Good Case Study About The Shakedown By Phil Bodrock
1. Why are the tax officials “picking” on Customer Strategy Solutions?
Pavlo Zhuk, a well established entrepreneur of Ukrainian roots from California set up, together with his friend Hnatyuk, Customer Strategy Solutions subsidiary company in Ukraine, at Kiev.
For Pavlo Zhuk, the setting up of his software development centre in Ukraine meant more than just the expansion of his company. For him, it meant making a good deed, making a difference by investing in the country and therefore helping its economy. Customer Strategy Solutions meant contributing nonetheless to the modernization of the Ukrainian society by introducing new technologies, training a wide range of skills to its employees, raising the living standards by providing higher salaries to the personnel than other local companies do, as well as enabling people to buy homes and cars and other consumer durables.
The first problem encountered by Pavlo Zhuk has occurred when he tried to get installed performing telephone lines in their office on Predslavynska Street. It was then, when he learnt how the „actual business” is made in this developing country and how high corruption and bribing goes, being fooled to let himself drawn and at the hands of Vasyl Feodorovych Mylofienko, the senior business manager at Dnipro Telecom, the telephone company.
According to Mylofienko, it would have taken three years to install the lines in Customer Strategy Solution’s offices, but for a certain price, this could have been done in a week or in a month.
Moreover, six months after he has set up his software development center in Kiev, the local bureaucrats claimed that the company hasn’t field all its tax schedules that it was supposed to; therefore Customer Strategy Solutions is being targeted for money extortion by the Ukrainian Tax Authority officials, represented by Laryssa Ossipivna Simonenko. The Ukrainian Tax officials claim that the company owes the government tax arrears of 86,954 hryvnia due to not filing of 5 out of the 17 schedules that they were supposed to file in the previous quarter.
2. Should the company have paid to Mylofienko – as it did – for the installation of the phone lines? Had they or had they not bribed Mylofienko?
According to Alan L. Boeckmann, Pavlo Zhuk and his friend, Hnatyuk should have dedicated more time and put more effort in trying to understand the challenges, the practices and the Ukrainian environment and business culture they were walking into (Bodrock, 2005, p. 36). It is imperative for any business person to first of all have an understanding of the local business culture when entering a market abroad, to get familiarized before with that country’s policies for adressing bribes and other corruption issues if they wish to succeed in unknown waters.
Zhuk should have done a little more research before agreeing to pay Mylofienko for the installation of phone lines, and in the end decide not to encourage this corrupt system but instead fight against it.
According to the same Alan L. Boeckmann, Zhuk could have researched U.S. State Department’s governmental websites for background information regarding the situation in Ukraine and prepare himself to face corruption, lack of law enforcement as well as excessive government regulation. Also, there is enough information regarding the Ukraine’s antiquated telephone system on the CIA’s World Factbook website, therefore Zhuk could have made a strategy for implementing the telephone system he needed for his development centre, avoiding bribery, by just appealing to the authorized and knowledgeable people. Before deciding to place his company in Kiev, the first thing Zhuk should have done better was to ask his U.S. attorney and accountat for references in Ukraine, and secure his safety in that way. (Bodrock, 2005, p. 36)
If Zhuk would have taken the necessary measures, then he would have gotten consultancy from the Ukrainian attorneys and accountants and timely be warned of what to expect at. Moreover,before starting the whole foreign activity, Zhouk should have looked in the U.S. Foreign Corrupt Practices Act, making plans and developing strategies and setting up company policies in order to be able to deal with corruption.
Regarding the question whether they had or had not bribed Mylofienko, the answer is that they actually did it, even if they were not fully „aware” of it, laws are laws and should have been known by them before making the payment step, and despite the „good” intentions behind their reasons.
3. In your view, how should Customer Strategy Solutions respond to the extortion request: pay off the tax officials in Kiev and stay; do not pay and stay; or do not pay and leave Ukraine?
In my opinion, Pavlo Zhuk and Customer Strategy Solutions should for no reason pay off or bribe the tax officials. Whether to stay or not should represent a different problem, as they should at least try and sort out their problem before there is no other thing to do than leave Ukraine.
Zhuk has shown his good intentions from the beginning of the setting up of his firm, but paying bribes, unfortunately does not mean to “take one for the team” and do a good thing on the long term, as it would only encourage happening more of this type of actions, despite the moral and ethical implications.
I believe that the best course of action the Customer Strategy Solutions from Kiev take coincides with Bozidar Djelic’s five steps, in order to be able to try and run his business legally in Ukraine. First of all, there is the need to hire a professional security firm for the avoidance of unpleasant situations and the reassuring of the personnel’s safety. Secondly, Zhuk should make sure everyone in the company is aligned to the new standards and ethics, despite the disclosure of the past actions. (Bodrock, 2005, p. 41)
There is the need to address the authorities at the highest level in regards to the extortion demand; the minister of economy, the minister of finance, the Foreign Investment Protection Agency, the head of the UTA, the U.S ambassador in Ukraine are the legal representatives that have to be contacted and announced regarding the difficulties that the company has faced.
The fourth step addressing this problem is represented by total transparency, by holding a press conference that would draw public’s attention to matters that are, after all, of national importance.
Last, but not least, if none of the actions taken to try and save his company produce any good results, Zhuk would be forced to pack up and leave Ukraine, but resting assured that his measures would eventually be celebrated and in time, if more people would take actions such as his, things could be changing for the better.
Bodrock, P. (2005). The Shakedown. Harvard Business Review, 31-41. Retrieved from http://www.hbr.org
Campbell, N. (2006). Corruption, Extortion, Reputation, and Asymetric Information. Department Of Applied And International Economics. Retrieved from http://econfin.massey.ac.nz/school/publications/discuss/dp06-09.pdf
Churchwell, C. (2005). Should I Pay the Bribe?. Hbswk.hbs.edu. Retrieved 14 January 2015, from Hbswk.hbs.edu,. (2015). Should I Pay the Bribe? — HBS Working Knowledge. Retrieved 14 January 2015, from http://hbswk.hbs.edu/item/4714.html
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