Public and private sector graft go hand in hand

2021-12-09

Public sector graft is a daily news headline in Africa. It cripples economies and impoverishes ordinary citizens while crooked government officials get richer. Much-needed funds for socio-economic services to citizens such as housing, healthcare and education are squandered for private gain. While the media focus is predominantly on public sector corruption, and rightly so, it is not the exclusive domain of corrupt public officials. Focusing on corruption in government often obscures the private sector corruption and the role it plays in enabling public sector corruption. Every transaction that results in corruption requires both a willing seller and a willing buyer. Whether in the public or private sector, every gain obtained by corrupt means requires a seller.

Our daily news feeds demonstrate the problem of private sector corruption and the instrumental role it plays in enabling public sector corruption. Public sector corruption refers to the abuse of public office for personal gain. Corrupt activities fall on a wide spectrum of acts including bribery, patronage, nepotism and favouritism and procurement fraud. Private sector corruption, meanwhile, refers to the abuse of power in the private sector and may include activities such as commercial bribery, kickbacks, corporate fraud, embezzlement, collusion and insider trading, among others. These may or may not extend into the public sector. Where the corrupt acts are between private sector and state officials, the public are the victims.

The transactions, the sums involved, the beneficiaries, and the losers have played out at the Commission of Inquiry into Allegations of State Capture (Zondo Commission) hearings in South Africa. Here many cases highlighted the pivotal role the private sector plays in enabling systemic corruption and state capture. The Commission pointed out that auditing firm KPMG played a key role in several state capture ‘projects’. KPMG completed the South African Revenue Service (SARS) ‘rogue unit’ report and allegedly provided tax and auditing services to one of the Gupta companies that laundered funds stolen from the Vrede Dairy Project. Software giant SAP was also named.

In 2020, South Africa’s Special Investigating Unit (SIU) launched proceedings to recover funds from SAP based on two contracts that SAP allegedly unlawfully entered into with the South African government, namely, the Department of Water and Sanitation(DWS) and Transnet. In the DWS deal, the public protector found that '

the department irregularly procured the SAP license' and breached several financial regulations as set by the PFMA and National Treasury regulations. There were also allegations that the software company paid commissions to business development partners to secure the deals at DWS and Transnet.

Public sector graft cripples economies and impoverishes ordinary citizens while crooked government officials get richer

The recent spate of ‘Papers’ - Panama, Paradise, and now Pandora - show that the private sector’s entrenched role in corruption is not a uniquely South African issue, but rather is a global phenomenon. These leaks and Papers have highlighted the role of corporates such as banks, auditing firms and consulting companies in enabling public sector corruption, as well as aiding public officials to evade taxes and launder illicitly obtained gains.

While personal gain is the key driver in public sector corruption, the motivation in private sector corruption is quite different. It’s about obtaining and maintaining the competitive edge, grabbing as much of the market by any means, leading to ever-greater profits for the corporate. The harms caused by both are damaging. This is particularly devastating when private sector companies facilitate or become key role players in public sector corruption, and where, at a grand scale this becomes the capture of the state.

The harm from public sector corruption is decreasing public trust in state institutions, undermining the rule of law and democratic principles (and practice), and compromising the socio-economic well-being of citizens. The consequences of private sector corruption include unfair competition, inflating the cost of goods and services, and eroding intended social development. The profit motive and benefits of corruption for corporates often outweigh the harms caused by such practices to clients and citizens.

Several international and domestic legal instruments are intended to address private sector engagement in or facilitation of corruption. Article 12 of the United Nations Convention against Corruption and the African Union Convention on Prevention and Combating Corruption seek to address both the issue of private sector graft and the link between public and private sector corruption.

The ability of the private sector to enable corruption if left unchecked shouldn’t be overlooked

In South Africa, legislation such as the Prevention and Combating of Corrupt Activities Act 12 of 2004 and the Companies Act (2008), as well as regulations and guidelines such as King Code on Corporate Governance, are designed to prevent and limit corruption in the private sector. However, the evidence from the Zondo Commission, among others, shows that these efforts are yielding limited results.

And often the penalties or consequences to companies are an insufficient deterrent. The fines are no more than an irritant on a spreadsheet, and are usually be recouped in revenue in a few months. For instance, in 2019 KPMG was fined US$50 million by the US Security and Exchange Commission for 'altering past audit work after receiving stolen information about inspections of the firm' and in 2021, the firm was fined around US$17 million by the UK’s Financial Reporting Council for 'breaches of the fundamental principles of objectivity and integrity'. Meanwhile, its global revenue for 2020 alone was US$29.22 billion. This amount is equivalent to the combined GDPs of Mozambique and Madagascar in 2019.

The inadequacy of penalties imposed on corporates links to another factor that contributes to private sector corruption – the monopoly certain corporates have developed in the markets they work in. In creating a monopoly, an organisation, or small network of corporates completely dominates the market, and is able to, amongst other things, set pricing regimes, determine competition 'rules' and so make it extremely difficult for other  smaller companies to compete.

A prime example relates to the construction of stadiums for the 2010 World Cup in South Africa. In 2013, the Competition Commission of South Africa found that fifteen construction firms were involved in collusive tendering for the building of soccer stadiums. These included Aveng, Basil Read, Esorfranki, GLiviero, Giuricich, Haw & Inglis, Hochtief, Murray & Roberts, Norvo, Raubex, Rumdel, Stefanutti, Tubular, Vlaming, and WBHO. It is estimated that municipalities had to cover approximately R14 billion in added construction costs due to the collusion. Yet, the firms would later reach a settlement agreement with the Commission totalling around R1.46 billion – a mere fraction of the cost of the collusion.

Instead of corporate liability, punishment could be focused more on personal liability for executives

Without consistent application of meaningful sanctions,  the ‘slap on the wrist’ sanctions do little to deter corporates in engaging in corrupt practices. To stem the outflows of funds intended to benefit communities means that it is imperative to raise awareness on the systemic harms of corruption and implement the instruments geared towards good corporate governance and accountability.

In addition to closing loopholes, there’s then a need to review and strengthen legislation. Michael Marchant, Head of Onvestigations at Open Secrets, told ENACT, ‘There should be legislative changes in that greater responsibilities be placed on corporates’. Rather than hollow checkbox compliance – such as, for instance, the number of suspicious activity reports being submitted by banks, more thorough diligence that result in sanctions are a necessary step to counter the corruption-as-normal trend. A move from corporate liability to personal liability for executives involved in or who have authorised corrupt activities may hit home more potently and serve to deter private sector corruption.

An example of this is the arrest by United States authorities of Meinl Bank’s former CEO Peter Weinzierl and officer Alexander Waldstein on charges related to bribery of public officials and money laundering. It’s alleged that the two 'helped launder hundreds of millions of dollars through the U.S. financial system on behalf of Odebrecht in order to pay bribes to public officials worldwide and defraud Brazilian tax authorities'.

Tracking and investigating the trail of corrupt activities is difficult and complex. Offshore secrecy and opaque financial systems means that law enforcement needs specialised skills and resources to detect criminal activity and gather the evidence needed to result in arrests. To address the challenge of private sector corruption and its links with public sector graft, it’s critical not only for law enforcement, but also the prosecutions and judiciary to understand the nature of these toxic co-dependent relationships and apply legislation that shows no tolerance for deviation from good governance – public or private.

Richard Chelin, Senior Researcher, ENACT Project, ISS Pretoria

EU Flag
ENACT is funded by the European Union
ENACT is implemented by the Institute for Security Studies in partnership with
INTERPOL and the Global Initiative against Transnational Organized Crime.
ISS Donors
Interpol
Global
feature-5Page 1