In this sophisticated and highly technological era in which we live, supply chains play a crucial role in the ability of a company to acquire goods or to sell and deliver their products to their customers. A supply chain is defined as “a network between a company and its suppliers to produce and distribute a specific product to the final buyer. It also represents the steps it takes to get the product or service from its original state to the customer.” (Kenton, 2020, para. 6).
Companies rely on supply chains to stay competitive in their respective markets while lowering their operational costs. To be successful, companies have to establish and maintain good relationships with different stakeholders involved in that market. However, in some instances, some stakeholders (politicians, suppliers, law enforcers/regulators, policymakers, etc.) might have opportunistic intentions that can lead to corruption. It can harm the company’s performance and reputation. Corruption is defined “as the abuse of public power for private benefit” (Rodriguez, 2005, para. 35). There are two different levels of corruption that affect supply chains, such as political and bureaucratic. Corruption not only hurts companies but also affects society and the reputation of governmental institutions.
Political corruption occurs when government officials demand a substantial sum of money or personal favors in exchange for political acts or government policies that will benefit a company. It takes place almost everywhere, but it is more visible in emerging economies, where countries have limited laws and regulations to prevent it or have different ethical standards. There have been plenty of cases around the world where politicians have been involved in corruption scandals.
Recently, government officials from Brazil were exposed to a corruption scandal after they accepted bribes from a Brazilian beef supply chain (JBS) in exchange for “policies that streamlined certain processes of interest to the supply chain” (Silvestre, 2018, p. 767). In this case, government officials (governors, members of the parliament, senators, and ministries) took advantage of their political power to enrich themselves, which is not only unethical but also illegal.
Less developed countries in South America, Asia, and Europe are more exposed to bribery due to their lack of control mechanisms and opportunistic behaviors from both government officials and company executives. Government officials and politicians have a civic duty, and they should put the interest of their people ahead of their interests. However, in multiple cases, that is not the case, and ambitious people seek political positions to promote their self-interest and increase their monetary revenue. Political corruption can be very harmful to societies, and it also creates damaging consequences for the companies involved in the corruption scheme.
Political corruption “not only breeds distrust among citizens, but it is also bad for businesses as companies that are located in areas with high levels of corruption are worth less than similar companies located in low-corruption areas” (White, 2019, para. 2). In some cases, company executives are victims of political corruption, and they have no other choice but to comply with the government official’s demands to have a successful business. In other instances, company executives are the ones who offer bribes in exchange for political favors that will benefit their companies. They are equally as guilty, and companies need to implement more robust supply chain management mechanisms to prevent this from happening.
Bureaucratic corruption is “the small-scale abuse or misuse of power or trust for private benefit” (Tanzi, 1998, para.13). Bureaucratic corruption involves low-level public servants (law/policy enforcers, quality control agencies, etc.) who take advantage of the limited authority of their positions for personal gain. The only difference between political and bureaucratic corruption is that bureaucratic corruption takes place at a smaller scale, and it involves low-level public officials who exchange favors for a lower amount of money. During the Brazilian beef supply corruption scandal, the law enforcement investigators discovered that JBS was paying quality control inspectors in exchange for favors.
In certain instances, public agents from the Department of Agriculture accepted bribes in exchange for not reporting the company or issuing fines when their products were not in compliance with their quality/health standards. The investigation also discovered that JBS was repackaging expired products and using prohibited substances to alter their meat products, which the quality inspectors knew and did not report. This is an excellent example of public servants who put their interests ahead of the public. In this case, agents from government agencies jeopardize the health of thousands of people for their greed. Policymakers worldwide need to create new anti-corruption policies to strongly penalize companies and public servants who engage in corrupt practices.
Supply chain management plays a vital role in the success of any business around the world. Supply chains are expected to maintain good relationships with the different stakeholders involved in their market.
In some cases, stakeholders with opportunistic intentions engage in corrupt practices to obtain personal gains. Often capturing a vast chain of different parties across a country or the world, such as agents, intermediaries, distributors, resellers, and partners, supply chains are highly vulnerable to poor conduct. The corruption can take place in local or regional jurisdictions that are usually less strict in the enforcement of ‘white-collar law’ or do not rigidly monitor for such instances of misconduct. In addition, it is essential to consider a broad range of different procedures and policies in various jurisdictions, codes of ethics, as well as the IT frameworks used by supply chain parties. Therefore, the multi-dimensional nature of supply chain management creates an environment in which corruption and fraud can occur, as illustrated by the fraud triangle.
In the case of supply chain management, the fraud triangle is represented by three areas, which include motive, opportunity, and rationalization. The motive represents the initial reasons that an individual has for committing fraud. These include the desire to attain financial gain or increased power and influence. Opportunity is represented by an individual seeking a means by which fraud can be committed, which can take place when the internal organizational controls are weak or insufficient. Rationalization is defined by the justification of the actions and behaviors associated with committing fraud. The influence of corruption and fraud within the management of the supply chain can be monumental, such as the financial loss as well as those linked to ongoing legal action and audit requirements.
There are several types of finance-associated issues that can occur within the supply chain management system. For example, financial fraud can take place, which is characterized by falsified transactions and improper payments. When it comes to billing fraud, contractors may submit several invoices for jobs that had only taken place once or issue inflated or false invoices. Another example is inventory fraud, which involves either theft or an incorrect statement of inventory items or records on the financial statements of a company.
Bribery most often includes violations of the Foreign Corrupt Practices Act (FCPA). The bribes and kickbacks received by different entities within the supply chain management framework may include money, gifts, and favors, which are being exchanged for a range of benefits. Bribes may be made for giving qualifications to an unqualified supplier, paying more for goods and services than needed, accepting poor-quality goods or services, as well as giving preference to one bidder over another, thus limiting health competition within the supply chain.
As a result of bureaucratic corruption practices, supply chains suffer from losses that could have been avoided. According to Liu and Arthanari (2014), globally, the cases of bribery and corruption have been steadily increasing, becoming third in the ranking after asset misappropriation and procurement fraud. Apart from the direct costs, corruption in the supply chain also implies indirect costs such as the management of time and relevant resources to reduce the impact of the adverse practices. Corruption in the domain that is regarded as appropriate for supply chains is classified as commercial bribery and is broadly referred to as private-private corruption (Liu and Arthanari, 2014).
The private-public corruption, which is characterized by companies bribing government officials for public contracts or government services is a significantly smaller part of corruption within the supply chain. The issue exacerbates because claiming damages from private-private corruption within the supply chain is rare because of the complexity of the procedures, the challenges associated with providing evidence for the act, the separation between the criminal and civil measures, as well as the reluctance of victims to come forward.
The overall process of evaluating the likelihood of fraud and corruption in the supply chain is complicated. Notably, no relationships between suppliers and customers present the same levels of risk when it comes to corruption. For instance, purchasing office supplies from a large office supply chain in a developed country has varied risks and requires different levels of control than the purchase of key food products from a medium-sized supplier in a developing country (United Nations Global Compact, 2016). Therefore, fighting bureaucratic corruption in the supply chain requires a comprehensive assessment of risks, a balancing of the costs and benefits, and adjusting the program of fighting fraud to fit the risk profile.
At present, there are several recommended practices implemented for addressing corruption within supply chains. The most valuable practice is a cooperation between partners to foster transparency and compliance with the established codes to meet their long-term interests. Ideally, suppliers will implement their systems aimed at preventing corruption, and if they do not have them already, there may be some challenges associated with transparency when they make deals with their clients (United Nations Global Compact, 2016). Therefore, supplier education is essential in preventing the occurrence of corruption within the supply chain, and it can be presented in different forms, depending on the risks and costs involved. Depending on suppliers’ capabilities in needs, both web-based and face-to-face training can be carried out.
In conclusion, it is important to mention that bureaucratic corruption that concerns supply chain management processes remains an understudied issue. Despite the apparent negative implications that influence both suppliers and their clients, there is a lack of research and awareness aimed at identifying the challenges and reducing them as necessary. The overall consensus among the scholars that have investigated the issue is that bureaucratic corruption within the supply chain processes needs to be identified as soon as possible to prevent significant financial losses for organizations. The investigations into corrupt practices at organizations have discovered how suppliers and their customers could engage in bribery.
Liu, X., & Arthanari, T. (2014). Perspectives on supply chain corruption and risk management. 12th ANZAM Operations, Supply Chain and Services Management Symposium. Web.
Silvestre, B., Monteiro, M., Viana, F., & de Sousa-Filho, J. (2018). Challenges for sustainable supply chain management: When stakeholder collaboration becomes conducive to corruption. Journal of Cleaner Production, 194, 766-776.
United Nations Global Compact Office. (2016). Fighting corruption in the supply chain: A guide for customers and suppliers. Web.