Understanding Corruption

Francis X. Donnelly
Sarah Kellogg
Published: Fall 2011

Corruption is a scourge that stretches from multinational firms in the United States, to manufacturers in China, to farmers in Latin America. It has led to water scarcity in Spain, child labor in China, illegal logging in Indonesia, unsafe medicine in Nigeria and poorly constructed buildings in Turkey, where collapses have killed people. Corruption affects every industry in every nation, according to Transparency International, a Berlin-based group that monitors corruption around the world. GWSB professors are actively involved in studying the nature, scope and effects of corruption-as well as ways it can be curtailed. Among other things, they find that poor and isolated countries, as well as those with weak democracies, large bureaucracies and state-controlled economies, are especially susceptible. "Corruption has a devastating effect on people, especially the poor," said Huguette Labelle, chairwoman of Transparency International. In developing countries and emerging markets, bribes to politicians and government officials total as much $40 billion a year, according to the organization. In times and places in flux, such as war zones, corruption is rampant and harder to control. If anyone is willing to pay bribes, it makes it all the more difficult for companies, contractors or governments that have no-bribery policies.

The problem of corruption is massive, global and, at the most fundamental level, difficult to even define. According to Stuart Umpleby, a professor of management, any discussion of corruption must begin with a conversation about cultural conventions. That's because what constitutes corruption in Western nations may not be considered corruption in emerging ones.

For developing countries, which lack a strong sense of national identity, family or tribal alliances may trump national loyalty and might even lead to practices that flout the rule of law. However, as Meghana Ayyagari, associate professor of international business, explained, "Most commonly it's defined as a bureaucrat or elected official breaking the rules for private gain."

Even when there are laws, it's not always clear what is covered. The U.S. Foreign Corrupt Practices Act, signed into law in 1977, makes it a crime to bribe officials of foreign governments, but the U.S. Chamber of Commerce said the government's interpretation goes far beyond government officials to include employees of state-owned companies. There is also a problem of liability when a U.S. company acquires an overseas company with a history of bribe paying. The chamber is lobbying for changes that would clarify the scope of the law.

U.S. Rep. F. James Sensenbrenner Jr. (R-Wis.), has indicated that he will introduce a bill to amend the Foreign Corrupt Practices Act.

Regardless of how it is defined, corruption still plagues the planet. Trace International, an Annapolis, Md., nonprofit business association, trains companies in anti-bribery compliance. In 2006, it set up a network that allowed businesses to report bribe solicitations. In the network's first five months, companies reported 1,500 solicitations in 136 countries. Two years later, Trace surveyed 2,700 business executives in 26 countries. Nearly 40 percent of respondents claimed they had been asked to pay bribes in the past year.

While all industries were affected, the hardest hit were construction, oil and gas, and mining, where more than half of the respondents said their competitors resorted to bribery in the past five years. Trace noted that the problem was even more common in Egypt, India, Indonesia, Morocco, Nigeria and Pakistan, where 60 percent of the executives were pressured to make illegal payments.

In the United States, the growth of corruption can be seen in the burgeoning caseload of the Securities and Exchange Commission and the Department of Justice, said Mark Klock, professor of finance. Wrongdoing includes insider trading, bogus analyst recommendations, sham financial transactions, the subprime mortgage crisis and the collapse of the credit derivatives markets.

Corruption is a serious barrier to global economic growth. GWSB experts have found that it discourages foreign investment, weakens institutions, erodes trust in government, dilutes effectiveness of corporate governance and imposes additional costs on businesses. In countries where corruption is widespread, it can even lower stock market valuation, said Jennifer Spencer, associate professor of international business.

Corruption also inflates the costs of public contracts, leads to biased judicial rulings and nurtures a dishonest political class that plunders public funds, according to Transparency International. Even small bribes are harmful because they're funneled through the political system and help sustain the corrupt ruling party, the organization said.

The cost is real. A Transparency International survey shows that half of the business executives polled estimated that corruption increases the cost of projects by at least 10 percent. Besides direct costs and lost business opportunities, the executives lose money through damage to their brand, staff morale and relations with other businesses and governments.

And the price can go beyond a company's bottom line to affect the country as a whole, added Renato Barbosa Medeiros, a graduate of the Minerva Program at GWSB's Institute of Brazilian Issues and a Brazilian government official who has looked at corruption in both North and South America.

"The costs of corruption are well-known: economic growth slowdown, impediments to development, compromised political legitimacy and weakening of democratic institutions," he said.

Multinationals

Corruption Spawns Violence

Timothy L. Fort

When it comes to war, multinational corporations have been blamed for everything from causing the conflicts to profiteering from them. But the director of GWSB's Institute for Corporate Responsibility argues that business can be a force for peace.

Timothy L. Fort, who also is a professor of business ethics at GWSB, has written three books that show how companies, run honestly, can promote peace in society. "Ethical business behavior has an unexpected payoff," he said. "It contributes to more peaceful relations among people."

The premise for Fort's fresh take was a study he worked on with Cindy Schipani, professor of business administration at the University of Michigan's Ross School of Business. That research showed how corruption fuels violence. By comparing two indices, one measuring corruption and the other political conflicts, they discovered a nearly perfect correlation between corruption and violence in countries around the world.

The more corrupt a regime, the more likely it was to resolve disputes through violence.

The violence doesn't just flow from rulers, said Fort. Sometimes the populace is so frustrated by corrupt leaders that their resentment finally explodes in a physical act. The uprising that has spread across Arab countries began earlier this year with resistance against the corrupt leadership of Tunisia.

"Those protests were largely peaceful," Fort said, "but the point is the level of frustration that can build in a corrupt system."

Ethical companies build trust in three ways, he said. Hard trust comes from following the law. Real trust comes from running a company that is fair and honest to workers and customers. Good trust comes from moral excellence in everything you do.

Ethical companies can promote peace in countries by respecting their laws, contributing to economic development and engaging in community building. "To the extent that a company can have a strong anti-bribery policy, it does something to move the needle away from violence," he said.

In his book Business, Integrity and Peace, Fort shows it wouldn't be much of a stretch for businesses to behave ethically. He said the basic components are already in place. That is, peace and ethics are deeply rooted in human, even primate, nature. People and companies just need to draw upon those instincts in contemporary times.

Asked whether any companies are known for acting ethically in foreign countries, he said it's difficult to say because corruption is hidden far from public view. But, given that caveat, he said, Motorola, Caterpillar and Deere & Company all seem to run ethical shops.

Local Government

Morally Ambiguous Actions Can Corrupt

Angela Gore

If you think people are outraged by stories of corruption in big corporations and among top CEOs, you should see how they react to malfeasance -or even the hint of it- at the local-government level.

For Angela Gore, associate professor of accountancy, the intersection of politics and accountability in municipal government has been an absorbing research subject. One of the most volatile areas is compensation packages, a practice that is often legal yet politically risky.

"When people look at corporate CEOs and their compensation practices, they aren't as upset as when they hear about these exorbitant compensation packages for public officials," she said.

Excessive compensation packages may not be illegal, but they do not reflect honorably on the stewardship of public funds, said Gore, whose research with co-authors Ying Li and Susan Kulp investigated city manager salaries and severance packages. "Is this technically corrupt? No. Does it raise your eyebrows? Yes," said Gore.

The case of Bell, Calif., demonstrates where excessive compensation can shift from unethical to illegal. Eight officials allegedly bilked taxpayers out of $5.5 million through excessive salaries and perks. The indicted city officials had salaries between $100,000 and $400,000, violating a state law that imposed limits on public salaries but which was sidestepped when the city council changed the city's charter. "Citizens were outraged," said Gore, noting that the case, which came into the spotlight in 2010, is still unresolved.

In the world of municipal ethics, there are few guides for how city officials should or should not act when crafting compensation packages or golden parachutes for exiting executives. It's a political judgment call based on what the public will bear.

Along with outright corruption, Gore said hefty benefits packages for city managers draw voters' ire. Still, there may be a case for paying generous salaries. "City managers can be fired on a whim or when the political balance of power changes," said Gore. "It does make sense that they're paid for political risk."

But voters don't favor cutting checks for city managers fired for malfeasance or moral turpitude. Currently, 8 percent of city managers can keep their severance when booted out, according to Gore.

Another questionable practice facing municipalities is pension spiking. Not illegal, it has nevertheless grabbed the attention of cost-conscious city leaders. Spiking occurs when workers cash out years' worth of sick pay before they retire. By cashing out, they boost the final paychecks that are used to calculate their pensions.

Gore's solution for reducing dubious municipal spending? Transparency. By shining a light on compensation, either by publishing budget information or instituting rigorous financial audits, corruption can be reduced.

"Fraud auditing would go a long way toward improving money management," Gore said, "but nothing makes up for vigilant citizens who hold their elected officials accountable."

International Law

International Law Can Deter Corruption

Robert J. Weiner

Anti-corruption laws and international conventions are more than legal window dressing. They can serve as deterrents to bribe paying by businesses.

"For countries that have criminalized foreign bribery on their own or by adopting the international convention, regardless of enforcement activities, their firms were less likely to pay bribes," said Robert J. Weiner, professor of international business, public policy and public administration, and international affairs."For countries that have criminalized foreign bribery on their own or by adopting the international convention, regardless of enforcement activities, their firms were less likely to pay bribes," said Robert J. Weiner, professor of international business, public policy and public administration, and international affairs.

In the report "Who Bribes? Evidence from the United Nations' Oil-for-Food Program," co-authors Weiner and Yujin Jeong, GWSB, PhD, '10, detailed their study findings that home-country implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions decreased the likelihood of companies engaging in bribery abroad.

The convention, adopted by 38 countries, establishes legally binding standards to criminalize bribery of foreign public officials in conjunction with international business deals.

Weiner's study looked at data from a forensic investigation completed after the fall of the Iraqi regime under Saddam Hussein. The investigation unearthed details of widespread bribery. "This was truly grand rather than petty corruption," noted Weiner. "The illicit funds changing hands amounted to well over a billion dollars."

However, the research also concluded that corporate managers from the United States and other signatory countries to the OECD convention were less likely to pay kickbacks.

Weiner and Jeong's research, which is slated to appear in Strategic Management Journal, offers a rare examination of the supply side of corruption in a global setting. Most corruption research has focused on bribe-takers rather than bribe-payers.

By studying who pays bribes, Weiner hopes to illuminate the decision-making process inside companies. "People have to imagine they're in the shoes of the manager," said Weiner. "In the past, we haven't been able to inform the thinking of MBA students because we haven't looked at bribery from a manager's perspective."

Weiner also found that private companies were more likely to pay bribes than public corporations. "I thought the type of firm wouldn't make any difference, but it did," Weiner said. "Companies listed on stock exchanges tend to get a lot more scrutiny. Privately held companies don't have to provide the same breadth of information and face the same scrutiny and are more likely to pay bribes."

Weiner said quality research on corruption is difficult because it requires data about activities that happen in the shadows.

"People are much more aware of corruption today than in the past," said Weiner. "How much of that translates into clean and ethical behavior is very hard to know."

Entrepreneurs

Corruption Dampens Innovation

Meghana Ayyagari

Developing countries need entrepreneurs to spur economic growth. But corruption in those nations tends to hurt the innovative companies more than other firms, according to Meghana Ayyagari, associate professor of international business.

That's because the bribes that entrepreneurs pay government officials hamper economic progress in the countries, she said. It makes the cost of startup ventures prohibitive by diverting money that could be reinvested in the firms.

"Innovation and entrepreneurship are considered the engines of economic growth and development," she said.

Last year, Ayyagari helped write a working paper (unpublished) that studied corruption and tax evasion at 25,000 companies in 57 countries. The co-authors were Vojislav Maksimovic, professor of finance at the University of Maryland School of Business, and Asli Demirguc-Kunt, chief economist of the financial and private sector network at the World Bank.

Their study found that entrepreneurs paid a larger percentage of their revenue in bribes than established firms. Entrepreneurs were more susceptible to corruption because they needed permits, licenses and other government services more than other firms. And the more time an entrepreneur spent with government officials, the higher the bribes they paid.

Despite paying the bribes, the innovative companies received government services that were no better than the service received by established firms.

"Corruption acts as a tax on innovating firms," said Ayyagari.

The study also looked at tax evasion among the 25,000 companies, many of which were small and medium-sized firms in developing countries. It found that companies financed by mainstream banks were less likely to evade taxes than firms that were informally financed from sources such as family, friends or non-bank institutions that lend money.

The reason banks curbed such cheating is that their financing involves more scrutiny and monitoring, said Ayyagari. "If a firm is going to evade taxes, it will have to maintain a separate set of books," she explained.

The study suggests the need to reform the financial sector in developing countries. With banks acting as curbs against tax evasion, a strong banking sector could boost economic growth, according to the study.

The report also found:

  • Smaller and younger companies paid a larger percentage of their sales as bribe payments than other firms.
  • Companies owned by individuals or families paid higher bribes than companies owned by a bank, the state, another corporation, an investment fund or employees of the firm.
  • Companies in the construction industry paid higher bribes than firms in the manufacturing industry.

Finance

More SEC Oversight Isn't the Answer

Mark Klock

If Americans are hoping that the solution to a turbulent decade of financial chicanery is improved or increased oversight by the Securities and Exchange Commission, their hopes are ill founded.

Just look how badly the SEC bungled its investigations of Bernie Madoff and his massive Ponzi scheme, said Professor of Finance Mark Klock.

If the United States is serious about stopping crooks in high finance, it needs to allow victims to sue not only the thieves, but any individuals or companies that aided or abetted the scheme, he said.

"The integrity of our entire market is at risk," said Klock. "Capital is being drained and the economy is floundering."

In an article in the Fall 2010 edition of the Arizona State Law Journal, Klock also argued that law schools should teach more about financial markets to prepare lawyers to deal with financial wrongdoing and other issues. He wrote that the SEC lacks the competence to prevent future financial calamities. In fact, he described the agency as a bunch of Barney Fifes, referring to the bumbling deputy sheriff from "The Andy Griffith Show." He described how the agency investigated Madoff several times beginning in 1992 with none of the probes resulting in action against him.

Madoff's investments were especially suspicious in that they yielded big returns with little risk and high liquidity, said Klock. But the SEC continued to find nothing, even as news publications such as Barron's in 2001 raised questions about how Madoff obtained consistent returns that didn't seem tied to the stock market or anything else.

"Anyone who has taken a course in finance understands that the first and most basic principle of financial markets is that average returns can only be increased by taking on risk," said Klock.

The SEC's failure to find any wrongdoing helped assure people that it was safe to invest with Madoff, said Klock. In fact, Madoff lured investors by trumpeting that fact.

The answer isn't creating more regulations or giving the SEC more resources, said Klock. The agency still lacks the expertise to do adequate audits. Instead, the United States needs to bring back the right to file federal lawsuits against people who assist securities fraud, said Klock. The Supreme Court surprised legal observers by ending the practice in 1994.

Changing the law back would give accomplices to financial wrongdoing a motive to behave properly because they would have to pay victims back when wrongdoing is discovered, Klock explained.

Now, fraudsters know they have a small probability of being subjected to enforcement actions, he said.

"They can hide in the vast market and take their chances," Klock said. "The gamble seems like a pretty good one."

Reputation

Reputation Protects Corporations

Jennifer Spencer

When operating in highly corrupt countries, a good reputation is a corporation's best shield, according to Jennifer Spencer, the director of GWSB's Center for International Business Education and Research (GW-CIBER).

International companies may be pushed to offer bribes in highly corrupt countries, but the degree of pressure they face often depends on the company's reputation, said Spencer, an associate professor of international business. A firm with a tough, anti-corruption track record is better able to resist pressure to pay bribes.

"Even in highly corrupt environments, government officials face risks when they try to extort money from firms, and they may apply less pressure on firms or managers they think are unlikely to pay the bribes," Spencer said. "If a company builds a reputation for zero-tolerance of employees engaging in corruption, it may be able to insulate its managers from intense pressure from local officials."

That's not saying that high-corruption environments aren't challenging, even for the most law-abiding corporations.

"Corruption has a negative impact on most firms operating in a country for several reasons," said Spencer. "In terms of a direct effect, requests for bribe payments by government officials tend to both raise firms' operating costs and increase the uncertainty they need to deal with.

"But the broader economic effect is probably more detrimental for business. In a country with pervasive corruption, it becomes impossible to trust the economic institutions and that can have a broad impact economy-wide."

For example, in highly corrupt environments, banks and other investors cannot rely on accuracy of companies' audited financial statements, Spencer said. As a result, they have no way of knowing which companies are good credit risks or superior investment opportunities, she added.

Corruption in public infrastructure projects also can damage the economy, Spencer said.

"In a context where contractors can use corrupt means to avoid building roads or other construction projects to the required specifications, the result tends to be a crumbling infrastructure," she said. "And that affects the ability of firms throughout the economy to transport people, materials and final goods throughout the country and the world."

Surprisingly, Spencer's research showed that acquiring a local representative may do more harm than good.

"It seems that the more a foreign firm tries to localize its strategy in a highly corrupt environment—by taking on a local business partner—the more pressure it may face to engage in corruption," Spencer said, noting that local partners make it more difficult to maintain a zero-tolerance policy on corruption. "A local person may be more likely to give into a bribe because they have local ties and face greater pressures.

Investment

FDI: Corruption Is No Deterrent

Neli Kouneva-Loewenthal

The folk wisdom that corruption deters foreign direct investment (FDI) in emerging countries—and that good governance and transparency are required to ensure robust FDI—isn't true for energy sector, according to Neli Kouneva-Loewenthal, a PhD candidate in international business who is studying corruption, FDI and the energy industry.

"Everyone thinks that corruption always has a negative effect on foreign direct investment," said Kouneva- Loewenthal. "What I'm finding in the energy sector is that the level of corruption, even excessive amounts of corruption, has no relationship to foreign direct investment."

It may be the unusual nature of the energy sector that makes corruption merely a cost of doing business. Heavily dependent on natural resources, the industry has high entry barriers and an extended horizon for returns on investment. "Corruption is not a high enough obstacle to stop firms from getting in," said Kouneva-Loewenthal. "A bribe won't necessarily stop companies, despite the fact there could be sanctions for paying it."

It is difficult to detect corruption, and the risk of getting caught and fined is lower than the perceived benefit, she explained.

Corruption in the energy sector is concentrated in two key areas: the extraction of oil and gas, and the construction of electric power grids, she said. These enterprises have high fixed costs, and the unwieldy projects rarely generate a competitive bidding process, she added.

"The theory is that if countries adopt and implement legal measures, economies will be more open to imports and exports," said Kouneva-Loewenthal, noting the correlation between corruption and FDI depends ultimately on the business sector and the country.

Of course, there are many examples of countries that have eliminated corruption and flourished because of it. Singapore instituted ambitious—almost draconian—regulations against corruption, and its ranking on international corruption indices dropped from high to low.

Transparency International, a global anti-corruption organization, annually measures public-sector corruption around the world. In the 2010 Transparency International Corruption Perception Index, Singapore, Denmark and New Zealand were tied as the least corrupt countries on the planet.

Although Kouneva-Loewenthal's research has focused on the energy sector, she believes similar results might be found in the security/military sector, some types of heavy manufacturing and other industries. She noted that countries where corruption is ingrained have no trouble investing in other corruption-heavy countries. But globalization—including FDI—may be lessening the acceptability of corruption.

"China, India, Russia and Brazil have high corruption levels," said Kouneva-Loewenthal. "They certainly wouldn't be deterred by corruption in other countries."

But as those four nations become greater global players, they may feel pressure from international corporations put off by excessive corruption.

"As they develop, corrupt countries will become less corrupt and, in doing so, will pressure their developing country partners to become less corrupt," said Kouneva-Loewenthal.

Public Spending

Transparency through Technology

Renato Barbosa Medeiros

Of all the roles the Internet plays in society, add one more— corruption fighter.

Websites that monitor government expenditures can assure that the money is spent exactly as intended, said Renato Barbosa Medeiros, a graduate of the Minerva Program, which helps government officials in Latin America sharpen their skills in economics and public administration. The program is offered through GWSB's Institute of Brazilian Business and Public Management.

Medeiros, a financial analyst for Brazil's federal Court of Audit, wrote a research paper for Minerva showing how the Internet could boost the transparency of government spending in Brazil and the United States.

"Through transparency, government creates confidence," he said. "The ability to see how government uses the public purse is fundamental to democracy."

This kind of financial monitoring would have other advantages, he said. It helps citizens get involved in government by following how their taxes are spent, boosts public confidence in leaders if the money is spent wisely and reins in leaders if they're wasting funds.

"Such analysis allows anyone to gauge the effectiveness of expenditures," said Medeiros.

As part of his research, Medeiros compared websites that track government spending in Brazil and the United States. So far, the United States does a much better job monitoring the money, he said.

In fact, the United States was ranked second in the world for Internet access to government data, according to a survey last year by the United Nations. South Korea was first. Brazil was ranked 61st.

Among the U.S. websites that measure expenditures is data.gov, a clearinghouse of government spending programs that was launched in 2009. Two others are recovery.gov, which tracks money spent under the Recovery Act, and usaspending.gov, which follows the expenditure of stimulus funds.

Brazil's websites are far more limited, Medeiros said. But even though the United States has better online tools for transparency, he said the United States can improve its monitoring. Websites do a good job of showing spending within an agency, but they don't allow money to be followed as it moves through different branches and layers of government.

For example, it's difficult to track funds as they move from a congressional appropriation to disbursement by a federal agency, Medeiros said. The technology is there, but it's a matter of persuading government agencies to work together to provide complete access to information, he added.

Ideally, he noted, the public would be able to follow the full cycle of spending: from an agency's budget request, to its congressional appropriation, to its disbursement by the agency.

Banks

Banks: Self-Regulate Now or Suffer Later

Scheherazade Rehman

Swiss banks, once sacred for their silence about secretive account holders, changed their behavior with the recent Middle East uprisings. They acted before they were acted upon, adopting publicity-friendly policies to out dictators who moved money from their home countries.

It's an approach that other financial institutions would be wise to adopt in the aftermath of the global credit crunch and the Arab Spring, according to Scheherazade Rehman, professor of international business/finance and director of the European Union Research Center. She said global banks can no longer claim innocence when it comes to ethics or corrupt practices within their own ranks.

"The banking community is facing a change in public perception that stems from the financial crisis. To the public, they were the bad guys," said Rehman, author of Corruption and the Persian Gulf. "If the financial sector doesn't get on the ball and clean up its own house, it will suffer. The public outcry is already forcing governments to put legislation in place."

International financial institutions must act swiftly to self-regulate and immunize their industry from a disgruntled public and disaffected policymakers, Rehman said. If they don't, they could face onerous and punishing banking regulations. In her current research, Rehman examines the debate around banks, transparency and standards, providing a starting point for international efforts in regulation and developing a rationale for early action by financial institutions.

"Regulations are coming in a haphazard fashion from various governments and multilateral institutions," said Rehman. "Banks like to know what regulations they're facing up front. They need certainty. Money doesn't like uncertainty."

stage for a pro-regulatory climate: the Sept. 11 terrorist attacks, the accounting scandals of 2002, the 2008 financial collapse and the furtive flight of money during the Arab Spring. These events left the impression that financial institutions were not self-regulating, Rehman said.

"Due to the financial crisis, the rest of the world wants more answers and more regulation," said Rehman. "Up until now, banks have been able to justify their wall of silence. This silence is becoming more and more deafening in the wake of the Arab uprising."

Critical reforms are underway globally, most recently through the Basel Committee on Banking Supervision, the international forum for monetary and financial cooperation, which sought higher capital requirements for large banks and surcharges on banks engaged in risky activities. The International Monetary Fund (IMF) and the World Bank are also involved in setting more rigorous financial standards.

Taking early action on reform can help reverse the impression that banks are governed by self-interest, at the expense of the public, Rehman said.

"Banks must actively seek to guide healthy regulation," she added. "If they don't, they will have to live with regulations they don't like, and that may damage the financial sector's growth in the long term."

Sports

Corruption Follows the Money

Lisa Delpy Neirotti

Worldwide sports spectacles can be cash bonanzas for the countries hosting them. The Olympics, World Cup and Pan Am games raise epic sums through ticket sales, sponsorships and broadcast revenues.

Because the cash is so plentiful, the sporting events are also ripe for corruption, said Lisa Delpy Neirotti, associate professor of sports management.

The chicanery could begin even before a country wins the right to host the prestigious events. The competition is so fierce that a government will offer favorable trade agreements to other nations in exchange for their votes to hold the event in the government's country, said Delpy Neirotti.

Members of the International Olympic Committee (IOC), which decides where the Olympics will be held, have received cash, university scholarships, medical treatments and lavish vacations. "Everyone justifies the unethical practice based on cultural differences or as a requirement to be competitive," said Delpy Neirotti.

The IOC tightened its bidding process after a voting scandal at the 2002 Winter Olympics, but the World Cup continues to experience corruption accusations, she said. In May, after years of dismissing claims of corruption, FIFA Vice President Jack Warner and Qatar's Mohamed bin Hammam were suspended after an inquiry into reports that Caribbean soccer leaders were paid $40,000 apiece to back bin Hammam's later-abandoned bid to become FIFA president.

Another magnet for corruption is the construction of sports facilities and other infrastructure, said Delpy Neirotti. It is a lucrative business. China spent $40 billion on construction for the Summer Olympics in 2008.

Some event organizers delay construction to the point where it becomes an emergency, and contractors must quickly be selected without going through the official procurement process, said Delpy Neirotti. That drives up the cost and the opportunity for kickbacks to the officials who select the contractors, she added.

Organizers may also overstate the price tag for holding the events, with vendors submitting false receipts attesting to the exaggerated cost. After receiving the money from the government, the organizers and the vendors split the ill-gotten gains, Delpy Neirotti added.

The chief executive of the 2014 Commonwealth Games resigned last June after it was discovered he had accepted a gift from a prospective supplier.

"What surprises me the most is how many people know of the corruption but turn their heads," said Delpy Neirotti. "They do not want any repercussions."

Another type of corruption that occurs in sports has left many professional athletes in financial straits, she said. That's when the athletes enter into business deals with unscrupulous people who fleece them of their money.

One of GWSB's customized education programs, STAR EMBA, tries to address this problem, said Delpy Neirotti. The program helps athletes, musicians and other artists and celebrities leverage the success of their personal brand into business and social achievements. One of its classes, on ethics, teaches students to thoroughly review prospective business partners and opportunities so they know exactly what they're getting into.

"Throughout their lives, athletes are conditioned to trust team members," said Neirotti. "This trust is often carried off the field and into business deals where partners are not as trustworthy."

Culture and Customs

Corruption as a Cultural Phenomenon

Stuart Umpleby

For Stuart Umpleby, a professor of management, any discussion of corruption must begin with a conversation about cultural conventions. That's because what constitutes corruption in Western nations may not be considered corruption in emerging ones.

"Corruption is a pejorative term, and it is used a lot by people from Western societies who look at what are quite common behaviors in Southern and Eastern societies," said Umpleby. "In tribal societies, your affiliations are determined by your family and religion, and your loyalties are there first, above laws and even nations."

For developing countries that lack a strong sense of national identity, family or tribal alliances may trump national loyalty and might even lead to practices that flout the rule of law.

"People and leaders in many developing countries are more likely to ask: Who are you committed to? Who are you responsible for?" said Umpleby. "The concept of corruption doesn't come up in these societies because you're supposed to look after your family, your tribe and your friends. If you don't, then you're not a good person."

Umpleby isn't arguing that corruption should be accommodated. An obstacle to development, corruption undermines the state's ability to effectively deliver goods and services even while it erodes trust in the electoral and judicial processes. Any attempt to counter its insidious effects, however, can only begin with a thorough understanding of its cultural role, he noted.

Take the practice of nepotism. In a nation where identity is determined by tribe or religion, hiring a loyal relative who needs a job makes more sense than hiring a more capable stranger. "In most of the world, you get to know someone and socialize before you do business," said Umpleby. "The reason you do that is you don't have a legal system to enforce whatever agreement you come up with. The agreement is enforced through a set of personal relationships."

Effectively battling widespread nepotism and bribery is a top priority for a number of international institutions including the United Nations, the World Bank and the African Union, Umpleby said. These efforts have focused on establishing international and regional anti-corruption standards.

Umpleby said many corporations also have come to the forefront, unwilling to accede to bribery to win contracts or access to markets and natural resources. He noted that IBM's anti-corruption policies have cost it in some cases, but they have also led to a more stable business environment. In 2010, IBM's anti-corruption campaign at its Chinese facilities resulted in some 120 resignations and demotions.

Covalence, the Geneva-based organization that rates corporate reputations, ranked IBM top among 581 international companies for its professional ethics and corporate social responsibility in 2010.

"IBM recognizes that corruption makes your costs unknowable, and it chooses what countries to enter based on that knowledge," said Umpleby. "If your costs are unknowable, then your operating environment is completely uncertain. That's no way to run a business." GW