The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

The Abuse of Insider Knowledge as a Form of Corruption 65
minister as used to be possible under communist regimes. But he can make use
of his insider knowledge by tipping off his friends. The use of insider knowledge
by members of the council of a country’s central bank, for instance, can be worth
billions of dollars. If the central bank of the United States lowers the interest rate
by one percentage point, it causes the Dow Jones index to rise by several points.
And someone who has this knowledge 24 hours earlier than everybody else could
certainly make profits to the tune of millions of dollars from stock-trading. Profits
made from corruption and the abuse of information known only to the individual
concerned by virtue of his official function violate economic law and economic
ethics for three reasons: corruption and the abuse of insider knowledge violate the
principle of parity of rights, the principle of economic efficiency, and the principle
under the democratic rule of law that all citizens have the democratic right of
equal access to political and administrative power and official institutions, and the
right to hold private and public holders of office accountable for their actions in
office.
By means of corruption, those who practice bribery gain an unjust advantage
over others. If this were not the case, they would not “invest” in corruption. This
procurement of advantage is supposed to be prevented through the rules of public
tendering for state building projects and through the public advertisement of positions
by state or private sector employers. What all forms of corruption and insider
knowledge have in common is not just that they violate the position of trust and
the principal-agent relationship, the relationship between beneficiary and fiduciary,
but also that they set perverse incentives, which divert the individual’s attention and
effort to precisely those activities which are not in the interests of the common good
nor the good of the individual’s employer.
The theory of perverse incentives, which has documented this effect for insider
trading on the stock exchange, does not apply to the capital market alone.
The corruption-induced striving for insider knowledge creates perverse incentives
among workers who, instead of concentrating on their actual tasks, look out for
ways of procuring advantages by exercising their official role or their professional
position corruptly.
For the entrepreneur and manager, this prompts the necessity to combat all forms
of corruption, at home or abroad, because they are not in the long-term interests
of the firm. Even where a firm can attract contracts by paying bribes to a foreign
middleman, the repercussions of this practice of bribery on the internal economic
ethics and business practices of employees are so negative that it is better dispensed
with. The acceptance of offshore corruption, of corrupt practices in countries beyond
the scope of domestic law, compromises the moral integrity not only in one’s own
country but also in one’s own firm. 31
31 The borderline between legal commission payments and bribes is not always clear-cut. Consider
the following scenario, for instance: you are taking your firm into a new market in which you have
never operated before, and in which your firm has no business contacts of any kind. Your firm sends
you as manager to a Latin American country, where your remit is to organize the distribution of its
products. Mr X from a supplier firm gives you the name of a Mr Y in Nuevo Berlin, who (he assures