Bribery and corruption in the market: From Kickbacks to Insider Trading: Unraveling Market Corruption Schemes

1. What is market corruption and why does it matter?

Market corruption is a broad term that encompasses various forms of unethical and illegal practices that undermine the integrity, efficiency, and fairness of the market. It can take many shapes and sizes, ranging from bribery and kickbacks to insider trading and market manipulation. Market corruption matters because it distorts the allocation of resources, erodes public trust and confidence, and harms the interests of consumers, investors, and honest competitors. In this section, we will explore some of the most common and prevalent types of market corruption schemes, their causes and consequences, and how they can be detected and prevented.

Some of the market corruption schemes that we will discuss are:

- Bribery and kickbacks: This involves offering or accepting money, gifts, favors, or other benefits in exchange for influencing a business decision, such as awarding a contract, granting a license, or providing preferential treatment. For example, a construction company may bribe a government official to secure a lucrative public project, or a pharmaceutical company may pay kickbacks to doctors to prescribe its drugs.

- Insider trading: This involves trading securities or commodities based on confidential or non-public information that gives an unfair advantage over other market participants. For example, a corporate executive may buy or sell shares of his or her company before a major announcement, or a hedge fund manager may trade on information obtained from a tipster or a mole.

- Market manipulation: This involves creating false or misleading impressions about the supply, demand, or price of a security or commodity in order to influence its value or induce others to trade. For example, a trader may spread rumors, create artificial demand or supply, or coordinate with others to inflate or deflate the price of a stock or a currency.

- Fraud and deception: This involves misrepresenting, concealing, or omitting material facts or information in order to deceive or mislead others for personal gain or to avoid liability. For example, a company may falsify its financial statements, a broker may overcharge or underdeliver on commissions, or a seller may misrepresent the quality or origin of a product or service.

2. A taxonomy of common schemes and examples

Market corruption is a broad term that encompasses various forms of illicit or unethical behavior that distort the functioning of a market. It can involve both public and private actors, and it can affect different levels of the market, from individual transactions to entire sectors. Market corruption can have serious consequences for economic efficiency, social welfare, and public trust. In this section, we will explore some of the most common types of market corruption schemes and provide examples of how they operate in practice. We will classify these schemes into four main categories: bribery, kickbacks, insider trading, and market manipulation.

1. Bribery is the act of offering, giving, receiving, or soliciting something of value in exchange for an undue advantage or influence in a market transaction. Bribery can occur between public officials and private parties, such as when a company pays a government official to secure a contract or a license. Bribery can also occur between private parties, such as when a supplier pays a buyer to favor its products or services over those of its competitors. Bribery can distort market competition, reduce product quality, increase costs, and undermine public accountability. For example, in 2018, the US Department of Justice charged several executives of a multinational telecommunications company with bribing government officials in Uzbekistan to obtain lucrative contracts and licenses in the country's telecom sector.

2. Kickbacks are a form of bribery that involve a return of a portion of the payment or benefit received by one party in a market transaction to another party that facilitated or influenced the transaction. Kickbacks can occur between public officials and private parties, such as when a government official receives a percentage of the contract value from a company that won a public tender. Kickbacks can also occur between private parties, such as when a buyer receives a commission from a supplier for choosing its products or services over those of its competitors. Kickbacks can create conflicts of interest, reduce transparency, increase costs, and undermine fair competition. For example, in 2019, the US securities and Exchange commission (SEC) charged a former executive of a global pharmaceutical company with paying kickbacks to doctors in China to prescribe its drugs and falsifying the company's records to conceal the payments.

3. Insider trading is the act of trading securities or other financial instruments based on material, non-public information that gives an unfair advantage over other market participants. Insider trading can occur when a person who has access to such information, such as a corporate insider, a government official, or a professional adviser, uses it for their own benefit or discloses it to others who use it for their benefit. Insider trading can harm market integrity, erode investor confidence, and reduce market efficiency. For example, in 2020, the SEC charged a US senator and his wife with insider trading for selling millions of dollars worth of stocks after receiving confidential briefings on the coronavirus outbreak and its potential impact on the economy.

4. Market manipulation is the act of deliberately creating or influencing the price or volume of a security or other financial instrument in order to deceive or defraud other market participants or to benefit from the resulting price movements. Market manipulation can involve various techniques, such as spreading false or misleading information, engaging in wash trades, spoofing, layering, or cornering the market. Market manipulation can distort market signals, create artificial volatility, and harm market liquidity. For example, in 2021, the UK financial Conduct authority (FCA) fined a trader for manipulating the price of Dutch state bonds by placing large orders that he did not intend to execute and then cancelling them shortly before the closing auction.

3. How it affects the economy, society, and individuals?

Market corruption is a pervasive and complex phenomenon that undermines the efficiency, fairness, and stability of the economic system. It refers to the abuse of power or position for private gain in the context of market transactions, such as buying and selling goods and services, investing and financing, or regulating and supervising market activities. Market corruption can take various forms, such as bribery, kickbacks, insider trading, market manipulation, fraud, embezzlement, extortion, collusion, and nepotism. The causes and consequences of market corruption are manifold and interrelated, affecting the economy, society, and individuals in different ways. Some of the main aspects of market corruption are:

- Economic effects: Market corruption distorts the allocation of resources and the functioning of markets, leading to inefficiency, waste, and mismanagement. It creates unfair competition and reduces the incentives for innovation and productivity. It also erodes the trust and confidence of investors, consumers, and businesses, resulting in lower investment, growth, and employment. Moreover, market corruption increases the costs and risks of doing business, as well as the uncertainty and volatility of the economic environment. For example, a corrupt regulator may demand bribes from firms to grant licenses, permits, or approvals, or to overlook violations of rules and standards. This increases the cost of entry and operation for honest firms, while favoring those who are willing or able to pay. It also reduces the quality and safety of the products and services offered in the market, as well as the accountability and transparency of the regulatory process.

- Social effects: Market corruption undermines the social values and norms that underpin the market system, such as honesty, integrity, fairness, and responsibility. It erodes the legitimacy and credibility of the institutions and actors that govern and participate in the market, such as regulators, intermediaries, firms, and professionals. It also exacerbates the inequalities and injustices in the distribution of wealth, income, and opportunities, as well as the access to public goods and services. Furthermore, market corruption fosters a culture of cynicism, apathy, and resentment among the public, as well as a sense of alienation, frustration, and dissatisfaction among the market participants. For example, a corrupt broker may collude with a company insider to trade on confidential information, or manipulate the price or volume of a stock to deceive or defraud other investors. This violates the principles of fair and efficient markets, as well as the fiduciary and ethical duties of the broker and the insider. It also harms the interests and rights of the other market players, as well as the reputation and integrity of the market itself.

- Individual effects: Market corruption affects the behavior, attitudes, and outcomes of the individuals who are involved in or exposed to it, either as perpetrators, victims, or bystanders. It can have psychological, emotional, and moral impacts, as well as material, legal, and reputational consequences. It can also influence the choices, preferences, and expectations of the individuals, as well as their motivations, incentives, and risks. For example, a corrupt employee may accept or offer a kickback to secure or facilitate a business deal, or to obtain or provide a favor or advantage. This may result in a personal gain or benefit for the employee, but also a loss or harm for the employer, the customer, or the competitor. It may also expose the employee to legal sanctions, disciplinary actions, or social sanctions, such as shame, guilt, or ostracism. It may also affect the employee's self-esteem, self-image, and self-respect, as well as the employee's loyalty, commitment, and performance.

4. The role of laws, regulations, and ethics

Market corruption is a pervasive and complex phenomenon that undermines the efficiency, fairness, and integrity of the market system. It involves a wide range of illicit practices, such as bribery, kickbacks, insider trading, market manipulation, money laundering, tax evasion, and fraud. These practices distort market outcomes, create unfair advantages, erode public trust, and harm the common good. Therefore, it is essential to detect and prevent market corruption through various means, such as laws, regulations, and ethics. In this segment, we will explore how these three elements can play a role in curbing market corruption and enhancing market governance.

- Laws are the formal rules and sanctions that define and prohibit market corruption and prescribe legal consequences for the offenders. Laws can deter market corruption by increasing the expected costs and risks of engaging in such behavior, as well as by providing incentives and protections for whistleblowers and witnesses. Laws can also facilitate the detection and prosecution of market corruption by establishing clear standards of evidence, procedures, and jurisdiction. However, laws alone are not sufficient to prevent market corruption, as they may face challenges such as loopholes, ambiguity, inconsistency, enforcement gaps, and corruption within the legal system itself. For example, in some countries, the legal definition of bribery may be vague or narrow, allowing some forms of influence-peddling or gratuities to escape legal scrutiny. In other cases, the law enforcement agencies or the judiciary may be compromised by political interference, lack of resources, or corruption within their ranks, resulting in low detection and conviction rates of market corruption cases.

- Regulations are the specific rules and mechanisms that govern the operation and supervision of the market and its participants. Regulations can prevent market corruption by creating a level playing field, ensuring transparency and accountability, and imposing checks and balances. Regulations can also detect market corruption by monitoring and auditing the market activities, transactions, and records, and by requiring disclosure and reporting of relevant information. However, regulations also have limitations and drawbacks, such as complexity, rigidity, inefficiency, and regulatory capture. For example, in some sectors, the regulations may be too complex or burdensome, creating compliance costs and barriers to entry, and reducing market competition and innovation. In other situations, the regulators may be captured by the regulated entities, either through bribery, lobbying, or revolving doors, resulting in weak or biased regulation that favors the interests of the corrupt actors.

- Ethics are the moral principles and values that guide the behavior and decisions of the market actors, such as firms, managers, employees, investors, consumers, and intermediaries. Ethics can prevent market corruption by fostering a culture of integrity, responsibility, and professionalism, and by promoting self-regulation and voluntary compliance. Ethics can also detect market corruption by encouraging ethical awareness, education, and training, and by providing ethical codes, standards, and guidelines. However, ethics also face challenges and dilemmas, such as moral relativism, rationalization, and conflicts of interest. For example, in some contexts, the ethical norms and expectations may vary or differ from the legal or regulatory ones, creating confusion or ambiguity for the market actors. In other cases, the market actors may rationalize or justify their corrupt behavior by appealing to the common practice, the necessity, or the greater good. In addition, the market actors may face conflicts of interest between their personal, professional, and social obligations, which may compromise their ethical judgment and behavior.

5. The issues of enforcement, compliance, and whistleblowing

Market corruption is a pervasive and complex phenomenon that undermines the efficiency, fairness, and integrity of the market system. It involves various forms of illicit behavior, such as bribery, kickbacks, insider trading, market manipulation, fraud, and money laundering, that distort market outcomes and harm the public interest. While there are many legal and ethical frameworks that aim to prevent and combat market corruption, they face significant challenges and limitations in terms of enforcement, compliance, and whistleblowing. Some of these challenges and limitations are:

- Enforcement: The enforcement of anti-corruption laws and regulations is often hampered by the lack of resources, expertise, and political will of the relevant authorities. Moreover, the enforcement agencies may themselves be susceptible to corruption, capture, or intimidation by powerful market actors. For example, in the case of the 1MDB scandal, the Malaysian anti-corruption agency was allegedly obstructed and threatened by the former prime minister and his associates, who were accused of embezzling billions of dollars from a state-owned investment fund.

- Compliance: The compliance of market participants with anti-corruption norms and standards is often influenced by the costs and benefits of engaging in corrupt practices, as well as the perceived risks and rewards of being caught or exposed. In some cases, market participants may rationalize or justify their corrupt behavior as a necessary or acceptable way of doing business, especially if they face intense competition, pressure, or uncertainty. For example, in the case of the FIFA corruption scandal, some soccer officials and executives allegedly accepted bribes and kickbacks in exchange for granting lucrative media marketing rights for major tournaments, claiming that they were acting in the best interests of the sport and their respective regions.

- Whistleblowing: The whistleblowing of market insiders who witness or experience corruption is often deterred by the fear of retaliation, ostracism, or legal action from their employers, colleagues, or clients. Moreover, the whistleblowers may face difficulties in finding credible and effective channels to report their concerns, or in receiving adequate protection and support from the authorities or the public. For example, in the case of the Enron scandal, some employees who tried to expose the accounting fraud and manipulation that led to the collapse of the energy giant were either ignored, dismissed, or harassed by the company's management and auditors.

6. How to avoid, report, and resist market corruption?

Market corruption is a pervasive and complex problem that undermines fair and efficient markets, erodes public trust, and harms the common good. It can take many forms, such as bribery, kickbacks, insider trading, market manipulation, money laundering, fraud, and collusion. These practices not only violate the law, but also the ethical principles of honesty, integrity, and transparency that are essential for market participants. Therefore, it is imperative that market participants take proactive steps to avoid, report, and resist market corruption in their respective domains. Some of the best practices and recommendations are:

- 1. establish and enforce a clear and comprehensive anti-corruption policy. Market participants should have a written policy that defines what constitutes corruption, outlines the roles and responsibilities of different stakeholders, sets the standards of conduct and compliance, and specifies the procedures for reporting and investigating suspected cases of corruption. The policy should be communicated and implemented across all levels of the organization, and regularly reviewed and updated to reflect changing circumstances and regulations. The policy should also include sanctions and incentives for compliance and non-compliance, such as disciplinary actions, rewards, recognition, and training.

- 2. Conduct due diligence and risk assessment. Market participants should conduct thorough and ongoing due diligence and risk assessment of their potential and existing partners, clients, suppliers, intermediaries, and competitors. They should identify and evaluate the sources and levels of corruption risk in their market environment, such as the legal and regulatory framework, the political and economic situation, the cultural and social norms, and the industry and sector characteristics. They should also monitor and audit their own activities and transactions, and ensure that they have adequate controls and safeguards to prevent and detect corruption.

- 3. foster a culture of integrity and accountability. Market participants should promote a culture of integrity and accountability within their organization and among their stakeholders. They should demonstrate ethical leadership and set an example of honesty and transparency. They should encourage and empower their employees, managers, and directors to act with integrity and report any concerns or suspicions of corruption. They should also provide adequate training and education on anti-corruption laws, policies, and practices, and create a safe and confidential channel for whistleblowing and reporting. They should also engage and collaborate with other market participants, regulators, civil society, and the media to raise awareness and advocate for anti-corruption initiatives and reforms.

- 4. seek legal advice and assistance. Market participants should seek legal advice and assistance from qualified and reputable professionals when they encounter or suspect corruption in their market activities. They should consult with lawyers, accountants, auditors, consultants, and other experts who can help them understand and comply with the relevant laws and regulations, and advise them on how to handle and resolve corruption issues. They should also seek legal protection and recourse when they are victims or witnesses of corruption, and cooperate with the authorities and the courts in the investigation and prosecution of corruption cases.

- 5. Resist and report corruption. Market participants should resist and report corruption whenever they encounter or witness it in their market activities. They should refuse to participate in or facilitate any corrupt practices, such as paying or accepting bribes, offering or receiving kickbacks, leaking or trading on insider information, manipulating or rigging the market, laundering or concealing illicit funds, falsifying or misrepresenting documents, and colluding or conspiring with others. They should also report any corruption incidents or allegations to the appropriate authorities, such as their internal compliance officer, their external auditor, their regulator, their law enforcement agency, or their anti-corruption agency. They should provide as much evidence and information as possible, and protect their identity and safety.

For example, consider the case of John, a sales manager at a multinational corporation that sells medical equipment. John is responsible for securing contracts with hospitals and clinics in a developing country. He faces a high level of corruption risk in his market, as he often encounters requests for bribes, kickbacks, and favors from the local officials, doctors, and intermediaries. John follows the best practices and recommendations above to avoid, report, and resist market corruption. He adheres to his company's anti-corruption policy, conducts due diligence and risk assessment of his potential and existing customers and partners, fosters a culture of integrity and accountability among his team and stakeholders, seeks legal advice and assistance from his company's lawyers and consultants, and resists and reports any corruption attempts or incidents to his company's compliance officer and the local anti-corruption agency. By doing so, John not only protects his company's reputation and interests, but also contributes to the fight against market corruption in his country.

7. Lessons learned from historical and contemporary scandals

Market corruption is a pervasive and complex phenomenon that undermines the efficiency, fairness, and integrity of the economic system. It can take various forms and involve different actors, such as public officials, private firms, intermediaries, regulators, and consumers. In this segment, we will examine some of the most notorious and instructive cases of market corruption in history and in the present day, and draw some lessons from them. We will focus on the following types of market corruption schemes:

1. Kickbacks: This is a form of bribery where a person or a firm pays a percentage of the value of a contract or a transaction to another person or a firm in exchange for securing or facilitating the deal. Kickbacks can occur in both public and private sectors, and can distort the allocation of resources, increase the costs of goods and services, and reduce the quality of outcomes. For example, in the 1970s, Lockheed Corporation, a major US aerospace company, admitted to paying kickbacks to foreign officials and politicians in Japan, Italy, the Netherlands, and other countries to secure lucrative contracts for its aircrafts. The scandal led to the resignation of the Japanese prime minister, Tanaka Kakuei, and the enactment of the foreign Corrupt Practices act (FCPA) in the US, which prohibits US firms from bribing foreign officials.

2. Insider trading: This is a form of market manipulation where a person or a firm trades securities or commodities based on non-public information that gives them an unfair advantage over other market participants. Insider trading can erode the confidence and trust of investors, reduce the liquidity and efficiency of markets, and create information asymmetry and moral hazard. For example, in the 1980s, Ivan Boesky, a prominent Wall Street arbitrageur, was convicted of insider trading for using confidential information from corporate raiders and investment bankers to profit from mergers and acquisitions. He cooperated with the authorities and implicated several other prominent figures, such as Michael Milken, the "junk bond king", and Martin Siegel, a former partner at Kidder, Peabody & Co.

3. Cartels: This is a form of collusion where a group of firms or individuals agree to coordinate their actions to restrict competition, fix prices, limit output, or divide markets. Cartels can harm consumers, competitors, and the society by creating artificial scarcity, inflating prices, reducing innovation, and creating deadweight loss. For example, in the 1990s, the European Commission uncovered a cartel among several major European car manufacturers, such as Volkswagen, BMW, Daimler, and Renault, who conspired to delay the introduction of cleaner diesel engines that complied with the emission standards. The cartel was fined a total of €3.8 billion by the Commission for breaching the antitrust rules.

8. A summary of the main points and a call for action

In this article, we have explored the various forms and manifestations of bribery and corruption in the market, from kickbacks to insider trading. We have also examined the causes, consequences, and challenges of combating these unethical and illegal practices. Based on our analysis, we propose the following recommendations for addressing the problem of market corruption:

- Strengthen the legal and regulatory framework. This includes enacting and enforcing laws that criminalize bribery and corruption, such as the Foreign corrupt Practices act (FCPA) in the US and the Bribery Act in the UK. It also involves establishing and empowering independent agencies that monitor and investigate market activities, such as the Securities and Exchange Commission (SEC) in the US and the Serious Fraud Office (SFO) in the UK. Additionally, it requires enhancing the transparency and accountability of market participants, such as requiring disclosure of financial information, conflicts of interest, and beneficial ownership.

- Promote a culture of integrity and ethics. This includes fostering a sense of responsibility and professionalism among market actors, such as by adopting and adhering to codes of conduct, ethical standards, and whistleblowing policies. It also involves raising awareness and education among market stakeholders, such as by providing training, guidance, and resources on anti-corruption measures. Furthermore, it requires creating and rewarding incentives for ethical behavior, such as by recognizing and rewarding good practices, and imposing sanctions and penalties for misconduct.

- Engage in collective action and collaboration. This includes building and maintaining trust and cooperation among market actors, such as by forming and joining industry associations, coalitions, and networks that share best practices, information, and resources on anti-corruption initiatives. It also involves partnering and coordinating with other sectors and actors, such as governments, civil society, media, and international organizations that support and facilitate anti-corruption efforts. Moreover, it requires participating and contributing to global and regional initiatives and frameworks, such as the United Nations Convention against Corruption (UNCAC) and the Organization for Economic Cooperation and Development (OECD) Anti-Bribery Convention.

By implementing these recommendations, we can hope to reduce and prevent the occurrence and impact of bribery and corruption in the market, and thereby enhance the efficiency, fairness, and sustainability of the market system. We urge all market actors and stakeholders to join us in this endeavor and take action against market corruption. Together, we can make a difference and create a better and more ethical market for everyone.