The Shakedown
Background
Shakedown is being faced by Customer Strategy Solution, which is a based in California and is involved in development of fulfillment systems. After six months of setting up the centre for software development at Kiev by the companys CEO, Palvo Zhuk, local bureaucrats claimed that the company has failed to file the tax schedules it was supposed to. The tax officials of Ukraine claimed that the company has tax arrears. Zukh is very surprised as he has done everything according to the set rules. Zukh has faced such problems even before. In the making of the centre, a telecommunication utility owned by the state had given problems in gaining the telephone lines the company needed. Zukh did not give up. He had dreamt of a modern Ukraine. Vasyl Feodorovych Mylofienko, who is the senior manager in the telecom company, told Zukh that he would have to wait for three years before the lines could be installed. He also added that Zukh pays him a certain amount, then it can be installed as well as functioning in a weeks time. Zukh still did not pull out. He wanted to the raise the living standard of the local residents of the country. Zukh was confused. He did now know whether he should pay the tax officials.
The major issue that is being discussed in the case is Pavlo Zukh wants to create a modern Ukraine. He wants to bring hope to the local people. (Bodrock, 2005)
Objectives
Identification of problems faced by foreign business in Ukraine
Identification of the steps Zukh should take to sustain in Ukraine while keeping his ethics intact
Should he pay the tax officials who started the shakedown
Alternative action
Pay Extortion
The law will not be broken if Zukh pays the Tax officials of Ukraine. Succumbing to extortion is not a crime. He will add the extra tax paid as expense for doing business in Ukraine. This way his long term good will remain intact. However, if he succumbs to extortion, he will help bribery grow. It will have a negative impact on the business environment. The utilitarian theory of normative ethical theory will support this option.
The positives of adopting this option will be, firstly that the company will not face any other issues while dealing with the Government in the future. All transactions will be smooth based as they will have agreed to their terms. If Zukh adopts the utilitarian way of reviewing ethical dilemmas then this option helps him keep his ethics intact.
The negative aspect however are that the company may face future legal consequences the US FCPA 1977. The cost of bribes may have a negative impact on the business. The sudden cost applied to the business may hinder the functionality of the business. Also the employees may be influenced negatively because of such an act. (United State, Department of Justice)
Recent study has been carried out by the Baseline Survey on Corruption and published in Ukraine. It shows that corruption is a major problem in Ukraine and is regarded as grand corruption. Ukraine residents have experienced such problems on a smaller scale by various sections of the society such as government, health care, etc. It is termed as petty corruption
In the last 12 months, 67 of the people of Ukraine who have been involved in some activity with the government have claimed that they have been directly involved in some kind of corrupt activities. Ukrainians are of the opinion that bribes have become compulsory and expected. Bribes have become a must to ensure that services are taken place and in the required time. Extortion for bribes by officials is 25 prevalent as compared to giving bribe voluntarily, which is 11. This seems like a dangerous view for those who want to follow this channel. In 2003, James H Giffen who serves as a counselor to Nursultan Nazarbayev, president of Kazakhstan was arrested and accused on March 30. He was accused off transacting 60 million dollars into the bank account at the Swiss bank for his boss. He also funneled 17 million dollars into the high ranking oil official then. His bail is pending for next January.
Pull out business from Ukraine
If Zukh quits business in Ukraine, he will kill his dreams to venture into Ukraine. He will have to bear responsibility for the locals Ukraine employees who will become jobless. This way he will not contribute towards the encouragement of corruption, but will be held responsible for slowing down the development of the software industry in Ukraine. Other institutions would also reconsider moving business to Ukraine if such a situation arises, which will deter its growth overall. This move will set back a huge financial set back for the company. Also any future endeavor by the company would also be after much thought if the business is pulled out from Ukraine.
The option is not to pay the UTA Special agents. This might lead to some serious consequences hereby following the business ethics. According to law under the US Foreign Corrupt Practices Act (US FCPA) of 1977 Anti-Bribery provisions, its unlawful to follow such practices. Zuchs company is governed by this Act. (United State, Department of Justice).
The positives of adopting this option will be that all the legal course of action will be followed and there will be no fear of regulatory and legal negative consequences in the future. The value maintained will be high, the employees and industries in Ukraine will be inspired by this act. Also the cost of bribery will be not being there, so no additional cost will be borne by the organization. The negative aspect however are that the company will have hard time in the country as it will face troubles and the local authorities may bother the functioning.
Basic provisions that prohibit a company to make payments such as bribery and extortion money to any foreigner as it leads to corrupting the entire system are discussed below.
The provisions of anti-bribery Its unlawful to bribe foreign officials in government services for the retention of attainment of business by the FCPA. These provisions apply to both the issuers required to those who issue such registered securities. A domestic reason is conceived as an individual who happens to be a citizen or a resident of the US. He might belong to any other organization such as a partnership or a sole proprietorship. He might have his main place of business in such sectors in the US or in institutions which is under the countrys law or might belong to a territory or commonwealth of the US.
Payments made by Intermediaries It is an unlawful practice make payment to any person who might give away a portion to any other foreign official. He might offer, give away or promise to make the payment to the foreign official this might happen in a direct or a indirect manner. The recipient might be a foreign official or a foreign political party. This is done knowing to obtain or retain the business. Knowing might include conscious disregard as well as willful blindness. This means one might do this willingly or under pressure. Both result in the same outcome.
Enforcement The department which is concerned for all civil and criminal enforcements of the anti-bribery factors and provisions in lieu of domestic concerns is the Department of Justice. The SEC holds responsibility for the enforcement of civil laws against bribery as far as issuers are concerned. (Lectric Law Library, Foreign Corrupt Practices Act)
Sanctions against bribery For the violation of the anti-bribery provisions of the FCPAs, the following penalties are made. A fine of 2 million is subjected to firms a fine of 100,000 is subjected to top directors, high officials and stockholders and an imprisonment up to five years similar rules are laid for agents as well. A firm may not pay the fines which are imposed on an individual. (Freshfields Bruckhaus Deringer, 2010)
A double life may be lead an investment can be made in NGOs which fight against corruption, as well as local rules will be followed.
Zukh can choose to follow the local laws and at the same time channelize some funds to NGOs that battle against corruption. In this way, both parties can be satisfied. Again if the companies would take the support of NGOs it would not leave much impact. This would not reap great results in fighting against corruption.
The benefits of adopting this method would be that the company will not have to make any transactions with the Government and also the business interest can be protected by Zukh. However the negative consequences can be that the company may be liable to US FCPA 1977 for prosecution in the future. A similar bribe may be asked for in the future which will raise the cost of business to unexpected level. The employees and neighboring companies will also follow their example which will lead to a spread of corruption thereby negatively effecting the business environment in Ukraine.
Analysis
Customer Strategy Solutions (SWOT analysis)
Zukh foresees opportunities for Ukraine through his company. Ukranian Software Developers Association (USDA) is of the opinion that Ukraines Exports of in relation to IT services would be doubled in the coming two years. He has an advantage of being the only center for software development in Ukraine. He has a lot of highly skilled and reasonable programmers. Zukh has been advised by his friend in the Banking industry to make his company public in order to get higher premiums.
Similar to other foreign SMEs, Zukhs company continues to remain vulnerable to extortion. Corruption is a part of the countrys bureaucracy. In the survey done by the Business Environment conducted by the International Finance Corporation (IFC) in December 2004, it was clear that bribes have become a part of life and 69 of people said that Corruption forms a major hassle in business. It was seen that the relations remained imperfect between the business done in private and the state. Businessmen feel that the legalities and the prevailing corruption is the main problem.
Corruption leaves a very repulsive impact. It should be scorned and hated by all. It deserves such repulsion. Discouragement would be the first step towards a better living. It might interfere in the general living standards of people. It might lead to misrepresentation. It is very important that such an issue is taken seriously. Steps have to be taken to eradicate it completely it should be done keeping in mind the social reforms. It must not be carried out in a very aggressive manner. It should not also lack sympathy. A pathologist should not lack sympathy while eradicating a good cause. Pathologists contribute a great deal to the investigation of the disease. He works away from the main workplace i.e. hospital in the laboratories. Thus to realize something like this, the following studies have been formulated. No corruption can take place without actually affection the life of the local people of the state. Corruption is the main cause which leads to corruption in politics. Both politics and the economy of a country are interlinked. There conspicuously related to each other. It is possible to distinguish between the subsections of such factors. Distinction of such factors is possible. Development is the factor which binds the two factors together. One is indispensable without the other. In modern times, both are related.
In todays world, Core beliefs and values in the society are being question. Such factors are brought to the fore front and challenged. Various government and economic institution face inconsiderate scrutiny. The list also includes religious and philanthropic institutions. They face fraudulent scrutiny which leads to financial as well as psychological losses for the local people. The innocent people become the target of such tactics. While laying directions for their respective organizations, managers face such underlying issues about their business. Leaders indulge into strategic planning on a long term basis on the basis of some fundamental issues on belief and ethical values. Such questions have been raised on ideology and core values. Stress has been laid on vision and perspective as well.
When one attains a common goal in any organization or institution, it becomes easier to explain issues expected from their subordinates. It he applied such regulations in the business then management of ethics and principles become easier. This helps restore the ideology ethics and principle of the organization concerned. This attitude helps govern the daily norms of the society as well. Before establishing his company in Ukraine, Zukh should realize and understand the factors which might affect the company in the future. Therefore, he should have known how corrupt Ukraine is and that there are no principles followed in Ukraine. He should do some online research on websites related to business in Ukraine. Some in-depth analysis has to be made before venturing into a new country.
It should have been noted that Ukraine is marked with business corruption all over. There is no law followed in a state like Ukraine. The website had already revealed about the pending telecommunication lines. The figure is as high as 3.5 millions. Zukh should have immediately realized the condition of the state of Ukraine and the problems prevailing there. He should have known that he would face problems in getting a telephone line. Zukh should have taken appropriate measure relating to this. He, being a business man should have familiarized himself with the laws under the FCPA. FCPA stands for Foreign Corrupt Practices Act. It was laid in 1077 and regulates the fines and the terms of imprisonment for people who should know what steps are to be taken for the violation of the Act. Strict rules have been issued by the International Chamber of Commerce (1996) against bribery and other forms of corruption like extortion. In 1997, Ministers of OCED have agreed for the ratification of a convention against the bribes given to foreign officials. This style of payment is strictly prohibited. The US style may work effectively in masculine countries which are more likely to be involved in corrupt activities. The FCPA may have vague rules for such high avoidance of uncertainty countries. For Zuch, it is a tough decision as it involves moral issues. Corruption found everywhere from private sector companies to public sector. Today corruption affects everything from social issues tp institution involved in business. In Zukhs case, he should concentrate on the cost of such bribes and make a cost benefit analysis sheet. He should actually calculate how much benefit he gets in the establishment of his company against such bribes.
Recommendation
On the basis of the case study after analysis, he must give the charge of security to a specialized security. This way guarantee is provided to the staff. Cost of doing the business will be under control. He should share his plans with his subordinates. His courage would be admired by all of Kiev. They would look up to the standard and business ethics maintained by him. The high officials should be informed about the extortion demands. He should write to the finance minister, economy minister, Foreign Investment Protection Agency and the highest official in the UTA. He must also approach the U.S. ambassador to Ukraine. He should try to meet each one of them personally. I can guarantee from my personal experience that Ukraine only focuses on inflows and not outflows, like most other developing countries
Even after this, if the corruption is not controlled then he should take a step further. He should call for a press conference. This would directly address the public and he would be able to tell them about his dreams about modern Ukraine and his patriotic motives. He just wants to improve the current business standard of his home country. He would emerge as an eminent leader with high business ethics and principles. With this kind of impression, no one would dare to indulge into corrupt activities around him. However, if none of these actions work, then he should pull out his business from Ukraine and leave.
Corruptions challenge the development in a serious manner. When it touches the political world, it challenges the democracy and disciplined governance by affection formal processes in a negative way. It affects the legislative bodies in many ways. It affects the accountability of such bodies. Corruption in the judicial practices reduces the applicability of laws. In public sectors, it affects the services provided. It affects the administration in many harmful ways. It affects the capacity of an institution working normally. People are promoted even if they do not deserve to be promoted. It leads to inequality in business houses. It undermines the ruling of the government and looks down upon democratic ethics such as trust and ethics, including tolerance. Knowing Ukraine is one the most corrupt countries in the world, one should really analyze the problems one has to set up for the establishment of the business. This becomes a vital requirement for any business.
A decision should be made keeping all such factors in mind. It has to be a well informed decision. In short, the final outcome of any transactions depends on the decisions taken by one. All decisions are interlinked. One decision might affect the other in many ways and might ultimately lead to an unsuccessful career. Zuch should critically analyze all factors before staring up his business in Ukraine. One wrong decision might lead to heavy losses. It might affect his organization financially as well as economically. It is Zukhs duty to analyze all factors properly and then take a decision. He should find solutions for all possible factors which might affect him.
In accordance to 1995, corruption takes place as the ruling government monopolizes certain resources which are required by a citizen for his private use. If corruption is compared from one country to another, one can ascertain the difference which arise due o economic and institutional factors and affect the actions of someone who is threatened by government officials. By being able to take advantage of such countervailing activities, one is able to decrease corruption. (Churchwell Cynthia, 2005)
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