Shakedown Case

CASE STUDY: SHAKEDOWN Statement of the Problem: What should Zhuk do to keep his business and to avoid extortion from government officials? Objectives: To provide solutions on how companies in Ukraine can fight corruption and face threats of extortion. To apply business ethics and corporate social responsibility Alternative Courses of Action: a)Pay – Extortion Zhuk can pay off the Ukraine Tax Authority officials. After all, he would not be breaking the law if he did so. He will be a victim of extortion and succumbing to it is not a crime.

He will consider the bribes as additional tax he has to pay for doing business in Ukraine and carry on with his company. He will be able to provide jobs for locals as his employees and keep all his long term investments in Ukraine. If he allows himself to be a victim of extortion this may lead to further bribery and harassment in the future. He will be placing the business to the hands of corrupt government officials. This will place his company in a bad business environment b)Pull Out – Quit Business in Ukraine

If Zhuk pulls out he would not contribute to corruption but he will give up his dream to establish a company in Ukraine. He will also be responsible to his local employees who will lose their jobs. He will also deprive the improvements in the software industry in Ukraine when he pulls put his company. Conclusion and Recommendation: American business people generally prefer to conduct business in a way that’s consistent with the US and local law. They would prefer not to make illegal payments to anyone. Zhuk may have difficulty in imposing his cultural values on others, particularly in Ukraine where bribery is not illegal.

However, if it’s his desire to create opportunity, to bring hope, and to help build a modern society, he should not allow himself to be a victim of extortion which may lead to further bribery and harassment in the future. He will be placing the business to the hands of corrupt government officials. This will place his company in a bad business environment as well. The most effective way to reduce the underlying causes of corruption would be to enhance the predictability of government regulations and intervention. Suggested Initiatives: ) Improve regulation and inspection procedures. In order to increase confidence in the government’s regulatory role in the economy, efforts should be made to: simplify government regulations and inspections; systematize and unify the work of inspection agencies and the procedures for conducting inspections; publicize clear and understandable information on inspections and the rights and duties of inspection agencies, and make taxation bodies liable for unfounded verifications, or establish an agency that registers inspections and limits the number of inspections.

Many businessmen believe this would discourage frequent inspections. 2) Unified business tax In order to keep businesses out of the shadow economy, urgent measures are needed to reduce the taxation pressure and replace at least a portion of multiple taxes with a unified business tax. The high cost of doing business in Ukraine also relates to the key objective of inspection agencies which is to extract the maximum amount of money from a company.

In order to cope with this problem, tax compliance should be simplified, and control by inspection agencies should be made transparent. 3) Improve enforcement of “conflict of interest” legislation. Legislation that disallows conflicts of interest is already in place. These laws prohibit officials and MPs from using their positions to assist individuals or legal entities in entrepreneurial activities or in receiving subsidies, subventions, and loans or other benefits. However, the obscurity of these regulations leaves them unenforced. 4) Reform the status of civil servants.

There is no consensus in the business community about whether increasing the salaries of civil servants will reduce corruption. However, most businessmen agree that the status, responsibilities and benefits of civil servants should be increased significantly, while their number should be reduced. 5) Develop business associations Rather than relying on illicit negotiations with government officials that take place behind closed doors, entrepreneurs suggest developing business associations that would effectively lobby their interests in the parliament and the government.

In a survey conducted by the Ukrainian Free Economy Foundation, almost 75% of the managers surveyed said that the most effective ways to advance their business interests were personal contacts and friendly relations with government officials. Fifty-nine percent said they would rather prefer to pay to be members of an effective lobby. Sources: Managing Business ethics 3rd edition by Nelson and Trevino Web-site: http://www. unglobalcompact. org , http://www. un. org. ua/? p=gc