Organizational corruption: practices and anti-corruption controls in Brazilian banks

Daniel Jardim Pardini FUMEC University Belo Horizonte Brazil Email: pardini@face.fumec.br

Denise Campos Chaves Machado FUMEC University Belo Horizonte Brazil Email: denise.machado@fumec.br

Yuri Richard da Silva Costa FUMEC University Belo Horizonte Brazil Email: yuricosta@yahoo.com.br

Paper accepted to the 29th EGOS Colloquium, 2013 Sub-theme 29: Unmasking Corruption: Critical Perspectives on Corruption and AntiCorruption

We would like to thanks CAPES, Coordenao de Aperfeioamento de Pessoal de Nvel Superior, MEC-Brasil, for the support in this study.

Organizational corruption: practices and anti-corruption controls in Brazilian banks Introduction

Corruption happens when there is a breach of collective and organizational rules by one or more individuals seeking personal gains from it through various types and strategies. It is a recurring phenomenon in social activities held by norms and models of behavior that consists mainly in breaking the accordance pattern through the action of an individual, group of individuals or an organization that try to obtain private benefits. (Lange, 2008; Pinto et. al. 2008; Misangyi et al. 2008). The literature on corruption consists on a variety of perspectives include ethical decision-make (Jones, 1991), government, political and legislative corruption (Schleifer & Vishny, 1993; Nice, 1986; Jain, 2001); normalization of corruption (Ashforth & Anand, 2003) and social networks (Nielsen, 2003). While management scholars have examined corruption at those different perspectives, the organizational and management level studies are until underexplored. We proposed a practices and anti-corruption approach as way to suggest insights to mitigate the manifestation of corruption in the organizational environment. Theoretical foundations permeating the relationship among practices and strategies to prevent corruption in organizational studies are still incomplete. Taken as whole, the organizational corruption literature is rife with inconsistencies and inconclusive empirical results. The existing studies address the issue of corruption separately; they focus on their ethical and behavioral aspects and their reflexes on the company (Pinto et al., 2008). However, they do not extend to the possible inter-relationships between the phenomenon manifestation and the possible controlling mechanisms to interrupt them. We develop our study around the question of which are the main practices and anticorruption control processes in the financial sector. In financial sector, corruption gets larger dimensions because of the huge amount of money circulating and the ease access of misconduct practices. The purpose of this paper is to identify the major corrupt practices and the mechanisms to avoid corrupt actions in banks. The Brazilian banking sector is the subject of analysis of the research. The study seeks to increase knowledge about the identification of corrupt actions and controlling resources that may mitigate the illicit behavior designed to ensure benefits for the corruptor agent or agents.

Theoretical perspectives on corruption organizational practices and control

The word of corruption derives from Latin term corruptionis, which is the conjugation of two Latin terms cum and rumpo (verb break). It means a complete break; break the whole; break it completely. Corruption also expresses disruption or deviation of a moral code or social behavior. The word also carries a strong negative sense that qualifies conditions and actions associated with degeneration, perversion and bribery. Corruption is a sudden or gradual act contrary to the norms and current values. It needs the corrupting agent acting alone or in groups in order to achieve benefits for one or themselves. The corruptor has a seductive behavior seeking fraudulent and solidarity advantage. Corrupts aim to break the rules and moral obligations in the financial, political and judicial areas in which they operate. The desired benefits could have material nature, especially the financial advantages and other kinds of benefits such as power, prestige, promotion and strategic positions in a company. Identify and describe corruption practices seem to be the most satisfactory alternative to open up for a more advanced view the complexity of corrupt behaviors. Olivier de Sardan (1999) uses the term of corruption complex to include practices beyond corruption in the strict sense of the word, i.e. nepotism, abuse of power, embezzlement and various forms of misappropriation, influence peddling, prevarication, insider trading and abuse of the public purse. Two other corrupt practices stand out in the literature: fraud and money laundering. Between the corrupt actions taking place in the financial system, fraud is the most studied one and it also produces the biggest financial losses. Fraud will become in the future a problem of great importance and its detection will be increasingly more difficult due to the sophistication of technology facilities. Money laundering is also a practice that causes heavy losses to organizations. The origin of the term dates back to American mafia organizations, which, in the 1920s, invested money on it. They got through criminal activities at laundries and car washes. The criminal practice aims to dissimulate or hide the illicit origin of financial assets or patrimony through a maneuver that will legitimate the licit origin or at least making the illicit origin been difficult either to demonstrate or prove. Others corrupt practices are considered in the literature: a) Not accounted cashes - use to accumulate funds not official accounted;

b) Active bribery - offering to an individual, any undue advantage expecting illicit benefits; c) Passive corruption - soliciting or receiving, for oneself or another, an undue advantage. d) Influence peddling - asking, demanding, collecting or obtaining for oneself or others, advantages, benefit promise. The use an authority to get favours or special treatment for oneself or others most of the time in return of payment e) Gang of criminals people get together having criminal objectives. f) Management reckless - managing third party funds in a risky way.

g) Administrative law - sponsor the public worker directly or indirectly. h) Concussion - requiring, for oneself or others, directly or indirectly, any undue advantage. In this study we explore the means of controlling the corrupt practices in organizations. The literature of organizational control have two main streams: controls oriented toward outcomes and controls transmitted through administrative and social/culture channels. Administrative controls are those that are intentionally designed, and social controls are those that emerge unintentionally through the social interactions of organizational members. (Lange, 2008) Those conceptions are practically relevant and theoretically important to distinguish organizational control and corruption control. Organizational control is any process by which managers motivate and encourage organizational managers to act in derived ways to meet the firms objectives (Child, 1973). It is adopted to maximize a desirable state by cooperation and efficiency. In other way, corruption control emphasizes the minimization of an undesirable state intentional maleficence. The goal of corruption control is combat intentional self-serving deviant behavior. It intends to: a) Reduce autonomy; b) Influence the members behaviors through rewards and punishment systems; c) Transmit to the members external pressures for legal compliance and social conformity; d) Facilitate the members own inclinations to reject corrupt behavior. Our purpose now is to looking for an in-depth understanding of practices and control processes of corruption in the financial sector.

Methodology

The methodology employed in this study embraced both qualitative and quantitative techniques. Initially, a qualitative approach was used to evidence the attributes of the meanings concern control mechanisms against corruption practices, within the financial system. Afterwards, we proceeded to the quantification of the qualitative data, through frequency statistics combinations to determine associations among the constructs of this study. The research may also be framed as an exploratory and descriptive. The exploratory study deals with issues that are poorly investigated; therefore it has not been accumulated a substantial literature revision. Despite the recent thematic of corruption in organizational studies, very few researches focus in identify practices and anti-corruption control processes. In order to identify the main corruption practices and their mechanisms of control in the Brazilian financial system, we have interviewed 23 professionals, who work in different areas at the four main banks of Brazil: Banco do Brasil and Caixa Economica Federal (the two biggest public Brazilian Banks), Santander (the biggest foreign bank in the country) and Ita-Unibanco (the biggest Brazilian private bank). Interviews were arranged with top, medium and operational bank managers, auditors, lawyers and technicians whose work in financial activities. The choice of this sample followed the criteria of convenience, due to the refusal of several employees to be interviewed and the companies reluctance to formalize the research. Thematic analysis was adopted to investigate the material extracted from the interviews. With the thematic analysis we identify the themes, sub-themes and a semantic content of the sub-themes identified in the oral statements (Fereday & MuirCochrane, 2006). The texts produced from the interviews are grouped into units (categories) and the semantic contents were described and rated in accordance to the analogical regroupings. This analysis is now briefly presented.

Practices and anti-corruption control in Brazilian banks

In the analyses of the oral statements, we identified and structured three themes and the respective sub-themes and semantic contents: meanings of corruption, corruption practices and anti-corruption controls.

We explore the meanings attributed to corruption by the bank managers to understand how the construct was perceived in the financial sector. Most of the oral statements indicate that corruption is associated with embezzlement resources in the public sector. The interpretations also relate the breaking of the law in favor of someones own interest:

Corruption is a transgression of rules, regulations and laws. Someone uses one privileged and powerful positions with the intention of getting benefits, mainly financial ones for oneself or a group of people. (Control manager) Corruption is the use of a particular power or knowledge unlawfully within an institution, either a public or private for ones own benefit, or a group. Corruption happens when the order ... current regulations are corrupted privileging oneself or a group of people. (Lawyer)

One of the main ways of getting personal advantages is the usage of power given to the corrupt actor. This power is manifested both by positions and occupied seats, ensuring access to specific processes and holding information relating to several important issues. We identified 24 other practices making use of corrupt actions in several bank areas. Table 1 shows the more frequent meaning semantic contents.
Table 1 Corruption Thematic Nucleus - Subtheme: Corrupt Practices in the Financial System Semantic Content Making easy for bank robbery and/or giving privileged information about clients Embezzlement of money (without specifications) Falsification of documents for different purposes Frauds in balance books and accountability information Use of fake bank accounts to raise loans Money laundering Embezzlement of money from credit government programs to small companies, agriculture investments and others specific economy sectors. Active bribery for different purposes Embezzlement of money from: treasurers office, internal bank accounts, self-services terminal electronic devices by internal employees Active bribery involving employees of the purchase sector Active bribery to illicit advantages in loan taxes negotiations Others semantic contents Total Frequency % of the Subtheme 9,72% 9,72% 8,33% 6,94% 6,94% 5,56%

7 7 6 5 5 4

4 4

5,56% 5,56%

3 3 3 21 72

4,17% 4,17% 4,17% 29,16% 100%

Corrupt actions in the financial system may be practiced by two corrupt actors (one internal, another external), by a single employee and by individuals or groups who are outside the bank physical located, which is the case of cybercrime. In the analysis of statements

regarding the subtheme experienced corrupt practices, 39.16% said they had never witnessed corrupt actions. The study of daily corrupt practices experienced at Brazilian banks has shown that the misconduct is performed not only to ensure private financial advantages, but also to guarantee the fulfillment of organizational goals. The oral evidence bellow illustrates one of this practice:

Not long time ago, we had, for example, a case that led to a dismissal. An employee was enabling credit cards to many clients without their solicitation. We have also had the case with savings accounts, which employees used to do a small transfer of money from clients current accounts to their savings accounts. Therefore these clients started to have savings accounts, but they didnt ask for that. In both cases, employees felt under pressure by bank goals and they ended up having inappropriate conduct, which it may be considered corruption. (Human Resource Manager)

Document forgery and misappropriation of withdrawal resources from current accounts, treasury and bank terminal services are the most common corrupt practices. Usually, defalcations in the bank treasury and automatic teller machines (ATMs) rely on the complicity of more than two corrupt agents, who were the employees supposed to supervise those activities. Failures on monitoring also led to situations in which managers create new bank accounts in order to get loans for their own benefit. Having their own bank account card, the corrupt agents withdraw cash from the bank which will be paid by new loans. If on one hand, over 60% of respondents have experienced corrupt practices on the other hand, 95% of respondents confirmed the inexistence of indicators that measure corrupt actions within their organizations. Therefore, what would be the controlling mechanisms used to mitigate corruption actions? Usually, the banks adopt conducting codes and educational awareness actions in order to try to stop corruption. Another widely used control process is the conference's veracity and legality of the reported data on credit operations (compliance). This task is also operationalized by the audits and it works as pressure mechanisms through monitoring and verifying all the suspicions and allegations of corrupt actions. According to the opinion of 74% of respondents, specific processes created to inhibit misbehaviors in the work environment are not enough to mitigate corruption in the banking industry. These respondents refer to the persistence of the corrupters who constantly use new illicit acts:

[...] The power of human mind, working to perpetrate illicit acts, corrupt acts and related acts such as corruption, peculation and accessories and similar, is infinite.

Peoples imagination in the business world is endless when they decide to frau d and to do corrupt acts. (Technician) Whenever institutions move forward trying to prevent and end these problems [of corruption], on the other side there are always people thinking and developing new methods of contravention all the time. So we always have to run after them. These people are so creative ... They are always making up something to benefit themselves. (Lawyer)

Both semantic contents courses and training in anti-corruption actions (audit, compliance, risk management, etc.) and investments in the areas of audit and control, each one representing 23.53% of all the given answers, are reminded as relevant organizational strategies to reduce corruption actions. We also use the sub-theme governance practices as anti-corruption control to understand whether the practices derived from governance principles, such as transparency of information and compliance with regulatory standards, are either relevant or undermine the struggle against corrupt practices. For 61% of respondents, transparency is important mainly because of the damages caused by the absence of governance mechanisms, which is not justified in the financial sector that "has no industrial secrets as Coca-Cola". Restrictions to the access of information may facilitate intentional actions and hamper the misconduct control, since the corrupt acts are "obscure and undefined situations". The major difficulty to end corruption is still its fast identification.

Conclusion

The interviews in this research allowed us to know the corrupt actions most often practiced in the Brazilian financial system, as well as the main mechanisms adopted by banks to prevent and mitigate these actions. Although, in the design of corruption control the individual differences in leading to corrupt behavior were normally neglected, this study contributes to the literature of corruption organizational control indicating that we have to consider the distinguish differences between the traditional and corruption concepts of organization control. Revisiting the theoretical statements about the main effects of corruption control proposed by Lange (2008), the present study indicates that, since corrupt behaviors pursuit individual interests through the intentional misdirectional of the organizational resources, it is also important to associate corrupt practices with anti-corruption controls. Most of the time, the corrupt actors know about the bureaucratic controls to limit corruption. Consequently,

many means of control used in organizations, like bureaucratic mechanisms, cannot be described as anti-corruption processes. Some difficulties were faced in this work, mainly due to the corruption theme. We were not able to do a larger number of interviews. Many of the invited respondents declined to speak or dodged interviews when they were informed about the topic of study. Besides the problems related to the research data, another restrictor was pointed out by some respondents: most of the corrupt actions are not discovered in financial institutions. Even when they are discovered, they are taken to the attention of a very restricted group of people. In general, appropriate actions in cases of corruption occur in a "domestic" way, at the risk of greater disclosures that deteriorate the image of the institution, shaking the confidence of clients and shareholders. These factors limit the knowledge of all available corruption actions and almost, concerning academic projects, they restrict the efficiency of quantitative research to unmask the phenomenon.

References

Ashforth, B. E. & Anand, V. 2003. The normalization of corruption. Research in Organizational Behavior, 25: 1-52. Child, J. Strategies of control and organizational behavior. Administrative Science Quarterly, 18: 1-17. Fereday, J. & Muir-Cochrane, E. 2006. Demonstrating rigor using thematic analysis: a hybrid approach of inductive and deductive coding and theme development. International Journal of Qualitative Methods, 5, 1-11. Hess, D. 2009. Corruption in the value chain: private-to-private and private-to-public corruption. In: Zinnbauer, D.; Dobson, R.; Despota K.; & Bock T. 2009. Global Corruption Report 2009: corruption and the private sector. Cambridge University Press. 19-23. Jain, A. K. 2001. Corruption: A review. Journal of Economic Surveys, 15: 71-121. Jones, T. M. 1991. Ethical decision making by individuals in organizations: An issuecontingent model. Academy of Management Review, 16: 366-395. Lange, D. 2008. A multidimensional conceptualization of organizational corruption control. Academy of Management Review, v.33, n.3, p.710-729. Misangyi, V. F., Weaver, G. R., & Elms, H. 2008. Ending Corruption: the interplay among institutional logics, resources, and institutional entrepreneurs. Academy of Management Review, v.33, n.3, p. 750-770.

Nice, D. C. 1986. The police consequences of political corruption. Political Behavior, 8: 287-295. Nielsen, R. P. 2003. Corruption networks and implications for ethical corruption reform. Journal of Business Ethics, 42: 125-149. Olivier de Sardan, J. P. 1999. A moral economy of corruption in Africa? Journal of Modern African Studies, Vol. 37, No. 1. Pinto, J.; Leana, C; & Pil; F, K. 2008. Corrupt organizations or organizational of corrupt individuals? Two types of organization-level corruption. Academy of Management Review, v. 33, n. 3, pp. 685-709. Shleifer, A., & Vishny, R. W. 1993. Corruption. Quarterly Journal of Economics, 108: 599617.