Bruno S. Sergi — University of Messina SEE TU Economic experts’ meeting Some aspects about corruption in SEE and the impact on business Kotor, 9-10 December 2010

Corruption/Crime and the impact on business The post-socialist transition process in Central and South-east Europe has been accompanied by widespread allegations of corruption and economic crime. In recent years, considerable progress has been made in Hungary, Poland and the Czech Republic, which joined the EU in The European Commission has issued a series of reports criticising Romania and – more strongly – Bulgaria, which joined the EU in 2007 but have failed to implement adequate institutional reforms to combat economic crime. In July 2008 the EU suspended €500m worth of aid to Bulgaria and, although it decided to unfreeze €115m in May 2009, this is at best a modest indication of progress. Questions remain about Serbia, whose new government has now formally expressed a desire to enter the EU, but which has a long-standing record of corruption and organised crime. Bruno S. Sergi — University of Messina

The public debate and some of the issue How far do corruption and crime impede economic development? What are companies doing to resist corruption? What should they do? Bruno S. Sergi — University of Messina

Control Risks’ report A London-based company, the report is based on a survey of senior executives from 244 international companies operating in three countries in Central Europe (the Czech Republic (40), Hungary (43) and Poland (40)) and three in SEE (Bulgaria (39), Romania (42) and Serbia (40)). The survey was carried out in With regard to size, 115 respondents came from companies with fewer than 250 employees in the country concerned; 68 represented companies with between 251 and 750 employees; and 63 were from companies with more than 750 employees.

Bruno S. Sergi — University of Messina The scale of the problem → When asked an open question about the most critical risks for business, most respondents mentioned mainstream commercial issues: - competition (18% - fiscal and economic policy (13%) - market-related risks (8%) - some 13% of respondents mentioned legal issues - perhaps surprisingly, only 3% cited crime, and none brought up corruption spontaneously! → A rather different picture emerged when they were asked whether corruption was relevant to their business. Overall, 18.8% said that corruption was ‘very relevant’ or ‘highly relevant’, representing scores of four and five on a five-point scale. The most striking feature of the responses was the sharp divide between the companies in the three SEE countries and their Central European counterparts.

Bruno S. Sergi — University of Messina Key findings of Control Risks’ report Three factors help to explain the apparent disparity between perceptions and concrete knowledge: First, media and academic attention has focused more on public-sector corruption than on private-sector bribery. People tend to give higher estimates of public-sector corruption because they are more sensitised to the issue, even if it is outside their direct experience. Second, many of the respondents are – by the nature of the industries in which they work – less exposed to public-sector corruption. This is borne out by other survey findings. For example, only 12.5% of retail respondents report direct knowledge of corruption in public-sector contracts occurring ‘often’ or ‘always’, compared with 21.2% of respondents from the construction sector. Third, some respondents may have been reluctant to admit to concrete knowledge because this could be taken to imply a degree of ‘guilt by association’.

Bruno S. Sergi — University of Messina International companies The risks to international companies are clear. When they operate in transition economies, it’s particularly important to understand the backgrounds and current connections of their business partners. If they fail to do so, they risk reputational damage, and even unwitting involvement in money-laundering scams. In the most extreme cases they may expose themselves to attacks, blackmail or even infiltration by criminal elements

Bruno S. Sergi — University of Messina Potential impacts of organized crime on business Overall, some 40%-50% of the respondents ‘rather’ or ‘definitely’ agreed with the view that organised crime could have a serious impact on international companies. Respondents “rather” or “definitely” agreeing that organised crime can have serious impact on business. Overall, 36.1% said that local companies ‘sometimes’ had financial links with organised crime, while 7% said that such links existed ‘often’ or ‘always’. However, the regional breakdown shows that there were hardly any Central European respondents who thought that criminal links with local companies were commonplace. By contrast, some 20% of Bulgarian respondents said that local companies ‘often’ or ‘always’ had financial links with organised crime.

Key points stand out The report points to a sharp disparity between the three Central European countries and their SEE counterparts. Bulgaria stands out as the country where respondents were most likely to report first-hand experience of corruption in public-sector contracts, as well as demands for bribes to speed up official government transactions. When asked about their personal knowledge of corruption, many respondents cited incidents involving the public sector. However, almost as many referred to ‘private to private’ corruption, for example when suppliers pay kickbacks to their private-sector clients. Overall, some 40%-50% of respondents ‘rather’ or ‘definitely’ agreed with the view that organised crime could have a serious impact on international companies. In practice, the most acute problems appear to apply in Bulgaria and, to a lesser extent, Serbia. Failures of information security leading to loss of confidential information constitute one of the most serious threats. Bruno S. Sergi — University of Messina

Rooms for optimism! In fact, an overwhelming majority of respondents either ‘definitely agreed’ (47%) or ‘rather agreed’ (38%) with the statement that ‘it is possible to conduct business successfully without corruption’ in their countries of operation. Thank you very much and let’s talk!