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CEO dinner “International trends in anti-corruption regulation and its impact on companies in Russia.”

In a speech to leading CEOs, Ambassador Beyrle spoke about the need for the public and private sectors to join forces and combat corruption.

Mark Mendelson, Deputy Chief, US Department of Justice, is in charge of the US Foreign Corrupt Practices Act which is increasingly having a major impact on how multinational companies manage corruption risks all over the world. He spoke about the international trends in anti-corruption regulation and its impact on companies in Russia.

IBLF would like to thank Baker & McKenzie and KPMG for sponsoring the dinner.

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Remarks by Ambassador Beyrle

It is an honor to be invited to speak to this gathering of CEOs of companies that do business in Russia.  Over the course of this conference, you will hear a lot about both U.S. and Russian anti-corruption legislation and how it can affect the ways in which you do business here.  This evening, however, I would like to take a few minutes to talk to you about why progress on reducing corruption in Russia matters to the U.S.  

Private and Public Sector Interests Coincide

In the fight against corruption, the interests of the private and public sectors coincide.  Corruption cripples economies and thereby places strains on a country’s political system.   

Corruption distorts the playing field making it more difficult for private enterprises to compete effectively.  Consequently, markets do not function efficiently and this hurts both consumers and businesses.

Corruption also injects a burdensome level of risk into a business transaction:   It’s not possible to predict with any level of certainty the cost of a deal or to calculate the risk-benefit ratio.  Furthermore, monies that are siphoned off by corrupt officials do not get invested into expanding a business or into gaining a research and development edge.

Similarly, monies that do not go into public coffers inhibit improvements in physical and social infrastructure.  And the costs of paying off customs officials, health and fire inspectors, tax inspectors and so forth are passed on in the form of higher prices to the consumer.  And on it goes, in a vicious circle that reduces the quality of life for everyone.

In the best case scenario, this quality of life reduction can lead to demands for change.  Corruption becomes a subject of legitimate political debate between competing political movements or parties.  A country’s leadership signals its intolerance of corruption by passing and enforcing stronger laws, and the judicial system punishes those who ignore them or break them.   This ideal “virtuous cycle” improves the investment climate by giving potential investors more certainty and more protection of intellectual and physical property and contractual rights.  Businesses become confident that their investments in time and money are protected, and that their ideas, inventions, and physical assets enjoy legal protections that can be upheld and enforced by the government institutions.   

Happily, fighting corruption is an area in which U.S. and Russian companies and multinationals can play a positive role.   When companies refuse to pay bribes, they help create an atmosphere in which it becomes more difficult for bureaucrats to ask for bribes.  When companies proactively educate their employees about appropriate action when a bribe is solicited, those employees are better prepared to fend off the request.

And it’s clear that businesses are taking the responsibility to behave ethically seriously.  Compliance officers are becoming the norm in companies, efforts to create a corporate culture of anti-bribery awareness are more common, and strong corporate governance principles are being more regularly instituted.  

And when businesses come together, such as this gathering under the auspices of IBLF, to discuss in practical terms how to fight corruption, powerful synergies can be created.  So, I applaud the initiative shown by the members of this gathering in signing your Corporate Ethics Agreement.  An anti-corruption pledge such as this illustrates to both government and other private sector actors the importance that business attaches to fighting bribery.

The gains are even greater, of course, when the private and public sectors work together.  Consequently, the U.S. is interested in supporting and encouraging private actors to comply with both the spirit and letter of anti-corruption legislation.  The U.S. also wants to support both President Medvedev and Prime Minister Putin in their efforts to fight corruption in Russia.  Both have clearly recognized and signaled that they would like to make the Russian economy more competitive, and reducing corruption is key to that goal.

And unfortunately, there is a lot of reducing to be done.  I recall reading a seminal work on corruption written in the 1970’s by Konstantin Simis, called “USSR – Secrets of a Corrupt Society”.  It was published, as you might expect, in the West, not in Russia, and I mention it simply to point out that many of the corruption problems that Russia is struggling with today are legacies of that inherently dysfunctional social and economic system.   Today, you can read about the scale of the problem in the Russian press or on the Internet; people complain about it in the blogs.    

And here’s what they complain about.  First, objective international measurements.  Russia’s Transparency International ranking in 2009 was 146 out of 180 – on a par with Ukraine, Zimbabwe, and Sierra Leone.  Worse than Nigeria (130th), Egypt (111th), China (79th), Bulgaria and Greece (71st), and Cuba (61st).  Better than Guinea-Bissau, Kyrgyzstan, and Venezuela (162nd), Haiti (168th), and Afghanistan (179th).  Transparency International gave Russia a 0.1 increase in its corruption score in 2009, which bumped Russia fr om 147th place in 2008 up to 146th.  The score increase was an acknowledgement of Medvedev’s anti-corruption efforts (more about that in a minute) .  By contrast, in 2004 -- six years ago -- Russia was in 90th place.   By 2007, it had quickly sunk to to the 140s.

Then came the economic crisis at the end of 2008 -- which most observers agree made a bad situation worse.  The Interior Ministry recently concluded that, in 2009, the average size of a bribe increased 2 and a half  times --  to about USD 750.  Last fall, InDem, a Moscow-based think tank, estimated that Russians pay about 318 billion $$ in bribes each year – approximately one-third of GDP.  Analysts estimate that businesses need to add up to 40% to production costs to cover bribery, extortion, and economic crime.  In November 2009, PWC’s global economic crime survey ranked Russia number one for economic crime, with an increase of 12% over its 2007 numbers and, at 71%, well above both the BRIC average (34%) and the global average (30%).

Naturally, a problem of this scale is not easily brushed under the rug.   Last summer, IKEA announced that it was suspending further investment into Russia because of pervasive corruption and demands for bribes, and recently fired two of its top executives in Russia over of bribery allegations.

Medvedev

I mentioned that there is now much more open criticism of the corruption problem in Russia in the media and among ordinary Russians on the Internet.   I described that ideal world wh ere this open criticism begins to influence political debate and the actions of political leaders.  Many observers here believe that the weight of corruption and its cost to society may finally have reached a tipping point in Russia.   Certainly the vision of Russia that President Medvedev has described has highlighted the importance he attaches to ridding Russia of corruption, and made the issue a far more salient issue of public and political debate than was the case several years ago.  And we have begun to see some actions to reduce it.

Last month, President Medvedev announced a sweeping reform of Russia’s Ministry of Interior in order to eradicate the “evil” of corruption.  He regularly cites economic backwardness and corruption as the key factors that underlie many of Russia’s problems.  In his now famous Internet manifesto “Forward Russia” from September of last year, he wrote: “Influential groups of corrupt officials and do-nothing ‘entrepreneurs’ are well ensconced [in Russia]. They have everything and are satisfied. They're going to squeeze the profits from the remnants of Soviet industry and squander the natural resources that belong to all of us until the end. They are not creating anything new, do not want development, and fear it. But the future does not belong to them – it belongs to us. And we are an absolute majority.”

Like the millions of ordinary Russians to whom he addressed these words, the U.S. wants to see President Medvedev succeed in his efforts.  Last year, President Medvedev began his campaign against corruption by promulgating a package of legislative reforms.  This “Anti-Corruption” package defines corruption for the first time; introduces criminal penalties for officials who engage in corruption; and institutes asset and income reporting requirements for officials.

While there is still a good deal of work the Russian government must undertake to implement fully this legislation, President Medvedev has taken excellent first steps.   We believe that Prime Minister Putin also recognizes that fighting corruption is critical to Russia’s future.  In the wake of the nightclub fire that killed at least 135 people in Perm last December, Putin said, "All the vices of our bureaucracy were exposed by this tragedy.  Its incompetence, corruption, and links to businesses."    

In terms of modernizing Russia’s economy, the Prime Minister has stated, “infrastructure monopolies and large companies with a state interest should adopt internal programs aimed at achieving global standards of efficiency and transparency, and eliminating corruption risks.”

FCPA, UNCAC, and OECD

We support President Medvedev and Prime Minister Putin in a number of ways.  One is through our continued enforcement of the Foreign Corrupt Practices Act, which basically makes it illegal to bribe foreign government officials in order to obtain or retain business.  I defer to the experts on the nuances, but this law is intended to have a wide reach and discourage firms from acting in ways that are detrimental to the global economy as a whole.   

In addition, the U.S. is also encouraging Russia to support the proposed review mechanism for the UN Convention Against Corruption, to which it is a signatory, which would make the treaty into a more robust tool in fighting transnational corruption.  Some have said that the UN Convention Against Corruption operates as an insurance policy for business.  And this seems right.  When countries robustly enforce the commitments that they undertake by becoming a party to the Convention, they signal to the global corporate community that their investments are protected.

Similarly, the U.S would very much like to see Russia become a signatory to the OECD Anti-Bribery Convention, and we remain ready to assist in any way we can.   In that vein, we translated the FCPA Layperson’s Guide into Russian and distributed it to government officials to assist them in their efforts to bring the Russian Government into compliance with the OECD Anti-Bribery Convention.

Bilateral Relationship

The commitment of the US and Russian governments to fighting corruption extends to our bilateral relationship.  The US Embassy –- supported by US taxpayer funded programs -- has long conducted anti-corruption projects throughout Russia.  Over the last several years, we have conducted training programs for Russian prosecutors on how to prosecute corruption cases in court.  Just recently we supported the visit of delegation from the Interior Ministry to the U.S. that focused on best practices in fighting corruption.    

We have also have conducted programs to improve the capacity of regional business associations to advocate for improvements in policies that affect small and medium business enterprises; programs to minimize the level of corruption faced by citizens and business in Russia by promoting the concept of rule of law among citizens and authorities; and programs to support the development of anti-money laundering policies and procedures in Russia.

And now we have a new institution to enhance our countries’ bilateral cooperation in the business and economic spheres: the Bilateral Presidential Commission, launched by Presidents Obama and Medvedev in July.   It has 16 working groups developing more effective exchange, training and partnership programs in a range of areas from space to the environment.   Two WGs are directly relevant to our efforts to curb corruption.  First is the WG on Business Development and Economic Relations, which is chaired by Secretary of Commerce Gary Locke and his Russian counterpart Elvira Nabiullina.   There is broad inter-ministerial representation in the WG, including the Departments of Energy, Agriculture, State and Treasury and USTR.   

The working group welcomes input from both the U.S. and Russian business communities, whether through individual companies or business associations, as we see this as crucial to the success of the working group.

In this respect, I encourage each and every one of you to contribute your thoughts and ideas so that we can use them as the basis for productive discussions.

The second body in which the issue of corruption is being tackled is in the Civil Society Working Group, which is chaired by Special Assistant to the President for Russia Michael McFaul and First Deputy Chairman of the Russian Presidential Administration Vladislav Surkov.  Anti-corruption was included as a topic in its first full session and the working group will create a subgroup on the topic that will develop and implement concrete, joint projects.  In support of this, in two weeks time our USAID Mission will launch an assessment of how it can best support efforts to combat corruption.  Most important, the Civil Society working group’s agenda acknowledges the importance that both countries place on corruption becoming a part of the political debate within Russia.  That debate is ongoing in both countries, but we have to be honest and admit that we are at different stages of the fight against corruption.  Here in Russian, we this discussion must continue until Russians themselves devise solutions for fighting the corruption they confront and often must engage in to get by –- whether in opening a new business, getting admitted to a university or a hospital, or just being able to drive home unmolested  -- in order for real and lasting progress to be made.

Conclusion

To conclude, we support Russia and Russians in their efforts to combat corruption and to create a competitive, innovative economy through the Bilateral Presidential Commission and through our day-to-day working relationships, because the fundamental interests of the U.S. in Russia continue:  We want to work with the Russian leadership to achieve a stable, prosperous world order promoting the benefits of democracy, free trade, and constructive relationships among nations.   

I believe that the work you are doing as CEOs of companies that operate in Russia can have a great impact on Russia’s efforts to reduce the level of corruption and raise the level of investment both domestically and from abroad.
 
The results will be a higher standard of living for all Russians and a competitive economy integrated into the world trading system.

Reducing Risk of Corruption in Russia Initiative (RRCR)