What is 'Corruption'

Corruption is dishonest behavior by those in positions of power, such as managers or government officials. Corruption can include giving or accepting bribes or inappropriate gifts, double dealing, under-the-table transactions, manipulating elections, diverting funds, laundering money and defrauding investors. One example of corruption in the world of finance would be an investment manager who is actually running a Ponzi scheme.

BREAKING DOWN 'Corruption'

In the financial services industry, chartered financial analysts and other financial professionals are required to adhere to a code of ethics and avoid situations that could create a conflict of interest. Penalties for being found guilty of corruption include fines, imprisonment and a damaged reputation. Engaging in corrupt behavior may have negative long-lasting effects for an organization. In 2015, five prominent investment banks were fined a cumulative total of approximately $5.5 billion for rigging the foreign exchange market between 2007 and 2013.

Corruption is likely to cause inefficiency when assets are used inappropriately. When corruption occurs within an organization, unflattering media coverage typically follows, which may result in customers losing trust in its business practices and products. A comprehensive public relations campaign is often required to limit reputational damage and restore trust. This requires valuable resources such as time and money, which may result in other critical areas of the organization being deprived of resources, causing inefficiencies to develop and possibly financial losses to be realized.

In 2016, software company PTC Inc. was ordered to pay $28 million for claims it tried to bribe Chinese officials by providing approximately $1 million in recreational travel. As this case has become public, PTC Inc. is likely to require a delicate public relations effort to restore its reputation. Organizations that have been known to engage in corruption find business development difficult. Investors and shareholders are reluctant to commit if an organization has a history of corruption, or bribes and favors are required to conduct business. Corruption is likely to increase criminal activity and organized crime in the community.

Corruption Prevention

There must be a strong focus on education; it must reinforce best business practices and alert managers and employees where to look out for corruption. This can be achieved by introducing mandatory learning such as anti-money laundering (AML) courses. Senior executives and management must set a strong culture of honesty and integrity by leading by example.

Corruption is likely to be reduced with accountability mechanisms in place; this is likely to reinforce a culture that fosters strong ethical behavior while holding those to account who violate the norms. Corruption can further be reduced by making it easy to report. whether by managers, employees, suppliers and customers, although it is often overlooked by colleagues. A robust control environment reduces the risk of corruption. Human capital management functions such as hiring and promoting employees should include thorough background checks.

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