Indem Opora Brochure Eng 0407

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Business WithoutCorruption:

An Action Guide



This project was supported by the Center for International PrivateEnterprise (CIPE) and the U.S. Agency for International Development (USAID).

This booklet is a translation of the original Russian,published in 2007.

Authors:

Georgiy Satarov, INDEM

Sergey Parkhomenko, INDEM

Dina Krylova, OPORA

Yuliya Rostovikova, Novorossiysk Chamber of Commerce and Industry

Please send and comments or suggestions to:

CIPE: [email protected]

INDEM Foundation: [email protected]

OPORA: [email protected]



Table of Contents

Preface 1

Introduction 3

How to avoid problems when dealing with bureaucrats 11

Using civil society institutions to protect business 29

Conclusion 35

Appendix: Anti-corruption strategies for business 37





BUSINESS WITHOUT CORRUPTION: AN ACTION GUIDE 1

Preface

Set in the context o the Russian experience, this brochure is the result o a joint

eort by two non-prot organizations that are well-known to entrepreneurs: the All-Russian Non-Governmental Organization o Small and Medium-Sized Enterprises(OPORA) and the Inormation Science or Democracy (INDEM) Foundation.OPORA is well-known as a business association not only or its research, but also orits extensive practical work to improve the business climate. Te INDEM Foundationis known or its research on corruption. For the last three years it has been involved inprojects to study small business.

Te authors o this brochure aced a complex task: to give small business ownerstools to resist corruption and strategies to survive and grow in an extremely aggressiveenvironment. Tese strategies are not easy to use, because they are oten in tension with your previous experience. Tey involve rejecting corrupt ways o doing business.Our suggestions are based on the results o research, an analysis o positive experience(however limited), and extensive interviews with representatives o small and medium-sized enterprises throughout the country. Our analysis o the situation and proposalsare accompanied by specic examples and quotations rom anonymous interviews withbusinesspeople.

We do not see this text as a nal truth. On the contrary, we hope this brochure willbe the starting point o a discussion with the active participation o its readers. Tis will help us correct mistakes and inaccuracies and gather additional inormation. With

your help, we will then update the text with a new level o understanding.






1Introduction

Small business is the oundation o any ecient market economy. Te successul

growth o small business addresses three undamental challenges. First, the socio-political challenge o creating a middle class, which stabilizes a democratic politicalsystem. Te second challenge, creating a primary source o employment, is social. Tethird challenge is economic. Small business is a crucible o innovation, in which theindustry o the uture is born and without which real breakthroughs are impossible.Te growth o small business led to the Ford automobileand the personal computer. Dynamic economic growth ispossible only on the oundation o small business. Tese threechallenges alone are enough to support a clear conclusion: where small business is suppressed, an ecient marketeconomy cannot exist.

1.1 Assessment of the current situation

What is the situation in Russia? Statistics provide anincontrovertible verdict: Small business is declining. Tis isa sign o a serious ailure to thrive. A clear maniestationo this ailure to thrive is the rapid growth o corruption.In the period between two large-scale diagnostic studies o corruption in 2001 and 2005, the average amount o bribespaid by businesses increased precipitously, according to

research by the INDEM Foundation and other groups. Inthe graph on the ollowing page, this increase is measuredin the number o square meters o apartment space that canbe acquired on the primary housing market at average national prices or one average-sized bribe. We see a seven-old increase in the relative gures, adjusted or infation andprice fuctuations. Both the INDEM Foundation’s data and the results o surveys by

DEFINITION:

Corrupt behavior is a type of opportunistic behavior by an

agent in which the agent usesthe resources of the principal notto accomplish the goals of theprincipal but for the agent’s ownpurposes. In this situation theprincipal is defined as a personor organization owning propertythat such person or organizationwishes to use in its interests. Theagent is often a person hired tomanage assests of the principal inorder to advance the principal’sgoals more effectively. Corruptbehavior is the intentional betrayalof the principal’s interests by theagent for the agent’s own benefit.


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OPORA yield a similar result: in 2005, bureaucrats’ income rom business corruptionequaled approximately seven percent o the total (both legal and black-market) turnovero Russian rms, which, as businesspeople point out, are barely protable in any case.

A representative survey o 1,600 Russian citizens in 128 cities in 46 regions o thecountry, conducted by Yuriy Levada’s Analytical Center (the Levada Center) in June2006, also revealed that about 50 percent o those surveyed see corruption as the mainobstacle to economic growth in Russia.

According to studies by OPORA, high non-production costs o small businesses(administrative and corruption-related costs) grew rom 8.5 percent o annual turnoverin 2005 to 9.6 percent in 2006 (or comparison, in Germany these costs are 3.5 percento net prot).

Many businesspeople say that the “reliability o corruption services” has changed.oday, a bribe is less likely to ensure the resolution o an issue. In other words, lower-quality corruption services are being provided or a higher price. For example, very oten giving a bribe to a municipal government employee at a “single- window” toexpedite processing land documents does not guarantee that these documents will beprepared without mistakes. Te businessperson must then pay to correct errors anddeects caused by the careless bribe-taker.

Apartment space that can be purchased for an amount equal to one average-sized bribe.




Te second trend is a reduction in “services” as a proportion o total corruptionand an increase in the share o extortion and direct conscation. For example, wherepreviously one could actually register a legal entity in less than the maximum allowable

time by giving a bribe to expedite the process, now the same amount o money might,in the best case, only ensure that the established deadline is met. New types o corruptpayments have also appeared, which might be described as “bribes or the right tooperate.” A very common example o such a bribe is a bribe to renew a lease agreementthat the tenant already has a contractual right to renew. But without a bribe additionalcomplications and unexpected problems could arise.

Te growth o corruption is directly linked to the growth o the shadow economy. As businesspeople oten describe it in interviews, a bribe is a sort o tax on shadow turnover. Tus, the growth in corruption is evidence o growth in the shadow economy.

Te INDEM Foundation estimates that the shadow economy is now at least 80 percentas large as the legal economy. However, that is on average. Deviations rom the averagemay be very signicant rom one economic sector to another. For example, the share o the shadow economy on the consumer market is much higher; black-market turnoveroten ar exceeds legal turnover — and this is the sector in which most small businessesoperate. Finally, operating partially in the shadows makes business more vulnerableand dependent.

Small business itsel has a general tendency to ocus on short-term businessstrategies, which is an entirely natural tendency in such an aggressive andunpredictable environment. he strategic consequence o this is that small

business is unable to perorm its innovative unction. his has a negative impacton the entire economy, its dynamism, and its potential or growth.

1.2 Origin of the problem

Te set o problems that make lie dicult or Russian business may be dividedinto two unequal subsets. Te larger subset has to do with the authorities, and thesmaller one concerns business itsel. Any transitional period in a society involves anincreased level o legal chaos. Te old system o legal norms and traditions collapsesmore rapidly than a new system is created. A sort o legal void orms. It is not surprising

that in these conditions, bureaucrats and businesspeople alike take advantage o thesituation. Business tends toward short-term strategies, which typically combine adesire or ast commercial success with indierence to legal purity, especially sincestrict legal compliance is so dicult in a transitional period. Te bureaucracy sees new opportunities to extract income through corruption by trading on its power and theexercise o such power.



In a certain sense, corruption is convenient or both sides in resolving problemsduring the early stages o the transitional period. Yet this convenience becomes a trapin which corruption fourishes. Te businessperson then

realizes that the legal gaps in his business generate lossesand great vulnerability and he begins to understand that itis in his interest to be “clean,” but it is too late or that now.Unrestrained by the authorities or by the public, corruptiongrows. Bureaucrats’ appetites increase. Tey no longer want“apples” (bribes); now they want “apple trees” (the businessitsel or total control over it). As a result, both legal regulationand the actions o the authorities push business into theshadow economy.

Bearing in mind this general picture o the growth o corruption typical in transitional countries, we ocus now onthe main causes o problems or business. Tis list is basedon interviews that experts rom the INDEM Foundationand OPORA conducted with small businesspeople in 2004-2006. In their view, the list o primary problems containsthe ollowing:

Mistrust o government.•

Constant changes in rules and laws.•

Ineective government regulation.•

Te tax burden.•

Black-market transactions.•

Expensive credit.•

Problems with commercial real estate and control by the authorities over the•

real estate market.Low quality o municipal services involving maintenance o leased properties.•

Enorcement and scal pressure.•

Corrupt exactions.•

Poor perormance by courts and the law-enorcement system.•

Participation in business by the authorities.•

Problems that businesspeople cause or themselves include:

Residual tendency to ollow short-term strategies.•

Insucient knowledge o the law and methods o legal protection.•

Mistrust o collective action.•

EXAMPLE:

Interference by the authorities inthe affairs of business is readilyapparent in the tender process.The authorities form municipalenterprises whose main functionis to conduct tenders. Initially,these enterprises arrange tenderson terms previously agreed uponwith “favored” bidders. Then theytake full control of this area of

business, awarding contracts onlyto “their own” companies whilepushing competitors out of themarket.




1.3 The “pros” and “cons” of non-corrupt behavior

In their attitudes toward corrupt behavior, business owners may be divided intothree groups. Te rst and largest group comprises those who ollow a strategy o passivenon-resistance: “Well, i there’s no other way, I suppose I’ll have to. Everyone else isdoing it.” Te most common example o this behavior is entering into a contract orurban redevelopment. It is illegal, but it serves a noble purpose in principle. Tereore,many businesspeople choose the well-known tactic, since violence is inevitable.

Another group, about 10 percent o Russia’s business community, does not hesitateto use corruption as an active strategy to gain a competitive advantage. Consequently,the larger the business, the more such “activists” there are. Tere are unlimitedpossibilities or agreements to cooperate with local authorities on various projects, with

the corresponding expenditures or the right to implement the project.

A much smaller proportion o businesspeople choose what is currently the mostdicult strategy: to do business without corruption. Tey strive to avoid virtually all corruption and to comply with all laws, no matter how dicult this is. Some areunsuccessul and go out o business. Others manage to survive, and many o themachieve real independence. Bureaucrats simply get tired o tormenting them because itbecomes unprotable to do so.

Te question naturally arises: what discourages peoplerom choosing this exotic strategy, and what would encourage

them? Businesspeople themselves cite these obstacles tochoosing non-corrupt behavior:

Low level o legal sophistication among businesspeople.•

Low level o legal literacy among businesspeople.•

Absence o a strong and just government.•

Inability to turn to law enorcement agencies or help•

and protection.Shortage o non-corrupt methods to resolve problems.•

Inconsistency and unenorceability o laws.•

Punitive approach o enorcement agencies.•

CASE STUDY:

After losing five lawsuits in acase against a businessperson inNovorossiysk, a bureaucrat in thetax service finally left him alone.Of course, the businesspersonspent a lot of time and money, butthat was a small price to pay toachieve increased independenceand security, and to maintain asense of dignity. Soon after, thisbusinessperson became the leaderof a grassroots group to protect

small business.



Many businesspeople perceive corrupt practices as eective. Here is a typicalresponse rom an interview:

“Te most eective companies are orced to pay a very large amount o money in order to eliminate obstacles to their growth. We are an ineective company,because we may spend a year, or two, or three, in an attempt to resolve an issuelegally, while others may take care o the problem in a month.”

Perhaps the short-term eectiveness o corrupt practices (which is precisely theissue here) is the best argument in their avor. But the usual result is that in themedium and long term, corrupt practices return like a boomerang and strike a blow against business. Violating the law always places the businessperson in a position o dependency on government bureaucrats, who can apply the law as they see t and or

their own purposes.

1.4 Scope of our recommendations

In light o what we have written above, our call to choose non-corrupt strategiesor doing business and our recommendations to implement these strategies may soundhighly naive and impractical, coming rom idealists who do not understand how the world really works. We assure you this is not the case. On the contrary, althougheach businessperson knows his particular situation best and we have only a supercialunderstanding o individual cases, we are quite amiliar with the lives o a large numbero business owners in every part o the country. We understand how dicult it is to

decide to change one’s strategy, how lie experience and the actions o the Russianauthorities can be discouraging. Tereore, we propose a system o simple criteriathat can be used to decide whether it makes sense this brochure can be helpul andapplicable to individual businessnes:

Long-term strategy.1. You can ocus on a short-term strategy o making money, oryou can take a more long-term view. A business owner who chooses the lattercourse must be prepared to ace diculties and losses or a certain amount o time in order to enjoy stable and reliable revenues in the uture. Te choiceo a short-term or long-term strategy may be dictated by the type o business,

its history, and ultimately the businessperson’s temperament. I a long-termstrategy is chosen, despite the diculties o the transition to non-corruptbehavior, it is possible to prepare or losses in this period by making long-term “investments in the uture.” Our recommendations may be helpul here.




“Te ask o the Augean Stables.” Te vast majority o businesspeople have some sort 2.o “skeletons in their closet.” Te legal uncertainties o the transition period, themany obstacles to doing business, and simply the search or easy solutions have

all led to the accumulation o unlawul baggage. As a rule, most o it gradually becomes insignicant or can be cleaned up with a certain amount o eort. I you are prepared to do this and your “stables” can be cleaned, then you shoulddo it, because that will make it much easier to ollow our recommendations.

Need or collective action. 3. Business owners are oten devoted individualists. Tey want to and can take responsibility or themselves. As they see it, other peopleoten get in their way. Tey usually believe that “No one is going to help me exceptmysel.” I you cannot overcome this mindset, it will be dicult or you to takeour recommendations. A signicant number o them involve collective action, or

which you must learn to trust others.

Tat is about it. Now decide or yoursel.






2How to avoid problems whendealing with bureaucrats

2.1 The nature of the environment

In order to choose the correct strategy, it is important tounderstand that regulation o business activity, administrativeprocedures, and biased rulemaking i the “business” o bureaucrats. Tey actively use their powers to maintain theirearning power in their markets. Te ollowing are the threemain areas o the bureaucrat’s “business,” each o which hasits own unique eatures:

Audits. Violations o the law in the conduct o your•

business may be identied (or “not noticed”) by abureaucrat, and negative measures may be taken (or nottaken) against your business as a result.

Administrative procedures (permitting, licenses,•

approvals, etc.). Overcoming administrative obstaclesto the continued opeartion o your business may behelped (or hindered) by a particular ocial, severalocials, or an entire agency.

Rulemaking (the adoption o regulatory acts and any •

ocial directives or decisions expressing the “political will”) transorms existing markets in the interests o certain groups or categorieso business, or in the interests o bureaucrats acting within their discretion onbehal o themselves or companies aliated with them.

CASE STUDY:

In one region, a bureaucrat whowas the head of the regional officeof Gosstroy (the State ConstructionCommittee) also ran a private firmthat performed expert analysisof license applications. The twodoors, with the same person’sname on each, were across thehallway from each other. Noapplication could get throughwithout going through this setprocedure. After a long period of

time and with significant effort,local business associations werefinally able to break this viciouscycle. The attorney for a businessassociation gave a legal opinionon the practice, and requestswere sent to higher authorities atthe regional and federal levels.Ultimately, the public outcry overthis conflict of interest forcedthe bureaucrat to resign from hisposition as head of the Gosstroyoffice.



1.

A bureaucrat sitting at the “trough” is not committed to making you comply with

all the requirements o the law. In act, i you have no violations, he may be ratherannoyed. Considering the act that no one gets a place at the “trough” or ree, the needto “recoup” his investment oten creates an incentive or the bureaucrat to act illegally.For example, extra requirements may be imposed on your business, laws that have beenrepealed may be applied to you, or non-existent procedures may be invented.

LAWYER’S COMMENARY What gets businesspeople into trouble? As an example, the typical small errors that occur

in a grocery store include these:

Te sticker containing required inormation becomes detached rom a liquor bottle •

Te Rules o Sale “all o the wall” •

Tere is no seal on the posted copy o the license •

Tese and other trivial violations are punishable by a ne o up to 30,000 rubles.

Experience in the courts show that the punishment specied by article 2.9 o the CAM RF 1 - a verbal warning - is applied very rarely.Te government, acting through its bureaucrats,

deprives businesspeople o the right to make amistake. Even or trivial errors that cause no harmwhatsoever, the maximum penalty is imposed.

Businesspeople should remember that arguments that you do not eel well, that youare poor, or that you were simply inattentive to the requirements carry no weight incourt. Unortunately, insuicient legal and psychological preparation can bring unavorable results. Only a sense o responsibility or

yoursel and your business, continual eorts toimprove your legal literacy, and an attentive and exacting attitude to your work can protect you rom errors.

In order to do business in such an aggressive environment, you must clearly understand all the nuances o the laws regulating business and calculate in advance the

CASE STUDY:

A company in the cosmetics industry wasaccused of violating applicable licensingrequirements. The stated fine for theviolations was 70,000 rubles. A bureaucrattold the company he would not refer the

case to court if the company gave him anotebook computer as a “present.” Thecompany manager correctly concluded thatgood arguments could be made against mostof the claims in court, and that it was a badidea to create a precedent for the bureaucratto continually “eat at the company table.” Asa result of the litigation, only one of the fiveoriginal allegations remained. The fine wasreduced to 30,000 rubles. And in the process,the company gained valuable experiencein organizing its affairs. It no longer fearsauditors, because absolutely everything isabove board. The manager acknowledgedthat 30,000 rubles was a fair price for thisknowledge, and the situation would have beenmuch worse if the matter had ended with abanal bribe.

1CAM RF – Code o Administrative Violations o the Russian Federation, dated December 30, 2001,No. 195-FZ.




risks and consequences o noncompliance (or the objective impossibility o compliance) with the requirements o the law.

Te bureaucrat also clearly understands all the nuances o his “business” and knowsall the legal “traps” into which businesspeople unintentionally all. In this situation itis important to make the correct decision: either accept the lawul punishment onceand get out o the trap, or become beholden to a bureaucrat who must be continually “ed.” Tis bureaucrat wants to reel you in on his hook and never let you get away. Any unresolved violations you have provide him with a constant source o income.

At rst, these payos may seem negligible and cheaper than the cost o payingnes or correcting violations. However, in the long run these expenses become a majorburden or several reasons:

Te bureaucrat’s appetite grows (“the cost o living is going up”);•

I you decide to terminate the corrupt relationship, you will ace the harshest•

punishments, involving attacks by other agencies under the principle o groupsolidarity; andGradually, the bureaucrat will begin to see your business as his own and may •

attempt to take it rom you (many raiders take over businesses on orders rombureaucrats).

It is important to recognize that you can never predicthow ar people engaged in criminal activity will go.

2.

Te most common method used by those who actually want to enter into a corrupt relationship with a bureaucratis to use the services o legal intermediary rms. Tis is“outsourced” corruption. Many Western companies operatethis way in highly corrupt markets in developing countries,because it allows them to claim that they never pay bribes.Indeed they do not pay bribes. Rather, they pay other companies to prepare their

documents, handle administrative procedures, etc. And how exactly the result isachieved is up to the other entity. Tese intermediary rms are usually aliated withocials in the relevant agencies.

Tere is a ne line between administrative barriers and outsourced corruption.Generally speaking, an administrative procedure is considered an administrative barrier when a government or municipal agency charges a ee or its services. In this case it isassumed that the prot does not go directly into the pockets o the ocials, but is spent

CASE STUDY:

The majority of firms providingreal estate brokerage services andservices involving such activitiesas registration of legal entities andreal property, preparation of landand zoning documents, foreigntrade, and customs law operatewith corrupt methods.



in a lawul manner (although what happens with the revenues o state and city-ownedcorporations and similar entities is a closely guarded secret). However in the situation when a company mysteriously obtains all necessary documents in a very short time, it

is hard to imagine that no compensation was paid to ocials. Te use o intermediary rms, which is so conducive to corruption, exists everywhere, in various agencies, butit is not yet legally regulated. Paying an intermediary rm or these services is moreexpensive than making simple cash payments, because some o the money goes towardoverhead, taxes, and converting money into cash. However, a customer who pays orthese services based on signed contracts and non-cash payments enjoys a signicantlevel o protection.

Another common method o overcoming administrative barriers involves theservices o black-market intermediaries. In this case, a signicant portion o the money

paid ends up in their pockets. Moreover, black-market intermediaries may reuse toreturn the money in orce majeure circumstances or simply extort the money.

Without getting into the details o the more subtle orms o compensating ocials, we will discuss the cheapest, riskiest, and most common orm o making payos:putting cash in the ocial’s hand. We must recognize that this is a criminal act, andboth parties can all victim to an unexpected anti-corruption campaign initiated by the other party. Sometimes these situations are staged by agreement between thebureaucrat and ocials o law enorcementagencies in order to orce the businesspersonto make a much higher payo.

3.

In one popular method, the authoritiesmake decisions that restrict or eliminatebusinesses in a certain category, industry, orgeographic area. Tis is particularly commonamong regional and local authorities due tothe ease o implementing such decisions.

Tese decisions are generally adoptedbehind the scenes, without prior debate withinthe business community, or they are insertedat the last minute into the text o an otherwiseuncontroversial document just beore it isadopted or signed. Tere are many examples o this, but here are just a ew, involvingthe most competitive retail markets:

ARTICLE 290 OF THE CRIMINAL CODE

OF THE RUSSIAN FEDERATION

Receiving a bribe. Punishable, depending on theseverity and elements of the offense, by a fine of up to 500,000 rubles or imprisonment for up to10 years. Imprisonment for up to 12 years for amajor bribe. The threshold for a major bribe isonly 150,000 rubles.

ARTICLE 291 OF THE CRIMINAL CODE

OF THE RUSSIAN FEDERATION

Giving a bribe. Punishment, depending on theseverity and elements of the offense, by a fine of up to 500 rubles or imprisonment for up to eightyears.




Increasing the minimum foor space o pharmacies (to•

60 square meters).Prohibiting sole proprietors rom selling alcoholic•

beverages and increasing the minimum equity capitalrequired or a company to apply or a license to sellalcoholic beverages at retail to one million rubles (orlower, at the discretion o regional authorities).Deciding to close mobile retail trade locations within•

25 meters o metro stations.“Imposing order” by selectively closing small retail•

outlets (in Moscow and St. Petersburg).Closing all fea markets and wholesale markets in order•

to modernize them, while also changing the ownership

o the markets or using the land or other purposes.

Decisions like these are usually adopted at the initiativeo specic persons (“lobbyists,” as that term is understood inRussian), and the eect o the decision is to alter the market,oten or the benet o the largest players on the market, orto change the ownership o business entities. Te risks o being “sequestered” in this manner grow in proportion to thegrowth o corruption as a means o successully competingin the market. Tis is the unortunate result o the past ew years, and the situation is only exacerbated as markets become saturated. Unscrupulous

bureaucrats are the main players in this dishonest competition.

Tese phenomena can be resisted only through collective action, by joining togetheralong industry or geographic lines, or by acting through large, authoritative businessorganizations.

Among other things, these organizations can obtain expert analysis o an ocialdirective to determine whether it has its origins in corruption. Tis becomes relevantin light o Russia’s ratication o the UN Convention Against Corruption.

LAWYER’S COMMENARY In the Krasnodar region, an experiment is being conducted or the purpose o improving

the operation o chambers o commerce and industry. Te governor o the region issued adirective, No. 1088-r, dated November 23, 2006, requiring the local authorities to involve representatives o chambers o commerce and industry in the drating o laws and other regulatory acts concerning business and oreign trade in the region. Chambers o commerce and industry are working with city and district administrations to nd ways to implement this directive. For example, the ollowing arrangement could be recommended or involving chambers o commerce and industry in expert analysis o municipal regulatory acts.

EXAMPLE:

Another typical example of anunfounded decision made behindthe scenes was the adoption of a corrective coefficient (K2) bycertain local authorities. Businessassociations objected, and arepresentative of the city councilwas invited to a meeting of theregional chamber of commerceand industry. He explained that theK2 coefficient was not adopted onthe basis of any sound calculation.They simply decided to extractthe maximum amount underthe theory that they might “getaway with it.” They did not. Butthis approach to such a seriousissue demonstrates not only theweakness and incompetence of theauthorities, but also the absolutenecessity for businesspeopleand business associations toparticipate in the legislativeprocess.



Develop a mechanism to deliver drat legal and regulatory acts or expert analysis,•

appoint persons responsible or conducting the analysis, and set deadlines to complete the analysis.

Deliver drat legal and regulatory acts to the chamber o commerce and industry in•

a timely manner or expert analysis and receive the chamber’s opinion based on its analysis. Analyze the chamber’s suggestions and comments on the drat legal and regulatory acts •

and convey them to the appropriate oce and departments within the administration or revision o the drats. Attach the chamber’s opinion to the drat legal or regulatory act as a separate opinion•

i the administration disagrees with the chamber’s comments and suggestions in whole or in part.

Tese provisions should be enacted in a directive or resolution issued by the head o the municipal government and specied in detail in an Agreement on Cooperation or in rules adopted by both parties.

When choosing a strategy, it is important to be lexible and to understand thatin some circumstances, the only way to avoid becoming a victim o administrativeextortion is to close the business. However, i you are already in a corruptrelationship, then the more successul your business becomes, the more likely itis that you will eventually lose it altogether. At some point, the bureaucrat willno longer be satisied with receiving only a portion o your income. He will wantall o it. Or your competitor will oer him more avorable terms in exchange

or eliminating your business rom the market. When the bureaucrat knowsyour weaknesses, it is easy or him to exploit them to achieve the desired result.hereore, your task is to minimize corrupt relationships, eventually rejectingthem entirely, at least the most risky and overt corrupt actions.

2.2 Method of self-defense

In an environment when a businessperson can be squeezed in a bureaucratic vicebetween debilitating corruption and the threat o simply losing the business due tobureaucratic opposition, the choice o the correct individual approach is extremely important.

In this section we will describe some o the most important and commonly usedmethods o resisting a bureaucrat’s corrupt intrusion into a business. Tese are eective,proven principles in the ght against corruption, as demonstrated by the experience o many businesspeople we interviewed at various times. Perhaps this experience will behelpul to you as well.




We will attempt to discover what a businessperson can do independently toreduce the costs o dealing with bureaucrats. First, it is very important to assess thesituation accurately and to determine the level, infuence, and connections o the

bureaucrat. A tactic that might be eective against a low-level bureaucrat may not beuseul to resist a higher-ranking ocial. It is also crucial to assess the extent to which abureaucrat is interested in putting pressure on a particular businessperson. I you havebeen individually “targeted,” you must act accordingly. Moreover, the businesspersonmust assess the chances o success not only against a single bureaucrat, but againstthe government apparatus associated with him. Solidarity within the bureaucracy may be very strong, in which case the administrative resources directed against thebusinessperson can multiply.

We now divide our task into two parts and attempt to answer two questions: what

to do i a problem already exists, and what a businessperson should do to preventproblems.

First, we will discuss what can be done in a situation in which a bureaucrat is already taking actions that have negative consequences or a businessperson or pressuring himto engage in corruption. Te businessperson has a wide range o options or preventativeaction:

Legal analysis o complex or disputed issues.• It is important to prepare or theconversation careully. You must be amiliar with your case. Toroughly study the documents you have and the legal provisions that are relevant to the specic

issue. Being prepared demonstrates a proessional approach and will help ensure apositive outcome.

Psychological preparation• or speaking with the bureaucrat, and using psychologicaltactics — they do it, why shouldn’t we? Tere is a lot o interesting and useulliterature now about how to negotiate. Buy a book on the topic, and perhapsit will come in handy in a dicult moment. Te most important thing in any negotiation is condence in your position, and only competence can give you thiscondence.

A ew additional tips:•

Bring a tape recorder and record the conversation.1.alk beorehand with a bureaucrat you know (or another competent specialist)2.and get their support. Te opinion o a proessional concerning your problemcould have a signicant impact on the bureaucrat’s behavior, and this approachdoes not require you to resort to corruption.



Prepare and cite an example o a avorable resolution o an issue in a similar3.situation.Put your request in writing, and le your letter with the agency regardless o 4.

how the negotiations go.I a confict arises, think o alternative, non-corrupt ways to resolve the problem5.and put them in writing. I your alternative solutions are benecial to thepublic, (equipment or a children’s playground, renovation o a school, etc.) it will be harder or the bureaucrat to ignore them. You may wish to obtain letters o recommendation giving avorable comments6.about your business and requesting help in resolving your issue (or example,a request to renew your lease agreement in light o the extraordinary benetprovided by your business). You may wish to come prepared with a drat letter o agreement on the7.

problem. Tis makes things very easy or the bureaucrat, who only has to signthe document.

I a confict has already arisen and the bureaucrat has made a decision thatthe businessperson disagrees with and believes to be inconsistent with the law, thebusinessperson can take certain actions to protect his interests, including:

Appeal the decision through existing administrative procedures, by ling an•

appeal with the bureaucrat’s immediate supervisor or with the next higheragency. Here you will also need the arguments you prepared or the unsuccessulnegotiations.

Appeal to the enorcement agencies or the prosecutor’s oce. Be careul: You•

must not make unounded accusations; your complaint must be supported by specic evidence and reerences to violations o laws or regulations.File a lawsuit. At this stage, the level o legal literacy required o the plainti •

increases dramatically, thereore it is usually best to work with a proessionalattorney.

When a bureaucrat’s decision does not technically violate the law but thebusinessperson suspects that the decision is based on discriminatory motives, ormallegal or administrative procedures will not help. In these situations, the most eectiveaction is to prepare in advance to respond when the decision is made using lawulmethods o infuencing the bureaucrat: Bringing public attention to the problem,getting business and public organizations involved in the issue, etc. We will cover thesemeasures later, but or now let us concentrate on a ew ways in which businesspeoplecan protect their interests on their own.




2.3 Legal remedies

When we interview businesspeople in the course o our sociological research, weoten hear examples o legal methods to resist unlawul claims and inormal (corrupt)encroachment by bureaucrats.

We have no precise statistics on the requency and eectiveness o these methods(our data are by nature not quantitative), but we can say one thing with certainty:Legal methods o resisting administrative corruption are much more widespreadthan commonly believed. Moreover, legal countermeasures against corrupt orays by bureaucrats are successul much more oten than we tend to think.

he problem here is in publicizing inormation. From the bureaucrats’

perspective, inormation about successul eorts by businesspeople in this area isitsel a recognition o the bureaucrats’ errors, so they try not to advertise these cases. A businessperson who wins a case usually believes, quite reasonably, that his jobis done, and he does not spend a lot o time and eort on publicizing his positiveexperience. Unortunately, this means that the majority o businesspeople know very little about positive experiences o, or example, successul litigation againstcorruption. At the same time, unsuccessul eorts are publicized almost immediately,because this helps the bureaucrats strengthen their control over business. As a result,most businesspeople are well aware o the negative consequences o “going againstthe low” and rarely see the avorable consequences and beneits.

LAWYER’S COMMENARY What does the term “legal remedies” include? It means the deense o one’s rights and

interests on the basis o the law. Tere can be dierent approaches to this deense, but the process should be handled by a proessional attorney. What should you do i you are acing aspecic act o extortion? Many business owners preer to resolve the issue by other than legal means, by “making a deal,” without realizing that this is not the easiest or least expensive route. Consult an attorney, even i you have no desire to get into litigation. You may get some sound advice that will help you diuse the situation.

Where can you nd inormation on legislative developments, ederal and local

government eorts to support small business, and positive examples o resolving conficts between business owners and bureaucrats? Contact the nearest business organization. It might be a chamber o commerce and industry, an OPORA oce, a business association, asmall business support center, or just a law rm. Make a point o visiting these organizations at least once every quarter, just to catch up on the news. Tis will help you avoid potential problems and resolve existing problems more eectively.



As a businessperson, a legal deense o your interests against claims by bureaucratsmay be eective or several reasons.

First, bureaucrats requently make demands o businesspeople that are utterly unounded rom legal standpoint. Tis is done intentionally, because the bureaucratknows he is in violation o the law and is counting on thebusinessperson to “save” him. Tis blu relies on psychologicalpressure on the businessperson and assumes that thebusinessperson is not well-inormed about administrativeprocedures and his rights and duties. Te only way to resistis to base your actions on a knowledge o the law, comply with it, and deend your lawul rights accordingly. Tereore,legal methods o deense may be eective, because they make

it possible to expose the bureaucrat’s violation o the law immediately.

LAWYER’S COMMENARY Business owners encounter corrupt behavior most oten in

the course o enorcement procedures. In one case, an auditor demonstratively “did not notice” an accounting book that was shown to him and stated in his report that the book was not produced.

I you encounter overtly unlawul actions by an ocial, you

may:

Suspend the audit until you nd someone to be present and be 1.a witness to the audit in your avor;Call and consult with an attorney or a small business support 2.center; Ask or the telephone number o the auditor’s supervisor and 3.call to report the “enorcer’s” unlawul behavior;Use a camera, video camera, or voice recorder to record every 4.detail o the audit;Describe all violations that occur and attach your statement to the audit report, and 5.include a reerence to the statement within the report itsel; or Make an inventory o all materials, documents, equipment, tools, etc., that are shown6.to the auditor and attach the list to the audit report.

CASE STUDY:

A businessperson in therestaurant industry was in adifficult situation. A fairly high-ranking bureaucrat had gotteninto the habit of coming in for afree lunch. After a while, sincethe businessperson toleratedthis behavior in silence, thebureaucrat started to bring largeparties in for dinner, callingit “charitable meals for theunderprivileged.” After almosta year, the businesspersondecided that he had fed all theunderprivileged and bravelytried to protest. This broughta furious reaction from thebureaucrat, along with aflurry of unfounded claimsand threats. Only then didthe businessperson consult

an attorney. A few properlyworded letters to the appropriateauthorities was all that wasneeded to stop the shakedownand put the bureaucrat in hisplace. Of course, there is nocomparison between the amountof losses the business incurredduring all that time and thecost of professional attorney’sservices.




DEFINIELY:Veriy the authority o the auditor (check the audit order and the auditor’s •

identication).

Copy down all the inormation about the auditor.•

Make sure the auditor lls in all inormation in the Audit Record.•

Do not sign protocols and statements without reading them. Add your own comments •

i necessary.Do not sign blank pages i told “we’ll write in the rest later.” Tey will certainly write •

it in, but it will not be in your avor.Do not take the auditor’s word. I he cites a provision o the law, get the exact citation•

and write it down.

Tis advice is simple, but it is oten ignored.

Second, bureaucrats themselves are requently ill-inormed about the legal detailso their jobs. Tey make mistakes that they are ashamed to admit. Supervisors may also attempt to protect subordinates who are acting unlawully. In these situations,the use o legal methods o deense immediately lets the bureaucrats know that thebusiness ownern is serious, will stand on principle, and intends to win vindication o his position. We have many examples o cases in which a business owner’s claims weresatised as soon as a lawsuit was led. Quite oten the case never even gets to court– when the bureaucrat realizes the legal vulnerability o his decisions, he corrects hisposition himsel.

Tird, we have observed a pattern in our discussions with businesspeople in variousregions o Russia. Businesspeople who prepare in advance to use legal deense and donot hesitate to use it generally have ewer diculties with bureaucrats; bureaucrats tendto avoid them. From the bureaucrat’s perspective, a confict with such a businesspersoninevitably involves prolonged arguments, attorney ees, and possibly litigation. I thebureaucrat is not 100 percent condent o his position, there is no benet to him ingetting involved with the businessperson.

In order to ght back against a bureaucrat on a level legal playing eld, a businessowner should have an even better understanding o the law than the bureaucrat. Tisrequires the businessperson either to continually monitor legal regulation o businessor to have access to a knowledgeable specialist or consultation.

LAWYER’S COMMENARY A proessional should really help you understand all the laws. Te businessperson’s job

is to make money. Te most common misconceptions among businesspeople are: “A lawyer’s services are too expensive, I have no time to meet with a lawyer, and the issue is not that complicated, I’ll gure it out mysel.”



Unortunately, only those business owners who have had todeend their rights in court understand how much money they would have saved by consulting an attorney at the beginning.

Te rst option requires signicant costs in acquiring andmaintaining knowledge about the laws regulating business.Tese costs include not only monetary expenditures topurchase legal databases and periodic updates, but also thetime and energy required or systematic monitoring andanalysis o the law. For small businesses, these costs may signicantly outweigh the benets. According to interviewsconducted by the INDEM Foundation, only a smallpercentage o businesspeople do this work themselves. And

those who do generally have a legal education. ypically,based on the examples we have seen, when such a smallbusinessperson immerses himsel in the details o the law inthis area, he realizes it makes sense to reorient his business.Now he provides legal services to other businesspeople!

Another way is to pay or the services o a proessionallegal expert. However, the most economical option – payingor a one-time consultation – is not very suitable in thisinstance or the very reason that it is not systematic. As aresult, businesspeople need to search or other options. One

option is the legal services available rom various businessassociations. Virtually every business association has either

one legal expert or a whole team o legal experts (depending on the scope o theassociation’s activities) working to protect the business sector’s rights, both throughpre-judicial procedures and in the courts. Legal services are usually provided to theassociation’s members on preerential terms, something that allows business owners toreduce their costs and is a key actor in attracting new members to such associations.

Conversations with business owners show that all the various legal means o resistingpressure rom ocials and protecting businesses can be categorized in chronologicalstages.

1. Te protection o a business owner’s legal interests before an ocial makes a fnaldecision.

Contract a legal specialist (a business’s own legal expert or a hired•

specialist) to take part in audits o the business’s operations. he legalexpert will be able to veriy and oer a legal assessment o the auditors’

EXAMPLE:

In 2004, bureaucrats from themayor’s office in Perm required afee on top of the price to purchasea license to engage in retail trade.With the support of a coalition of local businesses, a business ownerchallenged the requirement incourt. The Arbitration Court forPerm Province held that:

(1) Local government officials donot have the authority to enforcethe tax laws

(2) The absence of a license toengage in retail trade is not animpediment to (or prohibitionagainst) engaging in retail trade(article 2, sections 3 and 4, andarticle 3 of the Tax Code of theRussian Federation)

(3) District authorities within thecity and the administration of thecity of Perm do not currently have jurisdiction over issues regulatedby the laws on taxes and fees.




competence and o the legality o the auditors actions, make sure the resultso the audit are properly documented, and put a stop to illegal actions, ordocument their illegality or the purpose o subsequently appealing them.

he legal specialist can help draw up letters, statements, and other•

documents to support a business’s activities, since preparing materialsin the correct and proper way guarantees that the issues raised in them will be addressed.

Secure the invovlement o the legal aairs departments in the preliminary review •

o contracts and other documents imposing any obligations on a business.

2. Te protection o a business owner’s legal

interests after an ocial has made a decisionbut within the ramework o pre-judicialprocedures:

Ater an audit nding has been drawn•

up or an ocial denial received roman administrative authority, but beoreany legal action has been taken, anattempt to appeal may be made toa superior organization. Tis optionrequires special expertise as well, since

the arguments have to be based on thelaw. Only then can the action taken berescinded or reconsidered.

3. Pre-judicial deense o a business owner’sinterests.

Despite positive experience abroad using pre- judicial methods o resolving conficts withgovernment authorities, in Russia this option isstill almost completely absent. Although, it willeventually play an important role in upholding citizens’ legal rights. In the meantime,however, business owners have to ocus their eorts on infuencing ocials during thedecision-making process and on protecting their interests in the courts.

CASE STUDY:

The accountant for a small business filedreports with the tax office, and a documentaryaudit revealed a technical error in the reportingdocuments. A fine of 13,000 rubles was imposedon the business. The business owner decidednot to hire a lawyer, and represented himself inthe appeal of the decision before the arbitrationcourt. After a lengthy correspondence with thecourt, which returned the complaint severaltimes for failure to meet the filing requirements,a hearing was set, at which the small business

was shown to be completely unprepared legally.Moreover, the business failed to file its appeal ina timely fashion, so enforcement proceedings hadalready begun. Only then did the business hire anattorney, who was able to offer real assistance.However, the business’s costs to prepare thedocuments and travel to the regional center forthe hearing exceeded the amount in dispute,totaling 14,800 rubles. If the business owner hadhired a lawyer before drafting the appeal, thecosts would have been minimal.



4. Protection o a business owner’s legal interests in the courts.

An example o the eective use o legal remedies is provided by the ruling o •

the Arbitration Court o the Republic o Kalmykia (in Elista) in Case No. A22-523/06/12-59 on August 3, 2006 (Bulletin No. 10 [167] o the RussianFederation Higher Court o Arbitration or October 2006), which grantedthe demands o several sole proprietors seeking the invalidation and non-enorcement o a resolution adopted by the Elista City Assembly to introduce abase protability coecient, known as K-2, in the amount o 0.1 or transportingpassengers by taxi. Te main evidence cited in support o the business owner’sposition was a precise economic calculation based on objective studies andqualitative indicators that demonstrated their de acto inability to pay taxes atthe set rate and the lack o any economic justication or the amount o the K-2

coecient, which ultimately prevented citizens, in this case business owner, romexercising his constitutional rights.

LAWYER’S COMMENARY I the issue involves a change in legislation, do not try to settle the matter on your own.

Tis is a job that takes time and serious preparation. For this reason, the only proper course o action in such instances is to contact a business organization that will represent your interests in a proessional manner in the context o the interests o the group as a whole.

As noted above, business leaders agree that a person who well-inormed abouthis legal rights and obligations and about administrative procedures tends to have

a powerul deterrent eect on ocials. Over the past three years, the INDEMFoundation conducted a series o special in-depth interviews with business owners inMoscow, St. Petersburg, Saratov, Irkutsk, Smolensk, Volgograd, Velikii Novgorod, andver. Our experts also spoke with businesspeople in many other regions o Russia, andeverywhere they ound a number o individuals who had made successul use o thistactic in dealing with ocials. Most importantly, over time these people were harassedless and less oten. Te strategy produced real results.

Needless to say, another question must be addressed. Was the particular attitudethat the ocials took towards these business owners prompted by the legal awarenessthey exhibited, or were the businesspeople merely exceptions to the rule or theocials, since they were an unamiliar breed o opponent and thereore deemed toobothersome? It is hard to answer this question with any certainty, but in the nalanalysis, this is not the undamental concern. Te most important thing is the resultthat was achieved!

Judicial protection or violations o the interests o business owners is a logicalcontinuation o their struggle to assert their rights. Unortunately, the situation in this




regard, too, leaves something to be desired. Tere were instances in which businessowners had won court cases against ocials in all the regions where the INDEMFoundation conducted its surveys. In some cases, business owners had even won a whole

series o victories against various government authorities! Tere was always a downside,however. Te business owners usually turned to the courts only as a last resort. Tis was due to several actors. First, the case backlog means that court cases are heard very inrequently. Second, there are always signicant costs associated with the preparationo legal cases. Legal advisers and attorneys are not cheap. Tird, unscrupulous judgesare oten in league with government ocials. In such circumstances, it is very dicultto win a case airly. Fourth, in Russia a legal victory does not put an end to a confictbetween a business owner and an ocial. Tere have been instances in which, ater anocial has been deeated in the courts, he has led urther claims, the business ownerhas appealed them and won, and yet more punitive administrative measures are taken

against him.

LAWYER’S COMMENARY It oten happens that, ater a businessperson has successully appealed the ndings o

an audit, he becomes the ocus o the most varied inspection and monitoring agencies and departments. Te businessperson aces the choice o either going to court and putting his work aside, or trying to buy his way out o the situation. When this kind o heavy pressure is applied, the only viable solution is to get help rom experts. Gather together your acts and documents, and contact a business association, a consulting service, or a support center. Your situation is not unique; there are ways and means to combat corruption, and they are being rened all the time. Te problem cannot be solved unless you get involved.

Nevertheless, seeking to uphold one’s interests by legal means can be an eectivetool in the arsenal o the small business owner i he makes proper preparations.First, he must either master the relevant eld o law himsel or enlist the services o aproessional legal expert who specializes in the eld. Second, he must combine the legaldeense o his interests with eective eorts to uphold these interests in the course o his dealings with the ocial, and make use o pre-judicial means o resolving conficts whenever possible. Ten recourse to the courts will be just one potential outcome,and it will become possible to use other, less “extreme” ways o settling disagreementsbeore going to court.

Tis system o legal means o protecting a business owner’s interests would seemto be the most eective one. Tis is also proven by the ndings o sociological surveys.For example, many respondents say that dealing with various ocials calls or a very fexible approach. Only then is it possible to protect both a business owner’s interestsin a prompt and eective manner and to make sure the laws are observed.

An important role in enhancing the eectiveness o this system is played by twoother areas o such “deensive” activity: Standing up or one’s interests within the



ramework o administrative procedures, and establishing the best possible interpersonalrelationships with ocials. Tese areas will be examined below.

2.4. Administrative procedures for the protection of a business

owner’s rights

It is hard to say anything undamentally new about administrative means o deending a business owner’s interests. Nothing seems to have changed in this regard.I a businessperson is dissatised with a decision made by an ocial, he has the rightto appeal the ocial’s action to the latter’s immediate superior.

raditional policies and procedures remain in place. Te process is still simple andreadily understandable at rst glance, and still relatively ineective in practice. Te

main problem is that any appeal is heard within the ramework o the same institutionand inside the same system. As a result, there is too great a likelihood that uppermanagement will act in the interest o deending the institution’s good name and touphold justice as a secondary concern.

Even so, our observations indicate that it is essential to use this tool all the same.Glaring mistakes by subordinates will always be corrected by their supervisors, andthis will save time and money or busineses. Te advantage o using this method isespecially great in light o the act that it can be used in the early stages o a confict with an ocial and does not entail major outlays or attorneys.

I a business owner is unsuccessul with the ocial’s immediate supervisor, he can goto the supervisor’s superiors or to the agency that oversees the department with whichthe confict arose. Tis step entails the most tension in relations with ocials, but italso generates more resonance, which may be advantageous in certain situations.

For the most part, this technique can be undamentally more eective or a businessonly in instances in which the supervising agency answers to some other authority. Inthe case o a prosecutor’s oce, or example, the provincial or ederal prosecutor’s oce would be such an authority.

Our respondents have reported problems in this area. In Smolensk, or instance,the situation is such that all power in the region is highly concentrated and controlled. As a result, appeals to the prosecutor ailed to have the desired eect; instead, cases were “quietly dropped.” No results were achieved until the parties concerned were ableto orward the cases to a higher level.

rue, it must be acknowledged that ocials at the very top (o the prosecutor’soce, in this instance) are not very eager to get involved in such matters either. Very




oten, cases are sent back or urther investigation into thevery “swamp” rom which they were extracted with suchdiculty. In these situations, pro orma letters will not get

you anywhere. One has to continue storming the bastions o power. At some point your eorts will pay o.

2.5. Characteristics of interpersonal

relationships

One distinctive characteristic o relationships betweenbusinesspeople and ocials is the enormous impact o ocials’personal attitudes toward the businesspeople’s problemsand concerns. For example, i an ocial is sympathetic to a

businessperson, or at least not antagonistic or hostile towardhim, obtaining a normal solution to the businessperson’sproblems becomes wholly realistic.

In order to avoid additional problems in one’s relations with ocials, it is essentialto ollow certain rules derived rom experience.

First, a person should be very cautious and not provoke or annoy the ocial,not provoke a harsh reaction, avoid bravado, take a respectul and “understanding”approach, and show a readiness to work to correct any mistakes that may have been

made.

For instance, in your dealings with ocials, under no circumstances should youtry to show that you are stronger, smarter, more resourceul, and so on and so orth.Tat is like waving a red cape in ront o a bull. Te ocials will get all worked up and start trying their hardest to prove just the opposite – that they are relevant, irreplaceable, andall-powerul.

Te best strategy seems to be to adopt a serious, principled,and respectul attitude based on a search or ways to solve the

problem in keeping with the law. Ten the ocial can moreeasily be persuaded to help, not hinder, the businessperson.In the nal analysis, it is not a given that the person you aredealing with is corrupt. It may be that the ocial is simply eager to augment the city budget. Ater all, exceptions doexist.

EXAMPLE:

Very often, business ownerssubjected to administrativeliability by a tax inspectorate as aresult of an audit will appeal theauditors’ actions to the superiortax authority. This is almostalways completely unavailing.Very seldom does the tax servicerescind decisions made by itssubordinates. The case goes tocourt all the same, but time canbe lost. If you are sure you are inthe right, it is best to go straight

to court.

CASE STUDY:

A small business that produceshoney was confronted withdemands that it donate money tohold a ballroom dancing contest.After negotiation, a compromise

acceptable to both sides wasfound. The company paid a farsmaller amount but became anofficial sponsor of the event,during which it could display itsname, promote its products freeof charge and supply honey for abanquet.



One modern school o negotiation holds that in order to achieve a good outcome ina negotiation it is essential to adopt an orientation toward the parties’ actual interests,not their undamental positions. When the question is ramed in these terms, the

parties can jointly work out a mutually satisactory solution to the problem. Tisprinciple can also be applied to our situation.

Without going into great detail, the simplest and most useul practical advice is asollows:

Draw up a plan or the upcoming discussion;•

Select compelling arguments;•

Have the necessary documentation ready;•

Anticipate potential objections rom the ocial and prepare responses to them;•

Decide which issues are ones you can yield on and which ones are matters o •

principle or you;Tink about what you might oer in exchnge, such as paving the square in•

ront o your store, laying out a small public garden across rom it, repairing thebuilding’s açade, and so on; andFind out beorehand what kind o person the ocial is, where he is rom and•

what his interests are, so as to nd common ground and a common languageor discussion, to make a avorable impression on him, and to avoid unnecessary psychological problems in your dealings with him.

Needless to say, these techniques will not have any eect on an inveterate bribe-

taker, but not all ocials are that unapproachable.

Various methods o exerting a psychological infuence on the ocial can be quiteeective, such as:

Pointedly switching on a tape recorder,•

Starting to videotape the encounter,•

Inviting witnesses to take part in an inspection or audit, or•

Displaying calm and sel-condence.•

In the nal analysis, i ocials don’t have any qualms about putting psychologicalpressure on businessmen, why not employ deensive countermeasures?




3Using civil society institutionsto protect business

Civil society institutions can be very eective in helping to deend business interests.

o this end, such institutions have to command respect in government agencies andbusiness circles alike. Tey have to be represented in discussion orums betweenbusiness and government at the municipal level, in the region or at the ederal levelas legitimate representatives o the business community. Te institutions may takethe orm o business councils attached to municipal administrations; various typeso noncommercial organizations representing the interests o small business; tradeunions; advocacy groups seeking to solve specic problems; business committees andcommissions operating under chambers o commerce and industry; and other kinds o business associations. Tese organizations must have considerable expertise in order toidentiy problems in a proessional manner and propose constructive ways o solvingthem, and be o interest to media as a source o inormation and competent expertise where business aairs are concerned.

Infuential non-commercial organizations can protectbusiness interests (or business association’s interests) mainly by sending pertinent appeals to government authorities andcalling attention to problems and potential solutions invarious discussion orums operated by government agencies,as well as through the media. In some instances, suchorganizations sponsor mass events aimed at drawing publicattention to a specic problem conronting businesses.

First and oremost, the involvement o civil society institutions in protecting a business owner’s rights oers ameans o depersonalizing the problem. Te act that a non-commercial organization can be more objective than a given commercial structure isespecially important when the matter involves a violation o the rights o a specicbusiness owner. Above all, this oers a way to protect a business owner as muchas possible rom attempts by the ocial who created his problems to settle scores with him. Moreover, some appeals rom business owners themselves to government

EXAMPLE:

One example is the involvementof noncommercial organizationsaround the country in the fightto lower the amount of the K-2adjustment coefficient. In manyregions, such opposition hasbeen successful thanks to thesolid professional efforts of specialists affiliated with businessassociations.



institutions are aimed at promoting their own interestsand oten inringe to some extent on the rights o otherparticipants in a given segment o the market. An appeal

rom a prestigious non-commercial organization, especially a regional or industry-based association o businesses or anationwide organization (or regional division thereo) to therelevant government department carries much more weightand guarantees a measure o objectivity in assessing theproblem. Te more infuential the organization, the greaterthe likelihood that eective steps will be taken to addressthe matter and that a detailed response will be received, as

opposed to a perunctory reply that sends the appeal back to the ocial who already gures in it.

In many cases, however, problems are common to a whole category o businessowners. For example, such problems might have to do with some regional issue thatimpedes continued business activity. Tey might also involve systematic violations o abusiness owner’s rights by ocials working in a specic department, such as action orinaction on their part that hurts business. In such instances, assistance can be providedto a particular business owner by resolving an issue that poses a problem or many o his colleagues.

Te ecacy o a non-commercial organization’s appeals to a government authority is contingent on many actors, mainly the infuence that the organization wields in the

region where the problem arose. Te political will o local and regional authorities tooster a avorable business climate (or, on the contrary, to maintain a decidedly corruptclimate) is o great signicance. In the omsk region, or example, the governor isvery progressive and enlightened and works hard to battle administrative barriers andcombat corruption. However, this example is sooner the exception. A list o regions in which the situation is just the opposite would be very impressive, and the question o exactly which regions would top the list is a challenging one.

Also important is how eciently an organization goes to work in drating lettersto government agencies, and whether it cites suciently compelling arguments andselects the right recipients. o a considerable extent, this is a unction o how eectivethe leader or group o leaders o the particular civic institution is, the resources at theinstitution’s disposal, the leaders’ understanding o the workings o such institutions,and the organization’s personnel resources.

Adequate resources are one o the most important conditions or an eectively operating noncommercial organization. It is not imperative that these resources takethe orm o outright nancial resources. Tey can also take the orm o assets provided

CASE HISTORY:

The Krasnodar region issued adirective stating that, whenever amarket is renovated, businessesmust without fail be provided withretail space within the bounds of amunicipal entity. The directive is apositive example of effective workby business associations.




by businesses (such as oce space, oce equipmentand communications), personnel support (orexample, the organization’s personnel might be paid

by a commercial structure, or a commercial structuremight provide consultants), and inormationsupport (the creation and maintenance o Internetresources or the provision o airtime by commercialmedia outlets or space in commercial publications).It is not dicult to nd various structures interestedin ostering a avorable business climate; successdepends on the degree o trust in those who initiatethe process.

Extensive involvement by activist business ownersin the operation o business associations can greatly enhance these business owner’s social status, ensurethat they will have civilized support in governmentstructures, and help them gain a certain amount o publicity. All these things will help businesspeopleprotect their businesses against unscrupulousocials.

It is important that the activities o a non-commercial organization not boil downto serving the particular commercial interests o a specic group, because this will

soon become evident and others will become wary o the organization’s initiatives.Prestige, infuence, and “political capital” are won through patient and persistent eortsto promote the social well-being o a broad range o representatives o the businesscommunity.

I a given region does not have any infuential business organizations and thebusiness environment is in need o substantial improvement, it makes sense or businessowners to join together and create a new and active noncommercial organization. Suchan organization can carry on its activities both independently or in partnership witha larger non-commercial business structure. For example, the organization can maketougher and more radical demands o the authorities with regard to some specicproblem and stage mass protests, while asking the stronger and more infuentialorganization (or example, OPORA, the Chamber o Commerce and Industry andothers) to search or a compromise and settle the confict.

CASE HISTORY:

A city assembly decided to privatizesome municipally owned propertiesthat had been leased to businesses.It approved a privatization plan thatincluded various facilities that had beenleased for many years. The businessowners had spent enormous amounts of money to renovate the facilities, mostof which were abandoned basements,and had set up business operations inthem and just begun to earn a profit ontheir investments. Then the propertieswere put up for sale at auction andbought by third parties. A conflict

arose between the businesses and localadministration officials. After negotiationsinvolving the business owners, businessassociations, and the government officials,a compromise was found. A regulationwas adopted spelling out procedures forreimbursing lessees for costs incurredin renovating facilities in the event thefacilities were to be auctioned off.



LAWYER’S COMMENARY Tere are three main principles that business associations

should observe:

Tey should be organized according to the regional •

principle (or example, the Business Alliance o the Southern District o the City o _____);Tey should be organized by proession (or instance, the •

Union o Book Sellers); and Tey should be set up to deal with a specic task (or •

example, an advocacy group to work with the local administration in revising an adopted regulation, such as the aorementioned K-2 coecient).

All methods o joining orces are good i they achieve their intended objective and help protect business interests.

Another option is to join an existing organization oropen a regional chapter o a national business association.By taking proper initiative and an active stance, businessowners can signicantly enhance the prestige o an existingnoncommercial organization in a given area.

Being infuential at the ederal level does not automatically provide the same standing at the regional and local levels i a business association ails to do any eective work in thoseareas.

Te activities o OPORA oer an example. OPORA is actually two organizations joined together under onebrand:

Te OPORA Union o Business Associations (the members o which are•

associations, unions, guilds and other noncommercial business groups); and

Te OPORA o Russia, a national civic organization o small and medium-sized•

enterprises (consisting o individual members and with 80 regional chaptersthroughout Russia).

EXAMPLE:

Business associations provide:

legal experts familiar with•

practical issues;access to legal information;•

equipment and technical•

support;contacts with the public and•

news media outlets that cangenerate public resonance;opportunities to establish•

dialogue with the authorities;exchanges of ideas with other•

regions;

authoritative opinions; and•

financial resources.•

CASE HISTORY:

To fight back against what wasin effect legalized fund-raisingfor so-called “municipal needs,”businesses established a CityAssistance Fund and contributedmoney to it. Whenever the localadministration asked one of the business owners to provide

assistance to the city, the requestwas forwarded to the fund andreviewed by its board of trustees,which decided who would get howmuch money, and when and wherethe funds would be sent.




In just a ew years, OPORA has become very inluential at the ederal level and participates in mostpublic consultative bodies under the auspices o ederal

agencies. More recently, ederal agencies have regularly sent various drat regulations and directives to OPORA or expert review. his makes it possible to exert inluenceon the adoption o critical decisions regulating businessactivity and to solve numerous problems.

Te ollowing is a list o succesul OPORA initiatives:

2003: Signicant amendments to the Law on the•

Police relating to inspections, which now require an

inspection order and the presence o witnesses. Teamendments also limit the powers o the ocers o theMinistry o Internal Aairs ocers to suspendbusiness owner’s activities.2003-2004: Te government adopted a decision•

declaring it inadvisable to set up special accountsor payments o value-added tax.2004: OPORA played a role in ormulating administrative reorms aimed•

at reducing redundant government unctions, a result o which was theabolishment o the Russian Grain Inspectorate.2005: Extrajudicial procedures or suspending business activities were•

rescinded (by amendments to the Code o Administrative Legal Oenses).2005: Te Prosecutor General’s Oce issued a directive establishing•

prosecutorial oversight o compliance with laws intended to protect the rightso business entities.2006: OPORA’s proposals were taken into account in the drat law on eorts•

to develop Russia’s small and medium-sized enterprise sector.

For the time being, however, many decisions are still taken without any eort toget eedback rom market participants, and the business community nds out aboutsuch decicions only ater it is too late to organize any meaningul opposition againstsuch ill-considered decisions. As a rule, such situations arise rom lobbying eorts onbehal o the commercial interests o infuential groups.

A recent example is changes in the laws regulating the sale o alcohol. Te changesentailed a ban on the retail sale o alcohol by sole proprietors, a ban that benetedlarge companies and led to a decline in business or many smaller enterprises. Teintroduction o the unworkable Integrated National Automated Inormation System

EXAMPLE:

The following is an exampleof the activities of the RealtorsUnion. All enterprises providingservices in the real estate sectorand belonging to the associationmay use a well-crafted package of documents that include standardservice contracts. In addition,members of the union sign a codeof conduct and a set of rules forproviding realtor services. A staff legal specialist works to protectrealtors’ rights and interests. Allof these measures are designed to

provide guarantees of good faithand legality in business activities,and generated respect for andtrust in the realtors on the partof both clients and governmentofficials.



(INAIS) to track alcohol products and the need (in connection with that system) tore-label all wine and liquor triggered an extremely serious crisis in the alcohol market. Acquisition o the costly INAIS system, on the production o which, Atlas, a company

with ties to the Federal Security Service, had a monopoly, became mandatory or allparticipants in the alcohol and perume markets.

During this crisis, the government ultimately adopted a proposal put orward by an OPORA representative. It called or allowing businesses to provide the Federalax Service with manually-generated inormation about alcohol turnovers. Adoptiono the proposal made it possible to restore operations o the alcohol market, at leastpartially, and to prevent the total paralysis o the market.

Te changes also aected perumes containing alcohol and led to a serious

disruption o the perume market. Tanks to the eorts o OPORA representatives,it only took our months to reverse the changes, making them no longer applicable toperume. Unortunately, the damage that was done will continue to take a toll on thesector or some time to come.

However, OPORA’s prestige at the ederal level has by no means translated intosimilar clout or its regional chapters, unless that prestige has been backed up withvigorous work in the regions. For their part, some regional leaders are not interested in working with OPORA representatives. Protectionism with respect to large monopoliesand other companies aliated with regional ocials is incompatible with any civilizeddialogue between business and government. High levels o corruption and the avoidance

o personal responsibility make it impossible to resolve many issues at the regional leveland orce the business community to turn to ederal authorities.

In such regions, a situation in which a business owner struggles to protect his rightson his own can result not only in the loss o his business and property, but also inincarceration. Sometimes it can even cost a business owner his lie. Systemic corruptioncan be battled only by systemic methods, and authoritative and infuential civil society institutions are major components o such a system. Support or these institutionson the part o business owner and their personal involvement in the organizations’activities are one o the most reliable means o protecting a business owner’s rights.




Conclusion

Unortunately, the ideas and recommendations proposed herein cannot be viewed

as universal. In each individual situation, a business owner has to decide or himsel which methods, and in which proportions, should be employed to achieve the bestpossible results in his dealings with ocials. Te principles cited above are basicguidelines or strengthening and deending the positions o business owners who areunwilling to take part in corruption in carrying out their businesses activities.

Te only undamental requirement is a consistent renunciation o corruption asa matter o principle. Pratically speaking, it is impossible to battle corruption and, atthe same time, use it to urther one’s own interests. Tereore, sooner or later businessowners will be aced with the need to devise a stratgey o action to combat corruptionor an anti-corruption strategy that can be ollowed by business associations.

Assistance in this extraordinarily important and worthy cause can be providedby a ramework anti-corruption strategy developed specically or regional businessassociations. Tis strategy can be examined in the appendix to this brochure.

A “ramework” strategy implies a strategy that describes general tools and areas o activity; the specic measures and actions to be taken must be devised by the businessowners themselves. In the nal analysis, no one has a better knowledge or sense o thesituation in your region than you.






Appendix: Anti-corruptionstrategies for business

Eorts to solve many problems in dealings between businessmen and ocials can be

simplied considerably by employing the principles o an anti-corruption ramework strategy.2 Tis strategy makes it possible to design and systematically organize anti-corruption activities that can be carried out by individual business owners or businessassociations. It also sets orth guidelines or enhancing the eectiveness o these activitiesand or reducing the individual business owner’s costs incurred rom participation inanti-corruption eorts.

Te overall set o proposed measures can be divided into three interrelatedgroups:

1. Guidelines for individual business practices

Tese guidlines are geared toward changing everyday interaction between individualbusiness owner and ocials o various government and municipal structures. Forbusiness owners, it is important that the ollowing principles be observed in their work and dealings with ocials:

Make every eort to comply with current regulations. Tis is the only way to1.deprive ocials o any grounds or demanding bribes and to achieve independencerom them.

Know the laws and other regulations governing your business and the oversight2.unctions o government agencies. Very oten, ocials are not very well inormedabout the details o the legal regulations that apply to their own activities and theactivities o businesses, and i a business owner’s disagreement is well-reasoned andbacked up with acts, they will “orget” about their original complaints.

2 Tis strategy was devised by the INDEM Foundation in 2004 within the ramework o theproject “Business and Corruption: Deterrence Issues in 2004” and with the support or Center orInternational Private Enterprise; it was rened and adjusted in light o the ndings o subsequentstudies conducted by the oundation.



Monitor changes in laws and other regulations. It oten happens that ocials3.cite business regulations that are no longer in eect. In such situations, this is aneective means o countering unjustied complaints.

Use “audit logs.” Some businesspeople say they provide a good way to keep track o 4.the requency o audits and inspections, and that the practice creates at least somebarrier to unchecked and irregular audits and inspections.

Search or, and make use o, available experience involving eective individual5.interaction with ocials.

Strive to pool your eorts with other business owners and search actively or6.common ground with them (other business owners do not necessarily need to beinvolved in the same kind o activity as you).

2. Guidelines for joint activities of business owners

Tis set o guidelines is the most important element o an anti-corruption strategy and is geared oremost toward business organizations (associations, groups, etc.).Individual eorts to counter corruption in national or municipal governmental andadministrative agencies are much more eective i they are pooled collectively. Incontrast, the business owner who tries to implement an anti-corruption strategy by himsel is the sole ocal point or all the pressure and dissatisaction o corrupt ocials. As we know, ocials at dierent levels almost always have at their disposal repressive

mechanisms and means o suppressing discontent. At the same time, that individualbusiness owner is working or the benet o all businesses, since he is trying to replacethe ineective, corrupt practices o government ocials with more eective, uncorruptmethods. He is thereore entitled to the support o other business owners.

Although there are many high priority measures that should be implemented asquickly as possible, the ollowing can be singled out:

Help ocials realize that thriving businesses benet them. Give ocials incentives1.to cooperate with business in anticorruption eorts. Tis is rather hard to do, butentirely realistic nonetheless.

Foster an environment o constant and comortable corporate communication.2.Tis is very important in order to maintain regular inormation exchange amongbusiness owners.

Collect and disseminate experience involving positive examples o anti-corruption3.behavior. Tis will make it possible to greatly enhance a business owner’s resistanceto outside pressure.




Develop, introduce, and monitor compliance with with ethical business norms and4.sanction entrepreneurs who violate them. Collective business organizations should work to raise business ethics in their regions and should exercise a certain amount

o oversight over their members’ compliance with such standards.

Set up an integrated service to monitor changes in the law and to communicate5.essential inormation to association members.

Develop “rapid legal response” services that can provide instantaneous legal6.counseling by phone or on site – a kind o “legal rst aid service” – in situationsinvolving violations o the rights and interests o business owners.

Realize the potential o business associations to collectively deend individual7.

business owners in court and in administrative proceedings. o this end, it mightbe necessary to create organizations that can provide legal protection to businessowners. Teir services could be paid or both in a centralized manner (i.e., directly through an association) and on an individual basis (using preerred rates or thebusiness association’s members).

Organize seminars, roundtable discussions and advanced training sessions (in8.economics, legal matters, accounting and other aspects o business operations)or small business managers. Ocials rom relevant government agencies mightbe invited to practical seminars devoted to specic topics. Such seminars can beused to provide practical inormation and recommendations concerning the legal

resolution o various issues. Tis will also make it possible to nd out sooner aboutimpending changes in the practices o such agencies and to better prepare orthem.

Oer social-psychology training sessions or small business managers, with a ocus9.on ostering the necessary climate within a team.

Collective business associations should oer inormation and consulting services to10.businesses on a wider scale. For example, they could seek out new elds o activity or small business and provide assistance in assimilating such activities. Many business owners look to collective business associations or consulting services inanalyzing market conditions and other matters.



Business associations, oundations and individual businessmen should support the11.activities o non-governmental, non-commercial organizations working to protectvarious rights, such as helping citizens and businesses uphold their property rights.

Te sheer act that social protection is available or private property rights willdevelop this economic institution, promote the solution o problems conrontingbusiness, inorm and instruct citizens, and improve their attitudes toward business.Experience shows that such activities are carried out more eectively by non-commercial organizations, not by business associations per se.

Cooperate with government ocials in improving and stabilizing national and12.municipal regulation and administration.

Communicate the negative eects o corrupt business strategies to business owners,13.

and explain the actors that give rise to corruption and its negative consequences.

Exert a stronger infuence on public opinion and ocials through the news14.media, which is a major resource through which civil society can infuence thegovernment.

Plans should also be made or measures that will take a longer time to prepare:

Opposing “milking-cow” businesses set up by ocials by staging collective boycotts1.(depriving them o revenue), oering alternative (competing) services provided by business associations, and pursuing criminal prosecution in court in instances that

violations o the law come to light.

Centralizing charitable activities at the local level by nancing estivals, providing2.public services and amenities, and so on through centralized oundations.

Putting pressure on government ocials with a view toward ensuring transparency 3.and inormation disclosure in the ollowing matters: municipal and regionalownership o real estate, municipal and regional land ownership, land-relatedtransactions, transers o buildings rom residential use to non-residential use, theprovision o non-residential acilities or use, and bidding competitions and tendersor orders and purchases.

Setting up special expert councils o business owners under legislative and4.executive agencies to conduct assessments and expert reviews o decisions by theseauthorities that aect business. Te degree o infuence exerted by such expertcouncils will depend on the eectiveness, proessionalism, and activism o businessassociations.




One area o activity or expert business councils is the conduct o regular anti-5.corruption expert assessments o all drat laws and regulations that are underconsideration by government authorities and might aect the interests o business.

Tis will have the eect o limiting government authorities’ ability to adoptdecisions that will encourage the development and expansion o corrupt practicesrom the outset.

Extending commercial loans to small businesses on preerential terms. Te terms6.o these loans must not be beyond the means o the relevant categories o businessowners and should complement the capabilities o administrations at various levelsand the banking system to make actual loans to businesses. In the initial stages,projects o this kind will not be protable, but over time they will be ully capableo making a prot or those who undertake them.

Such projects will have the additional anti-corruption eect o promoting swit7.and objective audits by the business community o businesses that apply or theseloans. Even i non-bank lending to small business cannot be arranged, the practiceo public audits is very important, since it can demonstrate or veriy the honesty and transparency o rms belonging to business associations.

Steps can be taken jointly with government authorities to create “business incubators”8.– i.e., business centers in which a newly established or developing business canobtain comprehensive assistance in dealing with various organizational issues (suchas registration, leasing, accounting, etc.). Te purpose o these structures would be

to simpliy market entry or beginning business owners. Government ocials couldbe encouraged to take an interest in such activities, which would be very useul tothem as well. More business means more acclaim, more political dividends, moretax revenue, more jobs, more resources with which to tackle social problems, andso on.

Gathering inormation about, and prosecuting, ocials who violate laws and the9.legal interests o business owners.

Organizing reresher training (at the regional level) or ocials o agencies that are10.in constant contact with business, and also, as a subsequent step, training personnelor national and especially municipal administration.

In implementing collective measures under am anti-corruption strategy, businessorganizations are advised to use the “oot in the door” approach. First, they need toreach agreements o a general nature with ocials, agreements that include a statemento intention to jointly tackle corruption, listing several areas o activity. Generating



the greatest possible publicity is key. Te next step should be to inorm the publico the newly created partnership. Ten, beore public interest wanes, put orwardsome sort o initial proposal. As the authorities begin to analyze that proposal and are

ocused on it, unveil another proposal. All o these measures should be carried out aspublicly as possible, so the authorities have less o a chance to renege on their originalcommitments.

It is also very important to publicize individual membership in business associations.For example, a sign stating that a business is a member o an association can be postedin the business’s oce. Such signs make it possible to instantly identiy a business whobelongs to the association and provide additional symbolic protection against illegalencroachments.

3. Strategic political and administrative measures

Systemic opposition to corruption at the regional level requires the adoption andimplementation o many decisions at the ederal level o government. Over the longterm, the business sector should also consider the ollowing elds o activity, whichinvolve problems that have a considerable impact on the ecacy o anti-corruptionpolicy in a given region:

Business associations should present valid arguments and lobby or redistributing1.taxes in their regions and at the municipal level.

Coordinated actions should be taken in privately owned media outlets against2.especially corrupt individuals.

Business associations should take part in elections in which they support3.anticorruption platorms and candidates working to combat corruption.

Alliances should be ormed between grassroots business organizations and national4.parties with the aim o taking and holding on to power at the grassroots level.

Business associations and non-commercial associations should monitor expenditures5.

o budget unds by national and municipal administrative authorities.





Documents

Indem Opora Brochure Eng 0407