. 48 of the guide explains: “It is recognised that there are circumstances in which individuals are left with no alternative but to make payments in order to protect against loss of life, limb or liberty. The common law defence of duress is very likely to be available in such circumstances.”