Creating value through business integrity
5 May 2015 - laura.smitheman

Last month we welcomed Transparency International Cambodia and experts from law firm VDB Loi. Together they showed us ways of creating value through business integrity.

 

TI Cambodia works together with the private sector to support companies’ anti-corruption efforts in Cambodia and advocate for a cleaner business environment.

 

VDB Loi have over 30 foreign and local lawyers and tax advisors and they focus on the natural synergies that exist between tax and law.

 

Small and medium-sized enterprises, which are often led by young entrepreneurs, are driving Cambodia’s economy. Yet pervasive corruption and bribery have limited their ability to grow and achieve their full profit potential. Young entrepreneurs often lack the leverage and compliance systems of multinational companies and therefore face more challenges in resisting bribery and corruption while trying to ensure a good balance sheet.

 

 

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The full day workshop had the aim to equip the audience with the knowledge and tools necessary to boost their tax compliance and reduce their exposure to corruption or as we express it, create business value from integrity.

 

On the corruption perception index (a survey held in 170 countries to test the public’s perception of corruption), Cambodia came 9th out of 10 ASEAN counties (with Singapore ranking strongest and Brunei at the bottom). It was noted that there is a strong correlation between perceived corruption and GDP – low GDP countries showing higher rates of perceived corruption.

 

TI Cambodia began its Business Integrity program in January 2014. A global movement, it has regional networks in Vietnam, Malaysia and Indonesia. The aim of the initiative is for businesses to promote clean business. Through collective society, plus government agencies, the program promotes best practice and transparency for ease and effectiveness of business.

 

TI Cambodia define ‘business integrity’ as the adhere to globally recognized ethical standards. They admit that in Cambodia this is often not easy to do. Therefore they focus on accountability, integrity and transparency with the belief that integrity minimizes negative impacts (beyond simple compliance with law).

 

Corruption adds 10% to the cost of business globally and up to 25% on procurement contracts in developing countries. Facilitation payments are the most common form of corruption seen in Cambodia.

 

Their research has shown that the main corruption related issues found are: Inspections of SMEs – public officials go to a workplace and demand informal payment for an unrequested service; Taxation – tax audits in particular pick up ‘mistakes’ such that officials ask for money to correct/fine; Permits and registrations – processes are delayed or complication without facilitation payments.

 

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On a positive note, the Ministry of Commerce is aiming to tackle the issue of facilitation payments made in face to face meetings (the most common scenario for corruption) – they aim to make all applications for registrations online in one year, to end face to face interactions.

 

Sadly TI Cambodia is actually seeing more cases of corruption in some areas, in particular relating to the payment of taxes and business registration.

 

Why is corruption still prevalent?

Firstly, many lack knowledge – what taxes should I pay? What permits are needed? Without knowing the rules, business owners cannot protect themselves.

Secondly, culture – many believe they HAVE to pay bribes. However, this is no longer the case and some businesses are 100% clean.

Thirdly, time – time is money and many find themselves having to pay bribes to avoid delays.

Lastly, government officials lack the incentives not to embark on corrupt practices when salaries are so low. They gain no benefit for being clean.

 

Why is it important to be clean?

 

– To be competitive. If you understand your regulatory frameworks, you will have more knowledge to compete in ASEAN

– Likely to be cheaper and certainly more efficient. It is not possible to control or predict and therefore budget if you are in cycle of paying brides.

– Being clean is becoming increasingly attractive for investors and thereby having access to capital. Being registered and clean ensures your business will have value in the future.

– Important for your reputation – others will know that you do not operate on an adhoc basis, instead that you have proper procedures and efficiencies are recognized being as clean

 

So what do TI Cambodia recommend for doing business cleanly?

– Have knowledge. Know what is legally required and ensure you comply precisely. This will minimize the chance for corruption and ensure you know what you do and do not need to legally pay.

– Analyze the risks depending on your sector – if you import goods for example, be aware of the likely points for corruption and plan accordingly

– Have internal policies/governance – for example safeguard against kick-backs to staff in procurements.

– Remember that policies are only worth 25%. Action is 75% – be an example and demand commitment throughout the company.

– Plan – you will need time to become clean. You will probably run into delays to obtain permits, receive imports etc. If you are rushed, you will be pushed into corruption to speed up the process. If you plan ahead, you can accept delays and remain clean.

– Gain and maintain a clean reputation – corruption often becomes a cycle, public officials know you have paid before and this puts you at risk of continual fines and payments. Protect yourself. If you are clean you will be known and left alone by officials. Have time and patience to see rewards.

– Keep aware when reforms are being made. Understand them and take advantage (last year reforms for certificates of origin were implemented, next year, online registrations and so on).

– Know your history – if you have lacked compliance in the past be aware of retrospective risks.

– Avoid where possible face-to-face meetings in closed environments – take advantage of online registrations and certificate of origin applications online.

 

How can you apply integrity?

 

Tone from the top – then staff will follow. Say and DO. Demonstrate integrity through action.

 

Give staff training to ensure they are aware and understand how to implement policies. Be aware that sometimes staff may be scared and pay corruption payments personally if they feel pressure from management to be clean but do not understand how to act or feel uncomfortable to report.

 

 

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Where to start?

  1. Know your history – if you have not been compliant in the past, you may have to pay fines.
  2. Take time to change, chose goals and targets over a realistic timeframe.
  3. Plan for delays – you will find pressure to keep you in the corruption cycle, but have the time to allow you to say no.
  4. Act together – join or create an association/mechanism.
  5. Analyze what you can and can’t do – financially/operationally etc – over what time period. You need to find a balance between getting clean and being able to operate and meet you commitments.
  6. Undertake risk assessments on the potential threats and outcomes of becoming clean.

 

What if I’m a start-up?

Plan ahead. If you have the funds, get registered and operate a clean business – paying registration fees, tax etc – from the start. If can’t afford it, start as ‘non-regime tax payer’. When you are ready to become regime-tax payer the tax department will not tax you on the period you were registered as a non-regime tax payer. If you do not register as a non-regime tax payer you risk being threatened by corruption and/or fines.

 

What’s the government’s plan for social enterprises?

They are of interest to the Ministry of Commerce. They have undertaken field visits to look at best practice, but the process is slow and no timeframe is confirmed for recognition of SE as a legal concept.

 

When’s the next event?!

Saturday 9 May, from 9:00am, we welcome back TI Cambodia to discuss corporate integrity systems and we welcome for the first time CSR Asia to help us understand all we need to know on CSR. Sign up here for the free event, including networking lunch!

 

Many thanks to TI Cambodia and VDB Loi for all their invaluable insights.