cee corruption report 2009

8/2/2019 CEE Corruption Report 2009

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Business, corruption and economic crime in Central and

South-east Europe



Published by Control Risks, Cottons Centre, Cottons Lane, London SE1 2QG. Control Risks Group Limited ('the Company') endeavours to ensure the accuracy of all

information supplied. Advice and opinions given represent the best judgement of the Company, but subject to Section 2 (1) Unfair Contract Terms Act 1977, the Company shall

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This report was written by Kristof Gosztonyi and John Bray,Control Risks’ lead anti-corruption consultants.



Business, corruption and economic crime in Central and

South-east Europe

Introduction 1

Key findings 1

Recommendations for international companies 1

Patterns of corruption 3

The scale of the problem 3

When does corruption occur? 3

Corruption in public sector contracts 4

Corruption in private sector contracts 5

Speeding up the work of government officials 6

Applying for official permits 7

Securing essential services 8

Extortion by public officials and politicians 9

Patterns of economic and organised crime 10

Potential impacts on business 10

Local companies’ links with organised crime 10

Extortion of money by criminal gangs 12

Violence as a means of doing business 12

Industrial espionage 13

Product counterfeit 14

Stock theft 14

Preventative measures 16

Internal compliance measures 16

Policy on ‘facilitation payments’ 17

Training, compliance statements and hotlines 18

Dealing with business partners 19

Joint-venture partners and suppliers 19

Withdrawal from relationship in cases of suspected corruption 19

Employment of agents 20

Outlook: is it possible to conduct business successfully without corruption? 21

Appendix: survey sources and methodology 22



PAGE 1BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE

The post-socialist transition process in Central and South-east Europe has been accompanied by

widespread allegations of corruption and economic crime. In recent years, considerable progress

has been made in Hungary, Poland and the Czech Republic, which joined the EU in 2004.

However, the European Commission has issued a series of reports criticising Romania and –

more strongly – Bulgaria, which joined the EU in 2007 but have failed to implement adequate

institutional reforms to combat economic crime. In July 2008 the EU suspended €500m worth of aid to Bulgaria and, although it decided to unfreeze €115m in May 2009, this is at best a modest

indication of progress. Meanwhile, questions remain about Serbia, whose new government has

now formally expressed a desire to enter the EU, but which has a long-standing record of corruption

and organised crime.

The public debate on these issues raises questions about the impact on business. How far do

corruption and crime impede economic development? What are companies doing to resist corruption?

And what should they do?

Key findings

This report is based on a survey of senior executives from 244 international companies operating

in three countries in Central Europe (the Czech Republic, Hungary and Poland) and three inSouth-east Europe (Bulgaria, Romania and Serbia).1 Four key points stand out:

• The report points to a sharp disparity between the three Central European countries and their

South-east European counterparts. Bulgaria stands out as the country where respondents were

most likely to report first-hand experience of corruption in public-sector contracts, as well as

demands for bribes to speed up official government transactions.

• A distinctive feature of the survey is that it asked respondents about both their perceptions of

the scale of corruption, and the extent of their personal experience. Here the findings give

grounds for cautious optimism. Fewer respondents reported concrete knowledge of actual

corruption cases than might have been expected.

• When asked about their personal knowledge of corruption, many respondents cited incidents

involving the public sector. However, almost as many referred to ‘private to private’ corruption,for example when suppliers pay kickbacks to their private-sector clients.

• Overall, some 40%-50% of respondents ‘rather’ or ‘definitely’ agreed with the view that

organised crime could have a serious impact on international companies. In practice,

the most acute problems appear to apply in Bulgaria and, to a lesser extent, Serbia.

Failures of information security leading to loss of confidential information constitute one

of the most serious threats.

Recommendations for international companies

Changes in the global legal environment mean that no international company can afford to be

complacent about the risks from corruption and economic crime and – despite recent

improvements – our survey points to continuing risks in this area.

However, our respondents varied in the extent to which they had introduced effective ethics and

compliance programmes. The survey shows that US-based international companies were the

most likely to have such programmes. Western European companies and – to an even greater

extent – their Central and South-east European counterparts lag behind. For example, they were

much less likely to have anti-corruption training programmes or hotlines where employees can

report suspected ethics problems.

The overall findings of the survey are positive: an overwhelming majority of respondents

either ‘definitely agreed’ (47%) or ‘rather agreed’ (38%) with the statement that ‘it is possible

to conduct business successfully without corruption’ in their countries of operation. Control

Risks shares that optimism as long as companies have effective counter-measures in place.

1 See the appendix for further details on the sample and methodology.

Introduction



PAGE 2 BUSINESS, CORRUPTION AND ECONOMIC CRIME IN CENTRALAND SOUTH-EAST EUROPE

These include:

• A code of ethics forbidding bribes and kickbacks paid either directly or indirectly. The code

should be translated into local languages and distributed widely.

• An implementation programme, including awareness-raising at all levels of the company and

training for those who are likely to be most exposed to corruption risks.

• Ethics hotlines.

• Regular audits and reviews.

• Procedures for conducting due diligence integrity reviews of business partners.

A well-designed ethics and compliance programme is an essential requirement for all companies

operating in the region, not an optional extra.



The scale of the problem

When asked an open question about the most critical risks for business, most respondents mentioned

mainstream commercial issues such as competition (18%), fiscal and economic policy (13%), and

market-related risks (8%). Some 13% of respondents mentioned legal issues. Perhaps surprisingly,

only 3% cited crime, and none brought up corruption spontaneously.

A rather different picture emerged when they were asked whether corruption was relevant to their

business. Overall, 18.8% said that corruption was ‘very relevant’ or ‘highly relevant’, representing

scores of four and five on a five-point scale. The most striking feature of the responses was the sharp

divide between the companies in the three South-east European countries and their Central

European counterparts.

Respondents stating that corruption was “very relevant” or “highly relevant” to their business

Overall, 33.1% of respondents said that someone had tried to obtain a bribe – either in money or

favours – from their company during the previous year. Some 31% believed that their company had

failed to win a contract or gain new business because a competitor had paid a bribe during the past

year, and 40% believed that they had failed to win a contract for this reason in the past five years. It

is clear that – for a significant minority of companies – corruption remains a significant obstacle to

business in the region.

When does corruption occur?

Overcoming corruption requires a detailed understanding of how and when companies

are most vulnerable to demands for bribes. Respondents were asked a series of questions

about the frequency of corruption in five situations. These included cases where companies

were:

• Competing for public-sector contracts.

• Competing for private-sector contracts.

• Applying for official permits.

• Wanting to speed up the work of public officials, for example during customs procedures.

• Securing essential services, such as power supply.

The overall results suggest that the worst problems concerned tenders for public-sector contracts

and demands for ‘speed money’. Just over 40% thought that corruption occurs ‘often’ and


Patterns of corruption

0%

5%

10%

15%

20%

25%

30%

35%

40%

35.9%

5%

28.6%

35%

2.3%

7.5%

Bulgaria Romania Serbia Czech Republic Hungary Poland




‘always’ when companies are seeking public contracts. More than one-third thought that it

occurred ‘often’ or ‘always’ when they sought to speed up the work of public officials.

When does corruption occur?

While these perceptions are valid as a general truism, a more nuanced analysis emerges from a

closer analysis by country and sector, and especially when respondents are asked about the

extent of their ‘concrete knowledge’ of corruption. This was defined as knowledge ‘coming from

your own experience or the experience of a reliable source such as friends and colleagues’.

Corruption in public-sector contracts

When the results for public-sector corruption are analysed by country, two cases stand out: the Czech

Republic and Bulgaria. In these two countries the percentage of respondents stating that corruption

in public-sector contracts occurs ‘often’ or ‘always’ is almost the same – 55% and 53.8% respectively.

Percentage of respondents from each country reporting that corruption takes place “often” or

“always” when companies compete for public sector contracts

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Public

contracts

Often/always

Sometimes

40.4%

31.8%

33.5%

14.6%

26.9%

38%

34.3%

32.2%

6.3%

18%

Private

contracts

Official

permits

Speed

money

Essential

services

Concrete knowledge

Media/hearsay

0%

10%

20%

30%

40%

50%

60%

38.4%

15.4%

15.8%

42.5%

25.6%

22.6%

27.5%

37.2%

55%

25%

53.8%

7.5%10.5%

12.5% 11.6%

5%

35%

42.5%





However, a closer examination of the figures shows that the number of respondents with concrete

knowledge of corruption – whether from their own experience, or that of friends and colleagues –

is significantly higher in Bulgaria. By contrast, 42.5% of Czech respondents saying that corruption

in public-sector tenders occurs ‘often’ or ‘always’ report that their knowledge comes from the

media or hearsay. There is a similar contrast between concrete knowledge and hearsay/media in

the other four countries.

Three factors help to explain the apparent disparity between perceptions and concrete knowledge:

• The first and probably most important issue is that media and academic attention has focused

more on public-sector corruption than on private-sector bribery. People tend to give higher

estimates of public-sector corruption because they are more sensitised to the issue, even if it is

outside their direct experience.

• Secondly, many of the respondents are – by the nature of the industries in which they work – less

exposed to public-sector corruption. This is borne out by other survey findings. For example,

only 12.5% of retail respondents report direct knowledge of corruption in public-sector contracts

occurring ‘often’ or ‘always’, compared with 21.2% of respondents from the construction sector.

• A third possibility is that some respondents may have been reluctant to admit to concreteknowledge – even though our survey was confidential – because this could be taken to imply a

degree of ‘guilt by association’.

Corruption in private-sector contracts

The survey results for corruption in private-sector contracts point to both similarities and contrasts.

Again Bulgaria stands out: 35.9% of respondents say that that they have concrete knowledge of

private-sector corruption occurring ‘often’ or ‘always’. However, the figures for Romania, Serbia, the

Czech Republic and Hungary are much lower, and they are lowest of all in Poland.

Percentage of respondents from each country stating that corruption takes place “often” or

“always” when companies compete for private sector contracts.

The greatest contrast with the public sector figures concerns the much lower percentage of

respondents reporting a high incidence of private-sector corruption on the basis of ‘the media or

hearsay’. This reflects the current priorities both of the media and international anti-corruption

initiatives. For example, the US Foreign Corrupt Practices Act (FCPA) focuses specifically on

bribery of public officials, as does the Organisation for Economic Co-operation and

Development (OECD) anti-bribery convention.

Concrete knowledge Media/hearsay

0%

10%

20%

30%

40%

50%

60%

35.9%

17.9%

2.6%

20%

9.5%

5%

7.5%

13.2%

53.8%

7.5%10.6% 10%

10%

7.1%

2.4%

2.5%

5%

12.5%





The focus on bribery of officials is justified from a policy perspective in that this kind of corruption

often involves large amounts of money in connection with major projects financed by the taxpayer.

There is therefore a clear public interest in combating it. Nevertheless, from a business perspective,

there is a danger that companies may underestimate the legal and commercial risks associated

with corruption in private-sector contracts.

An analysis of the incidence of public and private sector corruption by industry offers further

insights. The three sectors with the largest samples in our survey are construction, manufacturing

and retail. Again, the findings for these sectors show a marked disparity between perceptions and

concrete knowledge.

Percentage of respondents from three sectors stating that corruption occurs “often” or “always”

when companies compete for public and private sector contracts

It is no surprise to find that more respondents from the construction sector report concrete knowledge

of public-sector corruption because they – by the nature of their work – have more dealings with

government officials. By contrast, manufacturing and retail companies are less likely to bid for

government contracts, though they too report direct knowledge of public-sector corruption in a

significant minority of cases.

Companies from all three sectors report less concrete knowledge of corruption in the private sector,

but certainly not to the extent that the problem can be downplayed or ignored.

Speeding up the work of government officials

Overall, 34.3% of respondents reported that corruption occurred ‘often’ or ‘always’ when companies

wanted to speed up the work of government officials (for example, in customs procedures), and

32.2% said that this occurred ‘sometimes’.

Concrete knowledge Media/hearsay

0%

10%

20%

30%

40%

50%

60%

21.2%

27.3%

38.7%

18.4%

40.6%

3.1%

9.4%

46.7%48.5%

12.2%

8% 6.4%

12%

12.5%

28.1%

6.3%

6%

18.2%

C o n s t r u c t i o n

p u b l i c

C o n s t r u c t i o n

p r i v a t e

M a n u f a c t u r i n g

p u b l i c

M a n u f a c t u r i n g

p r i v a t e

R e t a i l p u b l i c

R e t a i l p r i v a t e



Percentage of respondents from each country stating that corruption occurs “often” or “always”

when companies want to speed up the work of public officials, for example customs procedures

A breakdown by country again shows that the problem is most widespread in South-east Europe,

with 35.9% of Bulgarians and 42.5% of Romanians reporting – on the basis of concrete knowledge

– that this kind of corruption takes place ‘often’ or ‘always’.

Romania-based businesspeople interviewed by Control Risks report that they often give officials

small gifts – such as bouquets of flowers or bottles of wine – as a matter of courtesy when

engaged in routine administrative transactions. Somewhat less frequently, interviewees mentionedgiving small monetary enticements (typically ranging from some €20 to €100) to officials, and

said that these payments were often facilitated by lawyers.

Small payments to speed up ‘routine governmental actions’ are – following US usage – frequently

known as ‘facilitation payments’. The US Foreign Corrupt Practices Act (FCPA) excludes facilitation

payments from its definition of the foreign bribery offences that it covers. However, such payments

are illegal under most countries’ domestic laws and, as will be seen in the preventative measures

section, more and more international companies are banning them outright.

Against this background, it is encouraging to note that the Czech Republic and Hungary in particular

are achieving a degree of success in curbing demands for facilitation payments, though they

have yet to eliminate them. On the other hand, even if the payments are relatively small, it is

disturbing to see that the practice still appears to be widespread elsewhere, especially in

Romania and Bulgaria.

Applying for official permits

The pattern of corruption when companies apply for official permits is similar. Overall, 29.6% of

respondents said that such demands took place ‘often’ or ‘always’, while 38% said that they

‘sometimes’ occurred.


Bulgaria Romania Serbia Czech Republic Hungary Poland0%

10%

20%

30%

40%

50%

60%

70%

35.9%

7.7%

7.7%

27%

15%

14%

17.5%

30%

37.8%

51.3%

42.5%

10.8%7.5%

7.5%

9.3%

4.7%

12.5%

20%

62.5%

Concrete knowledge

Media/hearsay

Refusal/don’t know




Percentage of respondents believing that corruption occurs “often” or “always” when companies

apply for official permits

Official permits – for example, applications for planning permission or production licences – are

often essential requirements for companies, and this means that corrupt officials are in a strong

position to demand bribes in return for granting them. Again, the practice seems to be most

common in South-east Europe, particularly Romania and Bulgaria (the Bulgarian respondents

who refused to reveal their source of knowledge may have been motivated by a reluctance to

imply that they had paid such bribes).

Securing essential services

Encouragingly, a relatively low proportion of respondents reported that corruption was likely to

occur when companies were applying for essential services such as power. Overall, 6.1% saidthat such corruption occurred ‘often’ or ‘always’, and 18% said that it happened ‘sometimes’.

Again, Bulgaria stands out as the country where companies were most likely to report that this

problem occurred ‘often’ or ‘always’, but even there the figures were low.

Percentage of respondents from each country stating that corruption occurs “often” or “always”

when companies want to secure essential services such as power supplies

The relatively low instance of bribery in essential services reflects greatly increased professionalismin the post-socialist period. This in turn is often the result of privatisation of services such as power

supplies, which were formally the domain of the state.


10%

20%

30%

40%

50%

15.4%

7.7%

23.1%

10%

2.5%

25% 25.6%

12.5%

2.5%

27.5%

20%

31%

10% 7.5%

15%

14%

11.6%

12.5%

9.5%

42.5%

Concrete knowledge Media/hearsay Refusal/don’t know

Concrete knowledge Media/hearsay Other sources


2%

4%

6%

8%

10%

12%

14%

7.7%

2.6%

2.6%

2.6%

7%

5%

7.5%

5%

2.6% 2.5%

4.7%

2.3%

2.5%

5%

12.9%




Extortion by public officials and politicians

The final question in this section concerned the extortion of bribes by public officials and politicians.

The question overlaps with earlier ones in that demands for payment in return for permits or

essential services can amount to a form of extortion. However, in the worst case officials or politicians

may erect artificial obstacles – often in open disregard of the law – to force companies to pay bribes.

Percentage of respondents from each country stating that public officials and politicians “often” or

“always” use extortion to obtain bribes

At first sight, the ‘lead’ country is the Czech Republic, where some 27.5% of respondents stated that

public officials and politicians abuse their positions in this way ‘often’ or ‘always’. If true, this is a

damning indictment. However, a closer look at the figures shows that 15% of Czech respondents

base their judgments on ‘media and hearsay’, while only 10% – still a large figure – claim to have

direct knowledge of such extortion. The country where most respondents state that they have

concrete knowledge of such extortion is Bulgaria.

Concrete knowledge Media/hearsay Other sources


5%

10%

15%

20%

25%

30%

35%

40%

20.5%

23.1%

2.5%

10%

15%15%

2.5%

27.5%

14%

12.5%

17.5%

4.8% 5%

10%

2.3%

11.6%

5%

4.8%

9.5%




Since the beginning of the transition process there has been widespread concern about the

expansion of organised crime. Throughout Central and South-east Europe, Control Risks has

encountered stories of entrepreneurs who financed their original businesses through activities

such as cigarette- and alcohol-smuggling, or even the drugs trade, prostitution and human-trafficking.

A number of these early entrepreneurs have now invested their profits in legitimate businesses

while still retaining their links with the criminal underworld. Yet others have almost completelysevered their links with organised crime and abandoned criminal activity.

The risks to international companies are clear. When they operate in transition economies, it is

particularly important to understand the backgrounds and current connections of their business

partners. If they fail to do so, they risk reputational damage, and even unwitting involvement in

money-laundering scams. In the most extreme cases they may expose themselves to attacks,

blackmail or even infiltration by criminal elements.

Potential impacts on business

Overall, some 40%-50% of the respondents in our survey ‘rather’ or ‘definitely’ agreed with the

view that organised crime could have a serious impact on international companies.

Respondents “rather” or “definitely” agreeing that organised crime can have serious impact on

international companies

Levels of concern about this potential risk were greatest in the Czech Republic, followed by the

three South-east European countries and – to a lesser degree – Hungary and Poland. However,

this may be another case where sensitivities in the Czech Republic have been heightened by

widespread media discussion rather than first-hand experience. Responses to questions regarding

concrete knowledge of links between local companies and crime pointed to a much clearer divide

between Central and South-east Europe.

Local companies’ links with organised crime

Respondents were asked two related questions:

• How often were local companies financially linked to the criminal sector (for example, in terms

of financial dependency)?

• How often did personal ties exist between local companies and the criminal sector?

Patterns of economic and organised crime

0%

10%

20%

30%

40%

50%

60%

46.2%

55%

42.9%

47.5%

34.9%

32.5%





Overall, 36.1% said that local companies ‘sometimes’ had financial links with organised crime,

while 7% said that such links existed ‘often’ or ‘always’. However, the regional breakdown shows

that there were hardly any Central European respondents who thought that criminal links with

local companies were commonplace. By contrast, some 20% of Bulgarian respondents said that

local companies ‘often’ or ‘always’ had financial links with organised crime.

Respondents believing that local companies in their countries “often” or “always” have financial

links with the criminal sector

Similarly, 28.3% of the overall sample said that local companies ‘sometimes’ had personal

links with crime, while 8.6% said that such links existed ‘often’ or ‘always’. Again, more South-east

Europeans reported that companies ‘often’ or ‘always’ had personal links. In Bulgaria 10.3% of respondents reported concrete knowledge. Another 2.6% refused to cite their source of information,

suggesting that they too had first-hand experience but were reluctant to acknowledge this, even

in a confidential survey. Similarly, 10% of Serbians thought that local companies ‘often’ or

‘always’ had financial links with organised crime. Of these, 5% cited concrete knowledge of such

cases as the source of their knowledge, while another 2.5% refused to mention their source of

knowledge.

Respondents believing that local companies in their countries “often” or “always” have personal

links with the criminal sector

Media/hearsay

Other sources

Refuse


Concrete knowledge

0%

5%

10%

15%

20%

25%

20.5%

23.1%

23.1%

23.1%

2.5%

2.5%

2.5%

2.5%

2.5%

0%

10%

4.8%

5%

9.5%

9.5%

0%

Media/hearsay

Other sources

Refuse


Concrete knowledge

0%

5%

10%

15%

20%

5.1%

12.9%

2.6%

2.6%

2.6%

5%

2.5%

5%

5%

0%

12.5%

5%

16.7%

16.7%

2.5%

5%

2.5%




These findings correspond with Control Risks’ practical experience advising clients in the region:

links to organised crime appear relatively frequently in Bulgaria, to a lesser degree in Serbia, and

only rarely in the remaining countries of Central and South-east Europe. In particular, it is the

high degree of infiltration of the legal economy by organised crime that poses a risk to investors

in South-east Europe.

Extortion of money by criminal gangs

Extortion – for example, in the form of demands for protection money – is a common tactic used

by criminal gangs. Overall, 38.5% of respondents thought that this was ‘sometimes’ an issue for

international companies operating in their country, and 22.5% thought that it was ‘often’ an issue,

though none said that this was ‘always’ the case.

Percentage of respondents from each country stating that extortion by criminal gangs is “often” a

problem for international companies

In all countries, a significant proportion of companies had concrete knowledge of the problem,

with the highest figures in Serbia (22.5%) and the Czech Republic (17.5%).

Violence as a means of doing business

Particularly in the early stages of the transition, organised criminal groups were known to resort

to violence in support of their business activities, for example when seeking to cancel or redefinecontracts. Overall, 25% of respondents in our survey thought that this still happened ‘sometimes’.

The countries with the highest percentages of respondents reporting concrete knowledge were

Bulgaria and the Czech Republic.

Media/hearsay

Don’t know


Concrete knowledge

0%

5%

10%

15%

20%

25%

30%

35%

12.7%

23.1%

6.1%

3.7%

2.5%

5%

10%

2.5%

30%

17.5%

11.6%

4.7%

16.3%

30%

22.5%

11.9%

21.4%

9.5%

5%

15%

2.5%

7.5%



Percentage of respondents from each country stating that violence is “sometimes” used as a

means for doing business, for example to redefine or cancel contracts

Only a very small percentage of respondents 5.7% said that such violence occurred ‘often’ or

‘always’. Of these, only a handful had first-hand experience of the problem: one each in Bulgaria,

Serbia and Poland, and two in Hungary. Even if these numbers are small, they serve as a warning

against complacency.

Industrial espionage

Several factors mean that industrial espionage is a significant risk in the transition economies.

During the socialist period, each of the countries under review maintained large, well-trained

secret services. After the end of the Cold War substantial numbers of former operatives soughtnew employment, in many cases adapting their old skills to meet new objectives, whether in the

private sector or organised crime. Moreover, the extent of civilian oversight of the official secret

services varies, and international companies operating in industries that are considered to be

‘strategic’ may be classified as intelligence targets.

Against this background, some 25% of respondents thought that industrial espionage posed a

‘severe’ or ‘serious’ threat to international companies in their countries of operation, and 34%

thought that it was a medium-level threat.

Respondents’ assessment of the threat from industrial espionage


Media/hearsay

Other sources


Concrete knowledge

0%

10%

20%

30%

40%

50%

17.9%

43.6%

17.9%

7.7%

10%

5%

7.5%

30%

22.5%

7%

4.7%

16.3%

22.5%

7.5%

16.7%

16.7%

22.5%

27.5%

5%

Severe

threatSerious

threatMedium

threat

Lesser

threat

No threat

at all

Don’t

know

8%

25%

11%

5%

34%

17%

0%

10%

20%

30%

40%

50%




There were no significant regional differences, but there were some clear trends regarding industry

sectors: the most severely affected sector is public works and construction (21% believe industrial

espionage to be a ‘severe’ risk, and another 21% believe it to be a ‘serious’ risk), followed by

manufacturing (12% and 17% respectively). The most likely explanation for the prominence of

these sectors is that the respondents were referring not so much to loss of technical secrets or

specialist expertise, but rather to information leaks in connection with contract bids or confidentialinformation on customers. In Control Risks’ experience, these are the most common forms of

information loss in the region.

In summary, companies active in Central and South-east Europe are advised to take the risks of

industrial espionage seriously, and implement strict preventative measures, including comprehensive

information security policies throughout their operations.

Product counterfeit

Overall, 85% of respondents took the view that product counterfeit was a problem in their countries.

In a follow-up question, they were asked how far this applied to their own businesses, and 30%-40%

of South-east European respondents ‘rather’ or ‘definitely’ agreed that it presented a serious

problem. The figures for Central Europe were lower but still significant.

Respondents “rather” or “definitely” agreeing that product counterfeiting is a serious threat to

their business

As might be expected, the most seriously affected sector is retail (45%), followed by manufacturing

(38%), and information and communications technology (ICT) (35%).

Stock theft

Only for a minority of companies – an overall average of 14.2% – does theft of stock pose a ‘serious’

or ‘severe’ problem. However, a regional breakdown of cases is revealing.

Rather agree


Definitely agree

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

31%

8%

39%

13%

10%

13%

3%

9%

12%

21%

38%

25%

17%

12%

29%

13%

23%

10%




Companies viewing stock theft as a severe or serious problem

In Bulgaria 28% of respondents reported ‘severe’ or ‘serious’ problems, followed by 19% in Romania.

As might be expected, retail is the worst-affected sector, with 24.2% of retail respondents assessing

the stock theft problem as ranging from ‘serious’ to ‘severe’.

Serious

Refusal


Severe

0%

5%

10%

15%

20%

25%

30%

13%

15%

28%

3%

10%

8%

8%

5%

12%

16%

3%5%

14%

7%

26%

8%

11%

17%

3%




Internal compliance measures

Avoiding corruption and economic crime demands hard work. The first step is to implement an effective

internal compliance programme. We asked respondents whether their companies had instituted five

key compliance measures. These were:

• A clear policy statement banning bribes to obtain business.

• A ban on ‘facilitation payments’.

• Anti-corruption training.

• Annual compliance statements by senior management stating that they had abided by the company’s

anti-corruption requirements.

• Hotlines for employees to report suspected corruption or other integrity problems.

Percentage of respondent companies with established internal anti-corruption compliance measures

A clear majority of companies had statements banning bribes. However, less than half of the

companies had adopted other key compliance measures. Perhaps most importantly, there were

significant variations according to the country in which the company was headquartered.

The non-Western European samples were relatively small,2 but it was nevertheless possible toidentify a clear pattern: US companies were significantly more likely to have effective compliance

programmes. The Western European companies came second overall, followed by their counterparts

in Central and South-east Europe.

2 By far the largest proportion of respondents (155 out of 245) represented companies headquartered in

Western Europe. However, there were also 25 US-based companies, as well as 12 from Central Europe, 36

from South-east Europe and 16 ‘others’.

Preventative measures

0%

10%

20%

30%

40%

50%

60%

70%

80%

69.8%

25.7%

47.8%

29.8%

23.5%

No bribes No facilitation

payments

Training Annual declarations

by senior management

Hotlines




Implementation of internal compliance measures according to headquarters’ country

.

These results echo similar findings in the 2006 International Business Attitudes to Corruption survey

by Control Risks and Simmons & Simmons.3 US practice reflects the fact that the US authorities

enforce the FCPA vigorously, and companies also have to take account of the Sarbanes-Oxley

Act on corporate governance. Since the 1997 OECD Anti-Bribery Convention, all Western

European countries have introduced extra-territorial anti-corruption legislation similar to the

FCPA. However, enforcement has so far been uneven, and this is reflected in company practice.

Central and South-east European practice lags further behind, though this may change in the

future. It is interesting to note that 28% of the South-east European companies had training

programmes to help their executives to avoid bribery. This is likely to reflect a combination of the

relatively high-risk environment, and a desire to do something about it.

Policy on ‘facilitation payments’

In recent years, the problems associated with ‘facilitation payments’ – small payments to speed

up routine governmental transactions – have moved up the international anti-corruption agenda.

In the 1990s, campaigners focused on ‘grand bribery’ to secure government contracts. However,

Transparency International (TI), the International Chamber of Commerce (ICC) and the World

Economic Forum (WEF) now agree that facilitation payments count as ‘small bribes’, and that

companies should not pay them.

These changing views are reflected in the 2006 International Business Attitudes to Corruption

survey , which showed that 88% of US-based international companies had banned facilitation

payments outright, as had 77% of our combined sample of Western European companies (from

France, Germany, the Netherlands and the UK).

By contrast, the findings from the present survey point to an apparent disparity between the policies

laid down at headquarters and the feedback of respondents in subsidiary and branch offices in

Central and South-east Europe: only 60% of US companies and 49% of Western European

companies in these regions reported bans on facilitation payments.

3 The survey is available on www.control-risks.com.

0%

20%

40%

60%

80%

100%

8 8 %

5 2 %

6 0 %

6 0 %

7 2 . 3

%

4 9 %

2 7 %

2 6 . 5

%

2 3 . 9

%

7 5 %

1 6 . 7 %

1 6 . 7 %

8 . 3

%

0 %

4 7 . 2

%

3 8 . 9

%

2 7 . 8

%

1 1 . 1

%

5 . 6

%

6 0 %

US Western Europe Central Europe South-eastern Europe

No bribes No facilitation payment Training Annual declarations Hotlines




US and Western European company policies banning facilitation payments at the international

level, and in Central and South-eastern Europe

*Source: 2006 International Business Attitudes to Corruption survey

*Source: 2007 CE and SEE Businesss Survey

A combination of three different factors explains this apparent contradiction:

• First, our respondents were frontline businesspeople, not company lawyers: they may simply

have been unaware of their companies’ policies at the international level. If this is true, it

represents a significant failure in their internal compliance programmes.

• A second possibility is that the results reflect investment patterns: the most reputation-sensitive

companies with the strictest compliance policies have chosen to stay away from environments

such as South-east Europe, which are perceived to incur high risks. However, while this may

have been the case in the earlier years of transition, we think that it is less likely today because

most of the big multinational companies are already present in the region.

• A third factor is that our samples from Western Europe are not strictly comparable: the sample

from the present survey contains a number of companies from Austria and other parts of Western

Europe that were not covered in the International Business Attitudes to Corruption report .

Whichever explanation applies, international companies operating in Central and South-east

Europe appear to have adopted a more ‘pragmatic’ approach. In doing so, they may incur both

legal and operational risks. Facilitation payments are illegal under most countries’ domestic law.

Moreover, if companies demonstrate a willingness to make small payments, they may find itharder to resist demands for larger bribes.

On a more positive note, it seems that the amounts being paid are relatively low. The companies

that permitted facilitation payments were asked what was the highest amount that might be

acceptable. There were only 30 replies in total. Of these, 15 (50%) said that €10 would be the

highest acceptable amount, while a further nine (30%) said that amounts up to €50 might be

paid. Only one respondent went as high as €500.

Training, compliance statements and hotlines

Ethics codes are an important first step in combating corruption, but it is essential to back them

up with training and compliance programmes. In this respect the companies in the survey had

some way to go. Only 29.8% had programmes to train executives in ways of avoiding corruption. A quarter had instituted the practice whereby senior executives are required to sign annual

compliance statements, while only 23.5% had company ‘hotlines’ that executives could use to

report suspected cases of malpractice.

88%

49%

60%

77%

US International* US in C&SE Europe** W. European

International*

W. European in

C&SE Europe**

0%

20%

40%

60%

80%

100%



Failure to back up statements of principle with practical compliance measures could in the worst

case leave companies more exposed to corruption and economic crime. If employees see a

disparity between policy statements and actual practice, they are likely to become more cynical,

and more likely to cross the boundary between ethical and unethical behaviour.

In Control Risks’ recent experience, ‘hotlines’ where employees can both report suspectedmalpractice and appeal for guidance (‘helplines’) are particularly important. The 2006 International

Business Attitudes to Corruption survey pointed to a significant increase in the introduction of

such hotlines since a previous survey in 2002. For example, 42% of UK companies and 38% of

Dutch companies surveyed had these facilities. Our Central and South-east Europe survey

suggests that international companies operating in that region are still lagging behind.

Dealing with business partners

Effective internal compliance measures are essential. However, in Control Risks’ experience, the

greatest challenges that companies face concern their relationships with business partners.

There are three sets of problems. First, although companies are in principle able to control the

activities of their own executives, they may have limited influence over their partners’ style of business. Secondly, some companies have deliberately used local partners as proxies, permitting

or even encouraging them to pay bribes on their behalf. Thirdly, as noted above, there is a particular

risk in transition economies that companies could – wittingly or unwittingly – find themselves

dealing with partners associated with corruption, economic crime or even organised crime.

Joint-venture partners and suppliers

As with other aspects of the fight against corruption, prevention is better than cure. Overall, 56%

of the respondent companies have specific procedures to review the integrity of potential joint-

venture partners before entering a commercial relationship, and a somewhat higher number,

62%, have procedures for checking suppliers. While these figures are encouraging, they also

point to the need for a further tightening of business practice. Procedures to review the integrity

of business partners before major deals should be regarded as essential, not optional.

Withdrawal from relationship in cases of suspected corruption

It is harder and more costly to withdraw from a commercial relationship once it has been set up.

Nevertheless, a total of 20% of respondents reported that their company had withdrawn from an

existing relationship with a specific commercial partner because of concerns about corruption.

The findings are broadly similar to those of the 2006 International Business Attitudes to Corruption

survey, where 19% of respondents had pulled out of existing commercial relationships because

of concerns about corruption.

Companies who had withdrawn from an existing relationship with specific commercial partners

because of concerns about corruption


18%20%

14% 15%

30%

25%


0%

5%

10%

15%

20%

25%

30%

35%




Companies in Hungary were most likely (30%) to report withdrawals from existing commercial

relationships, followed by Poland (25%) and the Czech Republic (20%).

At first sight, this appears to contradict the other findings of the report: corruption levels appear to

be higher in South-east Europe, and yet companies are more likely to pull out of existing

relationships in Central Europe. The explanation may be that, even though overall levels of corruptionare lower in Central Europe, companies there are taking the problem more seriously.

As with other compliance measures, US companies were more likely to pull out of existing

relationships than their counterparts in Western, Central or South-east Europe.

Percentage of companies that had “withdrawn from an existing relationship with a specific

commercial partner because of concerns about corruption.” By headquarters country or region

Again, this finding underlines the greater sensitivity of US companies to corruption, in large

measure because of the greater risk of prosecution under the FCPA.

Employment of agents

The employment of commercial agents and consultants is a sensitive issue in the wider international

debate on business corruption because of a widespread perception that they are often used as

a conduit for bribes. This issue appears to be less important in Central and South-east Europe.

Only just over a quarter of companies (26.1%) said that they used commercial agents or consultants

to help them to win business. Part of the reason for this low figure may be that international

companies are most likely to use agents when entering a country for the first time, or operating

in a region with which they are unfamiliar. By contrast, our respondents all represented companies

with established operations in their respective countries.

Only 4.5% of respondents believed that agents offered bribes on behalf of international companies

‘a lot’ or ‘all the time’ – a much lower set of results than in the 2006 International Business

Attitudes to Corruption survey . Perhaps partly because of this relaxed view of the risks, only 50%

of the companies that use commercial agents have a formal procedure to check their integrity.

Of the companies that used agents, 84% stated that the intermediaries’ identity was ‘known in

the market place’. Much of the wider international debate about the use of agents has focused

on the international defence sector, where it has been common practice to use commercial

intermediaries whose identity is not widely known – thus raising obvious concerns about

transparency and accountability. However, none of the companies in this survey came from the

defence sector, and the practice of employing agents without revealing their identities seems to

be rare in Central and South-east Europe.

32%

21%

8% 8%

US Western Europe Central Europe South-east Europe0%

5%

10%

15%

20%

25%

30%

35%




The overall findings of the survey give grounds for cautious optimism. Corruption remains a

significant problem. Nevertheless, an overwhelming majority of respondents either ‘definitely

agreed’ (47%) or ‘rather agreed’ (38%) with the statement that ‘it is possible to conduct business

successfully without corruption’ in their countries.

Respondents “definitely” or “rather” agreeing” that it is possible to conduct business in their countries without corruption

A mere 3% took the hardline view that it was ‘definitely not’ possible to conduct businesssuccessfully, while 11% thought that it was ‘rather not’ possible. Bulgaria is the country with the

largest proportion of pessimists: 23% ‘rather disagreed’ with the view that it was possible to conduct

business without corruption, and as many as 10% thought that it was ‘definitely’ not possible.

Control Risks agrees with the optimists: it is possible – indeed essential – to conduct business

successfully in both Central and South-east Europe without resorting to graft. However, success

requires both business and government to engage with the problem, not to ignore it. At times this

may seem like a constant struggle, with inevitable setbacks on the way.

Companies have a commercial, legal and moral requirement to put their own houses in order

through effective ethics and compliance measures. Governments need to support them by

strengthening public institutions and the rule of law. In the last two decades, both regions have

made major progress in these respects. However, the European Commission is correct in its view

that – notably in Bulgaria and Romania – there is a pressing need for further progress.

Outlook: is it possible to conduct business successfully without corruption?

Rather agree


Definitely agree

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

31%

33%

64%

96%

85%

40%

45%

56%

86%

30%48%

48%

62%

83%

21%

83%

55%

38%




Appendix: survey sources and methodology

The survey was carried out in 2007 using four locally based research institutes: PRM in the Czech

Republic and Poland; Vitosha Research in Bulgaria; Forsense Kft. in Hungary; and Szonda Ipsos

in Romania and Serbia. Between them, they conducted a total of 244 interviews in six countries:

Poland (40), Czech Republic (40), Hungary (43), Romania (42), Bulgaria (39) and Serbia (40).

The survey interviews were carried out by phone using a questionnaire prepared in English byControl Risks and translated into each country’s national language. The respondents were senior

managers of international companies, and included both locals and expatriates. In Romania and

Bulgaria, it proved difficult to make up the target quota of 40 international companies: 19 (45.2%)

respondents in Romania and 16 (38.1%) represent joint ventures between international and local

companies, or fully local companies.

The survey questions were designed to elicit both perceptions of the scale of the problems

associated with corruption and organised crime, and the extent of concrete knowledge based on

the respondents’ own experience or of the experience of colleagues and close acquaintances.

Some respondents may have been reluctant to admit to concrete knowledge of some of the more

sensitive issues in case this implied that they were personally implicated. This consideration may

have influenced the responses from Romania and Serbia in particular.

Respondents were told that the survey had been commissioned by Control Risks. However, the

local research institutes did not record the identity of individual respondents and their companies.

We are not able to trace specific responses back to individual companies.

Respondents came from five main sectors as summarised in the following chart:

With regard to size, 115 respondents came from companies with fewer than 250 employees in

the country concerned; 68 represented companies with between 251 and 750 employees; and 63

were from companies with more than 750 employees.

31%

45%

56%

48%

62%

38%

Public works

&

constructionManufacturing Oil & gas

Telecoms

& ITRetail Other Total

Bulgaria 3 (7.7%)

8 (20%)

4 (9.3%)

8 (20%)

8 (19%)

2 (5%)

33 (13.5%)

12 (30.8%

18 (45%)

17 (39.5%)

8 (20%)

8 (19 %)

13 (32.5%)

76 (31%)

4 (10.3%)

1 (2.5%)

2 (4.7%)

7 (17.5%)

6 (14.3%)

1 (2.5%)

21(8.6%)

4 (10.3%)

2 (5%)

3 (7%)

2 (5%)

4 (9.5%)

4 (9.5%)

27 (11%)

8 (20.5%)

2 (5%)

4 (9.3%)

9 (22.5%)

8 (19%)

3 (7.5%)

34 (13.9%)

7 (18%)

8 (20%)

11 (25.6%)

6 (15%)

7 (16.9%)

8 (20%)

53 (17.5%)

39 (15.9%)

40 (16%)

43 (17.6%)

40 (16%)

42 (17.2%)

40 (16%)

244 (100%)

Romania

Serbia

Total sample

Czech

Republic

Hungary

Poland



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cee corruption report 2009

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