A new study published by Control Risks, an international business risk consultancy, echoes a few of my previous posts on corruption and the general findings of many development economists- when the economy falls, corruption rises. The report, “Corruption, Compliance and Change” argues that, instead of overhauling current financial and regulatory models, the global economic crisis may actually reinforce systems that inherently support fraudulent practices while enforcing regulations which have historically resembled a Band-Aid on a broken leg. Control Risks has predicted the following:

• More scams. We can expect further spectacular cases of large-scale fraud and corruption as the crisis continues to unfold. First, the strains of the recession will continue to expose frauds that are sustainable only in expanding markets. Secondly, at a time of financial desperation, companies will be all the more tempted to take greater risks, for example by paying bribes to outmatch their competitors. However, dramatic though they may be, these fraud and corruption cases do not represent fundamental change.
• Tighter regulation. The inevitable consequence both of the scams and of the deeper policy failures that contributed to the crisis has been repeated calls for tighter regulation. However, in the anti-corruption field, these demands reinforce an existing trend rather than creating something new. All the major industrialized states now have laws against foreign bribery that are similar to the US Foreign Corrupt Practices Act (FCPA). The question that really matters is how effectively these laws are enforced.
• Inconsistent and uneven enforcement. The answer, even now, is that the application of anti-corruption laws will remain highly inconsistent. We can expect a continuing trend towards tighter enforcement in the US and, to varying degrees, in other Western countries as well as Japan. In this respect the world is genuinely – albeit gradually – changing. However, partly for political reasons, the pattern of enforcement will remain highly uneven, both among the industrialized countries and still more in developing and transition economies.

Data citing increases in FCPA cases really drives the point home:

In 2007, 38 FCPA matters were initiated by the US Department of Justice (DoJ) and the Securities and Exchange Commission (SEC) followed by 25 in 2008, and show no sign of losing momentum. In late May 2009, Mark Mendelsohn, the deputy chief of the DoJ Fraud Section, reported that as many as 120 companies were currently under investigation on suspicion of FCPA violations, compared with 100 at the end of the previous year.
Source: “Corruption, Compliance and Change” by Control Risks

Overall, this report by Control Risks is an insightful and worthwhile read. I particularly enjoyed the graph detailing the nature of bribery demands in China during 2007-2008, as originally reported in a recent Trace International Bribeline China Report.

Given that anti-corruption policy seems to be a very hot topic these days and one close to my heart, I’m going to make a few predictions of my own for the second half of 2009:

• Another high-profile US-China case like Garth Peterson’s will likely come to light over the next six months.
• An excess of 180 US companies will find themselves under investigation on suspicion of FCPA violations.
• It is possible that at least one US-employed China powerbroker and/or rainmaker will find themselves under scrutiny for corruption-related activities.
• An increase in “missing” corrupt officials (like GOME’s Huang Guangyu) is inevitable; so too are further talks on an extradition treaty between the US and China.
• Run of the mill “under the table” activities between foreign business professionals, Chinese partners, and local officials will be prosecuted in much higher numbers as Hu Jintao marches forward with his anti-corruption campaign and, given political tensions, far more attention will be paid to cases involving Western companies in China.

If you’ve been reading this blog for a while, I’m about to sound like a broken record… Corruption is simply the largest impediment to China’s development. However, it is no longer an issue confined to China’s boundaries, nor one that can be neatly defined and addressed on Western terms. That stated, if you are doing business in China, keep the last prediction close to your own heart and follow the law. I know times are tough, but is ten years in prison and a massive fine really worth expediting paperwork or landing that deal?

(Note: a portion of this post has been deleted).

Commentary China Briefing, Control Risks, corruption, extradition, FCPA, Garth Peterson