Corruption Explained:

Types, Causes, and High-

Profile Cases
By
JAMES CHEN

Updated August 22, 2025

Reviewed by
THOMAS J. CATALANO

Reviewed by Thomas J. Catalano

Full Bio

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South
Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives
him expertise in a variety of areas including investments, retirement, insurance, and financial
planning.
Learn about our Financial Review Board
Fact checked by
TIMOTHY LI
Investopedia / Julie Bang

What Is Corruption?
Corruption is a misuse of power for personal gain, manifesting through acts
such as bribes, fraud, and bias from influential entities like governments and
businesses. It leads to significant social and financial consequences, eroding
democracy and public trust, while also limiting access to critical services for
vulnerable populations. Understanding the dynamics, economic roots, and
examples like financial market manipulation can help in formulating effective
prevention strategies.

KEY TAKEAWAYS

 Corruption is the misuse of power for personal gain, involving activities

like bribes and fraud by those in influential positions.
 It has far-reaching consequences, including undermining democracy,
stifling economic growth, and eroding public trust in institutions.
 Root causes of corruption often include excessive government
intervention, deregulation, and manipulation of economic policies.
 Effective measures to prevent corruption involve education, enforcing
accountability, fostering transparency, and establishing clear penalties.
 High-profile corruption cases, such as those involving major banks and
corporations, illustrate the complexity and global impact of such
unethical behavior.

Analyzing the Impact and Mechanics of

Corruption
Corruption occurs when those in power use their authority for personal gain
at others' expense. It is considered an abuse of power when someone in
power influences decisions through dishonest means such as accepting
bribes, engaging in under-the-table transactions, manipulating elections,
diverting funds, laundering money, and defrauding investors.

Corruption can involve individuals, companies, or governments in various

situations. For instance:

 A politician may be deemed corrupt for taking money to sway a vote on

a key issue.
  A corporation may be deemed corrupt for trying to influence the market
by cooking its books.
 A government may be deemed corrupt by offering a higher degree of
resources and incentives, such as tax breaks and health care, to the
wealthy rather than to those who are financially vulnerable.

The act of corruption has financial and social consequences for everyone.
But it does have a disproportionate effect on the most vulnerable. Corruption
may further limit their access to the education, health care, and legal services
they need. And they may end up paying more in bribes, as they are often
targeted because they may be less likely to report corruption. 1

Corruption causes multiple problems. It can draw negative media attention,

undermine democracy, harm economic growth, distort laws, create
bureaucratic hurdles, and discourage investment. This leads to damage to
the offending party's reputation and an erosion of trust. This erodes public
trust in affected individuals and organizations.

IMPORTANT

Extensive public relations efforts are needed to repair reputation and restore
trust, consuming time and money that could be used elsewhere. As a result,
inefficiencies that lead to financial losses can occur.

Exploring the Economic Roots of Corruption

The International Monetary Fund (IMF) cites several key factors that contribute
to corruption. These include government intervention in the economy, the
liberalization of policies, and the deregulation and privatization of certain
industries. This can pop up in several different areas, including:

 Lowering wages for civil servants compared to those in the private

sector. Certain employees may resort to taking bribes in order to
compensate for the difference in wages.
 Price controls. Corruption thrives when governments intervene by putting
these in place to keep prices lower for certain goods and services.
 Eliminating foreign competition through trade restrictions, tariffs, and
trade barriers, thereby opening up the possibility of a semi-monopoly by
domestic players. The latter are more likely to resort to corrupt behavior
to keep restrictions in place for foreign companies to keep their place in
the market.
  Corporations and groups may receive government grants
and subsidies when they aren't the intended recipients. 2

Simply put, more government regulation gives lawmakers more discretion in

applying rules. This can lead to dishonest behavior, such as taking bribes.

Implementing Strategies to Combat Corruption

Corruption can increase criminal activity and organized crime in the
community when left unchecked. But there are a number of steps that can
help to manage it. Here are steps to help prevent corruption.

 Education: A strong educational focus must reinforce best business

practices and alert managers and employees where to look for
corruption. This can be achieved by introducing mandatory education
such as anti-money laundering (AML) courses. Senior executives and
managers must set a strong culture of honesty and integrity by leading
by example.
 Environment: A robust control environment reduces the risk of
corruption as do thorough background checks before hiring or
promoting employees.
 Accountability: When there are mechanisms in place, there's a
likelihood of reinforcing a culture that fosters strong ethical behavior
while holding those to account who violate the norms.
 Regulation: Setting up codes of conduct and ethics can help avoid
situations that can create conflicts of interest. This is common in areas
like the financial industry, where chartered financial analysts and other
financial professionals must adhere to these rules or be penalized.
 Reporting: Making it easy for managers, employees, suppliers, and
customers to report corruption can reduce it further. It's also important
to ensure that those reporting are able to do so safely and securely.

Clear penalties must deter people and organizations from corrupt behavior.
This can include financial penalties and even legal action—prosecution and
perhaps jail time.

Notable Financial Corruption Cases Worldwide

There are many examples of corruption in the real world. They may include
individuals or organizations, whether that entails corporations or
governments. Many often go undetected because the behavior is well hidden
or because it goes undetected. Here are two examples of documented
corruption.

Major Banks
The Securities and Exchange Commission (SEC) fined five major global banks in
2015 on various corruption charges.

Citi, JPMorgan Chase, Barclays, and The Royal Bank of Scotland agreed to
plead guilty to rigging the foreign exchange market. According to the SEC,
the banks "manipulate(d) the price of U.S. dollars and euros exchanged in the
foreign currency exchange (FX) spot market." The four institutions paid
criminal fines of more than $2.5 billion. 3

UBS also pled guilty to manipulating benchmark interest rates, including

LIBOR, resulting in a $203 million fine. 3

PTC
In 2016, the SEC ordered software company PTC to pay a combined $28
million in fines for attempting to bribe Chinese officials by providing
approximately $1.5 million in recreational travel through two PTC China-
based subsidiaries.4 PTC struck a delicate public relations (PR) effort to restore
its reputation as the case became increasingly public.

What Does Corruption Mean?

Corruption is any dishonest or fraudulent behavior wherein someone uses
their position of power to benefit themselves at the expense of others. The
entity can be an individual, corporation, or government. This can come in the
form of giving or taking bribes, double-dealing, and defrauding investors
among other actions. Government intervention is often the root cause of
corruption but it can be prevented by putting certain checks and balances in
place. It has social and financial implications but disproportionately affects the
most financially vulnerable.

What Does Government Corruption Look Like?

Government corruption occurs when a ruling party takes on a more invasive
and pervasive role. Forms of government corruption include nepotism,
bribery, lobbying, embezzlement, and cronyism. For instance, a government
official may use their power and influence to grant family members high-
ranking positions. In other cases, officials may try to sway election results or
harm opponents to hold onto power.

How Do You Stop Corruption?

This involves public education, enforcing regulations, setting up accounting
mechanisms, and ensuring safe reporting channels. It's also important to
enforce penalties for charges of corruption, including fines and prosecution.

The Bottom Line

Corruption, the misuse of power for personal gain, manifests in numerous
forms such as bribery, fraud, and market manipulation, significantly affecting
society's social and financial health. It undermines democracy, stifles
economic growth, and erodes public trust. Preventive measures, including
robust checks and balances, transparency, and strict penalties, are essential
in combating this pervasive issue. By understanding and addressing the root
causes of corruption, including government intervention and economic
deregulation, society can work towards restoring trust and accountability in
institutions.

Corruption has far-reaching consequences that undermine economic stability, erode public trust, and
exacerbate social inequalities.

Economic Consequences

Reduced Economic Growth: Corruption distorts market mechanisms, leading to inefficient allocation of
resources. It often favors connected individuals or entities over more deserving projects, which can stifle
innovation and economic development.

Increased Costs of Doing Business: Businesses may face higher operational costs due to the need to pay
bribes or engage in corrupt practices to secure contracts or permits. This creates an uneven playing field,
making it difficult for honest companies to compete.

Loss of Investment: Corruption discourages both domestic and foreign investment. Investors are likely to
avoid environments perceived as corrupt due to the increased risks and uncertainties associated with
such markets.
2

Diminished Public Services: Corruption often leads to the misallocation of public funds, diverting
resources away from essential services like healthcare, education, and infrastructure. This can result in
poorer quality of life for citizens, particularly in marginalized communities.

5 Sources

Social Consequences

Erosion of Trust: Widespread corruption undermines public trust in government institutions and the rule
of law. When citizens believe that their leaders are corrupt, they are less likely to engage in civic
activities or cooperate with authorities.

Increased Inequality: Corruption exacerbates social inequalities by diverting resources from public
services that benefit the broader population. This disproportionately affects the poor and marginalized,
widening the gap between the rich and the poor.

Social Unrest: As trust in institutions erodes and inequalities grow, social tensions can escalate, leading
to protests, civil unrest, and political instability. Citizens may feel compelled to take action against
perceived injustices, further destabilizing society.

4 Sources

Political Consequences

Weakening of Democratic Institutions: Corruption can undermine the integrity of democratic processes,
leading to a lack of accountability and transparency in governance. This can result in a cycle of
corruption that is difficult to break.

2
Impaired Rule of Law: When corruption is prevalent, the rule of law is weakened, and those in power
may act with impunity. This diminishes the effectiveness of legal and regulatory frameworks, making it
harder to combat corruption itself.

Impact on Development Goals: Corruption hampers the achievement of international development

goals, such as the United Nations Sustainable Development Goals (SDGs). It diverts resources that could
be used to address poverty, hunger, and inequality, ultimately hindering progress toward a more
equitable society.

In summary, the consequences of corruption are profound and multifaceted, affecting economic
stability, social cohesion, and political integrity. Addressing corruption is essential for fostering
sustainable development and building trust in institutions. By promoting transparency and
accountability, societies can work towards mitigating the adverse effects of corruption and creating a
fairer environment for all citizens.