RISK WATCH COMMENT: Corruption of the spirit

By Dr Alan Waring

 

Hardly a day goes by without another corruption scandal being reported somewhere. With such frequent media coverage, it is easy for the public to suffer from ‘attention fatigue’ and relegate the latest corruption exposé to the ‘just another bit of bad behaviour’ category. After all, the perpetrators are often remote from the everyday experience of the public. Corruption thus often appears to be a ‘victimless’ crime. Nothing could be further from the truth.

 

— What is Corruption?

 

The UN Manual on Anti-Corruption Policy has become the base reference for how countries should view the problem of corruption and its eradication. The working definition adopted by the UN is ‘an abuse of (public) power for private gain that hampers the public interest’. This gain may be direct or indirect. In essence, corrupt practices involve public officials acting in the best interest of private concerns (their own or those of others) regardless of, or against, the public interest. However, in some countries the scope is extended to include any abuse of relationships in the private sector that threatens the public interest. For example, in Hong Kong the Independent Commission Against Corruption (ICAC) will also investigate corrupt practices between private companies and/or private individuals.

Two main categories of corruption are recognized. Petty corruption involves individuals or small groups acting on their own initiative. Grand corruption, however, exists when public policy making, its design and implementation are compromised by corrupt practices. At a strategic level, if a policy decision on which option to choose for a particular programme appears to ignore independent objective expert advice and appears to favour particular parties, then unsurprisingly questions of corruption may arise. For example, the recent hoo-hah about Cyprus’s LNG strategy and the decision taken has seen various allegations made in the media. The Auditor General’s report certainly seems to suggest some odd goings-on, but were flakey behaviour and incompetence involved rather than actual corruption? As a senior ICAC official said recently, one can observe obvious conflicts of interest in many relationships and often monumental incompetence but that does not necessarily entail, much less prove, corruption.

 

— Who are the Victims?

 

Ultimately, each citizen suffers from corruption. This may be indirectly because favours bestowed corruptly on a small number of people result in magnified outcomes that damage the public good. For example, if a major government contract is awarded corruptly to a mediocre or the worst bidder, the works may be finished late, probably with a budget over-run, and the ‘product’ may be shoddy or even permanently blighted. The cost over-runs and the remedies get loaded onto the taxpayer. Even projects run by the best companies can get into difficulty. However, a corruptly awarded contract is much more likely to run aground because corruption and incompetence usually go hand-in-hand. After all, competent companies do not need to win their work through corruption.

Fraud and corruption also often go hand-in-hand. Here again, the costs of  fraud may get loaded onto taxpayers as a whole.

Citizens may also suffer more directly as individuals. For example, if a property developer corruptly influences local planning authorities into letting him build an apartment block having more floors than the statutory limit, the amenity of neighbours may be blighted.

If the best candidate for a particular job or promotion is passed over because it has been awarded instead to a less qualified candidate who is a friend of the boss, not only does the individual suffer but also the company. The company will be left with the lesser candidate and all the consequences of that. The best talent always flows to high reputation companies. A poor reputation company is a victim of its own mediocrity and incompetence, which may well involve petty corruption such as nepotism.

Fraud and corruption within a company may damage the company’s financial stability and share values, thereby adversely affecting not only employees and shareholders but also damaging the reputation of the industry sector and the country. As noted in a recent Financial Mirror article from CPAG (www.cyprus-property-action-group.net), inward foreign investment relies on having a reputation overseas for being a safe and secure place for investment and that includes foreign investors not seeing TV documentaries and a litany of newspaper reports on fraud and corruption in your country. The recent Channel 4 programme and press articles in the UK focusing on fraud and the title deeds scandal in the Cyprus property market is a notable example of the reputation risk attached to fraud and corruption. The TV programme was seen by millions, many of whom were potential buyers or investors.

 

— The GRECO Reports

 

The Council of Europe’s GRECO (Groupe d’Etats Contre la Corruption) carries out high level evaluations of the anti-corruption policies and programmes of most countries in Europe. The majority have already been subject to two such evaluations and are undergoing a third. These include ‘new entrant’ EU members such as Malta, Cyprus, Romania and Bulgaria.

Bulgaria, for example, is already establishing a permanent Anti-Corruption Commission which appears to meet the UN/GRECO criteria i.e. is active rather than window dressing. Cyprus seems to be some way behind with an Anti-Corruption Advisory ‘Talk Shop’ and a general denial by the government in its evidence to GRECO that corruption exists in Cyprus, especially as the population is relatively small! Perhaps they’re right but clearly GRECO has not swallowed it as regards corruption! The Second Evaluation Report is positive overall about Cyprus’s potential and capacity to combat corruption but is critical of some aspects, particularly attitude and motivation.

The GRECO team ‘was not convinced that a small population in itself is a deterrent to corruption. One can argue that in a small country in which people to a large extent know each other, the willingness to report activities such as corruption may be less than in a larger and more anonymous society’. The Cyprus government’s  Co-ordinating Body Against Corruption which ‘appeared to be an advisory body without any targeted mandate and clear mission, could provide a good platform for development of a consolidated anti-corruption strategy’. Perhaps GRECO had in mind something along the lines of Hong Kong’s ICAC, which has become a model for many countries. The team was ‘surprised to hear’ that the Ombudsman had never received any complaints concerning corruption and recommended that the Ombudsman’s mandate should be clarified ‘to the effect that he/she has the ability to investigate corruption in public administration and to raise the public’s awareness’ of this.

 

— A Corrupted Spirit

 

While ‘the gumbare in the kafeneion’ will tell you that corruption in the conventional sense is rife in Cyprus, I have no objective evidence that it is. The annual Corruption Perceptions Index published by Transparency International ranks 180 countries according to the degree of corruption perceived to exist among public officials and politicians. Scores range from 10.0 (highly clean) to 0 (highly corrupt). In 2003, Cyprus ranked 27^th with 6.1. In 2007, it ranked 39^th with 5.3, just below Botswana. This implies that generally in the world Cyprus is perceived as becoming more corrupt, whether or not it actually is. In the investment world, perceptions mostly over-ride facts in decision-making. So, at the very least, Cyprus’s image needs cleaning up.

However, whatever the scale of conventional corruption, I do believe that ‘corruption of the spirit’ in Cyprus is overwhelming. This kind of corruption does not feature as such in the UN Manual or the GRECO reports yet I believe it to be the most pernicious, corrosive and debilitating of all. Corruption of the spirit refers to a culture in which officials lack the will or the encouragement to act professionally, ethically and efficiently. No one individual causes this state of affairs but ‘the system’ and operating environment in which they function are often so suffocating, pedestrian and timeless that collectively officials have little choice but to keep plodding on.

The UN Manual identifies 13 key factors that encourage corruption. Four are also particularly relevant to corruption of the spirit in Cyprus:

• Excessive red tape and procedural complexities at all levels of government.
• The abuse of discretion and uncertainty in the application and interpretation of regulations and laws within the administrative public sector domain.
• Poor motivation in public sector personnel due to the lack of a merit-based system used to hire, promote and remove employees at the local and central levels of government.
• The absence of results-based management in public service delivery.

For example, the Land Registry title deeds problem is probably just the outcome of years of mismanagement and inefficiency (i.e. corruption of the spirit). I have no real knowledge of actual corruption. However, the long-term failure to hand over deeds in less than 5 years or more and the government’s failure to radically correct the system appear to have become an accepted and institutionalized fact i.e. an instrument of state policy. The policy enables and encourages one group (developers) to gain financial advantage over another group (property buyers) against the public interest. This willful inefficiency opens the government up to accusations of grand corruption, as defined by the UN.  Of course, all this would disappear if only the government would galvanize itself and solve the Land Registry mess.

Corruption is bad for everyone. Let’s all hope for and work towards a less corrupt world.

 

Dr Alan Waring is an internationally recognized risk management consultant and is Adjunct Professor at the HKBU Centre for Corporate Governance & Financial Policy, Hong Kong. Contact [email protected].

 

©2007 Dr A E Waring