SASB Speaks: Steering towards Transparent Waters: Corruption in the Shipping Industry
Bribery and corruption at sea ports add hidden costs to doing business
Globally, the annual cost of bribery is $1.5 – $2 trillion, or two percent of the world’s entire gross domestic product. Transport is among the top three most corrupt industries, according to the Organisation for Economic Co-operation and Development (OECD). This is mainly due to facilitation payments at shipping ports, which are considered standard business practice in some countries. These payments are often necessary to obtain permits, cargo clearance, and port berths. Bribery can be an expensive hidden addition to the cost of doing business: a 2008 Harvard University study found that bribes can raise the cost of shipping a standard 20-foot container by 14 percent. In a world where nearly everything is shipped, this monetary cost is borne by all.
The United Kingdom’s 2010 Bribery Act expanded upon the OECD Convention by introducing strict liability in instances of bribery: Companies and individuals can be penalized even if they are not directly guilty or if they have no knowledge of a crime. As one of the strictest anti-bribery laws in existence, it may serve as a model for other countries. The U.S. Foreign Corrupt Practices Act (FCPA) maintains similar standards. Penalties for violating FCPA can be high – as much as $2 million in criminal fines for corporations and $250,000 for individuals.
Growing Investor Interest
Corruption is a key concern for investors, as they risk reputational damage and decreased returns if companies they are invested in are publicly implicated in corruption. Institutional investors should encourage a strong anti-corruption stance among their existing or prospective investee companies to reduce uncertainty over long-term returns. In January 2016, Norway’s public pension fund put Chinese telecoms equipment company, ZTE Corporation, on their exclusion list for “gross corruption”. A few months later, Brazilian petroleum company, Petroleo Brasileiro, was added to their observation list because of a “risk of severe corruption.” These actions are indicative of the growing importance of corruption in investment decisions.
Effective corporate management of bribery and corruption demonstrates strong governance and internal controls, reduces riskiness of investment, and preserves the reputation of companies and their investors. Corruption hurts investments by increasing costs, which can impact margins, and by diverting resources that could otherwise be spent on productive means, e.g. cost-saving technology.
Demand for Transparency & Effective Anti-Bribery Measures
There is growing demand for transparency around anti-bribery measures and reporting. The World Federation of Exchanges has issued environmental, social, and governance (ESG) metrics for listed companies to report. Anti-bribery transparency is among 33 material ESG metrics identified by the Federation.Anti-corruption is also one of 10 guiding principles for the United Nations (UN) Global Compact. The UN Global Compact is a voluntary initiative for businesses to adopt sustainable and socially-responsible policies, and to report on their implementation. A new ISO (International Standards Organisation) standard on Anti-Bribery Management Systems received an overwhelming 91 percent vote of confidence from ISO members. It provides guidance for a management system designed to help an organization to prevent, detect, and respond to bribery and comply with anti-bribery laws and voluntary commitments applicable to its activities. It can also signal a company’s commitment to the anti-bribery stance.
Recognizing the depth of the problem, the shipping industry is coming together to attempt to reduce corruption and bribery. The Maritime Anti-Corruption Network comprises of vessel-owners and cargo-owners working together to establish and promote good corporate management of corruption. According to the 2008 Harvard University study, bribe payments at ports represent a significant distortionary tax on trade, in addition to a transfer of resources between shippers and port officials to facilitate customs clearances.
Despite the importance of this issue, it’s difficult to gauge how shipping companies and logistics providers are mitigating the risk of bribery. Also largely unknown to investors is the extent to which the cost of bribes is shared by logistics providers, shipping companies, and cargo owners. An analysis of SEC annual filings of the largest shipping companies showed that while 50 percent recognize bribery as a risk factor, none disclose to investors the specifics of their performance on the issue. Maritime shipping companies acknowledge that under anti-corruption laws, they may be held liable for payments made by strategic or local partners.
The SASB standard for Marine Transportation suggests disclosing the following metrics on corruption:
• Number of calls at ports in countries that have the 20 lowest rankings in Transparency International’s Corruption Perception Index
• Amount of legal and regulatory fines and settlements associated with bribery or corruption
Such information can fill gaps that leave investors in the dark about one of the key infrastructural elements of our economy: how cost-efficiently and promptly goods can move around the globe.
Nashat Moin is the Transportation sector analyst for the Sustainability Accounting Standards Board