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Are Italians so prone to corruptions?

When the Italian ministry of justice resigned, three weeks ago, amid a corruption charge, nobody was shocked either in Italy or in the rest of the world.

This was only one of the hundreds of corruption’s investigations that Italian authorities have promoted towards politicians, bankers and corporations. Are Italians so prone to corruption?

Data shows that the threat from accounting fraud, money laundering, intellectual property (‘IP’) infringement , corruption and bribery has increased and remains one of the most problematic issues for businesses worldwide, with no abatement no matter what a company’s country of operation, industry sector or size. Despite the attention of regulators and companies, the actual level of economic crime and the associated financial and non-financial damages have not declined – one out of every two companies become victim of economic crime in the last two years.

Companies continue to develop systems and controls to detect and to deter economic crime but analysts think that fraud controls alone are not enough. An ethical corporate culture plays an equally important role in deterring fraud. For that reason many companies have adopted a company code of conduct. However even that is not enough.

Figure 1: Companies that have reported frauds 2003-2007

Figure 1 shows the number of companies that have reported fraud in the period 2003-2007 and compares Italy to the rest of the world. Data comes from a biennial survey brought about by PricewaterhouseCoopers.

There are two clear facts that arise from the graph: 1. that Italian reported percentage frauds are lower than the European average 2.that this percentage has increased in 2007. The first fact is surprising: Europeans do not consider Italians trustworthy and Italians do not trust each other, as the Eurobarometer survey shows. However that belief can not be clearly justified by fraud and corruption.

To understand the second fact is even more complicated. On one side analysts talk about a ‘fraud controls paradox’: when controls are introduced the number of frauds detected increases almost immediately and declines only over time. However this paradox should affect all European countries and not only Italy whose number of controls in place is close to the one of the other western European countries (Ernst&Young FIDS Survey 2007).

On the other side it might well be, instead, that the controls were introduced but they were seriously implemented only in the last years. The perception, living in Italy, is that indeed the effort to fight frauds has clearly increased lately. The true Italian bug, in fact, is not the lack of a proper legislation but the lack of its enforcement. Forms of controls and prevention of corruption and frauds have been introduced but never really implemented: More simply the data might show a change of culture towards crime. Companies, which usually tend to deal with corruption internally, threatened by the possible lack of reputations that they might suffer, have started reporting an offence to the prosecuting or regulatory authorities. That change of behaviour might well be due to the fact that the average loss reported by Italian firms, because of frauds and corruption, is around 4.4 million dollars while it is around 2.5 millions dollars in Europe. And it is even more astonishing to know that the probability of recovering most, or part, of the loss is very close to zero. Again it is the lack of the certainty of justice and punishment that is responsible for the high level of crime.

Lack of enforcement

That the lack of enforcement is a peculiarity of the Italian system is true even when we look at contracts. A recent survey developed by the World Bank has built quantitative indicators on business regulations affecting 10 stages of a business’s life: starting a business, dealing with

licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business.

The data on starting a business are based on a survey and research investigating the procedures that a standard small to medium-size company needs to complete to start operations legally. These include obtaining all necessary permits and licenses and completing all required inscriptions, verifications and notifications with authorities to enable the company to formally operate. The time and cost required to complete each procedure under normal circumstances are calculated, as well as the minimum capital that must be paid in under the assumption that all government and nongovernment entities involved in the process function without corruption.

Italy is ranked 53 overall for ease of doing business (Germany 20 and Spain 38) but it is ranked 155 (Hong Kong, is the top ranked economy followed by Luxembourg, Latvia and Singapore) overall for enforcing contracts: you need 1210 days on average from the moment the plaintiff files the lawsuit in court until the moment of payment in Italy, almost four years.

If enforcement is the key word why do not we see a bigger effort to change the system? I think that should be one of the questions our politician should urgently answer. May be that should have been the question to ask to our last ministry of justice.

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