Tackling Corruption in the Maritime Industry

Tackling Corruption In The Maritime Industry

Anti-corruption enforcement has developed into an area of foreign policy with far-reaching consequences for companies and senior executives (e.g., the US administration new policy to combat corruption). It is no longer a local or siloed problem for companies with fines and enforcement now reaching into head office and senior management (e.g., the Glencore settlement announced in May 2022). Corruption laws are ever-tightening, while at the same time regulators are increasing in their transnational reach. International governments and regulators are focusing on senior management commitment to anti-corruption, and liability and compliance risk now need to be addressed at the board level. It is becoming clearer that corruption now ties to other risks such as safety, security, and investor relations.

The maritime industry is particularly exposed to corruption risk. Every day, vessels and cargos enter ports where operational processes involve numerous stakeholders across several jurisdictions, resulting in multiple interactions with government officials. This provides fertile ground for corruption where multiple government officials enjoy broad discretionary powers. Further, the port is an administrative monopoly over an essential public service that businesses depend on to function and prosper. This creates a breeding ground for ‘coercive’ corruption where port officials extract bribes from companies for performing the routine processes of vessel and cargo clearance1.

Corruption in the maritime sector not only generates additional operational costs for the maritime industry and endangers the safety and well-being of the crew, but also is a barrier to trade and development.

The social cost of corruption

• The World Bank estimates that corruption constitutes an additional cost on business totaling as much as 10% of sales in high-risk markets and over 5% in many other countries.
• At a global level, estimates show that the cost of corruption equals more than 5% of global GDP (USD $ 2.6 trillion, with over USD $ 1 trillion paid in bribes each year (see International Chamber of Commerce / Transparency International / United Nations Global Compact / World Economic Forum Partnering Against Corruption Initiative, 2008).
• An OECD study reveals that foreign direct investment is undermined when corruption affects the passing of goods through customs, and that foreign direct investment in corrupt countries is almost 5% less than in countries that are relatively corruption-free (OECD, 2014).
• Moreover, corruption in the port sector facilitates tax evasion and has a detrimental impact on national revenue collection through, for instance, malfunctioning custom regimes (Attila: 2008). Recent estimates from the World Customs Organization suggest that customs-related corruption causes a global loss in customs revenue of USD $ 2 billion each year (Michael: 2012).
• Research demonstrates how corruption in the port and maritime sector is driving up trade costs, particularly in developing countries, where trade costs are already the highest (see Sequeira and Djankov, 2012). Studies from Southern Africa have shown that bribes represent up to a 14% increase in total shipping costs for a standard 20ft container and that shipping companies are actively avoiding “corrupt ports” by taking longer and less direct routes to less corrupt ports. This brings up the costs of trade and create increased congestion and delays regionally.

The role of the private sector in tackling corruption

Twenty years ago, researchers and experts paid little attention to bad governance and corruption, but today, the link between the quality of government institutions that implement policies controlling corruption and economic development is clear. However, in many parts of the world, corruption is still one of the biggest obstacles to social and economic development. Today, it is also widely agreed that the private sector has a critical role to play in eliminating corruption. While companies recognize that there is a pressing need for them to take a firm stance against corruption and to actively fight it, it is becoming increasingly clear that only by working collectively[1] will the private sector be able to bring about the systemic changes in the external operating environment that are required to eliminate corruption. This is particularly true in the global maritime industry, where corruption occurs as a result of the interplay of a multitude of public and private sector stakeholders.

Shipping is leading the way on collective action and transparency

In 2011, the Maritime Anti-Corruption Network (MACN) was established and has grown into a significant industry initiative. The companies in MACN have learned that driving change is much easier when the industry works together in areas that impact us all. The more we share and work together when fighting corruption, the more we can achieve as a group. One vessel from a single company trying to change the world has a difficult task – but 50% (or more) of the global fleet working together is a powerful voice for change. This is particularly noticeable in countries where the industry has taken proactive actions e.g., in Nigeria, Egypt, and Argentina.

Example: In Nigeria, prior to our collective action, it could take up to 7-10 days to resolve a potential discrepancy. Today, due to the collaboration with the Nigerian authorities, it takes 1-8 hours. This is reducing the operational cost due to delays heavily.

Example: Depending on market conditions, port costs and commercial delays accrued from each extra day in Argentinean ports could amount to more than USD 50,000 per day. Today the industry has seen a 90% drop in corrupt demands, reducing operational costs and time in port significantly.

The shipping industry moves over 90% of global trade. In 2013, MACN launched its anonymous incident reporting system, which enables maritime players to submit reports on corrupt demands they have faced during port calls. The outputs of the anonymous incident reporting mechanism allow the industry to learn from each other to potentially avoid similar incidents in their own operations. Use of the mechanism has significantly increased over the years and, to date, MACN has collected over 50,000 reports of corrupt demands globally, covering more than 1000 ports in over 150 countries.

• Over 2000 reports are linked to the risk of the vessel and crew’s safety including threat of physical violence.
• 61% of all demands are for cigarettes
• 71% of demands cause delay or risk of delay in port.
• 61% of all reported incidents are from ports East Asia & Pacific and Middle East & North Africa. This demonstrates both significant trade volumes in this region as well as potential port integrity challenges.[2]

Despite progress being made, the shipping industry is still challenged with different approaches to ethics and integrity. Building a level playing field and aligning standards is critical to the fight against maritime corruption.

The importance of industry leadership buy-in

Well-prepared and trained crews who are challenged with corrupt demands can, in many places, reject demands successfully. However, the likelihood that illicit demands bear fruit is still high as there are many players in the industry who do not apply these same ethical standards. There is a need for an industry-wide approach to combatting corruption. The buy-in, support, and communication from senior leaders is a critical part of driving progress forward to the benefit of crews, companies and the countries impacted by corruption.

[1] https://www.oecd.org/corruption/2021-oecd-anti-bribery-recommendation.htm#:~:text=About%20the%20Recommendation,measures%20to%20make%20this%20effective.

[2] It is important to note that while some of the busiest ports in the world are topping the list, less busy ports also feature indicating that there are many other factors influencing levels of port corruption aside from port size, trade and traffic volume.

 

 

 

 

About MACN

The Maritime Anti-Corruption Network (MACN) is a global business network working towards the vision of a maritime industry free of corruption that enables fair trade to the benefit of society at large. Established in 2011 by a small group of committed maritime companies, MACN has grown to include over 175 companies globally, and has become one of the pre-eminent examples of collective action to tackle corruption.

MACN and its members work towards the elimination of all forms of maritime corruption by: raising awareness of the challenges faced; implementing the MACN Anti-Corruption Principles and co-developing and sharing best practices; collaborating with governments, non-governmental organizations, and civil society to identify and mitigate the root causes of corruption; and creating a culture of integrity within the maritime community.