At last Month’s Chatham House conference on Combating Global Corruption, much of the discussion focused on how to create incentives for corporations to uncover and voluntarily disclose violations of foreign anti-bribery laws like the U.S. Foreign Corrupt Practices Act (FCPA). This is important, because as I noted in last week’s post, most FCPA violations are revealed because of self-disclosures, rather than government or media investigation. During the conversation, a distinguished lawyer (whom I cannot identify by name, because of the Chatham House Rule) made the following argument: Although the U.S. Department of Justice claims to give corporations credit for self-disclosure of FCPA violations, “a careful examination of the evidence reveals” that self-disclosure does not result (on average) in any reduction in penalties.
This is not the first time I’ve heard the claim that quantitative studies have shown no beneficial effect of self-disclosure. But that claim is false. Self-disclosure of FCPA violations may, or may not, result in significant penalty reductions; the quantitative evidence (at least that available in public sources) is inconclusive–it does not “reveal” anything one way or the other.To the best of my knowledge, the oft-repeated “no benefit from self-disclosure” claim derives from two sources. (I’m only considering sources that attempt quantitative data analysis; lots of other sources look at a handful of cases, mostly concluding that there may be a benefit from self-disclosure but it’s hard to tell how big it is.)
The first source is a student thesis by Bruce Hinchey, subsequently published in the Public Contract Law Journal in 2011, which examined FCPA actions between 2002 and 2009 and compared the ratio of penalties paid to bribe size for both self-disclosing and non-self-disclosing firms. He found that the ratio was not any smaller for the self-disclosers—indeed, it was somewhat larger. Critics of DOJ’s FCPA enforcement program took this finding and ran with it, but thinking carefully about this for 30 seconds should be enough to realize that this finding tells us essentially nothing about whether there’s a real benefit from self-disclosure.
The reason is that the pool of companies that choose self-disclosure may well be systematically different from the pool of companies that choose not to disclose voluntarily—and the differences may not just be the size of the bribes. Other factors that might influence both the self-disclosure decision and the ultimate sanctions include the strength of the evidence, the egregiousness of the violations, the company’s own history of violations, the size of the firm, etc. Hinchey’s study doesn’t even attempt to control for any of this, let alone do so convincingly. To conclude, from this study, that there’s no benefit to self-disclosing FCPA violations would be akin to concluding from the fact that people who go to the hospital have a higher mortality rate than people who don’t that going to the hospital increases your risk of death.
The other source, an unpublished working paper by the NYU law professors Stephen Choi and Kevin Davis, suffers from similar problems. The impact of self-disclosure on penalty size is not Choi & Davis’s main concern, but in one of their many regressions they include self-disclosure and find that (when controlling for the firm’s market capitalization and the size of the bribe) voluntary disclosure does have a mild negative correlation with penalty size, but this correlation is not statistically significant. To ascribe significance to this finding one would have to believe that, controlling for firm size and bribe size, the characteristics of self-reported violations and the characteristics of non-self-reported violations are, on average, indistinguishable. But again, we have lots of reasons to suspect that might not be true—firms might be more likely to voluntarily disclose violations that, for example, involve particularly willful or high-level or widespread conduct (independent of the monetary size of the bribes involved), or where the firm has been in FCPA trouble before, or where the evidence of wrongdoing is particularly strong.
None of this is to say that self-disclosure in fact does lead to significant credit. The DOJ claims this is the case, and there are plenty of anecdotes to support that position. There are also plenty of anecdotes involving firms that voluntarily disclosed and got hit with huge penalties. The average benefit of voluntary disclosure is still very much an open question. But it’s sloppy and irresponsible to make sweeping claims to the effect that “careful examination of the evidence reveals” that self-disclosure has no benefit, when a careful examination of the evidence reveals no such thing.