Vietnamlawmagazine

It can be said generally that business-related corruption erodes the reputation of businesses, as well as their money, assets, time and future opportunities. Results from the enforcement of the Law Against Corruption showed that most of the high-profile corruption cases were related to businesses. According to initial investigation reports from 2006, 13 out of the 14 serious corruption cases involved businesses. At a time of international economic integration, business-related corruption is increasingly common and this raises the need to identify why and what breeds corruption as a foundation for anti-corruption efforts.

NGUYEN TUAN KHANH, LL.M

Renovated business management gives rise to corruption

The renovation of business management is linked with economic renewal and restructuring in preparation for integration into the world economy. Achievements made in the renovation of business management contribute to socio-economic development. However, constraints and shortcomings in this process are a fertile ground for breeding corruption.

Previously, non-state economic entities were transformed into state collectives and cooperatives. Now they are a strong pillar of the economy. However, the growth of this economic sector has created huge assets under multiple ownership and brought into existence public power beyond state power, affecting many stakeholders. With the fast-moving administrative reform and process of engaging all sectors of society in social and economic development, many services previously delivered by the State, such as education, training, healthcare, transport and administrative procedures, are incrementally transferring to the private sector, opening a window of opportunity for non-state businesses to grow. Meanwhile, international integration has made business relationships no longer confined to national boundary but extended and linked with those of other economies. A great number of foreign enterprises have come and invested in Vietnam. In the opposite direction, a few Vietnamese enterprises have managed to operate overseas. Backed by renovated economic management practices and the engagement of all sectors of society in the provision of public services, production and business relations have developed in diversified forms. It is when “public power” appears, that it comes with corruption risks. With the growth of the economy, an increasing number of companies and economic groups, even multinationals, have emerged and expanded their operations in Vietnam. Lying beneath their bulging capital, assets and human resources and their complicated organizational structure are diversified and complex interests. When these interests are not subject to proper standardized control, those in high positions or yielding power in a company can find ways to embezzle. This is corruption.

Previously, the state sector operated under centralized management and predominated almost all economic activities, such as industrial production, trade, supply of materials and food. Now the sector is robustly transforming itself in its organizational structure, area of activity and range of businesses. Despite undergoing change, the State still holds many of the key industry businesses with many closely linked to a line ministry. Therefore, their participation in the market is not completely governed by the market law of fair competition. This practice contains in itself the legacy of the old-style management mechanism and it is a fertile ground for corruption and wasteful spending. A series of serious corruption cases have rung alarm bells about the magnitude of corruption and wasteful spending in this sector.

The 6^th National Party Congress and the following congresses have identified equitization of state enterprises as a crucial solution to their rearrangement, renewal, development and improvement as well as to enhancing their competitiveness and reducing wasteful investment and corruption among them. State enterprise equitization started in Vietnam on a trial basis in June 1992. By December 31, 2005, there were 2,935 state companies that had been equitized nationwide. As planned, approximately 1,500 more will go public until 2010. By the end of 2010, it is expected there will be 554 state companies left, including 26 groups and big corporations. There will also be 178 companies operating in the fields of security, defense and supply of essentials, 200 state-owned agricultural and forestry farms, and 150 affiliates of stated groups and corporations[1]. However, equitization is an opportunity for corruption through various tricks such as pricing state companies much lower than their real market price, selling shares to just a few people of inner circle, etc. Unless preemptive and preventive actions are taken against this practice, future equitisation will open golden opportunities for some holding power in state-owned companies to illegally get rich quick.

Along with renovating business management, the Government is also making every effort to reform its administrative procedures. Administrative reforms at different levels and in different sectors have proved positive to preventing business-related corruption, where businesses are given easier access to administrative agencies to have their affairs handled accordingly. However, existing regulatory hurdles coupled with the redtape of a portion of civil servants remain as major setbacks to business operations, causing public dissatisfaction[2]. If the Government and ministries do not work hard to overcome this challenge, corruption will spread further.

In the process of renovating state company management against a backdrop of national economic growth, the risks of corruption remain strong in relations between businesses and state administrative agencies. The most possible are the following two types of corruption. In the first, a state position holder responsible for dealing with business affairs may commit acts of corruption by, for example, delaying the handling of affairs, trying to find mistakes, intimidating businesses with misrepresented information, and pressuring and making unlawful demands, etc. They may do this directly, through a middleman or simply do nothing until the business bribes them on other occasions, particularly on traditional festive days or through a mutual connection. By yielding to the unlawful demand of the public servant, the business has committed the act of bribery. In the second common type of corruption, the business offers to ally with the state position holder to appropriate state assets by acting as a “backyard” company. In this case, there is an agreement between the business and the public servant that the business is chosen over others in an unfair competition or a contract is signed between the business and the state agency or organization of that position holder to appropriate public assets.

Experiences of corruption in other countries show that international integration business relations are no longer restricted to national boundaries, but extended and linked with those of other economies, and corruption unavoidably arises out of company operations. Acts of corruption can be pricing a foreign trade contract for profit to be shared with criminals overseas, taking bribes from overseas traders to import low quality equipment and machinery, and fraud in local and overseas investments. In taking advantage of the policy on equitization, corruption includes the transfer, lease, sale and contracting of state companies to appropriate state assets, capitalizing on company losses to create a false bankruptcy to profiteer from legalized accounting papers, and misrepresenting information on corporate finance for share trading. In addition, insider trading for share hoarding or speculation and allying with customs officers for smuggling or false declaration of imports or exports are also common. If not properly dealt with, all these forms of corruption have the potential to ride the back of national integration into the world economy and develop more sophisticated corruption schemes between those inside and outside the country.

As a landmark in the whole process of international integration, the WTO accession has boosted the national economy in both growth and quality. Access and adaptation to general WTO standards of openness, transparency and integrity in economic management has contributed to minimizing corruption in the private sector and state sector as well as the equitization process. Although negotiations on the acceptance and implementation of WTO regulations and commitments included in the Report of the Working Party on the Accession of Vietnam (commitments in more than 30 issues[3]) did not cover corruption, several WTO requirements to which Vietnam is committed do directly focus on the fight against corruption.

The first requirement is to increase the efficiency and competitiveness of the national economy through changes in development strategies, rearrangement of state enterprises and efficient use of investment. It also includes reform of state administration, finance and banking, an improvement in planning, building infrastructure, and combating corruption, wasteful spending and loss of investment capital.

The second requirement is to create an open investment climate, focusing on administrative procedure reform, delegation of power to local governments while increasing the management role of state agencies at higher levels, with an initial focus on inspection, audit and handling of violations.

The third requirement relates to the publicity and transparency of policy and legislation, making the law clear and the functioning of the state apparatus transparent[4].

In response to these requirements, the fight against business-related corruption must be duly supported for the two reasons. First, WTO accession is an advantage to improve the fight against corruption in Vietnam. Second, to deliver its WTO commitments and to benefit from its participation in this “common playing field,” Vietnam is obliged to be tough in combating corruption.

Recommendations

The 2005 Law against Corruption provides a host of solutions to preventing corruption. Most deal with the rights and obligations of businesses, especially state enterprises, and they are deemed essential preventive measures against business-related corruption. However, it should be noted that these measures will not prove effective without the proper enforcement of other laws such as the Law on Thrift Practice and Waste Combat, the Accounting Law and the Bidding Law.

However, for better results in the fight against business-related corruption, apart from properly enforcing the Law against Corruption, it is necessary to take the following actions.

First, to formulate and complete legislation against corruption in the private sector, particularly the business sector.

Compared to the public sector, the private sector is less represented in the Government’s anti-corruption program. However, private sector corruption is common in most countries and includes violations of state regulations on audit, accounting and tax payment, company staff stealing their companies’ profits or property or taking illegal commissions or kickbacks from partners. It also involves businesses bribing officials or staff of a rival company to gain an unfair advantage, or doctors taking money from patients illegally.

Despite its economic achievements, Vietnam is still a developing nation and while there is plenty of legislation governing the private sector, there are loopholes in accounting, auditing and monitoring systems. Thus, it is imperative that corruption legislation covers the private sector. Further development of such legislation is in line with the UN Convention Against Corruption which requires member countries to take measures to prevent corruption in the private sector and enhance accounting and auditing standards and, when appropriate, provide effective, poroportionate and dissuasive civil, administrative or criminal penalties for failure to comply with such measures[5].

Second, to establish as a criminal offense bribery of foreign employees or staff of international organizations.

The Penal Code of Vietnam only generally provides for examination of penal liability of foreigners, foreign public officials and employees of public international organizations in Vietnam. Technically, the legislation touches upon the bribery of foreign public officials or employees of public international organizations. However, to make the fight against corruption more effective and fully compliant with the requirements of the UN Convention Against Corruption, Vietnam should study and disseminate specific provisions for this kind of crime.

Third, to increase management of the business sector.

Increasing management of the business sector is a far cry from the State interfering in business operations. It aims to make sure the government administrative system works effectively, efficiently and transparently, thereby helping prevent corruption and collusion between businesses and the administration which violates the order of economic management and to prevent the giving and acceptance of bribes by businesses and civil servants.

To that end, the Government should renew its thinking in managing businesses and set clear-cut criteria of corporate management, transparency, reporting responsibility and auditing requests. It should also provide for effective monitoring and instruments to enforce those regulations. The corporate management criteria should suit the actual socio-economic situation of Vietnam and work towards a fair and competitive business environment which facilitates trade and investment, both local and international. At the same time, the Government should facilitate and urge the private sector to take initiatives to strengthen internal control and develop an ethical and regulatory system for itself. It is also necessary to make it compulsory for businesses to maintain factual and accurate records of its financial transactions with a reasonable level of detail to prevent fraudulent trading, such as intentionally concealing fraud in financial documents or recording the correct transaction value but hiding details which are illegal or illicit, and to prevent corrupt collusion between local and foreign businesses.

Fourth, to develop and enhance business ethics.

Corruption in trade and investment is associated with business ethics. There is no doubt that the ultimate purpose of doing business is to make a profit, but businesses must also observe general social ethics, many of which have been institutionalized into law. Businesses themselves should be aware of their interests and role in avoiding, preventing and eradicating corruption. They should understand that corruption is not only unethical but it runs counter to their long-term interests because it increases their costs and risks, harms their efficiency, erodes the national credit, and discourages investors.

Finally, to encourage businesses to get involved in the policy and lawmaking process and establish mechanisms for business associations to take on a lobbying role.

Businesses are encouraged to get involved in the policy and lawmaking process through legal documents and in practice. Many draft legal documents have been released for feedback and input from the business community, particularly through the channel of the Vietnam Chamber of Commerce and Industry. Some business associations have established separate channels of lobbying that have yielded certain results. State agencies have accepted reasonable requests of business associations. However, this lobbying is in essence just limited to recommendations for amendments to regulations already issued. For the associations to lobby in an open and transparent manner, there should be a lobbying law to govern and facilitate this area.-