A couple months back I finally had a chance to read the Stolen Assets Recovery Initiative (StAR)’s latest report, Left out of the Bargain: Settlements in Foreign Bribery Cases and Implications for Asset Recovery. It’s a very useful report (though a lot of the preliminary material is pretty dull, but fortunately fairly skimmable). The key descriptive finding is that “significant monetary sanctions have been imposed [in foreign bribery cases] with hardly any of the respective assets being returned to the countries whose officials have allegedly been bribed.” The overall tenor of the report is that this is a problem. Although the report uses careful, measured language, I interpreted it as as a call for more aggressive action to force companies that admit to foreign bribery to pay significant fines, penalties, or other damages to the countries in which the bribery took place (either to those countries’ governments, or to NGOs or special funds). The report discusses, and seems to endorse, a range of related measures designed to further this overarching goal.
I’m sympathetic with StAR’s objectives, and with the idea that more can and should be done to help the victims of corruption. But the Left out of the Bargain report suffers from a number of serious flaws—chief among them the failure to give more than cursory attention to the possible adverse incentive effects of promoting duplicative enforcement or substantial redistribution of settlement proceeds.
Before getting to the meat of the argument, I think it’s helpful to draw more sharply two important distinctions that the StAR report sometimes elides. The first is the distinction between asset recovery actions—in which a country seeks the repatriation of assets stolen by the country’s own nationals (usually former officials or their family members)—and actions for penalties or disgorgement brought against a firm or individual for allegedly bribing foreign officials. The second distinction is between a joint or coordinated enforcement action, in which multiple enforcers work together to reach a comprehensive settlement with the defendant corporation, and follow-on (or “me too”) enforcement actions, brought by other jurisdictions or parties after one jurisdiction has already reached a settlement with the defendant.
For purposes of making my critique of the StAR report as clear as possible, let me focus on follow-on actions seeking penalties or restitution from a foreign firm that has acknowledged, in a settlement with its home jurisdiction, that it paid bribes. Imagine, for example, that the Acme Corporation, a (fictitious) U.S. firm, admits to violating the FCPA by paying bribes in Freedonia (a fictitious country), and reaches a settlement with the U.S. DOJ in which it agrees to pay $100 million to the U.S. government. Then the Freedonian government comes along and demands that the firm also pay $100 million to Freedonia (or, alternatively, demands that the U.S. transfer some or all of its $100 million settlement to Freedonia). At first blush, it looks reasonable for Freedonia to make such a demand; after all, it’s the poor Freedonians who were the main victims of Acme’s corrupt practices. I read the StAR report to be taking something like that position. But if we consistently allowed countries in Freedonia’s position to recover separately, or to claim some significant share of the U.S. government’s settlements, we might create a couple of undesirable incentive effects:
First, multiple overlapping actions may have adverse impacts on the incentives of companies to self-report violations. This is no minor matter: although some foreign bribery cases are uncovered by government investigators or by the media, a very large number of foreign anti-bribery cases begin when a company voluntarily discloses a potential violation (or set of violations) to the government. Yet companies do not report all violations (nor, in most cases, are they doing anything illegal in not doing so). When deciding whether to self-report, a company will weigh the costs and benefits. Among the principal benefits is the possibility of resolving the matter quickly and completely. Another, closely related factor that companies will consider is the reasonability of the government prosecutors (say, at U.S. DOJ) with whom they will negotiate a settlement. Self-disclosure is more attractive if a company’s officers can say to themselves, “Well, self-disclosure is going to be a pain, but we should be able to negotiate a reasonable settlement with DOJ, and then we can put this all behind us. And we’re confident we can have candid, behind-closed-doors conversations with the DOJ lawyers, so they can understand what went wrong and what we’re doing to fix it, without that information appearing on the front page of all the newspapers.” If, on the other hand, the company’s officers cannot be sure what their ultimate liability might be—because they cannot predict how the Freedonian enforcers will behave, or whether any information they disclose will remain confidential if the U.S. passes it onto Freedonia—they might decide in the end that the costs of self-disclosure outweigh the benefits, and they’re willing to run the (usually very low) risk that the violations will eventually be discovered.
Second, to the extent that the country where the corruption took place can successfully argue that it is entitled to some or all of the proceeds obtained by an enforcing jurisdiction (say, the U.S.) in a settlement agreement, this will weaken the incentives of those latter jurisdictions to enforce their foreign anti-bribery laws aggressively. To be clear, I find the claim that the DOJ vigorously enforces the FCPA as a way to make money for the U.S. government patently absurd; that’s just petty, tendentious whining. At the same time, the fines and penalties the U.S. achieves in FCPA enforcement actions are surely important to the internal politics of departmental resource allocation and prioritization. If only a modest proportion of settlement recoveries went to the U.S., senior DOJ decision-makers might begin to wonder whether it’s really worth putting as much money and time into FCPA actions, as compared with the whole range of other white collar fraud enforcement actions the Department might pursue–and it might strengthen the hand of FCPA critics who think that the U.S. shouldn’t be taking upon itself the burden of cleaning up corruption in other countries.
So, even if facilitating either separate follow-on actions or more transfer of settlement payments to affected countries would seem to be desirable, we need to keep in mind that those possibilities might reduce both self-disclosure by companies and investigative effort by enforcement authorities in the U.S. and other supply-side jurisdictions. It’s not at all clear that the developing countries (or their citizens) who suffer most directly from transnational bribery would be better off if we were to go that route. This is particularly so when one takes into account that the benefits of deterrence might dwarf those of restitution that might be paid if deterrence fails.
None of this is to say that the StAR recommendations are wrong—I don’t really know, and several of the proposals struck me as sensible. But I was disappointed in the report’s failure to seriously consider incentive effects of the sort sketched above; the report seemed to be written with the background assumption that the type and number of foreign bribery settlements would remain constant, unaffected by the possible reforms the report proposes, and that doesn’t seem plausible.
Now, my criticisms might not apply, or might not apply in quite the same way, to (1) actions to recover stolen assets from an affected country’s own nationals, or (2) actions involving voluntary coordination and cooperation among multiple enforcement jurisdictions with an interest in the same or closely related unlawful acts. The former are quite different, both in the form of the legal proceedings and the incentives they create for aggressive enforcement. (And here repatriation of assets is much more the norm — see, for example, Raj’s recent post on the Abacha asset seizure.) The latter already sometimes occurs, and we may see more of this as more enforcement agencies establish the capacity, credibility, and independence to be treated as peers by more established enforcers. But that process is a gradual one, and we need to be mindful of unintended consequences associated with multi-jurisdictional enforcement.
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I think that you raise very good points, and it is certainly a bit of a conundrum that a strategy that seems so inherently fair would actually be counterproductive. However, I think that additional enforcement by local governments (even in the least beneficial type of case, namely the follow-on enforcement action) might have at least two beneficial outcomes that you do not address here.
First, it may be politically difficult to prosecute a foreign company that has paid bribes without also at least investigating the local official who has received those bribes. Of course, this assumes that bribes actually were paid, and not only offered. Also, this common sense intuition isn’t always borne out in reality – see, for example the World Duty Free case, in which Daniel Moi was implicated, or the South African fighter jets scandal, which involved current President Jacob Zuma. One mighty expect, though, that at least corrupt lower level officials might be caught up in such a probe.
Second, it might be the case that local governments, upon seeing the benefits of increased prosecution first hand, decide to ramp up their investigations of bribery by foreign firms. It is true that bribery is difficult to detect, but one would think that a local government would be much better placed to do so than would the US DOJ. As a result, we might see enforcement that would otherwise have slipped through the cracks.
I admit that these two mechanisms are somewhat conjectural, but I think it’s worth considering some benefits of this type of strategy, especially given the positive impacts it might have on the perceived legitimacy of anti-bribery enforcement, given criticisms of moral imperialism and so on.
Phil,
These are both fair points, and to be clear I don’t want to be misconstrued as opposing efforts by developing countries to pursue their own legal actions, when their laws have been violated and their intererests harmed. And I’m all in favor of joint/cooperative investigations and comprehensive settlements, as we’ve started to see happen in some cases. That said, I think both of your points might be flipped around, and framed as concerns about, rather than advantages of, “follow-on” enforcement actions by demand-side countries.
First, while I’d love it if these investigations ended up netting more of the bribe-taking (or bribe-demanding) public officials, the experience thus far, as your comment notes, has been a bit disappointing on that score. Indeed, one might argue that the case for the US or other enforcing jurisdictions reallocating recoveries to the demand-side states is undermined by the failure of many of those states to go after the implicated officials. (Indeed, my understanding is that in two instances – one involving Costa Rica and the other involving Nigeria – the US rebuffed requests/demands for returning some of the recovery due to the requesting country’s failure to take meaningful action to deal with its own corrupt officials.) The Left Out of the Bargain report barely touches on this problem – noting it only when suggesting special funds as an alternative to repatriating money directly to governments.
As to your second point, while it would be great if US or other supply-side enforcement spurred more significant efforts by demand-side countries, the worry is that in the case of “follow-on” actions, or requests for redistribtuion of recoveries, the effect might be exaclty the opposite, becaue of the “free rider” problem.
Again, I have no problem whatsoever with demand-side countries more vigorously enforcing their anticorruption laws against foreign companies. I’m all for it. Bring it on. That can and should happen without any significant changes to the existing legal architecture in supply-side jurisdictions. But the tenor of the Left Out of the Bargain report is that we should create mechanisms that make it easier to redistribute recoveries secured by supply-side countries, or to enable demand-side countries to secure their own separate recoveries later, using the settlement with the supply-side country as the (sole) basis for recovery. And that’s where I think we need to think very carefully about the incentive effects — and where I think the LOOTB report falls short.
Your points make a lot of sense, and I’m not sure I can really disagree. This really points further to the idiosyncratic nature of corruption as a problem, in that it subverts the normal functioning of governments, thereby frustrating our (or at least my) normal understanding of how a government might react. This, of course, provides the primary justification for extraterritorial enforcement, as well as some of the more radical suggestions floating around, like an international anti-corruption investigator or court of some kind. I understand all this, but I also understand what I think to be the concerns of the LOOTB report, given that it really does seem unfair for the US Treasury to seem like the only beneficiary of corruption in other countries. In the end, it’s a frustrating problem, because it raises the bootstrapping issues common across all aspects of the study of corruption – anti-corruption enforcement probably can’t be optimal in the presence of corruption, but corruption itself is hard to significantly reduce without good enforcement measures.
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Thank you very much. I appreciate your thoughtful, detailed reply, and I encourage everyone who read the original post to read your response. My hope was that in outlining my concerns and criticisms, I might be able to stimulate more discussion about the important issues that the report raises, and I’m delighted that this seems to be happening.
In the interests of carrying that discussion further, let me briefly respond to a few of the points raised in your reply (other points are significant enough that they require a fuller response, and I hope to do a follow-up post touching on some of those issues).
To recap: My reading of the LOOTB report was that it was essentially calling for significant expansion of (1) sharing of recoveries in supply-side foreign bribery actions with governments or NGOs in demand-side countries, and/or (2) direct actions by demand-side governments (or private parties) to achieve recoveries (fines, restitution, disgorgement, etc.) against a bribe-paying firm, in addition to (and often subsequent to) a successful settlement by a supply-side country with jurisdiction. Now, the report also calls for more collaboration and collective action, and that’s all fine; nothing in my comments was really directed at those cases where authorities in different jurisdictions work closely together and coordinate their efforts–as the US and German authorities did in the Siemens case, or as the US and Thailand have been doing (at least to some extent, though there have recently been some hiccups) in the Green case. But my focus was on what I took to be the implicit call for more redistribution of settlement proceeds and/or more opportunities for direct follow-on actions (hence the implication, in the report’s title, that some countries have been “left out”).
I had two concerns about this, both of which have to do with incentives: (1) companies may be more reluctant to self-disclose in a world of uncoordinated follow-on actions; (2) supply-side enforcers may enforce less aggressively if they retain much smaller shares of the settlement recoveries. The consequence could be that the demand-side countries (which your response tellingly refers to as “victim countries,” even though the report itself assiduously avoids that language) might be worse off then they are now. As I read your reply, you make two main responses to these concerns:
First, you agree that the LOOTB study “does not delve into what [I] call[] ‘the incentive structure'” because that was not your objective, and that “discussing incentive frameworks would lead to unduly theoretical discussions, based on limited facts.” True that such discussions would necessarily be speculative, but it seems to me we need to have that sort of discussion if we want to figure out what to do. If you’re now disclaiming any normative or policy conclusions, that’s fine, but you can’t have it both ways. You can’t say (or insinuate) that the current approach to settlements is unfair, unjustified, inappropriate, etc., and then refuse to consider things like incentive effects because doing so would be “unduly theoretical.” Of course, no report can cover everything, and LOOTB has helpfully started an important conversation. But I take your concession that your report did not, and did not try to, assess the incentive effects of the report’s implicit proposals is a concession that my original critique was accurate insofar as it suggested that consideration of these incentive effects was omitted from (dare I say “left out of”) the report’s consideration.
Second, you cast doubt on my hypotheses about the possible incentive consequences by pointing out that (1) companies already self-report despite facing risks of enforcement in other jurisdictions, and (2) DOJ enforces vigorously even though in some cases victims have received restitution. Yes and yes. My argument was never that the risk of facing enforcement in multiple jurisdiction would drive enforcement to zero, nor that paying restitution to victims would drive US enforcement to zero. But the whole point of the LOOTB report (I thought) was to point out that right now there’s actually very little of either thing going on, relative to the size of FCPA settlements. The question is what happens to self-reporting and supply-side enforcement when/if enforcement by other jurisdictions and redistribution of settlement proceeds increases substantially.
One final thing: at several points in the reply you note that the report evaluates this issue through the lens of the UN Convention against Corruption, and suggest that our difference in perspective is due in part to the fact that LOOTB uses the UNCAC framework — and its legal definitions and commitments — whereas I presumably do not. That’s a bigger issue that I will try to address in a future post. In short, I continue to believe that the LOOTB report, and perhaps StAR’s approach more generally, unhelpfully conflates very different kinds of monetary recoveries (fines, restitution, disgorgement, forfeiture), and that this conflation is not mandated by UNCAC. But making that case will require a more sustained analysis, so for now I’ll leave UNCAC to one side and re-assert that a significant weakness of the LOOTB report is its failure to consider how the substantial change in settlement practices would affect incentives.
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