Why These Industries Are Prone to Corruption

Corruption is a problem all over the world. Soccer’s governing organization, Fédération Internationale de Football Association, or FIFA, is just one example, with several executives found guilty of racketeering and money laundering in 2015. The college admissions world was rocked in 2019 after several high-profile celebrities faced legal trouble—including charges of bribery and several types of fraud—for illegally arranging to have their children admitted to top universities. In this article, we’ll look at some other industries that consistently rank high on corruption indexes and why they have such a problem.

Extractive Industries

Mining, oil, and gas—broadly known as the extractive industries—inevitably end up with a corruption problem due to the nature of the business. Extraction companies search all over the world for valuable resource deposits to dig up and sell. To do this, they need permits to conduct their search and then secure the rights to dig up the deposit. This means there are various officials at the national, regional, and local levels that can make getting at a deposit more or less difficult—setting up a principal-agent problem. In this case, the extraction company might fall into a corruption trap if it chooses to pay bribes in order to access the deposit.

Depending on the deposit, the bribes are likely a fraction of the profits that the company expects to realize, so it makes economic sense. Officials are generally tasked with watching out for the public good and ensuring the deposit is extracted in a way that is environmentally and economically responsible, so the bribe might also be used to convince them to look the other way during the extraction process. This means that the general public does not get true value from the exploitation of the mineral wealth and is left with environmental and economic losses, while the official and the extraction company take the gains.

Construction

Construction has a very similar principal-agent problem as the extractive industries. The largest construction projects in the world tend to be infrastructure projects tendered by governments. These projects are assigned through a bidding process where companies submit bids to be assessed by a few key officials. 

In theory, the company that can do the best job at the lowest price wins the competitive bid. Again, however, it makes economic sense for marginal companies to pay the selection committee members to win a lucrative construction contract. Worse yet, corruption in the bidding process often leads to shady practices with these companies cutting corners, overcharging, and so on.

This is how critical infrastructure (like schools and hospitals) is sometimes built with concrete that you can crack with kicks and plumbing with no venting. This even leads to loss of lives in the case of building or bridge collapse. You hear news about this all the time across the globe.In 2022, a major apartment building in Florida collapsed and led to many lives lost and two large settlements in court, $83 million for the owners and about $1 billion for the victims and families.

Transportation and Storage

Most of the corruption indexes use the United Nations classifications for economic activities. So “transportation and storage” refers to land, sea, and air transport. It includes pipelines. The movement of goods is, of course, highly regulated to ensure that illegal goods—as defined by the nations they are moved through and to—do not get through. The inspection of goods is carried out by officials and agents tasked with upholding the law for the public good.

Unlike the previous two industries where corruption seeped in at the decision-making level, transportation and storage are ripe for corruption at the enforcement level. In situations dealing with illegal goods, the people trying to move the goods through customs or other enforcement structures are generally organized crime rather than formal organizations. However, there are situations where corporations get involved in corruption and bribery as well, particularly when a bribe can speed up customs clearance or the issuance of an import/export certificate. 

Investing and Finance

There are many situations where the suppression of or access to information leads an individual or organization to throw money at the problem. Political circles are rife with leaks and suppression, for example, although not all of these are motivated by cash. For investors, however, it is corruption around the information and communication in the finance industry that is most concerning.

In finance, information is money, particularly when it is not public, and institutions and investors are not above paying to profit from it. There are, of course, consequences. Martha Stewart was put in jail in 2004 for acting on non-public information. Hiding information from the public also led to the downfall of Enron and the accounting firm Arthur Andersen.

Of course, corruption in finance is not limited to the flow of information. Bernie Madoff, a prominent Wall Street figure and former market maker, pleaded guilty to fraud charges in 2009 for running a massive Ponzi scheme that bilked wealthy investors of billions.

In 2015, Malaysia’s then-Prime Minister Najib Razak was accused, with others, of funneling more than $2.7 billion from 1 Malaysia Development Berhad to their personal bank accounts. This 1MDB scandal ensnared the investment banking firm Goldman Sachs, as it had raised funds for the 1MDB fund and generated an estimated $600 million in fees, although Goldman Sachs has since disputed that figure. Nevertheless, in 2018, one banker pleaded guilty to charges while a second one faced a series of new bribery and money laundering charges.

The Bottom Line

We looked at some of the worst industries in this article, but corruption is like life, in that it exists pretty much anywhere that conditions are favorable. If a few people are entrusted with power or information that is valuable to another entity that is not above breaking the rules, then the odds are good that corruption can seep in. That entity can pay to get the decision, approval, or information it needs to realize a greater profit in the near future. The corrupt entity wins, the agent gets paid, and the public as a whole loses out.