effectively in Ukraine.
WENDY WRAY
espite Kostya Hnatyuk’s years of doing business in Ukraine, Pavlo Zhuk took a seat-of-the-pants approach to start- ing the software development center in Kiev.
They should have spent more time and effort up front trying to understand the challenges, practices, and business culture they were walking into.
Zhuk could have learned a lot from two U.S. government Web sites. First, the U.S. State Department’s (www.state.gov) background note on Ukraine would have told him that the country is burdened by corruption, excessive government regulation, and lack of law en- forcement. Second, the CIA’s World Factbook (www.cia.gov/cia/publications/factbook/) would have revealed that Ukraine’s telephone system is antiquated and in disrepair and that there are 3.5 million pending telephone applications. Since Zhuk needed a modern telephone system for his development center, he would have immediately realized that he faced a problem.
From the State Department note, Zhuk could have obtained contact information for key U.S. officials in Kiev. He should have consulted them before deciding to invest in Ukraine. Zhuk should also have asked his ac- countant and his attorney in the U.S. for ref- erences in Kiev. Ukrainian accountants and attorneys would have alerted him to the difficulties lying ahead. Moreover, before setting up his foreign operation, Zhuk should have familiarized himself with the U.S. For- eign Corrupt Practices Act (FCPA). He should have developed a company policy against bribery and made a plan for how to deal with corruption.
Encounters with corrupt officials are, re- grettably, common in many parts of the world. An understanding of the local busi- ness culture and appropriate policies for addressing demands for bribes are basic tools for succeeding in unfamiliar settings.
Last year, companies in my industry, with the
support of Transparency International and the Basel Institute, created a set of global anticorruption principles. The point was to create a level playing field and to eradicate the effects of bribery in an industry where corruption has too often determined who wins contracts. Companies that agree to the principles commit to implementing a zero- tolerance policy against bribery and to de- veloping internal programs to persuade em- ployees not to pay bribes.
By having Hnatyuk pay a bribe to Vasyl Feodorovych Mylofienko, Zhuk signaled that he would pay local bureaucrats whatever was necessary to do business in Kiev. In fact, by making that $5,000 payment, he may have violated the FCPA. The act permits facilita- tion payments as long as they are small.
Hnatyuk clearly violated the Anti-Terrorism, Crime, and Security Act of 2001 by paying a bribe. He would therefore be subject to prosecution in Great Britain because English law, unlike the FCPA, does not make excep- tions for facilitation payments.
Companies pay bribes for three reasons.
First, multinationals operate in countries where bribery has become systemic due to weak institutions and poor rule of law. Sec- ond, most countries do a bad job of enforcing their anticorruption laws. Third, managers often have to meet tough business goals.
Those factors can place managers in circum- stances where paying bribes may seem like the best choice. Only clear internal policies and controls can ensure that managers do the right thing. Had Zhuk created those poli- cies and controls within his own firm, he might have found ways to operate effectively in Ukraine.
In the present circumstances, Zhuk will face a series of requests for bribes. Since he cannot ethically operate in that environment, disengagement is his best course of action.
Breaking the law – in this case, the FCPA – would be unthinkable.
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s any businesspersonwould do in this situation, Zhuk will pay off the UTA officials. After all, he wouldn’t be breaking the law if he did so. The situation clearly sug- gests that Zhuk is a victim of extortion. Ac- cording to most nations’ laws, succumbing to extortion isn’t a crime. So Zhuk will pay off Simonenko. He will consider the bribes an additional tax he has to pay for doing busi- ness in Ukraine and carry on with his pet project. Make no mistake: That’s how the sit- uation would play out in real life. If a busi- nessperson doesn’t pay officials when he is a victim of extortion, he doesn’t have the stom- ach to do business in developing countries.
But should Zhuk pay off the officials?
That’s tougher to answer. I know what Zhuk will do; I don’t know what he shoulddo, be- cause that’s a moral issue, and we don’t know from the case what Zhuk’s morality dictates.
Let’s think of a framework that might help us. Start by imagining a continuum of cor- ruption cases. At one end, there is extortion of the Simonenko kind. At the other, there are money-laundering schemes that allow
businesspeople in cahoots with local politi- cians to enrich themselves without having to invest in a company. Businessmen like Zhuk usually tell themselves that while they may have to pay off politicians and officials, they would never get involved in rackets of the second kind. Fair enough.
What’s interesting is what companies do when they are in the middle of the contin- uum. Let’s say you are a businessperson who wants to do business without bribing offi- cials. One day, you find that a rival company is bribing bureaucrats for favors that are giving it an unbeatable advantage. You real- ize that if you don’t get the preferential treat- ment your rival is buying, you’re going to have to leave the country. In an economic sense, your choices are identical to those Zhuk faces: pay – or quit.
Under those circumstances, the end result will also be the same: Like Zhuk, you will pay a bribe. You’ll talk to the corrupt bureaucrat and demand to be treated the same as your rival. When the official says he can extend fa- vors to you only if you agree to do him favors in return, you’ll agree. You’ll find it easy to jus- tify these favors to yourself by saying that you were the victim of an extortion demand by the bureaucrat. Thus, companies that start paying bribes are actually on a slippery slope.
They justify extortion payments, and they jus- tify bribes by saying they’re doing only what their rivals are doing. And then…I’m not sure where they will stop on the continuum.
That worries me, because first, it means companies’ moral standards are going down- hill. Second – and this is something most firms don’t realize – companies create a bad business environment by indulging corrupt politicians. When organizations are corrupt, they lose legitimacy. As a result, people de- mand more regulation, more taxes on com- panies, and more harassment of firms. That sets off a vicious cycle of policy intervention–
and more corruption. It is up to Zhuk to de- cide what he wants to do: create one soft- ware center in Ukraine and risk damning his business in people’s eyes, or work to increase the legitimacy of Ukrainian business, even if that means pulling out.
A word of caution. Talking about corrup- tion in emerging countries has become too fashionable. It has few direct benefits and many indirect costs. Since the judicial sys- tems in most developing countries are highly politicized, real – as opposed to rhetorical – progress is unlikely. Real change requires judicial reform, which is hard and takes time.
No amount of talking about corruption and bribery is going to change that. This is why I recently proposed the creation of a Harvard- Yale Judicial Observatory. It will consist of a group of law academics and practitioners who can pass judgment on high-profile legal rulings that people suspect are politically mo- tivated. That will change the incentives fac- ing politicized judges and reduce idle corrup- tion talk, and it may even improve the quality of politicians in emerging countries.
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Rafael Di Tellais a professor at Harvard Business School in Boston.
When companies are corrupt, they
lose legitimacy. As a result, people
demand more regulation.
f S i m o n e n ko h a s a s k e d Z h u k for a coarse bribe rather than a facilitation payment, Zhuk’s only ethical recourse is to resist. If he is unable to fight her demands successfully, Zhuk must publicly pull out of his Ukrainian venture. Although he may want to focus on a pragmatic or a legal solution to the problem, doing so would be a moral mis- take. Any concession to Simonenko and those she represents will serve only to sustain cor- ruption in Ukraine – a grave consequence for that country’s people.
Zhuk may be tempted to pay off Simonenko because that may help his Ukrainian em- ployees. The urge to do so may be particu- larly great because of his desire to create op- portunity and bring hope to Ukraine. But the good Zhuk can achieve by maintaining a continued presence in Kiev isn’t a sufficient counterweight to the harm caused by cor- ruption. Paying bribes to stay in business doesn’t achieve the greatest good for the greatest number of people; it contributes to the cycle of corruption and harms many.
Ukraine has failed to live up to its eco- nomic promise for years, and the primary reason is pervasive corruption. In Trans- parency International’s 2004 Corruption Per- ception Index, Ukraine tied for 122nd (first is least corrupt). The cost to Ukrainians is enormous. Corruption often involves human rights violations because bribes are extorted from those who provide essential medical supplies and food for the starving. Ukrainians will be truly free only when they reach a tip- ping point against corruption. That will hap- pen when Ukrainians have the information, power, and will to counter extortionists like Simonenko.
How can Zhuk help create a tipping point against corruption? Simonenko appears to be demanding a coarse bribe, which involves payment of a benefit to a public official to breach a duty pertaining to a significant com- munity interest. It would therefore be a mis-
take for Zhuk to assume that Simonenko and her compatriots care in the slightest about the long-term impact of their actions on ei- ther Ukrainians or on Customer Strategy Solutions. Even if Zhuk makes only a small payment, he gives Simonenko the leverage to exert ever greater pressure on him.
Zhuk must act very quickly to see if he can counter the threat from Simonenko. He could contact other software firms or non- Ukrainian companies doing business in the country to determine if there are strategies they can collectively use to thwart such so- licitations. After all, transnational fast-food companies have been successful in Ukraine.
If that quest doesn’t produce results, Zhuk could contact NGOs like Transparency Inter- national to see if there is another reason- able option. If there isn’t, Zhuk should leave Ukraine. Once he is safely out, he must pub- licly state why it became necessary for him to leave and provide all the information he has gathered on Simonenko and her friends.
This case study demonstrates the pervasive and insidious nature of corruption. It is ex- tremely difficult to uproot. David Hess and I argued in 2000 in the Cornell International Law Journalthat business can be an important part of the solution. We suggested that companies adopt antibribery principles, similar to the Sullivan Principles, when they do business.
The Sullivan Principles were used in the 1970s as a strategy to fight apartheid in South Africa, and firms that adopted them committed themselves to equality in hiring and wages, nonsegregation in the workplace, and the training and promotion of blacks. In the same vein, Hess and I proposed the C2 Principles (see www.c2principles.org) for combating corruption in the hope that they might en- courage firms to resist solicitations for bribes.
Adopting the C2Principles can, together with other pressures, move companies closer to the day when an anticorruption tipping point is reached in every developing country.
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Thomas W. Dunfee(dunfee@
wharton.upenn.edu) is the Kolodny Professor of Social Responsibility and Professor of Legal Studies at the Univer- sity of Pennsylvania’s Whar- ton School in Philadelphia. He is the founding director of the Wharton Ethics Program and author of more than a dozen books, including, with Thomas Donaldson,Ties That Bind:
A Social Contracts Approach to Business Ethics(Harvard Business School Press, 1999).