Corruption is a problem all over the world. Soccer’s governing organization, Fédération Internationale de Football Association, or FIFA, is just one example, with nine officials and five executives under indictment for racketeering and money laundering, among other charges. In this article, we’ll look at some industries that consistently rank high on corruption indexes and why they have such a problem.
Mining, oil, and gas – broadly known as the extractive industries – inevitably end up with a corruption problem due to the nature of the business. Extraction companies search all over the world for valuable resource deposits to dig up and sell. To do this, they need to get the permits to conduct their search and then secure the rights to dig up the deposit. This means there are various officials at the national, regional, and local levels that can make getting at a deposit more or less difficult – setting up a principal-agent problem. In this case, the extraction company can choose to pay bribes in order to access the deposit.
Depending on the deposit, the bribes are likely a fraction of the profits that the company expects to realize, so it makes economic sense. The officials are generally tasked with watching out for the public good and ensuring the deposit is extracted in a way that is environmentally and economically responsible, so the bribe might also be used to convince them to look the other way during the extraction process. This means that the general public does not get true value from the exploitation of the mineral wealth and is left with environmental and economic losses, while the official and the extraction company take the gains.
Construction has a very similar principal-agent problem to extractive industries. The largest construction projects in the world tend to be infrastructure projects tendered by governments. These projects are assigned through a bidding process where companies submit bids to be assessed by a few key officials.
In theory, competitive bidding guarantees that the company that can do the best job at the lowest price gets the contract. Again, however, it makes economic sense for marginal companies to pay the selection committee members to win a lucrative construction contract. Worse yet, corruption in the bidding process often leads to more shady practices with these companies cutting corners, overcharging, and so on. This is how critical infrastructure like schools and hospitals end up being built with concrete you can crack with kicks and plumbing with no venting.
Transportation and Storage
Most of the corruption indexes use the United Nations classifications for economic activities. So “transportation and storage” refers to land, sea, and air transport, and includes pipelines. The movement of goods is, of course, highly regulated to ensure that illegal goods – as defined by the nations they are moved through and to – do not get through. The inspection of goods is carried out by officials and agents tasked with upholding the law for the public good.
Unlike the previous two industries where corruption seeped in at the decision-making level, transportation and storage are ripe for corruption at the enforcement level. In situations dealing with illegal goods, the people trying to move the goods through customs or other enforcement structures are generally organized crime rather than formal organizations. However, there are situations where corporations get involved in corruption and bribery as well, particularly when a bribe can speed up customs clearance or the issuance of an import/export certificate.
Information and Communication (and Finance)
There are many situations where the suppression of or access to information leads an individual or organization to throw money at the problem. Political circles are rife with leaks and suppression, although not all of these are motivated by cash. For investors, however, it is corruption around the information and communication in the finance industry that is most concerning.
In finance, information is money, particularly when it is not public, and institutions and investors are not above paying to profit from it. There are, of course, consequences. Acting on non-public information put Martha Stewart in jail not too long ago. Hiding information from the public led to the downfall of Enron and the accounting firm Arthur Andersen.
The Bottom Line
We looked at some of the worst industries in this article, but corruption is like life, in that it exists pretty much everywhere the conditions are favorable. If a few people are entrusted with power or information that is valuable to another entity that is not above breaking the rules, then the odds are good that corruption will seep in. That entity can pay to get the decision, approval, or information it needs to realize a greater profit in the near future. The corrupt entity wins, the agent gets paid, and the public as a whole loses out.