Corruption: Its Meaning, Type, and Real-World Example

What Is Corruption?

Corruption is dishonest behavior by those in positions of power. Those who abuse their power may be individuals or they may belong to organizations, such as businesses or governments. Corruption can entail a variety of actions, including giving or accepting bribes or inappropriate gifts, double-dealing, and defrauding investors. Corrupt behavior is often the result of government intervention in the economy but it can be prevented with certain checks and balances. One example of corruption in the world of finance would be an investment manager who is actually running a Ponzi scheme.

Understanding Corruption

Corruption is any behavior that leads to the benefit of an entity in power at the expense of others. As such, it's considered to be an abuse of power. Corruption occurs when someone in a position of power uses their authority to influence decisions or conducts any other dishonest or fraudulent behavior like giving or accepting bribes or inappropriate gifts, double-dealing, under-the-table transactions, manipulating elections, diverting funds, laundering money, and defrauding investors.

There are many situations in which someone can be considered corrupt. Keep in mind that corruption can involve any entity, whether that's an individual, company, or government. For instance:

• A politician may be deemed corrupt for taking money to sway a vote on a key issue.
• A corporation may be deemed corrupt for trying to influence the market by cooking their books.
• A government may be deemed corrupt by offering a higher degree of resources and incentives, such as tax breaks and health care, to the wealthy rather than to those who are financially vulnerable.

The act of corruption has financial and social consequences for everyone. But it does have a disproportionate effect on the most vulnerable. Corruption may further limit their access to the education, health care, and legal services they need. And they may end up paying more in bribes, as they are often targeted because they may be less likely to report corruption.

Damage from corruption is multi-fold. When reported, it can lead to unflattering media attention. It can also attack the foundations of democracy, dampen (economic) growth and development, skew laws and regulations, create red tape and bureaucratic hurdles, and stunt investment to name a few. This leads to damage to the offending party's reputation and an erosion of trust. That's because people can lose faith in the people and organizations in question.

Causes of Corruption

The International Monetary Fund (IMF) cites several key factors that contribute to corruption. These include government intervention in the economy, the liberalization of policies, and the deregulation and privatization of certain industries. This can pop up in several different areas, including:

• Lowering wages for civil servants compared to those in the private sector. Certain employees may resort to taking bribes in order to compensate for the difference in wages.
• Price controls. Corruption thrives when governments intervene by putting these in place to keep prices lower for certain goods and services.
• Eliminating foreign competition through trade restrictions, tariffs, and trade barriers, thereby opening up the possibility of a semi-monopoly by domestic players. The latter are more likely to resort to corrupt behavior to keep restrictions in place for foreign companies to keep their place in the market.
• Corporations and groups may receive government grants and subsidies when they aren't the intended recipients.

Put simply, the wider the spread of government regulation, the more discretion lawmakers have at applying the rules. When this happens, it opens the door for dishonest behavior, including taking bribes.

Corruption Prevention

Corruption can increase criminal activity and organized crime in the community when left unchecked. But there are a number of steps that can help to manage it. The following is a list of possible steps that can be taken to prevent corruption.

• Education: A strong educational focus must reinforce best business practices and alert managers and employees where to look for corruption. This can be achieved by introducing mandatory education such as anti-money laundering (AML) courses. Senior executives and managers must set a strong culture of honesty and integrity by leading by example.
• Environment: A robust control environment reduces the risk of corruption as do thorough background checks before hiring or promoting employees.
• Accountability: When there are mechanisms in place, there's a likelihood of reinforcing a culture that fosters strong ethical behavior while holding those to account who violate the norms.
• Regulation: Setting up codes of conduct and ethics can help avoid situations that can create conflicts of interest. This is common in areas like the financial industry, where chartered financial analysts and other financial professionals must adhere to these rules or be penalized.
• Reporting: Corruption can further be reduced by making it easy to report, whether by managers, employees, suppliers, and customers. It's also important to ensure that those reporting are able to do so safely and securely.

There must also be clear penalties in place to dissuade people and organizations from engaging in corrupt behavior. This can include financial penalties and even legal action—prosecution and perhaps jail time.

Real-World Example of Corruption

There are many examples of corruption in the real world. They may include individuals or organizations, whether that entails corporations or governments. Many often go undetected because the behavior is well hidden or because it goes undetected. The following are just two examples of documented corruption.

Major Banks

The Securities and Exchange Commission (SEC) fined five major global banks in 2015 on various corruption charges.

Citi, JPMorgan Chase, Barclays, and The Royal Bank of Scotland agreed to plead guilty to rigging the foreign exchange market. According to the SEC, the banks "manipulate(d) the price of U.S. dollars and euros exchanged in the foreign currency exchange (FX) spot market." The four institutions paid criminal fines of more than $2.5 billion.

UBS also plead guilty to separate charges of manipulating benchmark interest rates, including the London Interbank Offered Rate (LIBOR). This charge resulted in a fine of $203 million.

PTC

In 2016, the SEC ordered software company PTC to pay a combined $28 million in fines for attempting to bribe Chinese officials by providing approximately $1.5 million in recreational travel through two PTC China-based subsidiaries. PTC struck a delicate public relations (PR) effort to restore its reputation as the case became increasingly public.

The Bottom Line

Corruption is a form of dishonest behavior that has a big impact on everyone. It occurs when an entrusted entity abuses its position of power for its own benefit. Corruption can come in many forms including bribes, double-dealing, and fraud by individuals, businesses, and governments. Corruption has a big impact on people's social and financial well-being. As such, it can threaten the foundations of democracy, leading people to lose trust in their leaders.