Why Are These Industries Prone to Corruption?

Industries such as construction, extraction, and finance are prone to corruption. Fraudulent activity is commonly associated with the bidding process for projects in the extraction and construction industries. Corruption is prevalent in the transportation industry, where individuals involved in moving goods often engage in organized criminal activities, including those in law enforcement. Corruption is at the enforcement level. A scandal involving the alleged theft of a multi-billion-dollar fund called 1MDB implicated Goldman Sachs bankers in 2018. 

Basics

The issue of corruption pervades societies worldwide, manifesting itself in various domains. Notably, even renowned establishments face the ramifications of this malpractice. A striking instance is FIFA, the international governing body for soccer, officially known as Fédération Internationale de Football Association. In 2015, numerous FIFA executives faced legal repercussions, convicted of engaging in racketeering and money laundering schemes.

Similarly, the realm of college admissions was rocked by a scandal in 2019, unveiling a distressing reality. Numerous prominent celebrities found themselves entangled in legal predicaments. They faced charges of bribery and multiple types of fraud for orchestrating illicit arrangements to secure admission for their offspring into esteemed universities. While these cases drew significant attention, it is crucial to explore other industries that endure a perennial presence atop corruption indexes. This article aims to delve into the root causes behind their persisting challenges.

Corruption in Extractive Industries: The Predicament of Mining, Oil, and Gas

In the realm of extractive industries, encompassing mining, oil, and gas, a predictable problem emerges due to the inherent nature of the business. Enterprises engaged in extraction traverse the globe in search of lucrative deposits to unearth and market. To achieve this, they must obtain permits for exploration and subsequently secure rights to excavate these deposits. Consequently, they encounter a complex web of national, regional, and local officials, influencing the accessibility of these deposits—a scenario that gives rise to a principal-agent dilemma. Should an extraction company resort to bribery to access the deposit, it becomes entangled in the treacherous web of corruption.

Typically, the bribes paid are but a fraction of the anticipated profits for the company, rendering such actions economically viable. Officials entrusted with safeguarding the public interest and ensuring responsible and sustainable extraction practices may succumb to the temptation of looking the other way during the extraction process, compromising their duty. Consequently, the general public is deprived of the true value derived from the exploitation of mineral wealth while bearing the brunt of environmental and economic losses, as both the officials and the extraction company reap the gains.

Corruption in Construction: Perils of the Principal-Agent Dilemma

Within the construction industry, an analogous principal-agent predicament arises, mirroring the challenges witnessed in extractive sectors. Notably, the world's largest construction endeavors often pertain to government-funded infrastructure projects. These initiatives are allocated through a rigorous bidding process, wherein companies submit proposals for evaluation by a select group of officials.

Theoretically, the competitive bid is awarded to the company capable of delivering superior results at the most competitive price. However, in practice, it becomes economically viable for less capable companies to engage in illicit practices by offering bribes to members of the selection committee. Consequently, corruption taints the bidding process, enabling unscrupulous entities to engage in corner-cutting measures, overcharging, and other dubious practices.

Regrettably, critical infrastructures such as schools and hospitals have been constructed with defective materials and inadequate workmanship. Crumbling concrete, plumbing without proper ventilation, and compromised structural integrity frequently make headlines, resulting in the loss of lives and catastrophic building or bridge collapses. A grim example of this unfolded in 2021 when a significant apartment building in Florida tragically collapsed, claiming numerous lives and culminating in a settlement exceeding $1 billion in court.

Corruption in Transportation and Storage

When examining corruption indexes, the economic category of "transportation and storage" encompasses various land, sea, and air transport modes, including pipelines. Within this domain, stringent regulations govern the movement of goods to prevent the illicit transportation of items that contradict the laws of the nations involved. The responsibility of inspecting these goods falls upon officials and agents entrusted with upholding the law in the interest of public welfare.

Diverging from the aforementioned industries, where corruption primarily infiltrated the decision-making sphere, transportation and storage present fertile ground for corruption at the enforcement level. In instances involving illegal goods, the entities attempting to bypass customs or other enforcement structures are typically organized crime networks rather than formal organizations. Nevertheless, there are instances in which corporations also engage in corruption and bribery, particularly when the offer of a bribe expedites customs clearance or facilitates the issuance of import/export certificates.

Financial Corruption: The Intricacies of Investing and Information

In the world of investing and finance, corrupt practices often involve manipulating and controlling information. Individuals or organizations resort to monetary means to suppress or gain access to critical information in various scenarios. While leaks and suppression are prevalent in political circles, the corruption surrounding information and communication within the finance industry raises the greatest concern for investors.

Information holds immense value in finance, especially when it remains undisclosed. Institutions and investors alike are not averse to paying for privileged access to this valuable resource. However, such actions bear consequences. In 2004, Martha Stewart faced imprisonment for acting upon non-public information, shedding light on the repercussions of clandestine dealings.

Furthermore, the concealment of information from the public played a pivotal role in the demise of Enron and the accounting firm Arthur Andersen. The fallout from these cases exposed the destructive nature of withholding crucial details from public scrutiny.

Nevertheless, corruption within the financial sphere extends beyond information flow. One notable example is the notorious Bernie Madoff, a prominent Wall Street figure and former market maker, who admitted guilt to fraud charges in 2009 for orchestrating an extensive Ponzi scheme that defrauded wealthy investors out of billions.

In 2015, Malaysia's former Prime Minister Najib Razak and others faced accusations of embezzling over $2.7 billion from 1 Malaysia Development Berhad (1MDB) into personal bank accounts. The scandal surrounding 1MDB implicated investment banking firm Goldman Sachs, which raised funds for the 1MDB fund, generating substantial fees, albeit disputed by Goldman Sachs. Nonetheless, in 2018, one banker pleaded guilty to charges, while another faced a series of fresh allegations related to bribery and money laundering.

Conclusion

Corruption, much like life itself, pervades almost any environment conducive to its existence. Whenever a select few possess power or valuable information that can be exploited by entities willing to defy regulations, the likelihood of corruption infiltrating the system increases. By offering payments, these entities secure favorable decisions, approvals, or privileged information, thereby maximizing their profits in the immediate future. Ultimately, this cycle culminates in victory for the corrupt entity, monetary gains for the agents involved, and collective losses for the public.