resource curse may be insidious plague

8/4/2019 Resource Curse May Be Insidious Plague

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Resource Curse May Be

Insidious Plague

Adam R. Tanielian

The ubiquitous resource curse is also associated with legal and social phenomenon such as human

rights abuses and corruption. Nations with poor economic growth are generally also nations with

elevated levels of corruption and abuse of rule of law principles. This paper reviews legislative

framework for anti-corruption initiatives, financial and operating statistics from selected extractive

industry corporations. Corruption is present in all countries, yet OECD national corporations are

probably the majority of the sources of illicit payments in foreign territory. OECD national

dependence on foreign energy and resources are considered a factor creating a larger responsibility

on the part of OECD nations when compared to non-OECD nations in reducing and preventing

corruption and enforcing laws with primarily OECD corporations. The corruption problem is

examined from a psychological and social perspective. Relevant initiatives, trade groups, standards,

and plans of action are noted and supported. A corporate offender registry is suggested to

stigmatize the offences and disseminate specific, accurate information. Ultimately it is found that

human will limits or creates success in eradicating corruption.


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Resource Curse May Be Insidious Plague

Adam R. Tanielian

INTRODUCTION

Several researchers have found that natural resource wealth is either negatively

correlated with economic growth or not positively correlated thereto . Though there has been

no formal causal relationship between resource wealth and poor economic growth in mining

countries1, the resource curse is a commonly known term in economics. The worlds least

corrupt countries are, coincidentally or not, also wealthier countries with diversified

economies, while more corrupt countries are those with lower GNI per capita and less diverse

national economies2

.

Worldwide, annual bribery payments are estimated at more than US$1 trillion3

.

Hundreds of corporations have been charged with bribery in the past few decades since

corruption became a global issue. Extractive industry companies, being some of the first

foreign investment projects in the developing and third world, sometimes engage in illicit

activities to secure contracts and security. High profile cases like Rio Tinto in China4

are

only a part of the larger systemic corruption problem, which former UN Secretary General

Kofi Annan called an insidious plague and an evil phenomenon5

.

Developing and third world countries which lack macroeconomic policy, and thus

adequate tax revenue, without strong government infrastructure, where mining and resources

1 Monika Weber-Fahr, Treasure or Trouble? Mining in Developing Countries, World Bank and InternationalFinance Corporation (2002)2 Transparency International, Corruption Perceptions Index (2010)3 OECD, Working Group on Bribery (2010); UNODC & World Bank, Stolen Asset Recovery (StAR) Initiative:

Challenges, Opportunities, and Action Plan (2007); World Bank, The Costs of Corruption (2004)4 David Barboza, China sentences Rio Tinto employees in bribe case, New York Times (2010)5 United Nations Convention Against Corruption, foreword (2003)


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are dominant or crucial to economic livelihood, are subject to public and private corruption,

especially involving international firms which have the funds and power to provide relatively

large benefits. Global 500 companies are almost exclusively headquartered in OECD nations6

, and thus while bribery may represent a larger threat in the developing and third world, the

overwhelming majority of the funds are likely coming from the wealthier nations, which are

then perceived as less corrupt by their inhabitants who may be largely ignorant of the

activities of their people outside of their borders, though the wealthier nations are no less

involved in corruption as sending nations than are receiving nations.

In conducting some exploratory research into this topic, various questions have been

raised, such as: What are some key indicators in the worlds extractive industry in recent

years? Which countries are producing and consuming more or less of what? Who are the big

resource companies and what have their performances been in recent years? How have

nations and business addressed the issue of bribery and corruption? Aside from legislation

and policy, what are some cases of violations? What are the effects of corruption? What can

be done about the corruption problem?

Corruption is not a victimless crime, and thus this research is undertaken with a legal

positivist approach. Given the criminal nature of bribery and general corruption, no benefits

to these activities are considered to exist. A review of business, government, and other

private and publicly sponsored literature is made. Statistical analysis of trade data is

provided. Conclusions support the position that the majority of the burden of compliance

rests on the private companies and their personnel, though further government action is

required. Some budgetary and policy recommendations are made.

6 CNN, Global 500 (2011)


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EXTRACTIVE INDUSTRY ACTIVITY7

In resources, bigger companies generally do

better. Resource extraction is a capital and energy

intensive endeavor. Modern mines and wells are

staffed by highly skilled professionals who use

expensive technology. Mines are typically located

in remote rural areas, which often have little or no

electrical or sewer service prior to the mine

opening. Access roads and other infrastructure

may need to be built by the company working the

site. The industry is one of giants. SMEs have little opportunity to bid on land rights, recruit

top experts, and purchase the best equipment.

Bigger companies

have great strengths in

their enormous budgets,

though those same

monetary resources can

become a weakness and

threats when bribery and

corruption enter into the

equation. Companies like

BP and Chevron operate

in a competitive market where margins and efficiencies are important to turn a profit. Cost-

7 Table 1: BP,Annual and Corporate Reports 2001-2010; Table 2: Chevron,Annual and Corporate Reports2003-2010

Table 1: BP

Oil (milbarrels)

Gas(bil cf)

2001 704.82 3,150.68

2002 736.57 3,178.42

2003 774.17 3,143.75

2004 923.82 3,103.60

2005 935.13 3,074.76

2006 903.38 3,072.21

2007 881.11 2,972.20

2008 876.37 3,041.91

2009 925.28 3,097.032010 866.51 3,066.37

% change 22.94 -2.68

Table 2: Chevron

Oil & NatGasLiquids('000barrels)

NaturalGas (milcub ft)

Oilequivalent('000barrels)

2002 1,897 4,376 2,626

2003 1,808 4,292 2,523

2004 1,710 3,958 2,509

2005 1,669 4,233 2,517

2006 1,732 4,956 2,667

2007 1,756 5,019 2,619

2008 1,649 5,125 2,530

2009 1,846 4,989 2,704

2010 1,923 5,040 2,763

% change 1.37 15.17 5.22


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cutting is essential, but to some degree bribery can be absorbed due to market economic

phenomenon. Prices for oil and gas are more volatile than for any other mineral and

agricultural commodity, with short-term elasticity of demand low8

, so a company could

raise prices

in the short-term

to generate

additional

revenues to

recover the costs

of corrupt

payments at the

expense of the

consumer whose demand will not change much in the short-term after the price increase.

Economies of scale help balance the market forces and benefit consumers. As the

resource giants9

expand their production and distribution, their costs fall, so then they can

forestall extreme

price increases

even as the

limited supplies

are reduced.

Increases in production at the big companies actually increase market efficiency and help

keep prices within reach of the average consumers. To some large extent, regardless of

8 Jeffrey Frankel, The Natural Resource Curse: A Survey, Harvard Kennedy School Faculty Research Working

Paper Series (2010)9 Table 3: Exxon Mobil,Annual and Corporate Reports 2003-2010; Table 4: Rio Tinto,Annual and CorporateReports 2004-2010

Table 3: Exxon-Mobil

Crude oil& liquidgas ('000barrel)

%nonUS

Naturalgas (milcub ft)

%nonUS

Oil eq('000barrels)

2001 927,830 72 3,751,835 75 1,553,075

2002 911,040 73 3,814,980 77 1,546,870

2003 918,340 76 3,693,435 78 1,534,095

2004 938,415 78 3,600,360 80 1,538,4752005 920,895 81 3,376,615 81 1,483,725

2006 978,565 85 3,406,910 83 1,546,505

2007 954,840 85 3,425,160 84 1,525,700

2008 877,825 85 3,319,675 86 1,431,165

2009 871,255 84 3,384,645 86 1,435,180

% change -6.10 16.67 -9.79 14.67 -7.59

Table 4: Rio Tinto

China N America EU (not UK) JapanOtherAsia

2008 18.8 22.4 20.7 15.2 11.1

2009 24.3 23.1 14.4 13.5 13.22010 27.8 15.6 14.9 14.4 14.4

% of Rio Tinto gross sales revenues in select destinations


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corrupt or other criminal practices the big extraction industry firms have employed, they are

essential10

.

In the past several years, the worlds

resource economy has gone through

unprecedented changes. We now see big

companies like ExxonMobil and Rio

Tinto with the vast majority of their

operations and revenues outside of their

home nation. Companies that have not

negotiated wide-reaching projects across

the globe have seen limitations on their

production capacity and growth potential, and reduction in output.

Given current and future forecasted consumption rates

compared to apparent and suspected supplies of energy resources

and other minerals, those companies which fail to engage the world

trade aspects of extraction, thereby failing to establish internal

economies of scale, significantly decrease their potential for

longer-term successes. The situation that ethical businesspeople

and smaller companies are placed in regarding the pressures to

provide improper benefits for contracts, land use rights, protection,

and other essentials during operations is paradoxical but it must

then also be managed and exposed rather than covered-up and

accepted as a normal, rational, acceptable condition.

10 Table 5: Codelco,Annual and Corporate Reports 2001-2009; Table 6: Peabody Energy,Annual andCorporate Reports 2003-2010

Table 5: CodelcoCopper(metrictons)

Molybdenum(mft)

2001 1,698,978 24,238

2002 1,630,056 19,901

2003 1,673,606 23,173

2004 1,840,035 32,324

2005 1,831,183 36,567

2006 1,783,038 27,204

2007 1,664,600 27,857

2008 1,547,705 20,525

2009 1,781,604 21,556

% change 4.86 -11.07

Table 6:Peabody

Revenue(blnUS$)

2001 1.926

2002 2.719

2003 2.815

2004 3.631

2005 4.644

2006 5.2562007 4.574

2008 6.593

2009 6.012

2010 6.86


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The extraction industries are special in that they are not the

subject of much media exposure, yet are crucial11

. Mining is the

slow giant, the consistent source of food on the table in mountain

and rural villages, the quiet moneymaker which is more often

featured in folk music than on the evening news. Mine workers

are primarily male, middle to lower class, and proud of their work.

Mining is one of the worlds oldest economic functions. High

profits and large scale production are relatively new features.

Mining is an industry thick with culture and history, and some

habits apparently die hard. It was no doubt once a standard in the industry that for-profit

miners would grease the wheels of justice, or pay extortion

fees, and occasionally literally kill the competition. More

recently, however, a new class and breed of miner and mining

company have evolved out of the post-colonial period, and

ethical business practices are the only theoretical standard

today, regardless of the de facto rules. Gunslingers are subject

to prosecution today, as are corrupt politicians and company

men though obviously plenty get away with the white collar

crimes in this age.

The multinational aspects of the mining and moreover the corporate global economic

structure make compliance difficult to establish within and among organizations, and privacy

laws restrict government access to daily operations where violations occur. Subsidiaries and

foreign locations are subject to different laws and regulations than home nation facilities.

11 Table 7: Petronas,Annual and Corporate Reports 2002-2010; Table 8: Xstrata,Annual and CorporateReports 2003-2010

Table 7:Petronas

Revenue(RMbln)

2001 73.42002 67.2

2003 81.4

2004 97.5

2005 137

2006 167.4

2007 184.4

2008 223.1

2009 264.2

2010 216.4

Table 8: Xstrata

AttributableProfit (US$bln)

2002 0.14

2003 0.28

2004 1.03

2005 1.7

2006 3.4

2007 5.4

2008 4.7

2009 2.8

2010 5.2


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Language, religion and culture can interfere with translation, transfer and implementation of

corporate policy. Albeit a short-sighted tendency, many investors and other stakeholders

concern themselves only with the profitability and growth of the company, paying little to no

attention to various civil and criminal abuses the company may partake in during its pursuit

of capital.

Given the increases in production and revenues at companies featured in this section of

this report12

, its easiest to informally conclude that these companies engaged in bribery to

procure rights and contracts, and that bribery has been among the trade secrets at these and

other companies to a far greater extent than the court dockets and news media have portrayed

the issue. However, in law we need evidence to make formal conclusions, and implicit

evidence alone is insufficient to establish any proof. Our instincts and hunches are fallible.

What we can conclude today, given the facts, reports, and evidence made available to the

public, is that: A) corruption is a worldwide problem; B) the actual levels of corruption are

impossible to pinpoint though the modest estimates from the World Bank are remarkably

12 Table 9: BHP Billiton,Annual and Corporate Reports 2002-2010

Table 9: BHP Billiton

Oil (mil

barrels)

NatGas(billioncubic

ft)

Energy(Thermal)Coal ('000

tonnes)

Metallurgical(Coking)Coal ('000

tonnes)

Alumina&Aluminum('000

tonnes)

IronOre('000

tonnes)

Gold('000

ounces)

Diamonds('000

carats)

Silver('000

ounces)2002 78.52 283.47 82,840 35,400 4,932 67,910 289.76 40,750

2003 65.89 281.17 81,700 34,620 5,160 73,730 207.88 4,340 41,130

2004 58.03 324.34 83,882 35,360 5,480 84,220 115.60 5,482 42,652

2005 50.84 345.68 87,416 37,303 5,512 96,745 125.40 3,617 50,046

2006 45.87 360.44 85,756 35,643 5,549 97,072 216.50 2,561 46,476

2007 45.17 356.82 87,025 38,429 5,800 99,424 176.10 3,224 36,565

2008 57.44 366.54 80,868 35,193 5,852 112,260 161.50 3,349 43,487

2009 66.33 362.80 66,401 36,416 5,629 114,415 176.20 3,221 41,341

2010 84.39 368.57 66,131 37,381 5,082 124,962 141.90 3,050 45,362

%change 7.47 30.02 -20.17 5.60 3.04 84.01 -51.03 -29.72 11.32


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high at over 1% of global GDP; C) the mining (extraction) industry may have a higher rate of

corruption than other industries; D) the very same people and organizations who officially

condemn corrupt activity are some of those engaged in it; E) a vast number of ancillary

institutions and organizations are involved in hiding the illicit money; F) there is an urgent

need for action resulting in drastic reduction of improper payments.

OECD RESPONSIBILITY TO PROTECT MARKETS

Not only are the overwhelming majority of Global 500 companies from OECD nations,

thus placing the burden of enforcement on OECD nations given again that bribery is

something that SMEs cannot afford to engage in at the US$1 trillion dollar annual level, but

OECD nations are also the biggest consumers of resources, consistently dependent upon

foreign supplies, thus creating the impression of desperation and exaggerated

unscrupulousness in the habit of bribery in foreign territory. If we may be so bold as to liken

the OECD nations to a drug addict, and natural resources to a drug, we may then find a

suitable comparison for the lengths which the addict may go in pursuit of the drug.

Table 10: Petroleum 2001 2002 2003 2004 2005 2006 2007 2008 2009

OECD petrol demand 48.00 48.00 48.70 49.50 49.90 49.60 49.30 47.60 45.40

% of world 61.86 61.30 60.95 59.71 59.33 58.28 56.99 55.35 53.60

OECD petrol supply 21.70 21.80 21.50 21.00 20.10 19.80 19.50 18.70 18.80

% of world 27.96 28.17 26.81 25.15 23.73 23.16 22.81 21.59 22.12

% diff b/t supp/demand -121.20 -120.18 -126.51 -135.71 -148.26 -150.51 -152.82 -154.55 -141.49

non-OECD petroldemand 29.60 30.30 31.20 33.40 34.20 35.60 37.20 38.40 39.30

% of world 38.14 38.70 39.05 40.29 40.67 41.83 43.01 44.65 46.40non-OECD petrolsupply 23.40 24.50 25.50 26.60 27.20 27.80 28.20 28.50 29.00

% of world 30.15 31.65 31.80 31.86 32.11 32.51 32.98 32.91 34.12

% diff b/t supp/demand -26.50 -23.67 -22.35 -25.56 -25.74 -28.06 -31.91 -34.74 -35.52

Tot world demand 77.60 78.30 79.90 82.90 84.10 85.10 86.50 86.00 84.70

Tot world supply 77.60 77.40 80.20 83.50 84.70 85.50 85.50 86.60 85.00% diff b/t supp/demand 0.00 -1.16 0.37 0.72 0.71 0.47 -1.17 0.69 0.35


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The statistics in tables 10-1413

clearly show that the OECD and developed world

consume far more than they produce, thus making them dependent upon foreign supplies,

thus increasing their potential to initiate and otherwise engage in bribery. Central/South

American and African regions show surpluses in energy, which suggests that domestic

and regional-based bribery in those nations is likely less than bribery coming in from North

America, Europe, and Asia. OECD national firms have a comparative advantage in extractive

industries over non-OECD national firms due to access to technological and capital

resources, so again we can deduce that the primary players in the markets are also the usual

suspects. China shortfalls are relatively small, and given the nature of their economy it can be

13

Table 10: International Energy Agency, Oil Market Report Annual Statistical Supplement(2010); Table 11:US Energy Information Administration, World Energy Statistical Tables 1990-2009; Tables 12-14: BritishGeological Survey, World Mineral Production Statistics 2001-2009

Table 11: Energy 2001 2002 2003 2004 2005 2006 2007 2008

NA tot prod 99.44 100.09 98.66 99.04 98.53 100.51 100.93 101.72

NA tot cons 116.02 117.92 118.77 121.32 122.03 121.68 123.88 121.94

% diff -16.68 -17.82 -20.39 -22.49 -23.85 -21.06 -22.74 -19.87

USA tot prod 71.88 70.93 70.25 70.37 69.61 70.96 71.59 73.42

USA tot cons 96.81 98.48 98.73 100.98 101.04 100.48 102.51 100.58

% diff -34.68 -38.84 -40.53 -43.49 -45.16 -41.60 -43.20 -36.99

C/SA tot prod 25.92 25.24 25.66 27.03 28.01 29.04 28.99 29.56C/SA tot cons 21.11 21.10 21.57 22.41 23.15 24.30 24.61 25.76

% diff 18.55 16.40 15.94 17.09 17.36 16.33 15.12 12.85

Europe tot prod 51.20 50.98 50.32 50.32 48.61 47.34 46.34 46.49

Europe tot cons 82.49 82.22 83.88 85.40 85.84 86.44 85.84 85.74

% diff -61.12 -61.29 -66.70 -69.72 -76.59 -82.58 -85.24 -84.44

Africa tot prod 28.05 28.02 30.17 32.05 34.71 35.43 36.52 37.47

Africa tot cons 12.62 12.71 13.35 13.96 14.54 14.62 15.16 16.13

% diff 55.01 54.65 55.75 56.45 58.10 58.73 58.48 56.96

Asia/Oceania tot prod 82.55 88.20 96.01 108.20 115.11 120.37 125.10 134.33

Asia/Oceania tot cons 109.77 116.41 125.50 140.72 148.54 156.11 163.49 N/A

% diff -32.97 -31.98 -30.72 -30.06 -29.04 -29.69 -30.69 N/A

China tot prod 37.51 42.85 49.44 59.38 64.45 66.78 71.55 79.11

China tot cons 38.41 43.91 51.16 62.92 68.25 72.89 78.00 85.06

% diff b/t supp/dem -2.42 -2.48 -3.46 -5.96 -5.89 -9.14 -9.01 -7.52


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reasonably

estimated that

their energy

consumption in

production of

goods for export

accounts for the

deficit, and thus

we can attribute

their deficit to

nations to which

China exports

products, most notably in the North American and European regions. Henceforth, we should

Table 12: % of world production

USA Canada China AustraliaSAfrica

Crude

Petroleum (milbarrels) 0.05 3.6 5.1 0.01


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accept that OECD nations, Europe and North America have a level of responsibility for

reducing corruption and enforcing anti-corruption policies which is disproportionately high

when compared to nations in other regions and groups.

Table 14: Coal

% ofworldproduction(2009)

% of worldconsumption(2009)

% changeinproduction('90-'09)

% change inconsumption('90-'09)

World 100 100 43.64 43.9

N America 15 14.2 3.7 10.9

USA 13.9 13.2 4.2 10.6

Canada 0.9 6.9 -7.9 -3.6Europe 9.6 12.5 -44.2 -36.3Asia &Oceania 63.6 64.5 172.8 174.5

China 43.8 45.9 182.4 209.1

Australia 5.7 1.9 95.2 86.7

S Africa 3.5 2.6 41.1 43.1

The general responsibility to protect the integrity and function of markets has not gone

unnoticed by the OECD group, its individual members and partners. The Convention on

Combating Bribery of Foreign Public Officials in International Business Transactions

considered bribery as a widespread phenomenon in international business transactions

which undermines good governance and economic development, and distorts international

competitive conditions14

. The Convention requires all parties to criminalize bribery, to

prosecute nationals for domestic and foreign offenses, to implement accounting laws and

regulations designed to reduce potential for hiding corrupt payments, and to disseminate

information and engage the public on the issue.

14 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions,preamble (1997)


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Legislation implementing the Convention includes: Australias Criminal Code

Amendment15

(Bribery of Foreign Public Officials) Bill , which provides for up to 10 years

imprisonment and/or fines for offenses; Canadas Corruption of Foreign Public Officials

Act16

, which provides penalties of up to 5 years for bribery and up to 10 years for possession

of property obtained via corrupt practices; Chiles Criminal Code Amendments17

, which

provides minimum short-term imprisonment and a fine for violations; South Africas

Prevention and Combating of Corrupt Activities Act18

, which provides up to life

imprisonment for serious offenses; the UKs Bribery Act

19

, which provides up to ten years

and/or a fine for violations; the USAs Foreign Corrupt Practices Act20

, which provides up

to 5 years imprisonment and/or a criminal fine, and also creates potential for civil penalties.

The USA, as the nation with the most Global 500 corporations, has interest in providing

opportunities for whistleblowers and protecting the rights of informants. The Whistleblower

Protection Program prohibits any person from discharging or retaliating against employees

who exercise rights under the Occupational Health and Safety Act21

. The Dodd-Frank Act22

authorizes government officials to offer rewards to whistleblowers of 10-30% of sanctions .

ROOTS, FRUITS, AND CURES FOR CORRUPTION

In the foreword to the United Nations Convention against Corruption, Kofi Annan stated

that corruption feeds inequality and injustice, discourages foreign aid and investment, is a key

15 Australia Criminal Code Amendment (Bribery of Foreign Public Officials) Bill 70.2 (1999)16 Canada Bill S-21 (Corruption of Foreign Public Officials Act), 46-47 Elizabeth II, Chapter 34(3)(2)17 Chilean Criminal Code, Law No. 19,829 Article 250 bis A-B (2002), available via OECD,http://www.oecd.org/dataoecd/13/21/33656015.pdf18 South Africa Law No. 12, Prevention and Combating of Corrupt Activities Act, Chapter 5 (2003)19 United Kingdom, Bribery Act Chapter 23 11 (2010)20 15 U.S.C. 78dd-1, et seq., Foreign Corrupt Practices Act (1977)21

OSHA Act, 11(c) Whistleblower Protection Program, available athttp://www.whistleblowers.gov/(lastvisited October 2011)22 US Dodd-Frank Wall Street Reform and Consumer Protection Act 748
http://www.oecd.org/dataoecd/13/21/33656015.pdfhttp://www.oecd.org/dataoecd/13/21/33656015.pdfhttp://www.whistleblowers.gov/http://www.whistleblowers.gov/http://www.whistleblowers.gov/http://www.whistleblowers.gov/http://www.oecd.org/dataoecd/13/21/33656015.pdf


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element in economic underperformance, and a major obstacle to poverty alleviation and

development. General Assembly resolution 58/423

called corruption a threat to the

sustainable development of people. The Convention called for a comprehensive and

multidisciplinary approach to prevention, requiring international cooperation in prevention

and enforcement. Party nations are required to enact domestic laws criminalizing corrupt

practices which include bribery of public officials and in the private sector, misappropriation,

trading in influence, abuse of functions, illicit enrichment, laundering, concealment,

obstruction, and accessory. Parties shall also provide civil and administrative remedies for

violations. Preventative policies and practices are mandated, including participation with

society, enhancement of integrity, transparency and accountability. Conflicts of interest shall

be prevented among party nations, meaning that public officials may not have ties in the

private sector which could unreasonably prejudice the interests of the general public.

Property obtained illicitly may be frozen, seized, or confiscated, and witnesses must be

protected .

The insidious plague of corruption is a pandemic, and as industry grows, so do the costs

of corruption. There is no great diagnostic test for this affliction, and the infection has

infiltrated the immune system, so to speak. Those charged with protecting markets and

societies may turn back and violate their own codes, only exacerbating the scale and behavior

of the problem. The same companies and industries which make a goal of development are

also delaying and preventing their own cause from taking fuller course. The corruption

pandemic is not without its self-defeatist, ironic, self-loathing elements.

Self-help is the course of action with the highest probability of success. Companies can

use the government regulations as a guide and reduce corrupt practices from within.

23 United Nations Convention against Corruption, GA resolution 58/4 of 31 October 2003


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Governments can audit and track bank transactions more, investigate account records, and

supervise officials more to increase the likelihood of catching corrupt agents.

Vales board chairman announced the launch of its Code of Conduct for suppliers in

2009, which encourages external organizations to adopt principles of transparent and ethical

behavior that Vale24

officially supports . In 2010 Gazprom25

, though thought to be shackled

by corruption , committed itself to development of its business ethics framework and

corporate governance system such that it will comply with generally accepted international

standards .Newmonts Code of Conduct26

is designed to guide employees toward behaving

with integrity, trust, honesty, respect and teamwork , all of which help prevent corruption.

Corporate social responsibility (CSR) movements support policy and action intended to

reduce incidence of corruption. Rules made and enforced from within the corporations have

direct influence and binding nature on employees. All of the businesses featured in this report

offer ethics statements, CSR policies, business conduct regulations or other policies with the

same effect.

Industry groups have sprung up with the intention of combating corruption, which is

rational and logical considering that paying bribes at home or abroad can become rather

costly, regardless of whether or not price inelasticity of demand can be exploited to transfer

that cost onto the consumers in the short term. BHP Billiton, BP, Chevron, ExxonMobil,

Newmont, Rio Tinto, Vale, Xstrata and scores of their competitors and counterparts

committed to support the Extractive Industries Transparency Initiative27

, which is based on

12 principles affirming ethics, rule of law, sustainability, transparency, accountability, and

good practices .

24 Vale,Annual and Sustainability Reports 2000-201025

Gazprom,Annual and Corporate Reports 1999-201026 Newmont,Annual and Corporate Reports 2005-201027 Extractive Industries Transparency Initiative (2011), available athttp://eiti.org/supporters/companies
http://eiti.org/supporters/companieshttp://eiti.org/supporters/companieshttp://eiti.org/supporters/companieshttp://eiti.org/supporters/companies


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The United Nations Global Compact is an initiative based on voluntary compliance with

and support for ten principles which affirm the value of human rights, business ethics,

sustainability, rule of law, fairness, transparency, accountability, and good practices.

Corporate participants include BHP Billiton, BP, Newmont, Rio Tinto, and Xstrata. Business

associations such as the Ghana Chamber of Mines, the Ecuadorian Council of Responsible

Mining, Philippines Chamber of Mines, Argentine Chamber of Mines in San Juan, Argentine

Petroleum and Gas Institute, the Bulgarian Chamber of Mining and Geology, Ukrainian

Association of Gas Traders, Brazilian Oil and Gas Workers Association, American

Hightowers Petroleum Company, and British International Petroleum Industry Environmental

Conservation Association28

.

The World Economic Forums Partnering against Corruption Initiative29

lays down a

similar groundwork for development of policy, strategy, procedure, tactics, actions, and

vision for combating the plague. BP, Chevron, ExxonMobil, Gazprom Neft, Newmont, and

Rio Tinto are partners.

Corruption is a persistent nuisance, however, and it is clear that despite the official

participation in interest groups, and regardless of the theoretical commitments to anti-

corruption ideology and legally compliant practices, companies like government officials are

consistently involved in bribery scandals. Be they mere allegations of bribery like those

against Chevron in Cambodia30

, or investigations like those involving BHP Billiton in

Iraq31

and ExxonMobil in Libya32

, or warnings from government officials like that issued

28 United Nations Global Compact Office, Ten Principles (2004-2011)29 World Economic Forum Partnering against Corruption Initiative (2011)30

Marwaan Macan-Markar, Chevron Silent on Bribery Allegations, IPS (2009)31 Cosima Marriner,BHP Billiton embroiled in Iraq oil-for-food scandal, The Guardian (2006)32 Joe Palazzolo, SEC eyeing ExxonMobils ties to Libyan sovereign fund, Wall Street Journal Blogs (2011)


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to BP after a Russia deal33

, or implicit confessions in resignations of executives amid

corruption allegations like that at Codelco34

, or explicit confessions and settlements such as

those with BHP Billiton in Congo and Cambodia35

and Chevron in Iraq36

, reports and cases

show the same companies which are supposed to reject corruption actually support it too.

The effects on a company of exposure in corruption or other criminal scandals are

localized too, so beyond a tangible fine levied against an offender, there is little impact other

than on perhaps image and morality perceptions held by a sect of the population. For

example, Newmonts stock price did not show any negative effects after a corruption probe in

Indonesia37

.

We can thus conclude that the insidious plague is capable of mimicking healthy cells,

and it may be difficult to tell the difference between the genuine and infected parts. By

imitating the clean units, this infection can then operate covertly, gaining acceptance and

support of the healthy parts, and continue to infect others without their knowledge of any

illness being transferred. The resulting lack of trust and transparency in the group further

stalls healing, barricades the corporations and public offices and seals them off from outsiders

who have not been corrupted or infected. After sufficient time has passed in quasi-isolation,

and the disease has strengthened itself against internal and external efforts to eliminate it, the

plague can then survive perpetually as it becomes the norm to label only the truly well as the

ailed and to accept corruption as a constant. We must also accept that in the end, the body

may not have the requisite will to heal itself, as sadism and masochism are often found

33 Mail on Sunday,Beware of corruption, Labour MP warns BP after deal with Russian company (2011)34 Business News America, Codelco VP resigns in midst of corruption allegations (2008)35 Francesca Steele,Mining giant BHP Billiton admits it may have bribed foreign officials, The Sunday Times(2010)36

Securities and Exchange Commission, Chevron to pay $30 million to settle charges for improper payments toIraq under UN oil for food program (2007)37 Nasdaq,Newmont Sparkles at $78 Despite Indonesia Probe (2011)


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together, especially in austere ascetic sects such as those in the rural developing and third

worlds.

Considering that there is no substitute for most resources, and the substitutes that are

available are not in adequate supply to threaten significant portions of the market share of

primary resources like petroleum and iron, for example, there is a monopolistic effect to the

international resource market. A nations resources are considered public property, and so

state-ownership of mining or heavy state involvement is standard, resulting in 25-30%+ of

government revenues coming from extractive industries in some countries38

. The access to

and control over the resources which public officials wield creates opportunity to create

problems. Companies, especially wealthy foreign ones, are subject to the supply-side

economics in locations where they desire to harvest resources, considering again that there

are insufficient substitutes for those resources, and also that there is elevated competition to

gain rights to acquisition and development of lands containing such resources. Peak

production theory and the absolutely limited supply nature of the resource trade further

enhance competition in the short-term, when price elasticity is low not only at the point of

sale after first acquisition, but also likely at the initial sale of rights. Officials can merely raise

the price of access by requiring a bribe, and companies may face a the dilemma of payment

of the bribe or loss of rights, especially if they have a habit of paying bribes, since once the

cycle starts it is hard to break and there may be no legal agents willing to help when the

corrupt company finally wants to stop.

Factors including poverty, an uneducated general population, low local or national

development, and certain cultural and personality traits may sway otherwise decent

individuals to exploit their powers for personal gain, including at the cost of the public. A

38 Monika Weber-Fahr, Treasure or Trouble?, World Bank and IMF (2002)


19/32

better me than them attitude may also be inseparable from impoverished locales where

government is synonymous with corruption. Competition not only for resources, but also for

bribes is likely a feature of various locales, and then we may boldly compare the corrupt

officials to a drug addict as we have with persons attempting to procure resources, and there

are few limits to the lengths people will go to obtain the substance of their addiction, be it

money or resources or some other drug. This complicated, integrated and suspiciously strong

virus has no cure today, nor in the foreseeable future, and in the transitional meantime up to a

point when a vaccine can be theorized and practically administered, treatment and

management is the only realistic option. This plague, unfortunately, fiercely resists treatment.

PSYCHOLOGICAL AND SOCIAL THEORY

Corruption may be a mental health issue. Participants in bribery, kick-back, and other

corrupt schemes most often exhibit coherent speech, and are rarely the subject of violent

criminal court proceedings. However, there are milder forms of mental illness which

businesspeople and public officials may be suffering from while associated with criminal

activity.

Narcissistic Personality Disorder39

may be the most common form of mental illness

afflicting corrupt personnel. Attitudes and thoughts of such persons may be exaggerated, and

they may have a classic grandiose sense of self-importance, or be preoccupied with fantasies

of success and power. They may believe they should have exclusively high-status people or

institutions in their life. They may require excessive admiration, or have a sense of

entitlement to favorable treatment. They may exploit other people to achieve their own ends.

They may lack empathy for others, or be envious of others or believe others are envious of

39 American Psychiatric Association,DSM-IV-TR 301.81


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them, and they may show arrogant, haughty behaviors or attitudes. They may very easily fit

the diagnostic criteria for the disorder.

Such personnel may suffer from Antisocial Personality Disorder40

. In receiving or

giving bribes, they fail to conform to social norms with respect to lawful behaviors.

Deceitfulness by repeated lying may accompany unethical or criminal behaviors, for which

they may lack remorse. Impulsivity, reckless disregard for safety of self or others, irritability,

and consistent irresponsibility may also be present in such persons, who may have developed

such habits in adolescence.

If criteria are not met for Antisocial Personality Disorder, Conduct Disorder41

may be

present. Persons suffering from Conduct Disorder exhibit a persistent pattern of behavior in

which the basic rights of others are violated. Such people also act aggressively toward other

people or animals to the extent that they may bully, threaten or intimidate others, or initiate

physical fights, or steal from others, or force another into sexual activity. Such aggression

toward people is not absent in dysfunctional military or police organizations. Persons with

Conduct Disorder may destroy the property of others, and or invade someone elses home or

car. They may lie to obtain goods or favors, and exhibit other traits which significantly impair

their occupational functioning.

If criteria for Antisocial Personality Disorder or Conduct Disorder are not met, corrupt

actors may be suffering from Oppositional Defiant Disorder42

. Such mentally ill persons

exhibit a pattern of negativistic, hostile, and defiant behavior as indicated by losses of temper,

arguments, defiance of rules or refusal to comply therewith, deliberately annoying others,

40

American Psychiatric Association,DSM-IV-TR 301.741 American Psychiatric Association,DSM-IV-TR 312.842 American Psychiatric Association,DSM-IV-TR 313.81


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blaming others for his or her own mistakes, touchiness or is easily annoyed by others, general

angry and resentful demeanor, or spitefulness or vindictiveness.

Diagnostic criteria for Obsessive-Compulsive Personality Disorder43

include

preoccupation with details or schedules to the extent that the major point of the activity is

lost; perfectionism that interferes with task completion; excessive devotion to work and

productivity to the exclusion of leisure activities and friendships; over-conscientiousness,

inflexibility about matters of morality, ethics, or values; overly strict standards; miserly

spending style toward both self and others as money is viewed as something to be hoarded for

future catastrophes; rigidity and stubbornness. Perhaps this diagnosis may better suit the

public official side of corrupt arrangements, but several points concerning excessive

strictness and preoccupation with work to the detriment of other relationships may also apply

to private company men and women.

Some cases may involve persons who are suffering from Delusional Disorder44

.

Corrupt persons or participants in schemes may have delusions involving real life situations,

such as about being followed or under surveillance. Persons suffering from delusions may

show no remarkable impairment or bizarre behavior, and the disturbance is not due to the

direct effects of a substance. Delusions of being under surveillance may seem like good sense

among corrupt persons.

Within an office, corrupt activity may be allowed to continue due to simple passive

aggressive tendencies among coworkers. Procrastination, passing the buck, making excuses,

lying to save face, intentional inefficiency, letting a problem escalate, and self-depreciation

43 American Psychiatric Association, DSM-IV-TR 301.444American Psychiatric Association,DSM-IV-TR 297.1


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are all signs of passive aggression45

. In extremely dysfunctional organizations, individuals

may be induced into depressive internal states where external cooperation toward compliance

is not an option.

Corrupt organizations, as legal persons, exhibit a variety of ill pathologies46

but

businesses are inorganic, and are not humanper se. A growing number of experts have

approached the corrupt organization from both the external and internal, and conceptualized

organizations as collections of individuals. The corrupt organization may then be perceived

as an organization of corrupt individuals

47

.

There may exist a sense of being protected under the corporate persona or a sense of

anonymity as a corporate employee, which fosters ideation analogous to invincibility, or at

least that there is no danger in engaging in or supporting or ignoring corruption. Within the

corporate fortress, manifest violations of law and ethics policy may become the norm. A lie

may spread across an entire organization and become amplified as it feeds back into and

through the organizations personnel who fail to halt its progress and apparent validity.

Myriad systemic faults within the corporate structure can contribute to escalation of

deception such that it becomes the norm48

.

People who may have been otherwise law-abiding and compliant may develop deviant

tendencies at work where rationalization of criminal acts is standardized into the business

model, where corruption is valorized and seen as a mere part of doing business. Processes of

socialization within certain corporations may include convincing newcomers that corruption

45 Psychology Today Magazine, Passive Aggression (2011)46 Sergio Alvarado, Organizational Pathology, 26th International Conference of the Institute of ManagementSciences (1984)47 Jonathan Pinto, Carrie Leana, and Frits Pil, Corrupt Organizations or Organizations of Corrupt Individuals?,

Academy of Management Review, pp.685-709 (2008)48 Peter Fleming and Stelios Zyglidopoulos, The Escalation of Deception in Organizations, Journal of BusinessEthics, pp. 837-850 (2007)


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is permissible or even desirable. Once at the organizational level, corruption can continue

despite the turnover of its prior or initial practitioners. Within the system where individuals

and the collective are mutually reinforcing, otherwise decent people may be able to

consistently and routinely engage in corruption without feeling remorse or experiencing

conflict49

.

Crime has been considered a type of social deviance50

, and it has been argued that

deviance is established in social roles51

. When ones identity is structured around ones

place at work or occupation, demands made by others at work, even non-binding social

demands, may compel people toward deviance and thus crime. When people are rewarded for

deviant behavior, such as being awarded contracts which in turn leads to intangible rewards

of acceptance and admiration among a group of coworkers, the deviant behavior may seem

more justifiable and desirable than conforming behavior, which may provide negative

consequences such as losing contracts and being alienated from a group of peers, or

termination of employment52

.

Negative consequences associated with conforming behavior may easily lead to a sense

of victimhood and rejection of formal legal and ethical rules as being counterproductive or

damaging. A group of individuals in a work situation may find unity in defiance of public

policy, especially in cases involving bribery of public officials. The rivalry between the

corrupt and the formal legal institution may produce an ironic effect wherein the socially

deviant behavior which was established and reinforced in social roles is perpetuated by the

49 Blake Ashforth and Vikas Anand, The Normalization of Corruption in Organizations, Research inOrganizational Behavior, pp. 1-25 (2003)50 Charles Tittle and Raymond Paternoster, Social Deviance and Crime: An Organizational and Theoretical

Approach (2000), abstract available athttp://www.ncjrs.gov/App/publications/abstract.aspx?ID=18445651 EM Lemert,Human Deviance, Social Problems, and Social Control (1972), abstract available at

http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=759152 RL Akers,Deviant BehaviorA Social Learning Approach (1973), abstract available athttp://www.ncjrs.gov/App/publications/abstract.aspx?ID=27692
http://www.ncjrs.gov/App/publications/abstract.aspx?ID=184456http://www.ncjrs.gov/App/publications/abstract.aspx?ID=184456http://www.ncjrs.gov/App/publications/abstract.aspx?ID=184456http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=7591http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=7591http://www.ncjrs.gov/App/publications/abstract.aspx?ID=27692http://www.ncjrs.gov/App/publications/abstract.aspx?ID=27692http://www.ncjrs.gov/App/publications/abstract.aspx?ID=27692http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=7591http://www.ncjrs.gov/App/publications/abstract.aspx?ID=184456


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same forces which are directed at its elimination . Deviant behavior may then be further

magnified by stigmatization of the corporate employees, as stigmatization by others or

association with a stigmatized group has been shown as a cause of deviant behavior53

.

DISCUSSION

Effects of corruption are largely economic and thus can be considered theoretical,

indirect, or intangible, though significant work has been done which also considers the other

side of the economic costs argumentthat they are measurable and real. The Stolen Assets

Recovery Initiative considers corrupt payments and other illicitly obtained property as

outright theft of public assets, and the true cost of corruption as far exceeding the value of the

assets . Collateral damage is not without real value, and represents a moral loss of greater

social magnitude. Stolen assets are often hidden in financial centers in developed countries,

meaning the money which probably came from a developed-nation corporation returns again

to the developed world, magnifying the impact on the underdeveloped nations and distorting

the market function in the first world.

The resource curse likely has bilateral effects as corrupt payments and globalization take

thicker roots. Nations whose economies are more dependent upon resource trades suffer from

classic niche development and widespread poverty with the added newer component of

multimillion or multibillion dollar annual bribery activity, and nations whose economies are

expansive and dependent upon foreign supplies suffer from a reciprocal influence as

corporations move most of their assets abroad, employ more people abroad than

domestically, and as the corporate culture shifts from a more isolationist, protectionist and

nationalist one to one more inclusive of and dominated by developing and third world

mentality. Machiavellian axioms such as the ends justify the means proliferate as goods and

53 Erich Goode,Deviant Behavior(2000), abstract available athttp://www.ncjrs.gov/App/Publications/abstract.aspx?ID=193747
http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=193747http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=193747http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=193747


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people move freely across borders, and the once-developed high-class personality historically

frequently associated with the Western world is relegated to that of a glutton, a conquistador,

an imperialist, a neo-colonial neo-slave master. In the global market, the zero-sum game

produces inefficiencies that guarantee only losers.

Human rights abuses are constants in nations with high corruption, whether a causal

relationship or mere correlation exists between the two. Nations who have implemented

legislation in conformance with international norms, and those which have ratified either the

International Covenant on Civil and Political Rights or the International Covenant on

Economic, Social and Cultural Rights see their official policy and political will compromised

by rogue actors who engage in corrupt practices54

. Authoritarian regimes, military

dictatorships, nations with weak judicial systems and socialized industry are breeding

grounds for corruption, human rights abuses, and diminishment of the importance of

individual freedoms, all of which are associated with weak economies, though the association

between democracy and economic growth can be on the positive and negative side . In

poorer, more corrupt countries a cyclical phenomenon is noticed, and a chicken oregg

paradox results after pondering ing whether corruption is a result of underdevelopment or if

underdevelopment is a result of corruption55

.

Ethnocentrism and subjective perceptions clearly influence acceptance of corruption and

inaction against it. Authors have found that what people in the West see as corruption,

Africans, for example, view as normal politics. In Russia and China, bribery may be

considered a mere cost of doing business, especially for foreign firms56

(2005). Isolated

54 Kenny Feng, The Human Rights Implications of Corruption: An Alient Tort Claims Act Based Analysis,Wharton Research Scholars Journal (2004)55 John Quinn, The effects of majority state ownership of industry or mining on corruption: A cross-regional

comparison (2004)56 Steven Myers,In Russia, bribery is the cost of business, New York Times (2005); Zhang Yan,Bribery caseson the rise in China, China Daily (2010)


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regions where extraction facilities are located are often populated by tribal peoples who are

inherently distrusting of foreigners or domestic outsiders, which becomes an opportunity to

bribe, solicit, or extort to gain short-term cooperation and some resemblance of trust perhaps

by appeasing the fiery gods of superstition, yet another dimension of the resource curse and

insidious plaguewhich are largely indistinguishable from one another57

.

During the gold standard ages and in other systems where there was a limited quantity

medium of trade it was probably more rational and necessary to compete outside of the

ethical and moral rules, but today we have virtual money, binary credits, and an unlimited

supply currency which is not exclusively valued upon any tangible non-renewable resource,

but is at the core actually based on faith and other psychological factors in the common

market. Todays corrupt officials and businesspeople are more harmful and less emotionally

intelligent than those from 100 years ago and further back in time. Yields on corruption are

higher today than previously, both in the amount of resources obtainable in short periods of

time and in the spot bribe prices, and so corrupt actors are greedier today than in the past.

Prosecutors handle more corruption cases today than previously, and investigations,

inquiries, and oversight are more common today than before, so persons engaged in corrupt

activities are more fearless and unscrupulous than they were previously, meaning they risk

more, and pose a greater threat to themselves and others. More private individuals,

academics, officials, organizations and business groups are involved in activities designed to

combat, reduce, prevent, and eradicate corruption today than ever before, yet it is likely a

growth market, meaning that the situation is more complicated now than before, and its

participants are more entrenched into positions of high power.

57 Lowell Bergman and Jane Perlez, PeruThe Curse of Inca Gold, PBS (2005)


27/32

CONCLUSION

Managing the effects of corruption today includes paying attention to local, provincial,

state, regional, national, and global initiatives, regulations, and agendas. The United Nations

and OECD have offered business and public officials various pieces of literature that can be

used to reduce the propensity for corrupt activities internally and externally58

. Corporations

report great ideas and officially hold ethics and community responsibility very highly. The

action plans and rhetoric are only part of the puzzle, obviously. Today many of us are keenly

aware of the differences between theory and practice outside of the natural sciences, and the

difference between de facto and official laws, and compliance therewith.

The secret ingredient in the recipe for success has been and always will be individual and

collective will. We need to integrate micro and macro paradigms, to transcend the individual,

group, and collective whole to find a unified vision and set of goals. Goals and procedures

must be communicated effectively from individuals to other individuals, from the collective

to individuals, and from individuals to the groups of varying sizes, and people need to have

the integrity to go about their private lives with the fundamentals in mind. This, of course, is

the part where human nature has been consistently considered an absolute limiting factor, and

where individuals and groups have essentially given up on eliminating the problem, and thus

have directly and indirectly enabled the problem. We need better psychometrics, better

recruiting, better monitoring, and better human resources. We need a great deal of faith too.

A corporate offender registry may help in exposing organizations which are guilty of any

criminal offenses. Corporations which are required to notify their suppliers and customers of

their criminal history, and publicly acknowledge and perhaps apologize for their criminal

58

OECD Working Group on Bribery, Annual Report(2010); UN & Transparency International,ReportingGuidance on the 10th Principle against Corruption, UN Global Compact Office (2009); UN Global CompactOffice (2004, 2006, 2010)


28/32

behavior have greater incentive to cease criminal activity and assist authorities in enforcing

laws and preventing corporate crime. Exposure of corrupt and otherwise criminal

organizations may effectively stigmatize and increase the salience of the behavior, thereby

reducing such behavior and perhaps making it more noticeable and easier to talk about in the

community. An easily accessible user-friendly online database of all corporate criminal and

civil activity, including investigations, charges, and settlements would increase public

awareness of the issue and help stakeholders clarify certain issues and acquire specific

knowledge of the legal proceedings. Treatment options for the mentally ill are also necessary.

Bank records need to be more accessible so concealment of illicit income is not so easy.

At the end of 2010, about 89% of total assets at BIS reporting banks were external assets59

.

Although the ratio of local to foreign claims has come up in recent years, foreign investment

represents a very significant portion of emerging market activity60

, making concealment

fairly simple for experts with access to certain personnel at certain banks which do not report

59

BIS, Statistical Annex: The international banking market, BIS Quarterly Review (2011)60 Patrick McGuire and Philip Wooldridge, The BIS consolidated banking statistics: structure, uses and recentenhancements, BIS Quarterly Review (2005)


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to the public their transfers data, offshore data, and national data sufficiently to eliminate

opportunities for rogue bankers to provide ancillary services for some fee.

Discretionary spending can be reallocated to projects dealing with 21

st

century issues like

corruption from those dealing with 20th century issues like drugs and adult prostitution.

Revenues from tax evasion cases, which would increase with further relaxation of banking

secrecy laws and codes, can be put to good use in policing corporate criminalsby far the

most financially and economically devastating criminals on any street anywhere. Without a

will, unfortunately for all, there is no possible way to beat this peculiar plague or to bind this

evil curse.

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