Should Customer Strategy Solutions pay off the tax officials?

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by Phil Bodrock •
Should Customer Strategy Solutions pay off the tax officials?
Four commentators offer expert advice.
Reprint R0503A

HBR C ASE S
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by Phil Bodrock
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HBR’s cases, which are fictional, present common managerial dilemmas and offer concrete solutions from experts.
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A young American businessman in a developing country discovers that nothing gets done unless palms are greased. Should he play the game by his personal ethics—or the
local rules?
“How many of them were there? Were they armed? Did they confiscate any papers or disks?” Pavlo Zhuk suddenly realized he was shouting, though for once the telephone
line to Kiev was crystal clear. Zhuk was in a state. The grandfather clock in his sprawling farmhouse in Redwoods, California, had struck 6 AM , and the young
software entrepreneur had just come down to the kitchen when the telephone startled him. His friend Kostya Hnatyuk, who headed Zhuk’s software development center in
Kiev, was calling to say that the center had had visitors that day—and not very welcome ones. Hnatyuk patiently repeated what he had said a moment earlier. “I’m on my
way to the office, Pavlo, so I don’t have all the details. Taras Borovetz called me 15 minutes ago as I was getting off the plane and said that three or four UTA agents
showed up this afternoon. That’s Ukraine Tax Authority. Only one of them, a
woman, entered the office. I suppose the men could have been armed, but Taras didn’t say so—” “What did the woman say, exactly?” Zhuk interrupted. “She said that her
name was Laryssa Ossipivna Simonenko. She claimed to be a UTA special agent. She told Taras that she and her boss, who heads something called the Special Audits
Department, want to meet with us soon,” Hnatyuk replied. “She says that we haven’t filed five of the 17 schedules we were supposed to last quarter and we owe the
government tax arrears of 86,954 hryvnia.” Zhuk quickly converted the figure in his head: close to $16,000. “It’s a shakedown,” Hnatyuk concluded. “I can’t believe it!”
Zhuk cried. Had his life somehow turned into a B movie? “Why are they picking on us? We did everything by the book. How much time did she give us?”

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an adjunct professor of management science at Northeastern University in Boston.
“She said next week. Don’t worry, Pavlo. Our accountant can dig out all the tax papers, and I’ll keep the lawyer on call in case Simonenko drops in again. Meantime,
I’ll figure out who she is and whether she’s really conducting an official inquiry. She could be running an extortion racket on the side…” Hnatyuk’s voice trailed off;
then he added: “I’ll get our security guy to post two guards outside the office 24/7, starting tonight. No one else gets in unchallenged.” Zhuk was rattled by the
thought of the Ukraine Tax Authority laying siege to his company’s office. Standing barefoot in his kitchen, he felt powerless to deal with the situation. “Look. I’ll
try to get on that Lufthansa flight out of LAX this afternoon. I should be there before the weekend. Maybe it’s just a misunderstanding, but if we’re in the tax
authority’s crosshairs, this could be big trouble. I’ll call you again before I head out. Tell Taras and the other guys not to panic.” After putting the telephone back
in its cradle, Zhuk took a deep breath. He stared out the window toward the woods, hoping to spot the family of foxes he’d seen playing there a few days earlier.
Waiting for his coffee to brew, he went out for the newspaper and scanned the headlines. He stopped again to take in the countryside. It dawned on him that for the
first time in memory, he wasn’t looking forward to packing his bags and heading for Kiev.
Back in the USSR Six months earlier, Zhuk could hardly wait to land in Kiev. When the plane descended through a thin layer of clouds, he saw the setting sun reflecting
off the Dnieper River and Kiev’s golden domes. Without a doubt, this 1,000-year-old city was the most beautiful sight he had ever seen from the air. Sacked by the
Mongols in the thirteenth century and virtually destroyed by the Nazis and the Red Army in the twentieth century, it had still clung to much of its magnificent
Renaissance and Baroque architecture. Zhuk had his own connection with Kiev’s past. His parents had fled the city at the end of World War II and by 1951 had found their
way to the United States. The family first settled in Cleveland but moved in 1973 when Zhuk, Sr., an engineer, accepted a job in California. Pavlo, the last of six
children, was born the same year and grew up speaking English and Ukrainian at home. He was the academic star
of the family. After graduating with top honors from an engineering school on the East Coast, he worked for three years in Silicon Valley as a systems analyst and then
entered an MBA program at a premier West Coast school. He hadn’t even graduated when he decided to set up his company, Customer Strategy Solutions, to develop software
for order-fulfillment systems. That proved to be a lucrative niche. After five years, the start-up employed 35 people, generated annual revenues of $40 million, and
reported profits. Then, with the help of his friend Hnatyuk, Zhuk drew up a plan to create a software development center in Kiev. Hnatyuk, a British national of
Ukrainian descent, had graduated from a Newcastle polytechnic as an electronics engineer. The two had met years before while Zhuk was summering in the UK as an
exchange student. Their Ukrainian roots—and love for soccer—had kept them in touch. Before joining Customer Strategy Solutions, Hnatyuk had been based in Kiev as the
vice president of a German company that sold seeds, pesticides, and fertilizers in the Commonwealth of Independent States. His company had been doing business in
Ukraine for more than six years but hadn’t turned a profit there until recently. When Zhuk had called a year ago to chat about his desire to set up a software
development center, Hnatyuk immediately volunteered to quit his job and help set it up. Without discussing it much, the men both knew they were motivated by a feeling
that this wasn’t just about business; something more basic was at stake. Ukraine was a land where, due to two world wars, an ideologycreated famine, the Holocaust, and
political purges too numerous to list, 17 million people had lost their lives during the twentieth century. A tenth of Western Ukraine’s population, including one of
Zhuk’s uncles and many of Hnatyuk’s relatives, had been deported to Siberia. Zhuk and Hnatyuk’s return was an assertion of resilience. They were driven by a desire to
create opportunity, to bring hope, and to help build a modern society in Ukraine. Zhuk thought he was well on his way to proving the naysayers—those who had pointed
out the political turmoil and corruption in Ukraine and told him he should think twice about setting up shop there—wrong. He appreciated their concern but thought it
was overblown. As he’d told his 80-year-old father
Phil Bodrock (p.bodrock@neu.edu) is

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at Thanksgiving, he felt quite at home in the country of his ancestors.
Don’t Know How Lucky You Are As Zhuk disembarked from the aircraft at Borispol Airport, he felt less at home in Kiev than ever before. Hnatyuk picked him up in his
beat-up Land Rover and seemed to think that despite the extortion threat, it was business as usual. “Check it out,” Hnatyuk said as he drove toward the city apartment
they shared whenever Zhuk was in town. “Another McDonald’s, and a new Wimpy’s is going in across the plaza.” He knew that Zhuk would be heartened by the sight: While
most Western companies were reluctant to invest in Ukraine, fast-food restaurants were opening all over Kiev. When he got only a weary grunt of acknowledgment from
Zhuk, Hnatyuk piped up again: “By the way, I haven’t had a chance to tell you about that USDA meeting.” The Ukrainian Software Developers Association had held its
annual meeting the week before, and Zhuk had asked Hnatyuk to check it out. “I was quite impressed,” said Hnatyuk. “Do you know there are over 25 medium-sized IT
companies here—not just in Kiev, but also in Lviv, Kharkiv, and Dnepropetrovsk? We’re still the only development center for a multinational. Everyone there was talking
about how two Ukrainian firms had beaten an Indian rival and won a contract to develop embedded systems for a big American corporation. The Association forecasts that
Ukraine’s exports of IT-related services will double over the next two years.” Zhuk perked up momentarily. “There’s no question, we’re here at the right time,” he
said. His business model was simple. Like India and Ireland, Ukraine offered a virtually unlimited supply of highly skilled and, by American standards, reasonably
priced programmers. The country had a tradition of excellence in scientific and technical education that dated back to the formation of the Soviet Union. But most
engineers and programmers had lost their jobs since the Soviet Union’s demise and were looking for new openings. Meanwhile, Ukraine’s schools produced 50,000 fresh
technical graduates every year. That was great for Customer Strategy Solutions because, despite an economic downturn in the U.S., the company had more work than it
could handle. It had started out installing off
the-shelf order-fulfillment systems, but its professionals increasingly consulted with clients on custom solutions and, more broadly, on innovative digital strategies.
With Zhuk’s top talent being pulled into strategy-related work, he needed more programmers to engineer systems. On his previous visit, Zhuk had helped Hnatyuk recruit
a core group of programmers, mostly through Hnatyuk’s personal network. Later, as they made the rounds at Ukraine’s universities and polytechnics, they found other
institutions, such as the Institute of Cybernetics in Kiev, that were great sources of talent. “I feel like a kid in a candy store,” Zhuk had said at the time. In a
week, they hired 12 top-notch programmers, all in their twenties and with an average of three years’ experience. Zhuk wanted the best talent and was willing to pay top
dollar for it. That was another point the two men had agreed on before hiring anyone: They would pay a wage that would afford their employees a level of comfort that
most Ukrainians didn’t have. The typical programmer’s salary in Ukraine, at $500 a month, accounted for only 40% to 60% of his or her family’s budget. Zhuk wanted his
programmers to be able to afford three meals a day without having to barter, stand in queues for hours, or moonlight. He wanted their families to have good medical
care when they needed it. At the end of the day, he thought, the best way to make a difference in Ukraine was to enable people to buy homes, cars, and consumer
durables. Customer Strategy Solutions therefore paid its programmers a salary of 66,000 hryvnia, or $12,000—twice as much as a programmer could normally expect to earn
in Ukraine but well below the $75,000 to $85,000 that his American counterpart would command or the $24,000 that a Russian programmer would earn. “But that just isn’t
enough for some Ukrainians,” Zhuk thought darkly, his mind returning to the reason for his current visit.
The Costs of Doing Business It wasn’t as though Zhuk’s eyes were entirely shut to the difficulties of doing business in a developing economy. If they had been, they
opened pretty quickly in the process of getting the development center up and running. The first lesson came the day Hnatyuk took Zhuk to Dnipro Telecom, the state-
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they would need. Hnatyuk had already explained that the company didn’t offer dedicated high-speed lines, and getting Dnipro Telecom to sanction even plain-vanilla
telephone lines wouldn’t be easy. At precisely 9 AM , Zhuk and Hnatyuk were ushered into the office of Vasyl Feodorovych Mylofienko, a senior business manager at Dnipro
Telecom. The meeting had been arranged by a former colleague of Hnatyuk’s. They sat respectfully while Mylofienko detailed the costs of telephone line rentals, at ten
hryvnia ($1.85) per month, and usage rates, at 0.5 hryvnia (9 cents) per minute. The onetime installation fee that Dnipro Telecom would charge the company, 100 hryvnia
($18.50) per line, was reasonable. But then came an unpleasant surprise. Because of the current backlog of orders, Mylofienko informed them, it would take some time to
install the lines in their office on Predslavynska Street—about three years, in fact. If Zhuk couldn’t connect the center to the firm’s headquarters in Silicon Valley
via the Internet, the project would be dead in the water. Hnatyuk had seemed calm, though. He turned to Zhuk and remarked that they would have to approach one of the
other telephone companies in the city. A smaller firm would be more expensive but would probably be able to provide the center with lines in months, not years. Zhuk was
puzzled. Why were they discussing their options out loud in Mylofienko’s office? He got his answer when Mylofienko cleared his throat. “Of course,” he said, “we could
expedite your application.” Hnatyuk jumped on the remark. “ Tse duzhe tsikavo [That’s very interesting],” he purred. “Please tell us more, Vasyl Feodorovych. What is
it that you have in mind?” “For a onetime fee of $300 per line”—Zhuk noted the shift to U.S. currency—“I could install the ten telephone lines in your office next
month. For $500 per line, I would be pleased to offer you service beginning next week. That would require rearranging our installation schedules in Old Kiev, but I’m
sure it can be done.” For $3,000, Zhuk’s software center could be up and running next month; for $5,000, next week. He was sorely tempted to take his business to
another telecom company, where the installation charges would be more reasonable. The downside was that Hnatyuk would have to
set up fresh appointments, they’d have to visit more people, and they’d spend more time getting wired than training their programmers or scouting for customers. Zhuk
felt a trifle uncomfortable but made the call: “We would like to have the lines as soon as possible,” he said, as much to Hnatyuk as to Mylofienko. That was the cue
Hnatyuk had been waiting for. He asked Mylofienko to draw up a contract for ten telephone lines, then excused himself and went to the men’s room, where he extracted 50
hundred-dollar bills from his security belt, placed them in an envelope, and put the envelope in his breast pocket. When Hnatyuk returned, he took his seat, carefully
read the contract, and signed both copies. He ceremoniously handed one copy to Zhuk. He folded Mylofienko’s copy in half. Zhuk saw Hnatyuk take the envelope filled with
cash out of his pocket, discreetly insert it into the crease of the contract, and hand it to the manager. Hnatyuk wrote a check drawn on a Kiev bank for 1,000 hryvnia
and handed it to Mylofienko. Hnatyuk got up to leave. Following Hnatyuk’s lead, Zhuk got up and bid the telecom manager good day. Mylofienko smiled and assured Zhuk that
his telephone lines would be installed early the following week. The kicker came at the very end. As Mylofienko shook hands with Hnatyuk, he presented him with two
receipts: one for $5,000, the other for 1,000 hryvnia. Zhuk was no longer sure what was going on. Had they or had they not just bribed Mylofienko? As Zhuk and Hnatyuk
walked down the steps of the Dnipro Telecom building, Hnatyuk burst out laughing at the expression on his friend’s face. He explained that so many people had
complained about the demands for extra charges in hard currency that the telephone company had taken to issuing receipts. Paying extra in U.S. dollars or euros for a
service had become standard practice in Ukraine. In fact, Hnatyuk warned Zhuk, bureaucrats in most offices followed the same procedure. When they registered the
company, got the fire inspector to visit the premises, and listed with the tax authorities, they might have to pay official fees in local currency and quasi-official
charges in dollars or euros. “Crazy as that sounds, I’m relieved,” said Zhuk. “I knew that because of different laws, European firms could pay bribes more easily
Because of the current backlog of orders, Mylofienko informed them, it would take some time to install the lines in their office on Predslavynska Street— about three
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than American firms, but I’d never have guessed that paying bribes could be official.” He asked Hnatyuk to check, in any case, with the firm’s CFO in California about how
to account for such payments on the company’s books. “I realize you have a local accountant,” he added, “but let’s just make sure there won’t be any trouble with the
IRS.” By the end of the week, Zhuk was convinced that incorporating a business in Kiev was no more burdensome than setting up a company in California. They had to
register with only six bureaucracies: the Kiev city administration, an ecology office, a statistics bureau, the local social security office, the local police, and the
Ukraine Tax Authority. Zhuk and Hnatyuk had to visit the police twice—first to obtain a permit to open a business, then again to get the permit stamped, since the part
of the office that stamped permits was open only two days a week. But all that was hardly insurmountable. In the end, Zhuk got back to the United States just two days
later than he had originally planned, secure in the knowledge that the Kiev software development center would be up and running the very next week.
A Matter of Principle Hnatyuk’s Land Rover pulled into the parking area behind the apartment building. Zhuk sneezed and said he might be catching a cold. As they
entered the apartment, they discussed what they should attempt to accomplish—and be prepared to accept—in the days to come. “So we don’t know anything more, do we?”
asked Zhuk. “We only know that Simonenko told Taras that if payment was not forthcoming within a week, there could be some serious consequences.” Hnatyuk nodded. “She
also said that in such cases, it was not uncommon for the parties to reach an agreement,” he said. “That sounded like an invitation to me.” “Look, Kostya, I’m way
outside my comfort zone on this.” Zhuk massaged his forehead. “I was willing to go along with all those so-called facilitation payments to get bureaucrats to do their
jobs, especially if that’s what everyone else does. But let’s assume this is really an extortion racket. What happens when word gets out that we’re a soft target? I
don’t have the stomach or
the capital to pay off every thug in town. Also, we’re doing something good for this country. We shouldn’t have to put up with this.” “No question,” Hnatyuk said. “We
shouldn’t pay them too much.” Zhuk could tell his colleague was trying to hold him to a pragmatic line of thought. Why waste time wishing reality were other than what
it is? But reality was different where Zhuk came from, and it could be different here. Strike that “could,” Zhuk thought. It will be different here. It’s only a
matter of time. And Ukraine was where he wanted his company to be. A couple of days ago, he had gone to lunch with a merchant banker who felt that Zhuk should take
Customer Strategy Solutions public. “You’ll get a bigger premium for your shares because you have a development center in Kiev,” the banker had said. “People are crazy
nowadays over firms that outsource.” Maybe it wasn’t a comfortable time to be doing business here. But which was better: to pack up and go home with one’s personal
ethics unsullied or to live to fight another day and commit to being part of the solution? Perhaps he could lead a double life, abiding by the local rules of the game
while investing in initiatives led by local NGOs that wanted to battle corruption in the country. Zhuk glanced at Hnatyuk and realized it wasn’t that straightforward.
What about his friend’s well-being? Hnatyuk would never leave Kiev, and hadn’t Zhuk encouraged him to quit his job and work for Customer Strategy Solutions? For that
matter, what about the programmers they’d hired? He knew each of them by name and knew how grateful they were for the opportunity he’d given them. How could he let
them down at the first sign of trouble? In his heart, Zhuk knew he wasn’t ready to pull out of Ukraine; he would have to bargain with the bullies. But what actions
would constitute the high ground?
Should Customer Strategy Solutions pay off the tax officials? • Four commentators offer
Case CommentarySee expert advice.

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Case Commentary by Alan L. Boeckmann Should Customer Strategy Solutions pay off the tax officials?
Despite Kostya Hnatyuk’s years of doing business in Ukraine, Pavlo Zhuk took a seat-of-thepants approach to starting the software development center in Kiev. They
should have spent more time and effort up front trying to understand the challenges, practices, and business culture they were walking into. Zhuk could have learned a
lot from two U.S. government Web sites. First, the U.S. State Department’s (www.state.gov) background note on Ukraine would have told him that the country is burdened
by corruption, excessive government regulation, and lack of law enforcement. Second, the CIA’s World Factbook (www.cia.gov/cia/publications/factbook/) would have
revealed that Ukraine’s telephone system is antiquated and in disrepair and that there are 3.5 million pending telephone applications. Since Zhuk needed a modern
telephone system for his development center, he would have immediately realized that he faced a problem. From the State Department note, Zhuk could have obtained
contact information for key U.S. officials in Kiev. He should have consulted them before deciding to invest in Ukraine. Zhuk should also have asked his accountant and
his attorney in the U.S. for references in Kiev. Ukrainian accountants and attorneys would have alerted him to the difficulties lying ahead. Moreover, before setting up
his foreign operation, Zhuk should have familiarized himself with the U.S. Foreign Corrupt Practices Act (FCPA). He should have developed a company policy against
bribery and made a plan for how to deal with corruption. Encounters with corrupt officials are, regrettably, common in many parts of the world. An understanding of the
local business culture and appropriate policies for addressing demands for bribes are basic tools for succeeding in unfamiliar settings. Last year, companies in my
industry, with the support of Transparency International and the Basel Institute, created a set of global anticorruption principles. The
point was to create a level playing field and to eradicate the effects of bribery in an industry where corruption has too often determined who wins contracts. Companies
that agree to the principles commit to implementing a zerotolerance policy against bribery and to developing internal programs to persuade employees not to pay bribes.
By having Hnatyuk pay a bribe to Vasyl Feodorovych Mylofienko, Zhuk signaled that he would pay local bureaucrats whatever was necessary to do business in Kiev. In fact,
by making that $5,000 payment, he may have violated the FCPA. The act permits facilitation payments as long as they are small. Hnatyuk clearly violated the Anti-
Terrorism, Crime, and Security Act of 2001 by paying a bribe. He would therefore be subject to prosecution in Great Britain because English law, unlike the FCPA, does
not make exceptions for facilitation payments. Companies pay bribes for three reasons. First, multinationals operate in countries where bribery has become systemic due
to weak institutions and poor rule of law. Second, most countries do a bad job of enforcing their anticorruption laws. Third, managers often have to meet tough
business goals. Those factors can place managers in circumstances where paying bribes may seem like the best choice. Only clear internal policies and controls can
ensure that managers do the right thing. Had Zhuk created those policies and controls within his own firm, he might have found ways to operate effectively in Ukraine.
In the present circumstances, Zhuk will face a series of requests for bribes. Since he cannot ethically operate in that environment, disengagement is his best course
of action. Breaking the law—in this case, the FCPA— would be unthinkable.
Alan L. Boeckmann
is the chairman and CEO of Southern California–based Fluor Corporation, an engineering and construction services company with annual revenues of $9 billion.
Had Zhuk created clear internal policies and controls within his firm, he might have found ways to operate effectively in Ukraine.

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Case Commentary by Rafael Di Tella Should Customer Strategy Solutions pay off the tax officials?
As any businessperson would do in this situation, Zhuk will pay off the UTA officials. After all, he wouldn’t be breaking the law if he did so. The situation clearly
suggests that Zhuk is a victim of extortion. According to most nations’ laws, succumbing to extortion isn’t a crime. So Zhuk will pay off Simonenko. He will consider
the bribes an additional tax he has to pay for doing business in Ukraine and carry on with his pet project. Make no mistake: That’s how the situation would play out in
real life. If a businessperson doesn’t pay officials when he is a victim of extortion, he doesn’t have the stomach to do business in developing countries. But should
Zhuk pay off the officials? That’s tougher to answer. I know what Zhuk will do; I don’t know what he should do, because that’s a moral issue, and we don’t know from
the case what Zhuk’s morality dictates. Let’s think of a framework that might help us. Start by imagining a continuum of corruption cases. At one end, there is
extortion of the Simonenko kind. At the other, there are money-laundering schemes that allow businesspeople in cahoots with local politicians to enrich themselves
without having to invest in a company. Businessmen like Zhuk usually tell themselves that while they may have to pay off politicians and officials, they would never get
involved in rackets of the second kind. Fair enough. What’s interesting is what companies do when they are in the middle of the continuum. Let’s say you are a
businessperson who wants to do business without bribing officials. One day, you find that a rival company is bribing bureaucrats for favors that are giving it an
unbeatable advantage. You realize that if you don’t get the preferential treatment your rival is buying, you’re going to have to leave the country. In an economic
sense, your choices are identical to those Zhuk faces: pay—or quit. Under those circumstances, the end result will also be the same: Like Zhuk, you will pay a bribe.
You’ll talk to the corrupt bureaucrat and demand to be treated the same as your rival. When the official says he can extend favors to
you only if you agree to do him favors in return, you’ll agree. You’ll find it easy to justify these favors to yourself by saying that you were the victim of an
extortion demand by the bureaucrat. Thus, companies that start paying bribes are actually on a slippery slope. They justify extortion payments, and they justify bribes
by saying they’re doing only what their rivals are doing. And then…I’m not sure where they will stop on the continuum. That worries me, because first, it means
companies’ moral standards are going downhill. Second—and this is something most firms don’t realize—companies create a bad business environment by indulging corrupt
politicians. When organizations are corrupt, they lose legitimacy. As a result, people demand more regulation, more taxes on companies, and more harassment of firms.
That sets off a vicious cycle of policy intervention—and more corruption. It is up to Zhuk to decide what he wants to do: create one software center in Ukraine and
risk damning his business in people’s eyes, or work to increase the legitimacy of Ukrainian business, even if that means pulling out. A word of caution. Talking about
corruption in emerging countries has become too fashionable. It has few direct benefits and many indirect costs. Since the judicial systems in most developing countries
are highly politicized, real—as opposed to rhetorical— progress is unlikely. Real change requires judicial reform, which is hard and takes time. No amount of talking
about corruption and bribery is going to change that. This is why I recently proposed the creation of a Harvard-Yale Judicial Observatory. It will consist of a group
of law academics and practitioners who can pass judgment on high-profile legal rulings that people suspect are politically motivated. That will change the incentives
facing politicized judges and reduce idle corruption talk, and it may even improve the quality of politicians in emerging countries.
Rafael Di Tella
is a professor at Harvard Business School in Boston.
When companies are corrupt, they lose legitimacy. As a result, people demand more regulation.

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Case Commentary by Thomas W. Dunfee Should Customer Strategy Solutions pay off the tax officials?
If Simonenko has asked Zhuk for a coarse bribe rather than a facilitation payment, Zhuk’s only ethical recourse is to resist. If he is unable to fight her demands
successfully, Zhuk must publicly pull out of his Ukrainian venture. Although he may want to focus on a pragmatic or a legal solution to the problem, doing so would be
a moral mistake. Any concession to Simonenko and those she represents will serve only to sustain corruption in Ukraine—a grave consequence for that country’s people.
Zhuk may be tempted to pay off Simonenko because that may help his Ukrainian employees. The urge to do so may be particularly great because of his desire to create
opportunity and bring hope to Ukraine. But the good Zhuk can achieve by maintaining a continued presence in Kiev isn’t a sufficient counterweight to the harm caused by
corruption. Paying bribes to stay in business doesn’t achieve the greatest good for the greatest number of people; it contributes to the cycle of corruption and harms
many. Ukraine has failed to live up to its economic promise for years, and the primary reason is pervasive corruption. In Transparency International’s 2004 Corruption
Perception Index, Ukraine tied for 122nd (first is least corrupt). The cost to Ukrainians is enormous. Corruption often involves human rights violations because bribes
are extorted from those who provide essential medical supplies and food for the starving. Ukrainians will be truly free only when they reach a tipping point against
corruption. That will happen when Ukrainians have the information, power, and will to counter extortionists like Simonenko. How can Zhuk help create a tipping point
against corruption? Simonenko appears to be demanding a coarse bribe, which involves payment of a benefit to a public official to breach a duty pertaining to a
significant community interest. It would therefore be a mistake for Zhuk to assume that Simonenko and her compatriots care in the slightest about the long-term impact
of their actions on either Ukrainians or on Customer Strategy Solutions. Even if Zhuk makes only a small payment, he gives Simonenko the
leverage to exert ever greater pressure on him. Zhuk must act very quickly to see if he can counter the threat from Simonenko. He could contact other software firms or
non-Ukrainian companies doing business in the country to determine if there are strategies they can collectively use to thwart such solicitations. After all,
transnational fast-food companies have been successful in Ukraine. If that quest doesn’t produce results, Zhuk could contact NGOs like Transparency International to
see if there is another reasonable option. If there isn’t, Zhuk should leave Ukraine. Once he is safely out, he must publicly state why it became necessary for him to
leave and provide all the information he has gathered on Simonenko and her friends. This case study demonstrates the pervasive and insidious nature of corruption. It
is extremely difficult to uproot. David Hess and I argued in 2000 in the Cornell International Law Journal that business can be an important part of the solution. We
suggested that companies adopt antibribery principles, similar to the Sullivan Principles, when they do business. The Sullivan Principles were used in the 1970s as a
strategy to fight apartheid in South Africa, and firms that adopted them committed themselves to equality in hiring and wages, nonsegregation in the workplace, and the
training and promotion of blacks. In the same vein, Hess and I proposed the C2 Principles (see www.c2principles.org) for combating corruption in the hope that they
might encourage firms to resist solicitations for bribes. Adopting the C2 Principles can, together with other pressures, move companies closer to the day when an
anticorruption tipping point is reached in every developing country.
Thomas W. Dunfee
(dunfee@wharton.upenn. edu) is the Kolodny Professor of Social Responsibility and Professor of Legal Studies at the University of Pennsylvania’s Wharton School in
Philadelphia. He is the founding director of the Wharton Ethics Program and author of more than a dozen books, including, with Thomas Donaldson, Ties That Bind: A
Social Contracts Approach to Business Ethics (Harvard Business School Press, 1999).
Once Zhuk is safely out of Ukraine, he must publicly state why he had to leave and provide all the information he has gathered on Simonenko and her friends.

page 9 harvard business review • march 2005
The Shakedown •
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Case Commentary by Bozidar Djelic Should Customer Strategy Solutions pay off the tax officials?
Should Zhuk accept the protection-for-money deal offered to him by organized criminals under the guise of UTA Special Agent Simonenko? The answer is simply and
emphatically no. Much can be said about the need to understand the situation in Ukraine and to accept that there’s a fine line between legitimate activity and bribery,
as Zhuk found out at Dnipro Telecom’s office. But by putting things too much “into perspective,” Westerners in emerging markets end up accepting and doing things they
would never accept or do in their own countries. Few of them recognize that by behaving that way, they go down a path along which they cannot return. Zhuk has probably
done a cost/benefit analysis of his possible courses of action. Although he finds paying bribes morally reprehensible, doing so is the only way he can save a promising
operation that employs so many young people. Zhuk, a patriot, might find some moral comfort in that thought. But Zhuk needs to realize that by accepting Simonenko’s
seemingly limited offer, he will be flagging himself for bigger trouble. Once you join that dance, the music never stops. The same seedy group will soon be back, asking
for bigger benefits to protect Zhuk’s firm on other fronts: land rights, contracts with business partners, you name it. Rival underworld groups might also fight to extend
their turf to Customer Strategy Solutions. Over time, Zhuk will hear through the Kiev business grapevine that Simonenko and her associates have been bragging about
their successful relationship with him. That will lead some people to stay away from Zhuk’s company in order to avoid trouble. Finally, the entrepreneur might one day
find himself answering questions on the matter from local media or from the public prosecutor’s office. The noise around Zhuk in Kiev might even be heard in Silicon
Valley. No matter what he says at that stage, the fact that he illegally gave money to a public official will stick to his reputation. Zhuk should therefore immediately
implement the following five steps: 1. He should hire a professional security firm
to avoid unnecessary provocation from the thugs and to reassure his staff. That’s part of the cost of doing business in less-structured environments. 2. He should get
his staff’s buy-in for the tough stance he plans to take. Most of those young professionals will admire Zhuk for his courage and will tell other people about it. All
of Kiev will hear of his standards and ethics. 3. He should write about the extortion demand to Ukrainian authorities at the highest level: the minister of finance, the
minister of the economy, the Foreign Investment Protection Agency, and the head of the UTA as well as the U.S. ambassador to Ukraine. Zhuk should also request meetings
with them. Like all developing countries, Ukraine needs inflows, not outflows, of foreign investment. I can vouch from personal experience that Zhuk will get a patient
hearing from the people at the top. 4. If the threats don’t subside, he should hold a press conference to draw public attention to his problems. Zhuk will be able to
explain his patriotic motives and state that he wants to help improve business standards in his homeland. He will emerge as a principled and ethical business leader,
and no one will dare ask him for a bribe again. 5. If none of these actions produce results, he should pack up and leave Ukraine. Having lived and worked for years in
similar environments, I doubt that Zhuk will have to shut down his software development center. Quite the contrary: He and his firm will eventually be celebrated in
Ukraine as proof that things are changing for the better.
Bozidar Djelic
(bdjelic@altiscapital.net), founder of Altis, a professional services group focusing on Southeast Europe, was the finance and economy minister of Serbia from January
2001 to March 2004. Prior to that, he was a partner at McKinsey & Company and based in Paris and Silicon Valley.
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By accepting Simonenko’s seemingly limited offer, Zhuk will be flagging himself and his firm for bigger trouble.
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