Is the “Too Big to Debar” Problem a Problem? And Is Partial Debarment a Solution?

In my last post, I discussed one aspect of the (very useful) OECD Foreign Bribery Report: the characteristics of the bribe-paying firms in the 427 enforcement actions between February 1999 and June 2014. Today, I want to turn to a different aspect of the report, concerning the penalties levied in those foreign bribery cases. As the report notes, although these cases have often resulted in quite substantial fines (and associated monetary penalties, like disgorgement), one available penalty in the public procurement context–debarment from future government contracts–has been used extremely rarely (in only two of the enforcement actions the OECD examined). The OECD Report concludes that this is a problem, emphasizing as one of the report’s key conclusions that “the fact that only 2 out of 427 cases resulted in debarment demonstrates that countries need to do more to ensure that those who are sanctioned for having bribed foreign officials are suspended from participation in national public contracting.” This conclusion echoes the thesis of a 2011 article by Professor Drury Stevenson and Nicholas Wagoner, who developed the case for expanded use of debarment in FCPA enforcement actions at greater length and in greater depth.

But the title of Stevenson & Wagoner’s article–“Too Big to Debar”–alludes to the main reason debarment is not used more often as a sanction in FCPA or other foreign bribery cases: Debarment, particularly for firms that do much or all of their business with governments, may be effectively a death-sentence for the firm, or at the very least inflict a level of economic loss that seems out of proportion to the wrongdoing. This concern is especially acute when much of the collateral consequences of debarment would fall on “innocent” parties (non-culpable employees and shareholders, as well as the firm’s would-be government customers). Stevenson & Wagoner’s response to this legitimate set of concerns is not all that satisfying: they emphasize the deterrent value of debarment (perhaps suggesting that debarment is a bit like a nuclear weapon, in that a credible threat to use it means in practice you won’t need to use it very much), and they suggest the government could make the threat of debarment more credible by diversifying its set of suppliers.

More recently, Richard Bistrong (a convicted FCPA defendant turned insightful FCPA consultant and commentator) has advanced what I consider a more nuanced and plausible set of proposals that could allow the government to preserve debarment as a remedy, without necessarily imposing a “corporate death sentence.”  Mr. Bistrong’s proposals all entail some form of more limited debarment: debarment only until the firm demonstrates commitment to effective corrective measures; debarment only from certain kinds of contracts; debarment only from foreign contracts requiring export licenses; or debarment only from contracting with certain governments (for instance, with the government that was the subject of the anti-bribery enforcement action). Putting the details temporarily to one side, Mr. Bistrong’s larger point, as he explains it, is as follows: “[T]here is a misperception that debarment equates to a corporate death sentence. I hope that by elevating some of the incremental enforcement and policy options which might be available in the context of [de]barment, that perhaps the ‘all or nothing’ perception might be reassessed.”

I find all of this plausible and helpful, but I think it’s worth taking a step back for a moment to consider why we might want to use debarment as a sanction in the first place. Thinking this through might be helpful in assessing Mr. Bistrong’s intriguing proposals for incremental or partial debarment, as well as the “too big to debar” problem more generally. Continue reading

What’s the Interest in “Conflict of Interest”?

“Conflict of interest” is a deceptively simple term devilishly difficult to apply.  It first came into common parlance in the United States in the nineteen fifties thanks to the political uproar former CEO of General Motors Charles Wilson, President Eisenhower’s nominee to be the Secretary of Defense, sparked when he told the Senate committee considering his nomination that the interests of the U.S. and General Motors were aligned.  Senators questioned that premise given that Mr. Wilson owned considerable GM stock and as Secretary of Defense would make decisions that would affect that stock.  His interest in seeing the value of his stock holdings rise would, they asserted, conflict with his duty to advance the national interest and so they demanded he sell the stock to avoid any conflict of interest.

The ensuing controversy about when a public official must sell off assets or take other measures to prevent a conflict of interest prompted Congress to update and modernize federal ethics laws.  A 1962 statute banned four types of conflicts, those arising from employees: i) awarding themselves government contracts, ii) assisting anyone in pursuing a claim against the government, iii) taking money from someone for discharging their duties as a government employee, or iv) advising, after leaving government employee, an individual or firm on a matter they worked while an employee.

Each of these four involves the possibility that the employee will put his or her personal, financial interest ahead of the public interest when taking a decision.  These are clear, “bright line” rules easy to understand and easy to enforce.  The problem has come with the subsequent expansion of the term “interest.”

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Preventing the Next Sheldon Silver

Sheldon Silver, speaker of the New York State Assembly, was arrested last week on federal corruption charges, sending shock waves through New York’s political circles. He is accused of accepting millions of dollars in disguised bribes for more than a decade. Silver allegedly asked developers with business before the state to spend money on a law firm that, in turn, paid Silver for legal work he never did. He was able to disguise the source of the income for so long because New York, like the vast majority of other states, considers its legislature to be “part time,” freeing up legislators to maintain legitimate outside jobs, as well as their government work.

Such outside payments are ripe for unscrupulous dealings (or, at very least, the appearance of impropriety), and have long been decried by anticorruption forces. Outside payments were a primary focus of Governor Cuomo’s anticorruption Moreland Commission, which the Governor then disbanded under pressure from legislators. Governor Cuomo recently proposed a new commission to look at ways to increase disclosure of outside income and to cap the amount of outside income legislators may receive. While Cuomo’s new proposals would be a good start, they do not go far enough. The time has come to ban outside legal work for state legislators and to compensate them fairly for the full time job the people elected them to do.

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Which Firms and Employees Are Most Likely to Pay Bribes Abroad? Reflections on the OECD Foreign Bribery Report

I want to follow up on Melanie’s post last week, about the OECD’s first-ever Foreign Bribery Report, and what its findings tell us about patterns and tendencies in firms’ illegal bribe activities in foreign countries. The Report is an important and informative document that presents, as its introduction says, “an analysis of all foreign bribery enforcement actions that have been completed since the entry into force of the” OECD Anti-Bribery Convention. There’s a lot in it, and I may do another blog post at some point on some other aspect of the report. But for now I wanted to focus on one thing about the report that jumped out at me: the way in which the report’s findings seem to be in some tension with my prior beliefs/stereotypes about the contexts in which foreign bribery is most frequent.

Let me start with my prior beliefs, which are not based on much firsthand information, but which I’ve absorbed from a lot of people who work in this area, and I think are fairly widely shared. These beliefs run as follows: Whatever the world was like a decade or two ago, these days most major multinational firms recognize the seriousness of anticorruption laws like the FCPA, and most such firms have fairly robust (though often imperfect) compliance programs. When such firms run afoul of the FCPA or similar laws–which they still do, probably far too often–it is less likely these to be the deliberate policy of senior management, and more likely to be low or mid-level employees “in the field,” under pressure to increase business in high-risk emerging markets. This doesn’t mean senior managers are blameless–they may have failed to set the right “tone from the top,” or failed to implement an adequate compliance program, or looked the other way. But at major multinationals, many (including me) were of the view that bribery is usually not the firm’s policy. By contrast, the thinking often goes, small and medium-sized enterprises (SMEs), expanding in to high-risk foreign markets for perhaps the first time, are much more likely to run afoul of the FCPA. They are less likely to be familiar with the statute, less likely to have sophisticated (and expensive) compliance programs in place, and less accustomed to managing the pressures of doing business in environments where corruption is prevalent.

The OECD Report strongly implies (but does not quite say) that this is (mostly) wrong. As the report states at the outset, “[c]orporate leadership [was] involved, or at least aware, of the practice of foreign bribery in most cases, rebutting perceptions of bribery as the act of rogue employees.” More specifically, in the 427 foreign bribery enforcement actions the OECD examined, in 12% the CEO was involved, and in another 41%, “management-level employees paid or authorized the bribe.” As for the firms involved, the OECD found that “[o]nly 4% of the sanctioned companies were … SMEs,” while in 60% of cases the company had over 250 employees, and in another 36% the company size could not be determined from the case records.

So, does this mean my prior beliefs were all wrong? Are the most likely foreign bribery culprits senior executives at large multinationals, rather than lower-level employees and SMEs? Maybe. But not necessarily. Whereas Melanie treated the Report as refuting the “rogue employee myth,” and spinning out the logical consequences of that refutation, I want to take a different tack, by raising a few questions about how we should interpret the report’s findings here for the types of foreign bribery problems that are most typical. Indeed, although the OECD Report’s findings are important and ought to provoke all of us to re-examine some of our assumptions, I want to suggest a few reasons to be cautious about not drawing overly broad and unwarranted inferences on these particular points. Continue reading

Bribery in the Boardroom: Implications for Internal Reporting Programs

Early last month, the OECD released its first Foreign Bribery Report. According to Angel Gurria, the organization’s Secretary-General, the report “endeavors to measure, and to describe, transnational corruption based on data from the 427 foreign bribery cases that have been concluded since the entry into force of the OECD Anti-Bribery Convention in 1999.” The report as a whole is quite interesting, but I would like to hone in on the OECD’s findings regarding who engages in bribery, and how this should change how we approach arguments on whistleblower internal reporting requirements.

The report found that, contrary to popular belief, in the majority of cases senior management were aware of or endorsed the payment of whatever bribe occurred (in 41% of the cases senior management was implicated, in 12% even the highest level executives were aware of the bribe being paid). As the report notes, this “debunk[s] the “rogue employee” myth,” and this, I would argue, calls into question internal reporting requirements as a means of combating foreign bribery. Continue reading

Trust in Government and Public Health: Corruption and Ebola Revisited

A little while back I did a short post expressing skepticism about some claims that corruption was a significant contributor to the Ebola outbreak in West Africa. I agree that insofar as corruption diverts resources from public health and sanitation, or leads to undersupply of necessary medicines and supplies, it is likely to worsen both the frequency and magnitude of public health problems. But I was more skeptical that there was any direct evidence that the admittedly rampant corruption in places like Liberia, Sierra Leone, and Nigeria was a major contributor to that particular public health crisis.

Last month I was fortunate enough to moderate a panel on corruption and public health at the World Bank’s International Corruption Hunters Alliance meeting, and the presentations at that panel have altered my thinking about this issue somewhat. More generally, several of the presenters from countries hit hard by Ebola — including Commissioner Joseph Kamara of Sierra Leone’s Anti-Corruption Commission and Commissioner Aba Hamilton-Dolo of the Liberian Anti-Corruption Commission — made a convincing case that corruption has been, if not a primary cause, then at least a significant contributor to the extent and severity of the Ebola outbreak. Of course, there is still relatively little direct evidence, and it’s reasonable to wonder whether commissioners on anti-corruption commissions may be likely to overestimate the significance of their particular issue area for the most pressing immediate crisis facing their nations. Nonetheless, they did make a plausible case that corruption, while perhaps not a direct contributor to the outbreak, has significantly impeded the response.

On this point, Commissioner Hamilton-Dolo emphasized an important argument that I hadn’t really paid enough attention to, even though I quoted Professor Taryn Vian making essentially the same point in my earlier post: in addition to the squandering of public health resources, corruption may also impede the effective response to public health crises by undermining trust in government. The argument, as I understand it, goes something like this: Continue reading

Why Context Matters: The Failure of the Ugandan Revenue Authority to Curb Corruption

In his 2013 volume explaining why donor-supported reforms often go awry in developing states, Kennedy School Professor Matt Andrews lays the blame on the failure to appreciate how political imperatives, patronage networks, cultural practices, and other elements of local context affect the way reforms are implemented.  While Andrews offers telling examples of how ignorance of context doomed reforms in Argentina and Malawi, the failure to stamp out corruption in Uganda’s revenue collection service provides an even more vivid illustration of the way the very different context in a developing state can cause “best practice” reforms to fail.  The analysis is taken from Odd-Helge Fjeldstad’s classic account of the attempt to reform tax collection in Uganda, “Corruption in Tax Administration: Lessons from Institutional Reforms in Uganda,” chapter 17 of Susan Rose-Ackerman’s 2006 edited volume, International Handbook on the Economics of Corruption.

In 1991 revenue from taxes and customs duties in Uganda were seven percent of GDP, an astonishing low figure even on a continent where tax evasion was the norm.  Under pressure from the IMF, the World Bank, and other donors the then recently installed government of Yoweri Museveni took decisive action.  Following what was then considered best practice for boosting revenues and cutting corruption in a revenue service, the government made the revenue department of the Ministry of Finance into an autonomous agency.  Independent agency status allowed the Uganda Revenue Authority to implement a number of reforms to reduce corruption.  Salaries were raised above civil service levels and strictures on firing non-performing workers removed.  As a new agency, all employees were considered new hires and had to prove themselves during a probationary period; as a result almost 250, or 15 percent, of the old revenue department staff were weeded out.  In addition, “clean” expatriates were hired into senior management positions, and measures were taken to improve morale: offices were upgraded, working conditions improved, and training provided.  All in all, the Uganda Revenue Authority was considered a model for how to create an efficient, non-corruption revenue collection agency.

During the first years of its existence, the authority’s performance suggested these reforms were succeeding.  Revenue collection as a percentage of GDP improved and perceptions of corruption declined.  These early indicators of success, however, soon began to decline.  Forty-three percent of businesses surveyed in 1998 reported paying a bribe to a Uganda Revenue Authority employee; in March 2000 President Museveni termed the authority a “den of thieves,” and in 2003 its former head listed corruption as “problem number one” in the organization.  A Commission of Inquiry of C corruption in the Uganda Revenue Authority was appointed in 2002, and although its report was never released, leaks suggest the commission found massive corruption in the ranks. Continue reading