Shekel money bills.
(photo credit: REUTERS)
A new OECD report is ‘seriously concerned’ at the low level of foreign bribery enforcement against Israeli businesses. With no prosecutions despite multiple allegations, Israel’s burgeoning export sector faces serious risk when some exporters may be illegally supplying bribes to overseas officials and getting away with it.
In 2009, Israel joined the “OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.” This establishes legally binding standards to criminalize bribery of foreign public officials in international business transactions. The OECD heralds it as the first and only international anti-corruption instrument focused on the “supply side” of the bribery transaction. In other words, it criminalizes business persons that offer to supply bribes to overseas officials in exchange for benefits such as lucrative public contracts or secret market information in their country. The 34 OECD member countries and seven non-member countries have adopted this convention.
Since 2009 when Israel signed on to the convention, there have been 14 allegations of foreign bribery involving Israeli individuals or companies but no prosecutions. In fact, just four of the allegations have been formally investigated.
The OECD researched 45 advanced economies and found that, over the past 15 years, there have been 427 prosecutions of foreign bribery. While the total number of allegations is unknown, Israel obviously lags far behind the average enforcement rate. United States (128) and Germany (26) lead the way on convictions, and countries with worse reputations for allowing companies to “get away with it” such as Korea (11) and Japan (3) have recorded more convictions than Israel. This is particularly shocking since Israel actively exports in industries that are corruption- prone. Pharmaceuticals and diamonds constitute over a fifth of exports, and Israel is the world’s sixth-largest exporter of arms.
It is hardly surprising that five of Israel’s 14 allegations involve these sectors. To make matters worse, much of the trade Israel undertakes within these industries is to notoriously corrupt jurisdictions – half of defense sales go to Asia alone, and trade with Africa in diamonds is booming.
What makes foreign bribery so damaging is that it distorts free market competition in exports – an essential component in expanding Israel’s high-growth-potential sector. According to the OECD, 57 percent of foreign bribery offenses occur when businesses bribe foreign public officials to secure public procurement contracts overseas.
In other words, to win business abroad by gaining a contract to sell to a foreign population. Of Israel’s 14 allegations over the past six years, at least four involved bribes to win contracts, and that number is probably higher given five allegations were insufficiently detailed to infer the cause.
Since the overseas contract is won as the result of bribery rather than quality of goods, the bribing firm has less incentive to improve their inventory and produce competitive exports that could be sold around the world. Further, the remaining exporters are despondent at being unfairly shut out of markets as a result of illegal and anti-competitive activity by other firms, which can cause a reduction in their own efforts and innovations to improve their exportable goods. A vicious cycle then ensues where other firms are forced to join in bribery tactics in order to remain competitive. All of this makes Israel less effective at producing world-leading goods and services to export around the world, which is especially damaging given its reliance on exports as a source for growth due to a comparatively small domestic market.
The government must take more responsibility for tackling criminality to create a more competitive export environment, and the newly established inter-ministerial team on foreign bribery must focus on converting allegations into prosecutions. It should increase awareness and provide training in detecting foreign bribery to employees and auditors, so that those in the best position to discover bribery are vigilant and equipped to bring criminalizing evidence to court. Once these tools have been provided, whistle-blowing ought to be encouraged by strongly publicizing that whistle-blowers will not face legal action or job loss as a result of reporting suspicious activity. Obviously, the focus of efforts should be among companies already operating in high-risk industries.
The government should also stress to the authorities the power of investigative media reports. In stark contrast to the rest of the Middle East, Israel benefits from a free and fearless media that often publishes corruption scandals and possesses the energy to carry cases from the initial stages of allegation through to investigation and ultimately conviction. The government should see this as a blessing rather than a curse and encourage the Foreign Ministry Israel Police to “ride the wave” of media hype and subsequent public pressure to bring cases to court.
Overall, far too few cases of foreign bribery allegations, in a country exporting high-risk products to corruption- prone jurisdictions, have been converted from allegations into formal investigations and prosecutions.
The government must create an educated and safe environment for whiste-blowing, in addition to encouraging law-enforcement authorities to take full advantage of the increased publications from the media on this issue. Israel cannot fulfill its potential on export led economic growth without cleaning-up the sector and restoring free and fair competition in exports.
The author is a Research Fellow at The Jerusalem Institute for Market Studies.