An earlier post urged developing states to require firms doing business with them to have procedures in place to prevent their employees and agents from bribing government officers, making false claims, or committing other corrupt or fraudulent acts during the execution of a government contract. Mandating that government contractors institute anticorruption compliance programs is an American innovation that works reasonably well there and is spreading to other nations. Here I advocate a second American effort to curb corruption in government contracting that has not worked well in the United States but can in developing states.
Since December 1, 2008, any firm contracting with the federal government of the United States has been required to report to the government employee overseeing the contract any “violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations” it learns of. Federal Acquisition Regulations Sec. 3.1003. Firms must also disclose any civil violation of the False Claims Act, the law banning the knowing submission of a false claim to the government for payment. The failure to “timely disclose credible evidence” of either can result in the suspension of the contract or the firm being denied future contracts or both. The reporting requirement continues for three years after the contract is completed. Unlike the anticorruption compliance program regulation, the mandatory disclosure rule applies to all contracts regardless of size or time to execute; it covers all firms as well: small and medium as well as large.
The mandatory disclosure rule replaced a voluntary disclosure requirement the U.S. Department of Defense adopted in 1986. In its first decade the Defense Department recovered some $370 million in fraudulent and corrupt payments thanks to voluntary disclosures, but when the number of disclosures fell dramatically in the program’s second decade, the Defense Department’s Inspector General suspected firms were hiding wrongdoing, and reporting was mandated. It was also required of all firms contracting with the government whether for defense articles or not.
To say the rule has not been welcomed by the U.S. contractor community would be an understatement. Commentary published during or right after its consideration was harshly critical. (Click here and here for examples of such critical commentary.) One complaint was that government rule-makers had no evidence that voluntary disclosure was not working. Fewer disclosures were not proof that contractors were hiding violations; it was just as likely that thanks to the rule there were fewer incidents to report. Furthermore, a company that knew about a violation and did not report it was not likely to report simply because reporting was mandatory. If executives were not disclosing violations it was almost surely because they were complicit in them.
A second complaint with the rule was lawyerly lament about its vagueness. When was evidence “credible”? When was disclosure “timely”?
The extant evidence suggests the contractors’ complaints have merit. U.S. Department of Defense Inspector General reports show that close to 2/3rds of all disclosures involve minor infractions arising from labor overcharges. An employee of the contractor or one of its subcontractors will charge for working eight hours on the project when he or she only worked six. The Defense Contracting Audit Agency follows up on all such disclosures, and according to the contracting community, it has fallen behind in its more important work of auditing as a result of the flood of labor overcharge cases.
That the rule does not appear to be working well in the United States is no reason why developing states should not embrace it. Demanding a firm doing business with the government come forward with evidence its employees or agents corrupted or defrauded government will help developing countries combat corruption in an area where it is rife: the execution of government contracts. By alerting authorities to possible violations, it will help conserve on scarce enforcement resources and serve to inform law enforcers about types of fraud and corruption they may not have the time or expertise to root out on their own.
The objections raised to the U.S. rule are readily dispatched. Lawyer complaints about the vagueness of the terms “credible” and “timely” in the U.S. regulation are easily remedied. Drafters can either offer additional language clarifying what “credible” and “timely” means or they can write a bright line rule that, say, requires the disclosure of any evidence of wrongdoing immediately. To guard against a situation like that now prevailing in the Department of Defense, where investigators are chasing small, immaterial cases, the rule could make it clear that investigation of any disclosure will be at the discretion of the enforcement authorities.
American contractors’ strongest argument against mandatory disclosure was that on the evidence voluntary reporting seemed to be working fine. Among reputable U.S. firms reporting was an accepted practice, failure to do so if discovered risked a loss of reputation and business, and a firm that voluntarily reported a violation was not put at a disadvantage vis-à-vis its competitors for “everyone did it.” While there is no law in any developing state that this writer knows of that bars firms from voluntarily disclosing evidence of corruption, internet searches and discussions with anticorruption agencies in several nations has revealed no instances where a firm has come forward on its own to reveal evidence of wrongdoing.
It is not surprising that voluntary disclosure is unknown in developing nations. Neither the homogeneity of firms characteristic of U.S. contractors, the strong, disciplining effect of reputation on their conduct in the U.S., or other characteristics of American procurement markets that created a favorable environment for voluntary disclosure are found in developing states. Developing countries contract with firms from many different nations, and firms from different nations have differing norms of behavior about fraud and corruption. The absence of shared norms makes voluntary disclosure unlikely. A reputable firm doing business in a developing country cannot be sure a voluntary disclosure would not put it at a disadvantage when competing against firms who do not disclose. Hence it has no incentive to disclose any violations by its employees or agents.
The benefits of repeat business, which lies behind concerns about reputation, also provide little or no incentive to disclose violations. Being blacklisted by the U.S. government can be a severe blow to a firm’s financial future, for the U.S. procurement budget is large and likely to remain so in the future. Thus there is a powerful incentive to comply with the U.S. government’s anticorruption and integrity rules. On the other hand, even if a firm executing a contract in a developing state is found to be corrupt or fraudulent, a risk often not great given the limited enforcement resources in many developing states, being blacklisted by a poor country with a small procurement budget may be of little concern.
Developing states should mandate that any firm with which it contracts disclose any evidence it discovers that its employees, agents, or subcontractors has violated any provision of the national anticorruption law. An easy change to procurement law or regulations that would provide one more way to combat corruption.
GAB | The Global Anticorruption Blog 
This all strikes me as quite sensible, but I have a few questions.
First, do you have a sense that this mandatory disclosure requirement is likely to be honored (and enforced effectively) in many of the developing countries you have in mind? I can see why, if you’ve got a basically honest firm that discovers some of its employees have broken the law, there might be an incentive to disclose, and also why that incentive might not be strong enough to rely on purely voluntary disclosures. But where you’ve got a thoroughly corrupt contractor that relies on bribery, it’s hard to imagine there would be significant compliance with the reporting requirement.
Second, it’s worth highlighting that this solution doesn’t work so well when the officer to whom the firm would be obligated to report is a participant in the corrupt transaction. That’s not an objection, just an observation that it looks like this proposal would be more effective in combating, say, overbilling or other forms of fraud than at deterring collusive bribery.
Third, although I agree with your point about how the problem of excessive attention to trivial violations could be addressed by making investigation discretionary, it’s worth highlighting that in some legal systems that would be a more significant departure from prevailing norms. The US has a very strong tradition of prosecutorial discretion, but in other countries prosecutors would in principle be required to move ahead any time there’s credible evidence of a criminal violation. (Indeed, think about Mohamed’s post from a couple weeks ago, which argued for doing more to constrain prosecutorial discretion.)
Finally, how worried are you about the potential for abuse — the possibility that the government can exploit the stringent penalties associated with failing to report to target certain firms for illegitimate reasons? That can already happen, of course, but I wonder whether the sort of system you have in mind might not be even more susceptible to abuse.
Matthew,
What we want to do is move from the current situation where no one reports anything to one where reporting is the norm. Where a contractor building a large, complex facility who never ever reports a problem is suspect.
Critical will be the way the first reports are handled. Government agents should make it clear that firms that report will not be punished for coming forward but will be lauded – so long as they report accurately and completely. The model would be the treatment of Morgan Stanley after it disclosed one of its employees had violated the Foreign Corrupt Practice Act to secure business in China. (http://www.secmiscellany.com/2012/05/09/sec-and-doj-issue-first-fcpa-declination-opinions/) The ideal is an environment where compliance is treated as a cooperative endeavor rather than an adversarial one.
It’s true that where the authority to which the firm must report is part of the corrupt scheme, mandatory reporting is unlikely to work or work as intended. One safeguard is to ensure that reports go to more than one government agent – say the anticorruption agency, the prosecutor, and the supreme audit agency. That would make inaction less likely.
Ensuring the authorities in countries where prosecution is mandatory aren’t absorbed chasing trivial cases can be addressed through country specific solutions – from defining the violations reported as “administrative” to amending the mandatory prosecution law to except self-reported violations to the way a thorough and accurate report is handled by the authorities.
Yes, mandatory reporting could be abused – as can any system. The standard safeguards are 1) diffusing power over the process by involving different agencies within government so one can check the other and 2) ensuring legislators, the media, NGOs, and other watchdogs are watching the process. Both must be in place.
It seems to me that this requirement overlooks a couple of key issues inherent to corruption within developing states.
First there is an issue of interpreting local laws. Your recommendation that companies report any violation of local anticorruption regulations overlooks the fact that many of these regulations are plagued by overlap, contradiction, and other interpretation-related issues. As you said, many cultures view corruption differently which makes interpretational discrepancies inevitable from the start. Combine that issue with the fact that many developing countries’ anticorruption laws have been put together piece-meal by diverse groups and stakeholders, and the probability that any reporting will be reliable decreases significantly.
Next, there is the issue of follow-through. The metaphorical carrot for companies complying with recommended corruption reporting would be repeat business with developing governments thankful for honest reporting—a benefit that you have indicated may not be substantial due to these governments’ limited funds. The metaphorical stick, on the other hand—a more effective tool in many corruption-related scenarios—is the promise of prosecution or loss of privileges in the case of non-compliance. Many of the developing countries that may benefit from these recommendations, however, do not have the human resources to handle the enforcement of additional anticorruption measures. They struggle to find the time, money, and personnel to examine corruption reported through existing channels, let alone to expand their efforts. See, e.g., Bertram I. Spector, Detecting Corruption in Developing Countries: Identifying Causes/Strategies for Action 235 et seq. (2012) (discussing Timor Leste and its difficulties in finding enough qualified persons to staff government anticorruption efforts). For this reason, it may be better to implement your recommendations via large, well-staffed international watch agencies or non-governmental institutions, at least in the short term to ensure that compliance benefits both the companies and the governments with whom they are working. These programs could then be adapted to local needs and then handed off to local officials for long-term implementation.
Lastly, and perhaps most cynically, is the fact that a company must often times engage in corrupt acts in order to secure work with a developing government. Perhaps I am reading your analysis incorrectly, but wouldn’t this requirement be of little use if it is put in place by the same government that demands the bribes in the first place? Though many developing states are making great progress in changing their cultures for corruption, the fact is that in order to stay competitive in certain markets, companies may have no choice but to hand out bribes. Because of this, mandatory reporting may wind up benefitting the most corrupt corporations—those willing to look the other way—unless other, compelling benefits can be secured as a result of compliance. See http://www.cnn.com/2012/04/26/opinion/miron-wal-mart-bribery-law/.
I can, however, see the benefit in instituting such a requirement, not for the purpose of actually stopping the corruption being reported, but as one means of signaling to local government officials that corruption should not be accepted as a part of business as usual. Changing the culture of corruption is a big task in many developing states, and perhaps such a requirement could prove to be useful in that sense.
Thanks for the comments. A couple of thoughts in reply —
1) I am not so sure that developing countries’ anticorruption laws are in as bad a state as you think. Many have been revised in the wake of ratification of UNCAC and in the countries I know best (anglophone African nations) that process has often produced reasonably clear and coherent statutes — at least when it comes to the conduct expected of the private sector. It is the government official subject to laws criminalizing “abuse of office” that is at risk of running afoul of vague laws.
2) You write that mandatory reporting would “be of little use if it is put in place by the same government that demands the bribes in the first place.” Governments do not demand bribes; people do. In some governments there be more people demanding them than in others, but there will always be at least some people who don’t or won’t demand them. The purpose of mandatory reporting is to strengthen them and those on the other side of the table who don’t want to pay. As you say, one aim of mandatory reporting is to signal a change in culture or norms. And adopting measure that help tip the balance from the corrupt to the non-corrupt is one way to produce a change in culture or norms.