Corruption: Taking Responsibility

Corporate Responsibility

In its World Development Report 2005, the World Bank reported that more than half the companies in the Philippines had to bribe regulators just to get things done. In this context, "getting things done" refers to routine administrative processes like getting utilities connected, passing inspections, or securing permits from local government offices.

In survey after survey, both local and foreign companies continue to describe corruption as a serious roadblock to doing business in the Philippines. They also report that bribes consume a significant percentage of their total sales. Everyone seems happy to respond to these surveys, apparently thinking that if we talk about it enough maybe something will change. But what do the individual companies actually do about the the problem?

While most companies reject corruption in principle, very few have posted regulations that specifically prohibit corrupt acts. Many publish mission statements or company policies which address the issue, but these are rarely anything more than broad statements of philosophy. While demands for large under-the-table payoffs probably always get attention from senior executives, I doubt whether most CEO's are aware of the myriad of smaller demands that are handled routinely by their staff. Sometimes this is because they don't see, and sometimes because they don't want to see.

In day-to-day operations, company clerks and accountants routinely pay "fees", "consideration", and "for the boys" money to various local government offices or officials, to facilitate company needs. These payments are almost never demanded, but they are always expected, and junior company clerks often find themselves caught in the middle. A government official implies that a "fee" is required, and the employee knows that management needs the service in question. The employee knows the fee is not official, but also knows that the company tolerates the practice as a necessary evil. In most cases, the employee doesn't even feel the need to ask for guidance. It's just SOP.

This system has evolved into something way beyond extortion. Threats are almost never issued, or even implied. In fact, the whole process is more or less automatic. A new employee, unaware of the need for payment, may even be reminded by his co-workers, lest he forget to appease the official and risk some unspoken retribution against the company. A new accountant may ask "how much?", but never "why?" It's just SOP.

Without internal guidelines specifically prohibiting these acts, the employees that actually make a company run will continue to support corrupt behavior, even when it contradicts the company's declared anti-corruption "philosophy". Companies serious about resisting corruption must make their policy crystal-clear to employees, by issuing a regulation strictly prohibiting these payments. Employees need this clarity to give them the confidence to resist the overtures of corrupt city officials, and there should be no mixed signals from the top. By "mixed signals" I mean the company must not continue to unofficially tolerate the practice while posting a regulation that prohibits it. In that case, the safest thing for the employee to do is to quietly keep playing the game. All we've accomplished then is a little more paperwork.

The wording of an anti-corruption regulation is really pretty simple, and should not be hard for any law-abiding company to adopt:

· "It is prohibited for any company employee to make any payment to any government official or office, except published fees as prescribed by law."

· "It is prohibited to make any payment to any government official or office in cash."

· "All checks issued to any government office must be made payable to the institution that provided service. No check for such services may be issued in the name of any individual."

· "No payment may be made to any government office unless an official receipt is issued."

Any company can implement this regulation, which is really just a reinforcement of its commitment to obey the law. Obviously though, a single company making a lone stand may find itself on the losing end against corrupt government officials. Services may be refused or delayed, inspections may be failed, or permits denied. Corrupt officials hold considerable power.

But there is also strength in numbers, and a unified front can succeed where a lone resister could not. Business associations such as the Makati Business Club and the various Chambers of Commerce are perfect vehicles for coordinating simultaneous implementation among their members. The boycott aspect is a "make or break" element, and if enough companies suddenly start refusing to go along with the demand for under-the-table payments, the system will be forced to change.

As an odd kind of example, consider what has happened with airline hijackings since 9/11. After the heroic passenger uprising aboard Flight 93, and a few other celebrated incidents, we seem to have discovered that, if passengers simply refuse to cooperate, hijackers lose their power to take control. In the 3 years since that tragedy, I don't believe there has been a major hijacking anywhere in the world. The power of group resistance.

Finally, at the same time as these companies jointly implement the anti-corruption regulation, it would be helpful to hear a clear and public statement of support from local mayors and city councils. In many cases, bribes and extortion are wrapped within seemingly harmless acts of appreciation, tips, and gift-giving, and are often seen by all concerned as "just the way we do things". A public statement from a government official, worded as clearly as the regulation I just described, will carry weight even if it comes from a corrupt bureaucrat who has no wish to see the current system change.

Corporate policies and public statements are certainly not the cure-all for the kind of corruption described by the World Bank report, but they will definitely be a huge step in the right direction. Any problem must be defined before it can be attacked, and then the act must be specifically prohibited before it can be realistically defeated.

Reporting Corruption

As I said at the beginning, everybody seems delighted to answer surveys about corruption, and to complain about how much it hurts business, but there is a question I haven't yet seen on any survey: How many of the companies who complained of extortion in a survey actually reported the experience to the authorities?

Over the years, I have talked with many local and foreign businessmen in the Philippines, and almost every one has related some experience with under-the-table payoffs. Most were low-level payments to facilitate permits and the like, and a few talked about extortion at much higher levels, but for all the coffee-shop complaining, I have yet to meet anyone who has filed a report or an official complaint about extortion. In fairness, I do occasionally see newspaper reports of these complaints, but they represent a drop in the bucket compared to the "half the companies in the Philippines" mentioned in the surveys. Yes it's true that government doesn't do a very good job of telling people where or how to report corruption, and it's certainly true that exposing a demand for extortion may jeopardize the project, but it's also true that each of these companies have a legal responsibility to report criminal acts. The situation is infinitely more complicated than that, but it is important to understand that blind surveys do not trigger investigations or lead to arrests. Government must make a greater effort to educate individuals and businesses about their options for reporting corruption, and must instill confidence by demonstrating that complaints will be acted upon quickly. But the environment will not change unless official complaints are filed with the authorities.

In my view, this is the real meaning of "Corporate Responsibility".

Petty Cash Funds: Discretion Run Wild

Government petty cash funds are a perfect example of uncontrolled discretion. Not in the fact that they exist, but in they way they are managed. By definition, "petty cash" is a small amount of money intended for minor, unexpected expenses. The office printer suddenly runs out of ink, and there is no more in the supply cabinet. Sometimes these things happen, no matter how carefully a budget is planned. So the office manager issues a few hundred pesos from petty cash, properly logged of course, and someone runs to the store. After making the purchase he turns in the receipt, and that money is now accounted for. This is how petty cash works in most private businesses, and even in many governments. And no matter how big the company, the amount of money in any petty cash fund would never be more than a few thousand pesos at one time. There should not be many unexpected expenses, and those that do arise should be small. More expensive needs, even for emergencies, must still go through the formal purchase request process. The idea is that managers should plan for their needs with a carefully thought out budget.

In the Philippines however, many government offices maintain very large petty cash accounts, sometimes on the scale of several hundred thousand pesos. Expenditures from the fund are often documented by a certification signed by the official, rather than with receipts. There is no proof, other than the official's word, as to how the money was spent. Once again we see the "shield of honor" being invoked to ward off any accusations of corruption. But while we really do wish we could accept the word of those "honorable" officials, let's not forget the 1/5 of the national budget that "evaporates" every year. Misuse of petty cash funds is one of the cracks through which that money disappears.

This situation is simply not acceptable. To say that an office needs to keep 200,000 pesos available for emergency purchases is nothing but an excuse for poor fiscal planning. And not requiring a receipt for every expenditure is an almost overwhelming invitation for corruption. I suspect that millions of pesos, at the very least, are lost and stolen every year through the combined petty cash funds of the Philippine Government, high and low. This is one of the incredibly simple steps that government can take to immediately gain control over its money. Again, strictly regulating the size and use of petty cash funds, and requiring official receipts for every purchase, should not be seen as a sign of mistrust. Every private company does it. It's just good accounting.

Discretion: An Invitation To Corruption

One of the main causes of corruption is the excessive degree of discretion afforded to government officials, coupled with a nearly non-existent level of true accountability. In simple terms, "discretion" means having the authority to decide how money is spent. Some countries limit discretion by implementing very detailed budgets, and extremely clear regulations on how funds may be used. The more regulatory control a government exercises over its funds, the less corruption it experiences. "Accountability" is synonymous with "responsibility". It simply means that a government official who has control over a certain fund is responsible for either properly spending that money or returning it to the National Treasury. The word "accountability" also carries an implied consequence for failure. If a government official fails to properly control money for which he is accountable, there must be a consequence. Corruption-watchers use an embarrassingly simple equation to describe this concept:

DISCRETION - ACCOUNTABILITY = CORRUPTION

The beauty of this formula lies in the fact that it not only describes the problem, but also gives the solution:

LESS DISCRETION + MORE ACCOUNTABILITY = LESS CORRUPTION

The answer to the problem of corruption, in the Philippines or any other country, is simply a matter of reducing the discretion that government officials have to spend money, assess fees, and award contracts, and increasing accountability by holding those officials responsible for every peso under their control. There are basic procedures, used by governments and private businesses around the world, that force people to account for the money they control. Simple things, like requiring a receipt for every purchase, or tightly controlling cash advances. Countries that practice this sort of fiscal accountability do not experience the level of corruption seen in the Philippines. But enforcing these procedures requires challenging the assertion that government officials are inherently honest and that their word is the only verification necessary. This philosophy has been the shield behind which many dishonorable people have taken refuge over the years.

Because it is such a powerful force in daily interactions, and because it often overrides written procedure, the "shield of honor" serves to effectively cancel out any effort to enforce accountability. This is part of the self-sustaining nature of corruption in the Philippines. Any leader who tries to challenge the shield of honor is said to be lacking in delicadeza, and thus is considered arrogant and dishonorable himself.

This brings us back to something I said previously -- the phrase "political will", that is tossed around so often as both an excuse and an accusation, really means nothing more than "just do it". Any government official who says "I can't control corruption in my department" is actually saying "I'm not willing to do what is necessary to control it". No one has to wait for a new law to be passed before they can start fighting corruption in their own area of responsibility. Any government official, at any level, can implement a local policy requiring his people to submit receipts. This is what I mean by "just do it." And while we are on the subject of "willing", it must be clearly understood that it is absolutely not possible for a government official to spend money illegally or to award a contract in violation of government guidelines unless someone at a higher level allows it, either by specific action or by intentional inaction. That decision-making power, free from oversight from above, or in collusion with those above, is the discretion I am referring to.

When we talk about discretion we're not only describing one person's ability to make decisions without supervisory approval or oversight. We're also talking about decision-making groups that create the illusion of a working checks and balances system. Such a group might include only two or three people, such as a taxpayer, tax-collector, and the auditor who checks the work, or it might include an entire city council. It's even possible that a decision-making group might include the entire chain of a national government department, as well as the auditors from a completely separate agency. All it really takes is an agreement to work together in committing a corrupt act.

Whenever government officials are accused of corruption, they often respond by saying that they could not possibly have done anything illegal since their actions were approved at various levels, and that checks and balances within the system would have detected any irregularities. Government itself frequently makes this same assertion, in an effort to deflect arguments that it is not effective in controlling corruption. In reality, if all members of a decision-making group are in collusion, corruption is not only easy, it is also nearly risk-free. And in an environment where corruption brings very little risk and very high reward, coupled with a general belief that there is really nothing wrong with it, it becomes very easy to co-opt the entire group. This is a direct result of the informal way that government operates, as I described before. One of the reasons that procedures and regulations exist is to prevent just this kind of problem.

Of course, some discretion will always be necessary, to allow government to respond to situational changes, but for now that flexibility is far less important than the need to control corruption. All government processes can be charted to determine where discretion is necessary, and where it should be prohibited. This should not be seen as an indication of mistrust. It is simple accountability. Anyone entrusted with the responsibility of handling someone else's money should be able to accept this, whether he is a clerk or a congressman.

Journalist Killings: A Suggestion (Revised)

The rampant murder of journalists in the Philippines continues. Just today, one day after the New York based Committee to Protect Journalists identified the Philippines as the world's most murderous country for journalists, an attempt was made on the life of another reporter, this time in Dipolog City. Appropriately, we look to the police to solve these crimes, and we complain loudly that they are not doing enough to bring the killers to justice. But, as I see it from the outside, I'm not sure that journalists themselves are doing all they can in this battle.

Although there are sometimes other motives for the killings, it seems pretty clear that many of these journalists are murdered to kill a story. Obviously, the people behind these attacks believe that killing the reporter will also stop the exposure of wrongdoings attributed to them by that reporter. And, unfortunately, it does seem to work that way. For a little while after a reporter is assassinated, we hear a lot about what a hard-hitting journalist he was, and how he was always working to expose this or that corrupt official. But we don't seem to hear any followup on the stories the journalist was working on when he died. So in that sense, it may be true that you can kill the story by killing the reporter. But would a corrupt government official be as quick to consider murder if he knew that the story he wanted to bury would not only continue, but would actually gain wider exposure after he murders a reporter? It seems to me that the best way to deter journalist killings might be to ensure that the story that prompted a murder does not die along with the reporter.

It should become standard practice among the journalist community that, whenever a reporter is murdered, the story he was working on would automatically become an item of national interest. His comrades in the media should continue to follow the reporters leads, and make sure the case remains in the national limelight until the issue under investigation has been run to ground. I'm not talking about the investigation of the murder itself. I'm talking about keeping the spotlight on whichever corrupt official the murdered reporter was investigating.

The certain knowledge that a story will not die with its reporter, and will in fact receive even more publicity, may be an effective deterrent to these killings. Obviously reporters are protective of their sources and their information, and it might require quite a bit of uncharacteristic cooperation among journalists, but it would certainly be possible for others to pick up the leads and continue the investigation, even if they have to start from scratch. The bottom line is, the original story must be kept alive. Otherwise, the idea that it is possible to kill a story by killing its reporter will guarantee further assassinations.

Cashless Operations: Part II

In a previous article I discussed the idea of requiring all government transactions to be conducted by check or bank deposit, as a "corruption-proofing" measure. Well, I have a little more to say on the subject.

Government is currently involved in an all out drive to raise new revenue through new taxes. At first glance that doesn't seem like a bad idea. But additional revenue simply won't make any difference in solving this country's problems, and I'll tell you why. The National Treasury "bucket" is full of holes. But these are no ordinary holes. The amount of money that leaks out through these holes, meaning the amount stolen through graft and corruption, is not a fixed number like other expenses. The amount stolen is actually always a percentage of whatever is available. This means that no matter how much more we collect, more will be stolen. And the leakage is not small. The Philippine Center for Investigative Journalism is reporting today that up to 70% of local health funds are stolen by corrupt government officials. Not 5% or even 20% like the Mafia might take, but 70%! It's a wonder there is any money left after everyone gets their cut.

This tells us that there is very little, if any, control over the handling of government money. Sure, we have a whole book full of rules and regulations, but they are simply not enforced. The Finance secretary just reported that government will be filing new cases against corrupt BIR and Customs officials each week. But filing cases depends on catching those people. We'll certainly catch some, and it's important to prosecute them quickly, but those will really only be a drop in the bucket. The system is just too well entrenched, and too many people are involved, to be stopped by a few arrests. What we really have to do is gain physical control over the money itself. We may not be able to force people to be honest, but it is possible to make it very hard for them to hide the money they steal.

The way to do that, as I said before, is simply to STOP USING CASH! One of the suppliers of medicines to a local government, quoted in the PCIJ report, said it very clearly. "Mayors prefer cash, since checks leave a trail." Well, there you go! The bad guys avoid checks like a thief avoids the light. So why don't we shine a little light on the money trail and see where it leads?

Prohibiting the use of cash is one of the easiest moves government can make, and the very minor administrative costs would immediately be offset by the incredible gains in financial control. I suspect that the Department of Finance can probably implement such a policy without need for any new laws. Just advise all government units, at all levels, that from now on, funds will only be disbursed through bank transfers to each unit's official bank account. And then advise each of those units that the only way funds may be disbursed is by check. In fact, any government unit or office can already implement such a procedure within its own jurisdiction. The Armed Forces could do it, a city government could do it...we don't have to wait to be told.

This procedure certainly won't stop corruption, but it will definitely make it harder to get away with it. As a matter of fact, if we actually enforce it, we might even be able to reverse the numbers on corruption pretty quickly. How about 30% stolen and 70% actually used to buy medicines and health care? Not the end of the fight, but a definite improvement. And I believe it's very, very possible.

The Problem Is Us!

In an opinion article entitled "Bad news and good news" in yesterday's Philippine Daily Inquirer, columnist Winnie Monsod made a comment that caught my eye. While offering well-deserved praise for the Commissioner of the Bureau of Internal Revenue for his campaign against tax cheats, Ms. Monsod also cautioned the commissioner to be alert to corruption within the BIR. She says:

"One taxpayer I know paid P300,000 in income tax and was issued a receipt of P25,000. Another paid about P2.3 million and got a receipt for P200,000. Unfortunately, they are afraid to blow the whistle for fear of being harrassed in the future."

What she just described is a common occurrence, not only in the Philippines but in any country with a corrupt bureaucracy. In both of these examples, the actual tax owed was probably much higher than the amount paid. The P300,000 may have been reduced from an original bill of 1 or 2 million, or even more. Other than the tax-collector though, government doesn't know the original amount, and it doesn't know the amount that actually changed hands. As far as government is concerned, the documented tax obligation was P25,000, and that's the amount that was collected. But what really happened was that government (and of course, the country) was cheated out of a substantial amount, and the tax-collector put a hefty sum into his own pocket, which in this case amounted to P275,000. And by the way, the P25,000 that actually made it to the National Treasury is more or less equal to one month's salary for the tax-collector. So in a way, government's gain on this transaction was exactly 0 pesos.

Now I realize that the people in these examples are probably friends of the columnist, but the truth is, they have participated in a crime. Ok sure, they may have been coerced by the tax-collector, or felt an unspoken fear that they would forevermore be subjected to "tax-man's revenge", but a crime is still a crime. And herein lies the problem. Many of us, myself included, pay our taxes honestly, no matter how little faith we have that the money will actually make it all the way to the National Treasury. But when we become aware of someone who cheats, we don't say a word. Forget the issue of which party, the tax-payer or the tax-collector, is more wrong. That is for the courts to deal with. And as difficult as it may be, forget the fact that the cheater may be your friend. That person, along with at least one BIR official and probably others, has broken the law, and has robbed the country of desperately needed revenue. No one has a right to look the other way, even when it involves a friend or acquaintance. This is one of the core problems facing this country.

I don't mean to single out this particular columnist, and in fact I have great respect for her. But it's not enough just to preach from a soapbox (or a newspaper opinion column). People have to start getting involved. It doesn't matter how many laws we have. Nothing will ever change until people start reporting violators.