The illegal economy and its impact on global business risk

Mitigating the power of the privileged is difficult, but not impossible.

The impact of global risk is more devastating than we think. Emerging economies around the world worry about business risk as they struggle to control economic disparity – which provides the conditions for such risks to arise.

Illicit trade, organised crime and corruption are major challenges today. Instances of state failure, terrorism and geo-political conflict are directly proportionate to rising instability, nepotism, chronic negative business trends and systemic economic breakdowns. Financial mismanagement, money laundering, racketeering and tax evasion have severely undermined the efficiency of global governance, increased global risk and adversely affected global stability. Meanwhile, incentives to operate in such parallel economies continue to increase both dangerously and globally.

This has been detrimental to economic development, as it raises the cost of doing legitimate business within and between countries. It also reinforces the power of the privileged. In most developing countries, due to the lack of a robust legal framework, illegal networks have continued to grow. They use the international financial system to evade tax authorities: crippling the revenue system in their home country.

There are direct and indirect impacts of global risk on governments, citizens and businesses simultaneously. Erosion of civil services, revenue losses due to a small tax base, the threat of business volumes suffering from political meddling, weaker institutions and corruption are some of the major setbacks a society faces.

Internally, the society experiences moral decay, massive brain drain and diminishing intellectual capability, as the motivation to stay positive declines rapidly due to the continuous moral and ethical brainwashing of society. Externally, such countries are isolated, tourism diminishes and the entire society is marginalised.

Finally, all of the above affect business and economics due to higher transaction costs, need for higher security for the working classes, bribes, kickbacks and illegitimate sales. The cost of capital and investment goes up and there is constant pressure to participate in corrupt practices, leaving a country with zero competitive advantages on the global scale.

Mitigation of such risks is a slow process; slower than it should be. Once greed becomes a part of everyday life, those involved in illegal activities may not believe that they are doing wrong. Furthermore, illegal business and trade makes people a lot richer, a lot quicker. Such persons, once in influential positions, may oppose systemic transparency; as it may mean lesser profits and higher costs for them.

To counter such risks from arising, major focus areas should be education, ethical training, compliance management and a defined code of conduct for all businesses. Some illegal trade, if brought under legal control, can be helpful in raising tax and cutting down on corruption. For example, the sale of alcohol in Malaysia is legalised and it earns foreign exchange for the country. The revenue benefits the people only, as it enlarges the tax base without making the common tax-payer suffer. It also supplements and helps the tourist industry.

Another quick solution requires revealing all sources of capital for businesses and disclosing them as public information. All multi-national companies must also be made to ensure public country-by-country reporting of all profits, sales and taxes. Organisations must ensure that their staffs attend anti-money-laundering training programs regularly. Individual performance evaluations in organisations should transparent, and all data should be available to customs and law enforcement agencies; subject to certification of such authorities as capable, prudent and in abidance to the law. Businesses and individuals – whether public or private, self-employed or salaried – should disclose their taxes, be accountable to law, and be subject to legal review and action.

Finally, law enforcement agencies should have the authority to take action against mafias and punish the influential persons behind them. Private sanctuaries must be exposed honestly and ethically by the media, as no one is above the law. The physical movement of goods must be tracked and assessed more carefully, and supply chains monitored.

Everything can be brought under legal control, if there is general willingness to do so. Greed has no limits and greedy businesses don’t last long –there is always a catch somewhere and always a loss. We need to look on the inside, clarify business rules, imbibe good business ethics, and find solutions to administrative failures by seeking answers from within the ambit of business law around the world.

The writer comments on international relations and foreign policy

Published in The Express Tribune, April 23^rd, 2012.