Corruption and the Consumer

 Text of a presentation by Anwar Fazal, President of the International Organization of Consumers Unions at a Seminar organised by ALIRAN – a reform movement dedicated to justice, freedom and solidarity, held at Kuala Lumpur, Malaysia on 2 November 1980.

Friends, I like first of all to say that I am speaking here in my personal capacity as a Malaysian exercising his rights to participate in a discussion on an issue of great public importance in Malaysia.

My special areas of concern are the problems of consumers and I work full time advocating the interest of consumers through the International Organization of Consumers Unions (IOCU) whose headquarters is in Hague and which has its office for Asia and the Pacific in Penang, Malaysia.

In 1929 there was an election in Africa in the state of Liberia. The winner obtained 423,000 votes; the only problem was that there were only 15,000 voters. I start with Liberia as an example because the kinds of issues that I shall be focusing on are the kinds of things that were operating quite blatantly in Liberia then and still operating in many parts of the world. Some of you may know that Liberia was an extremely important place for the licensing of ships of all kinds and that the loose licensing system was a package that covered a great deal of corruption which combined with the cartels that controlled shipping gave consumers throughout the world, particularly in developing countries, a raw deal. It is this kind of pervasive global level corruption that I wish to talk about because it is a neglected area and because it has special relevance to our open economic system.

I would take a broader definition of corruption that takes it beyond the “buying-off type” – both of the small “kopi duit” and big “Lockheed” variety.

I like to call that the “White Corruption”. This “White Corruption” combined with “Black Corruption (the buying of favours) is rooted in a grossly inefficient economic machine, an economic machine in which powerful groups dominate over the small man, the individual consumer, and where there prevails a morality that puts power and money before the real needs of the people. You have heard this morning about the background of corruption; about how traditions of tributes, gifts, protection money and blackmail which were part of the concepts of taxation continue in new forms.

What is the Consumer’s Interest in all this?

By definition, “Consumers” include all of us. We are the largest single economic group in the country and yet the ‘sovereignty of the consumer’, that is supposed to exist in market economics like ours, only exist in the text books.

Instead, the economic systems gets corrupted and “pay-offs” are only a system of a larger economic malaise where:

·            Consumers are manipulated, and even lied to to purchase goods and services they do not need and cannot afford, and yet are often denied the things that are needed and which they can afford. Consumers are often captive of market forces who are motivated primarily by greed.

·            Consumers are sold goods and services that do harm to them and the fact of this violence against their body is not disclosed to them.

Greed and inefficiency add to corruption; the cost of that corruption is borne by us, the consumer – through higher prices, higher taxes,  waste and  harm to our bodies.

To give you an example of this kind of manipulation and violence I could take the whole manner in which the tobacco industry, for example, has managed to influence life styles. Advertising is a very important part of our economic system. But when you have a promotion of a known health hazard (had something that the World Health Organization (WHO) itself has descried as the most important health hazard in the world today) being permitted and encouraged to influence consumers, you are perpetrating a serious malaise. There is no fairness, to say the least, in a system where industry spends US$500 million promoting the virtues of a hazard but only US$5 million are spent by public authorities on how harmful it is. This is the kind of so-called “balanced information” consumers get through advertising. You have a choice that is weighted 100 times against your own real interest.

More recently in Malaysia you have seen petrol companies suddenly ferociously advertising their petrol as if they had discovered some new miracle that can drive your car. If they are not telling a lie they are not telling the truth either. I think it is unconscionable – where there is really little to choose between brands. One of the companies was asked to tone down the advertising in Singapore and I can understand in Malaysia too the Government is looking into that advertising.

We all need to look into the whole manner in which advertising is able to influence issues, to get us to buy things which are not necessary, not needed. If we are going to think in terms of an economic system that is fair to consumers, where they have a fair and real choice you have to give them an opportunity to take a good decision.

The second area that I wish to talk about involves the manner in which hazardous goods are promoted, goods that are quite obviously harmful and dangerous and sold to consumers without their being aware. I can give you many examples of pharmaceuticals and I can give you examples of pesticides. Early this year, for example, a study in Hong Kong showed that of 14 or 15 household insecticides of the vapouriser type, five did not meet the standards of the British Pesticides Safety Scheme and several more did not meet the US standards which are much more rigourous. Amongst the companies were products of Shell and Mobil. I checked up on the same product sold by Mobil in Malaysia and I was shocked to find that the product did not even contain a list of the ingredients. This is the kind of violence, I think that is the word of it, which is permitted, tolerated and undertaken by corporations which are very powerful, very rich.

We have been working in the area of pharmaceuticals. We have done work on the drug clioquinol, sold here as Mexaform or Enterovioform.

We’ve seen that the same companies give different kinds of information leaflets in different countries; they advocate different kinds of dosages; we’ve seen them withholding information on risks. It is not a question of one rotten apple. There is a pattern to exploit what is permissible and profitable, a morality that puts profits before health or even people. The corporations tell us it is up to the government and the consumers to make the change. They say if the government is not concerned, and you yourself are not concerned then do not expect them to be. The lesson for us that we have to realise is that we are part of a system that can be very heavily corrupt and that people are operating very often on the kind of system based on cash register ethics. And, mind you, this is being done even by the biggest operators of the world today, and is being done in Malaysia. This is of a great significance in Malaysia because we have an open market economy, which relies a great deal on international economic co-operation and especially private foreign investment. We have an open economy which permits goods,  investments, pursues a very liberal tax incentive scheme for the operations of multinationals. We boast of our free enterprise system as essential to our economy’s success.

I was surprised when I was working in government to learn that among the top investors in Malaysia was one of the Caribbean countries. I though, that is interesting – that one of the Caribbean countries should be one of the heavy investors in Malaysia. When I recovered from my naivety I realised that Malaysia was getting investments from one of those tax havens, that these big operators that were investing in Malaysia were in fact, you can say, hiding their profits from somewhere using the Caribbean country as a sanctuary to evade taxes and that is the money that comes into Malaysia. One could take the kind of view that these profits are legitimately earned but unfortunately these are often the fruits of gain from manipulation of international accounting through “transfer pricing”. This is a kind of corruption on a very large scale and difficult to discover. It does mean that taxes are not paid when they should be paid, it does mean that you don’t get the services that are provided out of these taxes. We in Malaysia, because of our own open economy, because we ourselves are seeing the development of our home grown multinationals have to be concerned in this kind of international corruption.

Let me give you some examples. These are well documented and have been previously published. They also involve incidents outside this region and I hope therefore, our press can have the courage to mention them.

In Switzerland, for example, one of the tax havens, Dupont set up a “distribution” subsidiary which raked off between 50 and 75 percent of the profit on the business it handled and they called the company there in their internal memoranda the “profit sanctuary trading company” and this was a channel for Dupont business in far-off Australia and South Africa.*

·         Between 1972 and 1976 Exxon, another multinational corporation, used a subsidiary in Bermuda to shelter profits and inflate prices for oil sold to utility companies in Canada and possibly elsewhere*.

·         Mobil sold oil from Saudi Arabia to a special “loss” subsidiary which through intricate accounting arrangements with the parent company enabled Mobil to increase its foreign tax credit. *

·         The drug companies Shering-Plough and Abbot Laborotaries booked 66 percent and 71 percent respectively of their 1977 worldwide profits in tax-free Puerto Rico. Abbot claimed an extraordinary 285 percent return on its hard assets on the tax haven island. U.S. corporations have stashed an estimated $6 billion in untaxed profits there.

These are some of the kinds of global examples which we in Malaysia who are dealing with multinational corporations will have to deal with. We have to be alert to these kinds of corruption, this kind of large-scale manipulation of money.

It is also significant that 40 percent of the total of the world trade is occurring between parts of these same corporations. This gives great opportunity for what is traditionally called “transfer pricing”, for manipulation of books, moving money from one place to another under all kinds of diverse guises – license and professional fees, whether they might be moving third rate equipment at deluxe prices. All kinds of possibilities are available and we had to be alert to these problems.

Let me say a few things about what we can do about all this.

In Malaysia the Government has been giving increasing attention to consumer protection. We have seen additional legislation. We have seen a great deal of increase in the enforcement machinery in the country. What we have not seen, however, is a vision, a philosophy of the consumer movement that takes it away from the chains of the Industry and Trade Ministry that gives it a kind of position where its perspective will have weight in the total context of our economic framework. Our experience has been that trade and industry ministries devote a great deal of their resources into promoting trade and industry and placing a consumer protection division or unit on this kind of mandate does not give it the kind of framework to operate in the way it really should – a real countervailing power. We need, therefore, to upgrade the whole question of consumer protection so that we can act on the broader current issues that we need to deal with.

The second area for attention arises out of the increasing government intervention in the economic sphere. We are getting a category of corporations also that are heavily sponsored and protected by government and even political parties. These corporations deal with more than the traditional public utilities. When we have to deal with private corporations that are owned directly or indirectly by government, that are protected by government, we have the opportunity for developing new ethical corporate behaviour, but if they degenerate to the level of ethical behaviour of the private sector, we have a serious problem because fighting these companies becomes fighting the government.

My third concern is the whole area of secrecy – secrecy with regard to information being available from government and information being available about the activities of corporations. If we are looking for ideas by which we can deal with these corporations, several; things are possible.

Because of our political structure we could consider again a system which the Scandinavian countries have found quite successful, the system of ombudsman, where a public- appointed official who is given special powers to investigate on behalf of the citizen and is independent enough to gain information from government and also from corporations. There are different kinds of ombudsman. If you take for example, in Norway there are special ombudsman who deal with consumer interests. There will be an ombudsman who might deal with a particular department. The ombudsman is a high level official, who can get access to files, information and deal with administrative procedures, about maladministration, etc. He is a social auditor who deals with complaints and abuses in quick equitable ways. We have at the moment a Public Complaints Bureau against which I have heard complaints that it is too much a referral service. I think it needs to be more visible and its credibility, authority and accountability needs to be enhanced so that it can act with much more sensitivity to the needs of our citizens.

The other thing that I think should be examined is some kind of Freedom of Information Act (in  USA it is called the “Sunshine” Act). We know how difficult it is to get information and the Official Secrets Act in our society could be an easy excuse. It is too easy under this particular Act to keep back information which is of public interest and a lot of information that would give ideas for civic action for a better society may be hidden from us. Corruption can be hidden from us. We can rethink the official Secrets Act, providing in it mechanisms whereby information about hazardous goods and public interest issues can be available and those can be linked up with the idea of ombudsman in order to provide the necessary safeguards.

The other thing which I think again needs to be looked at is our Companies Act. How we can ensure that the dealings within the corporations are at arms length especially companies that are associated and particularly about money that might be used for pay-offs, money that might be used for political contributions. I think there must be a mechanism whereby this kind of information is available.

In summary let me say we can begin to eliminate greed and inefficiency though greater governmental and corporate accountability. We will need to consider a new ethical framework for the conduct of our economic affairs if our needs as consumers are to be met and mean real things to real people.

We need also to consider greater openness in government and to examine new mechanisms for ensuring this greater governmental and corporate accountability. We need also to ensure how citizens, as consumers can participate and ensure this process.

Because of my own bias and interest in this particular field, I probably have not covered many more areas and I shall be very happy to comment on them if any of them are of particular interest to you.

I thank you very much for this opportunity to share perspectives on this important area of concern.

Back to Speeches