In June, Accountability Lab was proud to take a group of inspiring youth activists to the World Bank Group’s International Corruption Hunters Alliance 2023 Forum in Ivory Coast. This is part of a series of blogs from those participants.

Written by Simisola Samuel, Afia Poku, Liza Young, and Becky Majani

Small and medium enterprises (SMEs) are pivotal for economic growth and employment. According to the World Bank, SMEs represent about 90% of businesses and provide more than 50% of jobs globally. SMEs contribute over 40% to the national income in emerging economies and attract domestic and foreign investment. This raises the need to consider the role of compliance in SMEs.  

Current hindrances to SME compliance

SMEs face two main challenges: accessing funds and corruption. The most common forms of corruption are fraud, nepotism, bribery, extortion, money laundering, trading in influence, procurement or contract favoritism, price fixing, and conflict of interest. For SMEs in Africa, corruption issues largely stem from interactions with the public sector, characterized by the influence of state policies, kickbacks, and procurement of contracts that benefit public sector officials. These interactions are now synonymous with business, undermining corporate governance structures. A holistic approach that drives integrity and regulatory compliance frameworks is required to tackle corruption effectively. 

Anti-Corruption Collective Action: The Case for SMEs

‘Anti-Corruption Collective Action’ refers to members of the private sector and other stakeholders coming together to address corruption issues. It is a tool used to enable compliance in SMEs. The World Bank defines ‘Collective Action’ as a collaborative cooperation process between stakeholders. This process increases the impact and credibility of individual action, brings vulnerable players into an alliance of like-minded organizations, and levels the playing field. Collective Action can complement or substitute for weak local laws and anti-corruption practices. 

Some of the benefits of Collective Action include an agile approach tailored to stakeholders’ needs and resources, especially SMEs with limited capacities to develop and implement robust compliance programs, enables collaboration and peer learning, as well as fosters a collaborative problem-solving approach to addressing integrity challenges; offers SMEs greater bargaining power, leverage, and influence to resist corruption; creates a level playing field in which no business has the advantage to engage in bribe-giving; and eases the integration of SMEs into global value chains, given that multinationals bound to strict anti-bribery rules prefer SMEs that demonstrate high ethical standards.

The Ethics 1st certification model developed by the Center for International Private Enterprise (CIPE) is a successful example of the Collective Action approach. It aims to improve transparency and scale access to African SMEs that demonstrate a commitment to the highest standards of business integrity. For more examples of Collective Action initiatives, the Basel Institute on Governance hosts the B20 Collective Action Hub–a worldwide database of all the initiatives.

Recommendations for practitioners

There are a variety of tools and practices that enable SMEs to comply with anti-corruption measures; therefore, SMEs should:

1. Develop and implement a clear and comprehensive anti-corruption policy that sets the tone for ethical business practices within the organization.
2. Identify and assess potential corruption risks in their operations and supply chains. This can help them prioritize their efforts and allocate resources to areas where corruption risks are highest.
3. Educate their employees about anti-corruption laws, policies, and best practices. Regular training can create awareness and ensure employees understand how to comply with anti-corruption regulations.
4. Establish and enforce internal controls and procedures to detect and prevent corrupt practices. This may include financial management, procurement practices, and due diligence in selecting business partners and suppliers.
5. Create a culture of accountability where employees feel comfortable reporting any suspected corrupt activities. Whistleblowing mechanisms can provide a safe and confidential channel for employees to report corruption without fear of retaliation.
6. Engage with business networks and industry associations that promote ethical business practices and transparency. Collaborating with like-minded organizations can provide access to knowledge, resources, and support.

These tools help SMEs in their efforts to comply with anti-corruption measures but do not eliminate the risk of corruption. Implementing such measures is crucial in creating an environment of integrity and transparency that establishes best business practices and can lead to domestic and foreign investment. 

Compliance as a path to increased FDI

In conclusion, a combination of efforts towards improving compliance and transparency in SMEs is a crucial way to increase foreign direct investment (FDI). Foreign investors who often have intense regulation and compliance obligations are keen to ensure that any SMEs they invest in or partner with conduct their business in a way that will not incur any sanctions on account of investing in an SME without any strong compliance procedures. 

Simisola Samuel / Afia Poku / Liza Young / Becky Majani