UNIT 1

BUSINESS ETHICS
‘Survival of the thiefest not survival of the fittest’

1.1 Definitions

• It comprises principles and standards that guide behavior in the world

of business

It can also be defined as right as wrong, acceptable or unacceptable

within an organization. ( Ferrell O. C. and Fraedrich, John and Ferrell
hides in their book Business Ethics.)

• Business ethics is about building relationships of trust between people

and organizations an absolutely essential ingredient to conduct
business successfully especially in the long term

• Carl Skoogland says; ethics is the ground rules about how you are
going to relate to other people, the expectations and understanding
that define how you are going to deal with others. By others we mean
our customers, suppliers, the government, communities but most of all
one another.

1.2 Common unethical issues

 Canvassing for jobs: solicite for information before getting interviewed.

 Bribery: e.g. ZIMRA officials get paid for someone not to pay duty

 Nepotism

 Sexual harassment
  Conflict of interest

 Abuse of power/authority

 Discrimination: unequal opportunities, race, tribe.

 Underhand dealing

 Under invoicing

 Underweight of commodities

 Constructive dismissal

 Tax evasions

 Deceptive advertising

 Some issues are legal but unethical

 Insider trading of stocks

 Defective products

 Intelligence gathering

 Lying and holding information

 Misreporting time worked

 Overpricing of goods and services

 Breaking environmental and safety laws

1.3 Benefits of Managing Ethics at the Work Place

1) Attention to business ethics has substantially improved society

 • Some decades ago child labor was not condemned

• Disabled workers were condemned to poverty

• Employees were dismissed based on personalities and influence

was applied through intimidation and harassment, society then
reacted and demanded that business place high value on
fairness and equal rights

• Anti-trust laws were instituted, government agencies were

established and women were organized

2) Ethics programmes help maintain a morale course in tabulant times

• During times of change, there is often no clear morale campus to

guide leaders through complex conflicts about what is right or
wrong. Continuing attention to ethics in the work place sensitizes
leaders and staff on how or rather to how they should act.

3) Ethics programmes cultivate strong team work and productivity

• They align employee behaviors with those top priority ethical

values preferred by the leaders of the organization.

• Own going attention and dialogue regarding value in the work

place builds openness and integrity which are critical ingredients
of strong teams in the work place

• Employees feel strong alignment between their values and those

of the organization. They react with strong motivation and
performance.

4) Ethics programmes support employees growth and meaning

• Attention to ethics in the work place helps employees face reality

both good and bad in the organization and themselves
 • Employees feel full confidence, they can admit and deal with
whatever comes their way

5) Ethics programmes promote a strong public image. The fact that an

organization regularly gives attention to its ethics can portray a strong
public image in the long term

• Bob Dum the president and CEO of San Francisco Based

Business for Social Responsibility said ethical values consistently
applied are the corner stones in building a commercially
successful and socially responsible business.

6) Managers ethical values in the work place legitimizes managerial

actions, improves trusts and relationships between individuals and
groups, supports greater consistency in standards and qualities of
products and cultivates greater sensitivity to the impact of the
enterprises value and messages.

7) Ethics programmes help avoid criminal acts of omission and can lower
fines

• Ethical programmes tend to detect violation easily so that they

can be reported or addressed. In some case when an
organization when it is aware of actual or potential and does not
report it to appropriate authority this can be considered a
criminal act

• An organization can lower potential fines if it had made efforts to

operate ethically

8) Formal attention to ethics is the right thing to do.

1.4 Managing Ethics in the Work Places

1.4.1 Guidelines for Managing Ethics in the Work Place

1. Recognize that managing ethics is a process

2. The bottom line of an ethics programme is accomplishing

preferred behavior in the work place

3. Make ethics decisions in groups and make the decisions public

and appropriate

4. Integrate ethics management with other management practices

e.g. when developing the values during strategies include values
preferred in the work place when developing personal policies
reflect on ethical values you had like to be punishment in the work
place and then produce policies to curb these behaviors

5. Use cross functional teams when developing and implementing

the ethics management programmes to enhance a sense of
ownership through participation

6. Value forgiveness – help people recognize and address their

mistakes and then to continue operate ethically.

7. Note that trying to operate ethically and making a few mistakes

is better than not trying at all

Case Study: Fraud

Capitalism’s Achilles Heel : Dirty Money and How to Renew the Free
Market System

Enron. Tyco. WorldCom. This list of tainted companies could go on for pages.
More than ever our economic system is struggling to balance what is legal,
what is ethical and what serves the common good. The many disgraced
corporations in the last five years have met with scandal in their own unique
ways. But there is a common thread that links many of them and countless
other companies that operate “cleanly.”

That tread is the dirty money structure, which consists of tax havens,
secrecy jurisdictions, abusive transfer pricing, dummy companies,
anonymous trusts, hidden accounts, solicitation of ill-gotten gains, kickbacks
and loopholes left in the laws of western countries that encourage incoming
criminal and tax evading funds. Many global companies and banks use this
structure to skirt customs, tax, financial and money laundering laws. Roughly
$11 trillion is stashed away in tax havens and secrecy jurisdictions. About
half of cross-border commerce involves some part of the dirty money
structure, often to hide illicit proceeds.

The result is nothing less than legitimization of illegality. It is virtually

impossible to do business using tax havens, secrecy jurisdiction, abusive
transfer pricing and secret accounts without breaking laws in many
countries.

Why has so much bad behavior become business as usual? One explanation
is greed, but this does not adequately explain the phenomenon. A better
explanation is that we value “maximizing” our business operations over
ensuring that they are fair and just. The capitalist system is enormously
productive, yet it could accomplish so much more. We need to make a top
priority of justice and fairness in business operations if capitalism is to
achieve its fullness potential and spread prosperity to all. Curtaining the dirty
money structure is an essential first step.

THE UGLIEST CHAPTER IN GLOBAL ECONOMIC AFFAIRS SINCE

SLAVERY
Let’s talk about two things this afternoon. One, the international structure
that supports the flow of illicit money across borders, and two the harmful
impact these illicit flows have on economic growth and poverty alleviation in
poorer countries.

To begin, let’s get a simple picture of global poverty and inequality fixed in
our minds.

What we have here are two bar charts depicting the two usual ways of
measuring global
income. One is based on purchasing power parity and the other on currency
exchange rates. In each bar chart each color represents 20 percent of the
world’s population. The size of the color indicates the portion of global
income flowing to that 20 percent grouping. Look at how much of global
income flows to the top 20 percent, or quintile, and how little of global
income is available to the bottom 80 percent. Seventy to 90 percent of
global income belongs to the top 20 percent, leaving only ten to 30 percent
of global income for the bottom 80 percent of the world.

What I want you to understand about illicit financial flows is that the basic
motivation driving this phenomenon is the shift of money from the bottom to
the top, from poor to rich. In particular, out of the hands of the 80 percent
into the hands of the 20 percent, out of the countries where 80 percent of
the world’s population lives into countries where 20 percent of the world’s
population lives.

Now let’s focus on the structure that supports illicit financial flows. Illicit or
corrupt money is money that is illegally earned, illegally transferred, or
illegally utilized. If it breaks laws in its origin, movement, or use it merits the
label.

There are three forms of illicit and corrupt money that cross borders—1) the
proceeds of bribery and theft by government officials, 2) the proceeds of
criminal activities such as drug trading, racketeering, counterfeiting,
contraband, and including terrorist funds, and 3) the proceeds of tax-evading
and laundered commercial transactions.

Since the 1960s we have built and expanded a global structure to facilitate
the movement of illicit money. A few elements of this structure were
available before then, but the development of the structure accelerated in
the 1960s for two reasons. First, it was the period of decolonization.

From the late 1950s to the end of the 1960s, 48 countries gained their
independence from European powers. Many political leaders and wealthy
businesspeople wanted to take money out of these newly independent
counties, a desire which was well serviced by western financial institutions.
Second, corporations began to spread their flags across the planet. Certainly
there were international companies before the 1960s, but typically an
international oil or trading company had overseas branches in only 12 or 15
countries. The great thrust to expand all over the globe took off in the 1960s
and has continued up to the present. Most of these corporations utilize tax
evading techniques to relocate profits across borders at will. For these two
reasons— decolonization and the spread of multinational corporations—the
1960s marked the point at which the expansion of the illicit financial
structure took off in earnest.

There are a number of interrelated parts of the illicit financial structure

Tax havens – These are places where you can set up an entity—a corporation
or partnership or trust fund—and then you can sell to that entity and that
entity can sell to other entities, and you can structure the pricing in such a
way that all or most of the profits are earned in the tax haven entity, and it
doesn’t have to pay taxes or pays only minimal taxes on those profits. There
are now 72 tax havens around the world.

Offshore secrecy jurisdictions – These are places, usually located within tax
havens, where you can set up these entities behind nominees and trustees
such that no one knows who are the real owners and managers of the
business.
Disguised corporations – These disguised entities now number in the millions
across the globe.

Flee clauses – Many of these disguised corporations are equipped with flee
clauses. Thus, the nominee directors and fake owners can have the entity
flee from one secrecy jurisdiction to another should anyone come knocking
on the door trying to find out who are the real owners or managers of the
business.

Anonymous trust accounts – You can also set up trust accounts behind
nominees and trustees, disguising both the donor and the beneficiary of the
trust.

Fake foundations – You can set up a charitable foundation, donate money to

this charitable entity, and designate yourself the beneficiary of the charity of
the foundation.

False documentation – Used in all sorts of trade and capital transactions.

Falsified pricing – This is by far the most commonly used element in the illicit
financial
structure—falsifying prices on imports and exports in order to shift money
across borders.

Money-laundering techniques – Many specialized devices have been created

to facilitate the
disguised shift of illicit funds across borders.

Holes left in western laws – Gaps in legislation facilitate the movement of

money through the
illicit financial structure and ultimately into western economies.
All three forms of illicit money—the bribery component, the criminal
component, and the
commercial component—use this structure. It was developed in the West
originally to facilitate
the movement of flight capital and tax-evading proceeds out of one place
and into another
place. In the mid and late 1960s and 1970s, drug dealers stepped into these
channels to shift
their proceeds across borders into the legitimate financial system. In the
1980s and 1990s,
seeing how easy it was for drug dealers to move their profits, other kinds of
racketeers stepped
into these same channels to move their illicit proceeds across borders. In the
1990s and in the
current decade, again observing how easy it was for the drug dealers and
racketeers, terrorists
stepped into these same channels to shift their proceeds around the world.

Drug kingpins, criminal syndicate heads, and terrorist masterminds did not
invent any new ways
of moving their illicit proceeds. They merely utilized the mechanisms that we
had created for the
purpose of moving flight capital and tax-evading money.

Perhaps you are thinking that anti-money laundering laws are designed to
address this. Well,
yes and no. Many nations have major holes in their anti-money laundering
laws. Take the
United States for example. We bar only the incoming proceeds of drugs,
bribery, and terrorism.
It remains legal to bring into the United States the proceeds of other forms of
foreign crimes,
including racketeering, handling stolen property, credit fraud, counterfeiting,
contraband, slave
trading, alien smuggling, trafficking in women, environmental crimes, and of
course, all forms of
tax-evading money. Without trying to cover each country in Europe, suffice it
to say that no
western nation does a good job of enforcing its anti-money laundering
regime.

For the first time in the 200-year run of the free-market system, we have
built and expanded an
entire integrated global financial structure the basic purpose of which is to
shift money from poor
to rich.

I estimate that something on the order of $1 trillion to $1.6 trillion of illicit

money moves across
borders annually. These estimates are conservative and are developed with
some care in my
book, Capitalism’s Achilles Heel, utilizing both top down and bottom up
approaches. Other
analysts think these estimates are considerably short of the real global
totals.

This $1 trillion or more per year of illicit money that moves across borders
and the structure that
facilitates its movement is the biggest loophole in the global economic
system.
Now let me turn again to poverty and inequality. This $1 trillion or more a
year of illicit money
that flows across borders and the structure that facilitates its movement is
not only the biggest
loophole in the global economic system. It is also the most damaging
economic condition
hurting the poor in developing and transitional economies. It drains hard-
currency reserves,
heightens inflation, reduces tax collection, worsens income gaps, cancels
investment, hurts
competition, and undermines trade. It leads to shortened lives for millions of
people and
deprived existences for billions more. Within the economic realm, as
distinguishable from
political affairs or environmental constraints, nothing approaches the harmful
effects caused by
massive outflows of illegal money from poor nations into rich nations.

Of the $1 to $1.6 trillion of illicit money that I estimate crosses borders

annually, I further
estimate that half—$500 to $800 billion a year—comes out of developing
and transitional
economies. These are countries with the weakest legal and administrative
structures, the largest
drug and criminal gangs, and, far too often, political and economic elites who
want to shift their
money abroad.

The cross-border component of bribery and theft by government officials is

the smallest, only
about three percent of the global total. The criminal component constitutes
about 30 to 35
percent of the total. And the commercially tax-evading component, driven
primarily by falsified
pricing in imports and exports, is by far the largest, at some 60 to 65 percent
of the global total. I
am the first to state that these are orders of magnitude, but they
nevertheless serve to illustrate
the scope of the problem.

Now, cross-border illicit financial flows force us to address some prevailing

myths and erroneous
assumptions we often make in economics.

First, many people think that outflows of illicit money are just a temporary
phenomenon, and
when economic and political conditions become normalized this illicit money
will return to
countries of origin. Not correct. By far the greater part of illicit money
streaming out of
developing and transitional economies— some 80 to 90 percent of it—is a
permanent outward
transfer. The little bit that does come back almost always returns as foreign
direct investment—
FDI—having gone abroad and acquired a foreign nationality as a company or
partnership or
investment fund. Then, of course, after investment locally, it is intended to
go abroad again in
the form of interest and principle on loans or dividends on share capital.
Second, some people argue that we can’t distinguish between legal and
illegal capital flight. On
the contrary, there is a very clear difference. Legal transfers stay on the
books of the company
or individual making the transfer. Illegal transfers are designed to disappear
from any record in
the country from which the money comes. For example, many bank accounts
opened by
foreigners in Europe and the United States contain the instruction, “Hold all
mail.”

Third, the little account known as “errors and omissions.” Many people think
this balancing
account in national statistics shows flight capital going out of a country. In
fact it shows very little
of it. It does not record any of the trade mispricing, which is the biggest
component. When a
transaction is mispriced for the purpose of shifting money across borders,
this mixes capital with
trade, and the capital component does not appear separately on the
commercial invoice. This
explains how literally trillions of dollars have escaped across borders with
hardly anyone taking
notice.

Fourth, illicit financial flows make the most basic data we collect on
developing and transitional
economies inaccurate. Trade mispricing misstates the value of imports and
exports. Capital
transfers are unrecorded. And as a result, GDP is misstated. The cumulative
effect of these
errors is enormous. Furthermore, illicit financial flows make all our data on
global inequality
wrong. We are substantially under-recording the income of the rich. No one
can accurately
assert that the global income gap is narrowing. It may be, but we will not
know this until we do a
much better job of estimating the hidden income of the rich, particularly that
tucked away in tax
havens globally and in private banks in Europe and North America.

Now, let’s go further and consider the impact of this estimated $500 to $800
billion of illegal
money coming annually out of poor countries.

1) It eviscerates foreign aid. Through most of the 1990s and into the current
decade, aid has
been running about $50 to $80 billion a year from all sources. Consider the
comparison: $50
to $80 billion of aid in; $500 to $800 billion of illicit money out. In other
words, for every $1
that we have been generously handing out across the top of the table, we in
the West have
been taking back some $10 of illicit money under the table. There is no way
to make this
formula work for anyone, poor or rich.

2) Consider the effect on specific countries. The Tax Justice Network

estimates that the amount
of money domiciled in tax havens, ultimately sent on to the West, is $11.5
trillion. Think of
this in terms of individual countries. Russia has probably experienced the
greatest theft of
resources that has ever occurred in a short period of time—an estimated
$200 to $500 billion
since the beginning of the 1990s. This was accomplished by underpricing
exports of oil, gas,
gold, diamonds, aluminum, tin, zinc, pulp, timber, and other commodities.
China is pushing
these numbers and may have exceeded this level already. Again, the
technique is
underpricing of exports out of China, with the balance of the price
accumulating in foreign
subsidiaries and lodged in foreign bank accounts. Nigeria has probably
experienced the
greatest illegal outflow as a percentage of GDP. Here we have an oil-rich
country of 140
million people with 70 percent of its population— that’s 100 million people—
living on $1 to $2
a day. Congo has had the longest rip-off of any country, going on for two
centuries now. The
best available estimate of incremental deaths in Congo, above normal
mortality rates, since
2000 is 4.5 million. Illicit money flowing out of poor countries kills people. In
Venezuela, the
fight between HugoChavez and his state-owned oil company, PDVSA, is over
the question
of who will control oil revenues. For more than 20 years, the overseers of
Venezuela’s oil
reserves have shifted proceeds offshore, using transfer pricing techniques, in
order to get
revenues out of the hands of politicians and bureaucrats in Caracas.
3) Consider the impact on other global “bads.” Illicit money makes the drug
problem insolvable,
in the United States and in Europe and in producing countries as well. Illicit
money has been
the principle driving force in the explosion of global crime over the last 25
years, making
cross-border racketeering one of the fastest growing businesses in the world.
Illicit money
underlies the rise of Al Qaeda, with some $300 million estimated to have
passed through the
illicit financial structure into bin Laden’s hands in the decade prior to 9/11.
Illicit money is the
way that Saddam Hussein rearmed after the first Persian Gulf War, buying
munitions that are
killing Iraqis, Americans, British, and others in that country today. The illicit
financial structure
enabled A.Q. Khan, the Pakistani nuclear scientist, to buy and sell nuclear
materials across
many countries. And this phenomenon contributes to a number of failed
states. My wife’s
NGO, The Fund for Peace, annually produces the “Failed State Index,”
published in Foreign
Policy magazine. Two years ago the most failed state on the index was Côte
d’Ivoire—Ivory
Coast. Several years ago I was in the Bank of France, the equivalent of our
Federal Reserve
Board, talking with the director of West African affairs. He told me that at the
time of his
death in 1993, the long-term leader of Côte d’Ivoire, Houphouët-Boigny, had
assets outside
of Côte d’Ivoire valued at $7 billion. I blanched and asked, “Do you mean
francs or dollars?”
He repeated, “dollars.” This is a small country primarily producing cocoa for
export to Europe
and the United States to make chocolate, and its long-term leader had
accumulated $7
billion in foreign assets. Of course, the country soon descended into utter
chaos.

Think what would happen if $500 billion a year, or a reasonable part of it,
stayed in the
developing and transitional economies rather than coming illegally out. It
would alter our shared
world for the better, rich and poor alike.

Ten years ago I stepped out of international business and into the think-tank
community with a
primary goal of getting reality on the table. I had seen more corruption, more
money laundering,
more financial crime than any one person should see in a lifetime, and I
resolved to say what I
wanted to say about this overarching reality. Why wasn’t reality already on
the table? What is it
about this subject matter that is so mysterious or so frightening that we
hesitate to go there?
Basically is it that we can’t see it or don’t want to see it?

Paul Krugman, the American economist, says that he has come to

understand “. . . the
remarkable extent to which the methodology of economics creates blind
spots. We just don’t
see what we can’t model.”

Jack Blum, the well-known money-laundering legal expert and a member of

our program’s
advisory board, says that these are numbers that “. . . no one wants to
know.”
Which is it? We can’t see it, or we don’t want to see it, or a combination of
the two, or some
other explanation? Whatever the explanation, this is a shortcoming in our
analysis of and pursuit
of economic development that must be corrected.

This is the reality that we seek to get on the table. Illicit outflows from
developing and transitional
economies vastly exceed overseas development assistance going into
developing and
transitional economies. In my estimates, which I and others think are
conservative, by a factor of
ten to one. More analysis, better analysis in the future may make this a
narrower picture or
make it a wider picture. But no analysis will make this a pretty picture.

What we need to do is analyze the whole of the financial equation for

development—total capital
in, total capital out, what’s left over, both the money we can see and
estimates of the money that
is veiled and hidden.

Within the whole of the financial equation we should include foreign direct
investment going into
developing and transitional economies. And when we look at FDI going in, we
also have to look
at visible dividends and loan repayments coming out and invisible transfer
pricing taking money
out. We also have to look at remittances going into developing and
transitional economies,
largely by family members living abroad. We also have to look at charitable
and foundation
money going into poorer countries.
The biggest item we have to consider is this illicit money streaming out of
developing and
transitional economies. The harm done by illicit financial outflows exceeds
the good done by
overseas development assistance.
Economic deprivation brutalizes billions of people. This makes it necessary
for us to be brutally
honest with ourselves. This reality, broadly depicted here, has been going on
for decades and
cumulatively has moved trillions of dollars out of poor countries into rich
countries. This reality,
broadly depicted here, propelled by the illicit financial structure that we
created in good part of
accomplish exactly this end, this reality is, in my reading of history and in my
judgment, this
reality is the ugliest chapter in global economic affairs since slavery. The
poor deserve better
from us.

Now let me close with three points.

1) We don’t ask you to accept these numbers. We ask you to do just the
opposite – to produce
your own numbers. We ask the World Bank and other international
financial institutions and
the community of development scholars to do your own analyses. If
you do it honestly and
thoroughly, you are very likely to come up with numbers that are
greater than these.

2) Be prepared to produce a range of numbers. Highs and lows. Best

estimates and deviations
from such estimates. We will not reach certainty about these illicit and
hidden flows, just as
we do not have certainty about how many poor people there are in the
world. But we can
reach clarity as to the order of magnitude of the problem and
consensus on the importance
of the issue.

3) Numbers produced by the World Bank and the development

community—your numbers—
will bolster the political will to address the issue—curtailing illicit
outflows from poorer
countries. How such flows can be reduced is another subject. Two
quick comments. The goal is to curtail, not stop, but substantially
curtail illicit outflows. And curtailing these outflows
is a matter of political will; it is not rocket science. We are not asking
the international
financial institutions or the community of development scholars to
solve the problem. We are
 asking you to put numbers on the problem. What is required is a broad
consensus as to the
magnitude of the problem and the damage that is wrought by these
realities.

Numbers will drive the policy. Believable numbers will drive this issue onto
the political-economy
agenda.

It is time, ladies and gentlemen, for the first time, to put the whole of the
financial equation for
development squarely on the table. This may well be t03/13/2011he most
important contribution we can
currently make toward achieving poverty alleviation, growth, security, and
perhaps even
contributing to peace for the vast majority of people in our shared world.

1.4.2 How Managers Manage Ethics in the Work Place

The Code of Ethics

• As an organization we should establish a code of ethics and

decision rules.

• A code of ethics is a formal document that states an

organization’s values and ethical rules it expects its employees to
follow. This should be specific enough to show employees the spirit
in which they are supposed to do things yet loose enough to allow
for freedom of judgment.

• Establish an ethics committee

• Policies, systems and procedures to be in place

 • Whistle blowing

• Managers should lead by example

• Reward and punishments systems should be fair and equal to

everybody

• Carry out ethical audits

• Carry out ethical training

• Carry out performance appraisals based on ethical audits

• Set goals which are SMART

• Introduce toll free numbers

1.4.3 Possible Solutions

1) Top management should establish clear policies that encourage ethical
behavior

2) Management must assume responsibility for disciplining wrong doing

doers

3) Company can provide a mechanism for whistle blowing as a matter of

policy

4) Come up with an ethics programme which promote preferred behavior

in the work place

5) Make ethics decisions in groups and make decision public

6) Help people recognize and address their mistakes and support them to
continue to try and operate ethically

7) Recognize that managing ethics is a process and not an event - give

it time
 8) Set up programme to teach employees to deal with moral problems in
business

1.4.4 Description of a Highly Ethical Organization (Characteristics) Mark

Pastin

In his book Hard Problems of Management (1986) he came up with 4

characteristics

1. They are at ease interacting with diverse stakeholder groups

2. They are obsessed with fairness – these

3. Responsibility is individual rather than collective with individuals

assuming personal responsibility for actions of the organization

4. They see their activities in terms of purpose. This purpose is a

way of operating that members of the organization highly valued
and this purpose ties the organization to its ……………….