Business in Third World countries brings managers face to face with the expectation of illicit payments. People who say, "it´s the culture" put themselves at risk of violating the Foreign Corrupt Practices Act. Even bribes and graft paid to foreign agents on their own initiative expose a manager to civil and criminal liability.

This predicament has a silver lining. Corruption deterrents increase productivity. Policies that prevent corruption also reduce the unexpected costs and delays so common to these operating environments. Significant competitive advantage can be achieved by addressing the core problem: weak internal controls in Asia, Latin America, Africa, Eastern Europe and the Middle East.

Western firms have a historic strength in designing and enforcing internal controls. Lapses in this area are widely publicized so we underestimate the extent to which laws and procedures work. Organizational resources do not leak into personal pockets because there´s a strong likelihood of getting caught and punished. In some cultures, organizational resources are perceived as available for the taking. Company or government funds can be spent on personal ends with impunity.

A country´s legal system is the foundation that an organization´s accountability rests on. Managers skilled at administering internal controls within the support structure of their legal system find it much harder where the rule of law is weak. People who have always lived with the rule of law do not understand what life is like without it. Here´s a simple example:

Let´s say I make an illegal left turn and get caught. At that moment, the rule of law may seem like an inconvenience. In some countries, I could pay the police officer a few dollars for the convenience of "taking care of it" on the spot. But that results in much bigger inconveniences down the line, such as:

• higher road risk because drivers expect to violate traffic laws with impunity, or at a relatively low cost;
• police who detain drivers without probable cause and extort payments of uncontrolled amounts that do not contribute to the public treasury.

It´s easy to complain about the ticket you got and overlook the road safety and police integrity that are daily benefits of a functioning system.

Legalistic vs. Personalistic Rule Systems

In many countries, you have to "tip" the mailman or your mail disappears. You have to bribe a clerk to get a train ticket, a birth certificate, or a driver´s license. And for an extra fee, you can get a birth certificate without giving birth, a drivers license without a road test, and a train ticket for a seat that was already sold to someone else. These practices are not justified by the clerk´s low pay, since their job is better than most of their compatriots. More important, the chaos they create drives up prices so the total loss is much more than the gain.

If you never lived in a system with such "personalization" of the rules, it is hard to fully imagine the consequences. And conversely, those who have only lived with flexible rules have difficulty imagining a system that operates according to consistent rules. A person who can´t bribe their way onto a plane flight at the last minute may feel shocked and even cheated because they assume everyone else got on the plane that way. Booking in advance is scoffed at because reservations are presumed unenforceable. Negotiating one´s way onto a play may be regarded as a skill to take pride in.

In some countries, people have to negotiate the price of everything they buy. Bargaining over rules and regulations seems similar to bargaining prices, and it becomes the routine.

People adapt to the system they live in, and need time to appreciate the nuances of other systems. When you go to a country where there are no fixed prices, you need time to adjust to all the bargaining. And someone from a bargaining culture needs to adjust to your expectation that some rules and laws are fixed and not negotiable.

Shifting between a legalistic system and a personality system is difficult. And words don´t help much, because humans adapt to their surroundings nonverbally. We observe and adjust without talking about it. Internal control policies designed for legalistic organizations may not make sense to people with experience in personalistic organizations. That does not mean an organization should simply accommodate personalistic deviations. That´s illegal and wrong. Instead, managers must be trained to facilitate the shift between the two systems by articulating what is usually just intuitive. Managers must learn to transplant internal controls with enough soil that they take root.

The Skill of Communicating Internal Controls

It´s not just ethics. Ethical people need the skill of invoking regulation in a culture that does not support it. Managers must be trained to articulate system integrity in order to be effective in countries with high corruption risks. (For an index of corruption risk by country go to www.transparency.org). It´s like the difference between teaching English grammar to a native English speaker and teaching it to a non-native speaker. It´s hard enough for native speakers, but teaching the grammar of a foreign language requires a more comprehensive approach because there´s no internalized frame of reference.

Anti-corruption laws are spreading around the world, and enforcement of these laws is growing. Most laws distinguish "grand" corruption (bribes paid to get business) from "petty" corruption (small payments for routine services). These distinctions can be arbitrary. Grand corruption is hard to prevent in a place where petty corruption is accepted. And the consequences of routine corruption are not always "petty." Corrupt environmental inspectors damage public health significantly. Extortionary inspectors sometimes threaten to shut down plants that are fully compliant with environmental regulations, which clouds responsible decisions to install expensive environmental protection equipment.

Building inspections pose a similar challenge. Investors who work through many formal layers of permits and approvals suddenly find new requirements imposed after they have poured a few million dollars worth of cement. When building inspections are arbitrary and capricious, building have very high failure rates. This is tragically observed every time there´s an earthquake in countries with high corruption levels.

Corrupt trucking inspections in Third World countries have been linked to very high road fatalities. (See transparency.org for research.) Corrupt public works departments worldwide divert funds that should have patched potholes, leaving roads impassable and distribution impossible. Corrupt public health ministries divert funds for maternal and child health clinics, leaving high mortality rates. Corrupt governments divert famine and disaster relief funds, prolonging crises and provoking chaos. Anyone who believes they are respecting the culture by acceding to corrupt practices is mistaken. The best way to respect the majority of people in the culture is by embracing system integrity. Don´t take my word for it. Ask. Don´t ask political philosophers; ask people who have spent significant amounts of time in both systems.