Egos 2013 Final Corruption 14 Jan

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Organizational corruption: practices and anti-corruption controls in Brazilian banks

Daniel Jardim Pardini

FUMEC University

Belo Horizonte

Brazil

Email:[email protected]

Denise Campos Chaves Machado

FUMEC University

Belo Horizonte

Brazil

Email: [email protected]

Yuri Richard da Silva Costa

FUMEC University

Belo Horizonte

Brazil

Email: [email protected]

Paper accepted to the 29th EGOS Colloquium, 2013

Sub-theme 29: Unmasking Corruption: Critical Perspectives on Corruption and Anti-

Corruption

We would like to thanks CAPES, Coordenao de Aperfeioamento de Pessoal de Nvel Superior, MEC-Brasil,

for the support in this study.
mailto:[email protected]:[email protected]:[email protected]://www.egosnet.org/jart/prj3/egos/main.jart?rel=de&reserve-mode=active&content-id=1334581167609&subtheme_id=1319359704521http://www.egosnet.org/jart/prj3/egos/main.jart?rel=de&reserve-mode=active&content-id=1334581167609&subtheme_id=1319359704521http://www.egosnet.org/jart/prj3/egos/main.jart?rel=de&reserve-mode=active&content-id=1334581167609&subtheme_id=1319359704521http://www.egosnet.org/jart/prj3/egos/main.jart?rel=de&reserve-mode=active&content-id=1334581167609&subtheme_id=1319359704521mailto:[email protected]


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Organizational corruption: practices and anti-corruption controls in Brazilian banks

Introduction

Corruption happens when there is a breach of collective and organizational rules by

one or more individuals seeking personal gains from it through various types and strategies. It

is a recurring phenomenon in social activities held by norms and models of behavior that

consists mainly in breaking the accordance pattern through the action of an individual, group

of individuals or an organization that try to obtain private benefits. (Lange, 2008; Pinto et. al.

2008; Misangyi et al. 2008).

The literature on corruption consists on a variety of perspectives include ethical

decision-make (Jones, 1991), government, political and legislative corruption (Schleifer &

Vishny, 1993; Nice, 1986; Jain, 2001); normalization of corruption (Ashforth & Anand,

2003) and social networks (Nielsen, 2003). While management scholars have examined

corruption at those different perspectives, the organizational and management level studies

are until underexplored. We proposed a practices and anti-corruption approach as way to

suggest insights to mitigate the manifestation of corruption in the organizational environment.

Theoretical foundations permeating the relationship among practices and strategies to

prevent corruption in organizational studies are still incomplete. Taken as whole, the

organizational corruption literature is rife with inconsistencies and inconclusive empirical

results. The existing studies address the issue of corruption separately; they focus on their

ethical and behavioral aspects and their reflexes on the company (Pinto et al., 2008).

However, they do not extend to the possible inter-relationships between the phenomenon

manifestation and the possible controlling mechanisms to interrupt them.

We develop our study around the question of which are the main practices and anti-

corruption control processes in the financial sector. In financial sector, corruption gets larger

dimensions because of the huge amount of money circulating and the ease access of

misconduct practices. The purpose of this paper is to identify the major corrupt practices and

the mechanisms to avoid corrupt actions in banks. The Brazilian banking sector is the subject

of analysis of the research. The study seeks to increase knowledge about the identification of

corrupt actions and controlling resources that may mitigate the illicit behavior designed to

ensure benefits for the corruptor agent or agents.


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b) Active bribery - offering to an individual, any undue advantage expecting illicitbenefits;

c) Passive corruption - soliciting or receiving, for oneself or another, an undueadvantage.

d) Influence peddling - asking, demanding, collecting or obtaining for oneself or others,advantages, benefit promise. The use an authority to get favours or special treatment

for oneself or others most of the time in return of payment

e) Gang of criminalspeople get together having criminal objectives.f) Management reckless - managing third party funds in a risky way.g) Administrative law - sponsor the public worker directly or indirectly.h) Concussion - requiring, for oneself or others, directly or indirectly, any undue

advantage.

In this study we explore the means of controlling the corrupt practices in

organizations. The literature of organizational control have two main streams: controls

oriented toward outcomes and controls transmitted through administrative and social/culture

channels. Administrative controls are those that are intentionally designed, and social controls

are those that emerge unintentionally through the social interactions of organizational

members. (Lange, 2008)

Those conceptions are practically relevant and theoretically important to distinguish

organizational control and corruption control. Organizational control is any process by which

managers motivate and encourage organizational managers to act in derived ways to meet the

firms objectives (Child, 1973). It is adopted to maximize a desirable state by cooperation and

efficiency. In other way, corruption control emphasizes the minimization of an undesirable

stateintentional maleficence.

The goal of corruption control is combat intentional self-serving deviant behavior. It

intends to:

a) Reduce autonomy;b) Influence the members behaviors through rewards and punishment systems;c) Transmit to the members external pressures for legal compliance and social

conformity;

d) Facilitate the members own inclinations to reject corrupt behavior.Our purpose now is to looking for an in-depth understanding of practices and control

processes of corruption in the financial sector.


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Methodology

The methodology employed in this study embraced both qualitative and quantitative

techniques. Initially, a qualitative approach was used to evidence the attributes of the

meanings concern control mechanisms against corruption practices, within the financial

system. Afterwards, we proceeded to the quantification of the qualitative data, through

frequency statistics combinations to determine associations among the constructs of this

study.

The research may also be framed as an exploratory and descriptive. The exploratory

study deals with issues that are poorly investigated; therefore it has not been accumulated a

substantial literature revision. Despite the recent thematic of corruption in organizational

studies, very few researches focus in identify practices and anti-corruption control processes.

In order to identify the main corruption practices and their mechanisms of control in

the Brazilian financial system, we have interviewed 23 professionals, who work in different

areas at the four main banks of Brazil: Banco do Brasil and Caixa Economica Federal (the

two biggest public Brazilian Banks), Santander (the biggest foreign bank in the country) and

Ita-Unibanco (the biggest Brazilian private bank). Interviews were arranged with top,

medium and operational bank managers, auditors, lawyers and technicians whose work

in financial activities. The choice of this sample followed the criteria of convenience, due to

the refusal of several employees to be interviewed and the companies reluctance to formalize

the research.

Thematic analysis was adopted to investigate the material extracted from the

interviews. With the thematic analysis we identify the themes, sub-themes and a

semantic content of the sub-themes identified in the oral statements (Fereday & Muir-

Cochrane, 2006). The texts produced from the interviews are grouped into units (categories)

and the semantic contents were described and rated in accordance to the analogical

regroupings. This analysis is now briefly presented.

Practices and anti-corruption control in Brazilian banks

In the analyses of the oral statements, we identified and structured three themes and

the respective sub-themes and semantic contents: meanings of corruption, corruption practices

and anti-corruption controls.


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We explore the meanings attributed to corruption by the bank managers to understand

how the construct was perceived in the financial sector. Most of the oral statements indicate

that corruption is associated with embezzlement resources in the public sector. The

interpretations also relate the breaking of the law in favor of someones own interest:

Corruption is a transgression of rules, regulations and laws. Someone uses one

privileged and powerful positions with the intention of getting benefits, mainly

financial ones for oneself or a group of people. (Control manager)

Corruption is the use of a particular power or knowledge unlawfully within an

institution, either a public or private for ones own benefit, or a group. Corruption

happens when the order ... current regulations are corrupted privileging oneself or a

group of people. (Lawyer)

One of the main ways of getting personal advantages is the usage of power given to

the corrupt actor. This power is manifested both by positions and occupied seats, ensuring

access to specific processes and holding information relating to several important issues. We

identified 24 other practices making use of corrupt actions in several bank areas. Table 1

shows the more frequent meaning semantic contents.

Table 1

Corruption Thematic Nucleus - Subtheme: Corrupt Practices in the Financial System

Semantic Content Frequency % of theSubtheme

Making easy for bank robbery and/or giving privileged

information about clients 7 9,72%

Embezzlement of money (without specifications) 7 9,72%

Falsification of documents for different purposes 6 8,33%

Frauds in balance books and accountability information 5 6,94%

Use of fake bank accounts to raise loans 5 6,94%

Money laundering 4 5,56%

Embezzlement of money from credit government programs

to small companies, agriculture investments and others

specific economy sectors. 4 5,56%

Active bribery for different purposes 4 5,56%

Embezzlement of money from: treasurers office, internalbank accounts, self-services terminal electronic devices by

internal employees 3 4,17%

Active bribery involving employees of the purchase sector 3 4,17%

Active bribery to illicit advantages in loan taxes

negotiations 3 4,17%

Others semantic contents 21 29,16%

Total 72 100%

Corrupt actions in the financial system may be practiced by two corrupt actors (one

internal, another external), by a single employee and by individuals or groups who are outside

the bank physical located, which is the case of cybercrime. In the analysis of statements


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regarding the subtheme experienced corrupt practices, 39.16% said they had never

witnessed corrupt actions.

The study of daily corrupt practices experienced at Brazilian banks has shown that the

misconduct is performed not only to ensure private financial advantages, but also to guarantee

the fulfillment of organizational goals. The oral evidence bellow illustrates one of this

practice:

Not long time ago, we had, for example, a case that led to a dismissal. An employee

was enabling credit cards to many clients without their solicitation. We have also

had the case with savings accounts, which employees used to do a small transfer of

money from clients current accounts to their savings accounts. Therefore these

clients started to have savings accounts, but they didnt ask for that. In both cases,

employees felt under pressure by bank goals and they ended up having inappropriate

conduct, which it may be considered corruption. (Human Resource Manager)

Document forgery and misappropriation of withdrawal resources from current

accounts, treasury and bank terminal services are the most common corrupt practices.

Usually, defalcations in the bank treasury and automatic teller machines (ATMs) rely on the

complicity of more than two corrupt agents, who were the employees supposed to supervise

those activities. Failures on monitoring also led to situations in which managers create new

bank accounts in order to get loans for their own benefit. Having their own bank account card,

the corrupt agents withdraw cash from the bank which will be paid by new loans.

If on one hand, over 60% of respondents have experienced corrupt practices on the

other hand, 95% of respondents confirmed the inexistence of indicators that measure corrupt

actions within their organizations. Therefore, what would be the controlling mechanisms used

to mitigate corruption actions? Usually, the banks adopt conducting codes and educational

awareness actions in order to try to stop corruption. Another widely used control process is

the conference's veracity and legality of the reported data on credit operations (compliance).

This task is also operationalized by the audits and it works as pressure mechanisms through

monitoring and verifying all the suspicions and allegations of corrupt actions.

According to the opinion of 74% of respondents, specific processes created to inhibit

misbehaviors in the work environment are not enough to mitigate corruption in the banking

industry. These respondents refer to the persistence of the corrupters who constantly use new

illicit acts:

[...] The power of human mind, working to perpetrate illicit acts, corrupt acts and

related acts such as corruption, peculation and accessories and similar, is infinite.


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Peoples imagination in the business world is endless when they decide to fraud and to

do corrupt acts. (Technician)

Whenever institutions move forward trying to prevent and end these problems [of

corruption], on the other side there are always people thinking and developing new

methods of contravention all the time. So we always have to run after them. These

people are so creative ... They are always making up something to benefit themselves.(Lawyer)

Both semantic contents courses and training in anti-corruption actions (audit,

compliance, risk management, etc.) and investments in the areas of audit and control, each

one representing 23.53% of all the given answers, are reminded as relevant organizational

strategies to reduce corruption actions. We also use the sub-theme governance practices as

anti-corruption control to understand whether the practices derived from governance

principles, such as transparency of information and compliance with regulatory standards, are

either relevant or undermine the struggle against corrupt practices.

For 61% of respondents, transparency is important mainly because of the damages

caused by the absence of governance mechanisms, which is not justified in the financial

sector that "has no industrial secrets as Coca-Cola". Restrictions to the access of information

may facilitate intentional actions and hamper the misconduct control, since the corrupt acts

are "obscure and undefined situations". The major difficulty to end corruption is still its fast

identification.

Conclusion

The interviews in this research allowed us to know the corrupt actions most often

practiced in the Brazilian financial system, as well as the main mechanisms adopted by banks

to prevent and mitigate these actions. Although, in the design of corruption control the

individual differences in leading to corrupt behavior were normally neglected, this study

contributes to the literature of corruption organizational control indicating that we have to

consider the distinguish differences between the traditional and corruption concepts of

organization control.

Revisiting the theoretical statements about the main effects of corruption control

proposed by Lange (2008), the present study indicates that, since corrupt behaviors pursuit

individual interests through the intentional misdirectional of the organizational resources, it is

also important to associate corrupt practices with anti-corruption controls. Most of the time,

the corrupt actors know about the bureaucratic controls to limit corruption. Consequently,


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many means of control used in organizations, like bureaucratic mechanisms, cannot be

described as anti-corruption processes.

Some difficulties were faced in this work, mainly due to the corruption theme. We

were not able to do a larger number of interviews. Many of the invited respondents declined

to speak or dodged interviews when they were informed about the topic of study. Besides the

problems related to the research data, another restrictor was pointed out by some respondents:

most of the corrupt actions are not discovered in financial institutions. Even when they are

discovered, they are taken to the attention of a very restricted group of people. In general,

appropriate actions in cases of corruption occur in a "domestic" way, at the risk of greater

disclosures that deteriorate the image of the institution, shaking the confidence of clients and

shareholders. These factors limit the knowledge of all available corruption actions and almost,

concerning academic projects, they restrict the efficiency of quantitative research to unmask

the phenomenon.

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Egos 2013 Final Corruption 14 Jan