Monthly Archives: July 2014

Should FCPA Sanctions Be Nine Times Larger?

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In my post last week, I discussed a recent working paper (by Cheung, Rao, and Stouraitis) that attempted to measure the economic returns firms reap from foreign bribery — and which reached the depressing conclusion that, much as we would like to believe otherwise, bribery still “pays.”  In doing a bit more research along these lines, I came across another terrific working paper — by Jonathan Karpoff, D. Scott Lee, and Gerald Martin — that investigates a similar question, using a somewhat different (though complementary) method, and reaches a similar conclusion: in the authors’ words, “firms engage in bribery because it pays to bribe, on average.”

Let’s suppose — plausibly, in my view — that these papers are correct in their conclusions that, given the expected costs of foreign bribery (probability of detection times expected magnitude of direct and indirect sanctions), many firms will find it in their rational self-interest to bribe.  If one believes (as I do) that foreign bribery is a social cost that we should try to deter (if we can do so at reasonable cost), then this implies that we should increase the expected cost to firms of paying bribes abroad — either by increasing the probability of detection, or the size of the penalty, or both.

One of the cool things about the Karpoff, Lee, and Martin paper is that it attempts to calculate just how much higher the penalties would have to be in order to deter foreign bribery, if the probability of detection remains constant.  Their sobering answer is that the average penalties would have to by about 9.2 times larger.  So, despite all the hyperbole about the enormous size of FCPA penalties (with the US government bragging about the large penalties, and the business community and defense bar griping about same), this recent research suggests that the penalties are almost an order of magnitude too small, if we really want to deter foreign bribery. (The authors also calculate how much the probability of detection would have to increase to deter foreign bribery, if the penalties remain the same.  Their conclusion is that it would have to increase from the current estimated level of 6.4% to about 58.5% — clearly unrealistic.)

What to make of this?  A few preliminary thoughts:

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Fixing the Mutual Legal Assistance Regime: Some Thoughts on Reform

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Last week I reported that the United States was often slow to respond to requests from other nations for evidence needed to prosecute corruption cases in their courts and that as a result some cases have had to be dismissed.  I also noted that, as of spring 2013, 4500 requests awaited processing, a backlog the Justice Department blames on a shortage of personnel.  In a comment on the post. Matthew asks two questions:  1) are there other ways besides adding staff that countries can reduce the delay in responding to requests for legal assistance and 2) is the U.S. the only country with a large backlog of requests.

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Maybe Brazil’s Painful World Cup Defeat Was a Blessing in Disguise

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So the 2014 World Cup is over (congratulations, Germany), and the result was a disappointment for the host nation, to say the least.  Brazil’s ignominious 7-1 defeat in the semi-finals will probably go down as one of the worst sports losses in the country’s history.  As someone with many very close Brazilian friends, I’m hesitant to suggest that there may be anything good about Brazil’s loss.  But I’m going to anyway, from the perspective of anticorruption activism.  Here goes:

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Conference Room Advocacy: The Negotiating Power of Corporate FCPA Defendants

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For years, commentators have decried the plight of the corporate FCPA defendant in a world without trials: As Arthur Andersen made clear, most companies accused of crimes by the Department of Justice (DOJ) can’t afford to go to trial. As a result, the story goes, prosecutors are able to pressure companies into accepting negotiated resolutions of FCPA charges that rest upon conclusory allegations and dubious, untested legal theories. This story, often retold, is at the core of what Professor Mike Koehler calls “The Façade of FCPA Enforcement.” It also happens to be a gross oversimplification. Corporate FCPA defendants may not go to trial, but they aren’t helpless victims of prosecutorial bullying. Even as their advocacy shifts from the courtroom to the conference room, these defendants often retain powerful forms of leverage over federal prosecutors.

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Dollar for Dollar, Procurement Collusion Is Still Better Than Outright Bribery

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In a piece on this blog last March, Rick highlighted a perverse consequence of requiring transparent bidding in government procurement. Although bid disclosure is intended to prevent public officials from secretly favoring companies that pay bribes, it can facilitate collusion among bidders by making it impossible for cartel members to defect from collusive agreements without getting caught.  As a result, the cartel is easily enforced and the public pays an inflated price for the goods or services being supplied, yielding improper profits for the winning firm just as if it had paid a bribe to secure the contract.

Rick’s example reminds us of the importance of considering the collateral consequences of anti-corruption remedies before employing them.  Nonetheless, public procurement reform could be an instance in which it is desirable to shift the method of corruption, even if we can’t reduce the total loss to corruption on a dollar-for-dollar basis.  Even if the private cartel problem worsens, this could be a cost worth bearing if it leads to less collusion between government procurement officers and favored private firms.

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Does Bribery Pay? For Whom? And How Much?

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Anticorruption advocates—including those in the private sector who have taken the fight against corruption seriously—insist that bribery is bad for business. That’s likely true in the aggregate, and perhaps it’s true for some individual firms. But it’s probably not true for all firms—otherwise, why would so many of them pay bribes? But it’s hard to know how much firms benefit from bribery. Likewise, while would be useful to know more about the factors that affect the size and probability of bribery, figuring this out is a challenge because of the secrecy of corrupt transactions.

In a recent working paper, Yan Leung Cheung, P. Raghavendra Rau, and Aris Stouraitis try to get at these questions by looking at enforcement data for anti-bribery laws–both laws that apply domestically and those (like the U.S. FCPA and the UK Bribery Act) that prohibit foreign bribery. In particular, the study examines a subset of reported cases where (1) a bribe was (allegedly) paid for a particular, identifiable public contract, announced on a specific date, (2) there is stock and financial data for the firm, available on a day-to-day basis, and (3) the enforcement data contains information on the size of the bribe paid to secure the contract. Armed with that information, the authors reason that we can use the abnormal increase in firm market capitalization that coincides with the announcement of the contract as a measure of the gross benefit of the bribe to the firm (the authors assume that bribe-paying firms would not have gotten the contract without paying the bribe). We can then subtract the size of the bribe from that gross benefit to get the net benefit of bribery for the firm. On top of that, the authors reason that we can learn something about how the total gains from the bribe transaction are allocated between the firm and the corrupt public official by dividing the size of the bribe payment by the sum of the bribe payment plus the gross benefit of the bribe. The higher this ratio, the more the benefits of bribery go to the public official; the lower this ratio, the more the benefits of bribery accrue to the bribe-paying firm.

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America’s Broken System for Helping Friendly Nations Prosecute Corruption Cases

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Gaborone, Botswana, is not the place one would expect to find a group advocating that the United States government get tough on crime, but then the advocates were not the typical Washington cabal of interest group representatives, activists, lawmakers, and media.  Rather, they were investigators and prosecutors from 14 African anticorruption agencies attending a workshop on corruption investigations sponsored by the Association of Anticorruption Agencies in Commonwealth Africa.  Why the advocacy?  What is the complaint with the U.S.?

Especially in the smaller African countries, any significant corruption case almost inevitably requires a cross-border investigation.  The alleged corrupter is in one jurisdiction, the alleged corruptee in a second, and what may be the proceeds of the crime in a third.  Although the U.S. would seem to be a long way from Lesotho, Namibia, Malawi, and other Sub-Saharan nations, workshop participants explained that not only are corrupters sometimes located in the U.S., but many African elites favor parking assets acquired corruptly in American banks, real estate, and financial assets.  Hence the anticorruption authorities of Sub-Saharan states frequently seek help from the U.S. to locate stolen assets, obtain business records, and depose witnesses.  In a session devoted to the mechanics of investigating cross-border cases, however, not one of the 30 participants identified a single instance where the U.S. had timely responded to their request to provide evidence they needed to help convict corrupt public officials or freeze or seize his or her assets.  Indeed, several said they had been forced to dismiss charges or allow freezing orders to lapse because the U.S. had failed to reply to their requests. Continue reading →

Updated Anticorruption Bibliography

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An updated version of my ever-expanding bibliography on corruption and anticorruption is now available from my website, and a direct link to the pdf is here. I’m always looking for new sources to add, so if you have suggestions for additions, please send them using the Contact page.

Improving OECD Convention Enforcement While Respecting Voluntariness: The Case for an Optional Protocol

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Jordan recently floated a very interesting idea on this blog about how to move forward in strengthening enforcement of the OECD Anti-Bribery Convention. As he pointed out, the Convention itself allows extremely limited means of enforcement: other than shaming noncompliant countries with scathing reports, there’s nothing that can be done within the existing framework. Since changing the Convention to include new sanctions is a nonstarter because noncompliant nations would need to accede to those changes, he suggested that willing members of the Convention “[d]evelop an extra-Convention agreement” to reward countries that live up to the terms of the Convention and “impose collateral consequences upon those who don’t.” The upshot of this extra-Convention agreement is that it would allow states to punish and pressure countries like South Africa, which has resisted the shaming effects of the Convention’s reports.

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Corruption and Liberalization: Two Paradoxes

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Some aspects of a comprehensive anticorruption strategy are specifically targeted at corruption itself. But sometimes it makes sense to consider how broader political or economic reforms might ameliorate or exacerbate the corruption problem. Indeed, fighting corruption is often invoked – perhaps sincerely, perhaps strategically – as a justification for more general political and economic liberalization. But the relationship between political and economic liberalization, on the one hand, and corruption, on the other, is complicated, and beset by two seeming paradoxes:

Here’s the first paradox: On the one hand, longstanding democracies seem to have lower levels of corruption than do non-democracies. However, the process of democratization – the introduction of democratic reforms, along with a general liberalization of the political system – often seems associated with a significant increase in corruption. Indeed, countries going through democratic transitions, or those that have been democratic for a shorter time, seem not only to have more corruption than established democracies, but also to have worse corruption problems, on average, than non-democracies.

The second paradox, on the economic side, is similar: Some research suggests that more open economies – with more market competition, fewer state-owned enterprises, and less central economic planning – have lower levels of corruption than more statist economies. (This should not be overstated: it’s not that more regulation always increases corruption, nor is there convincing evidence that “bigger” governments, measured by the size of the public sector relative to GNP, have more corruption. Still, the balance of the evidence suggests that more open, liberal economies have less severe corruption than more statist economies.) However, the process of economic liberalization—including privatization, deregulation, etc.—often appears associated with an increase, often a dramatic increase, in corruption.

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