Demand-Side Prosecutions: Be Careful What You Wish For

Many anticorruption activists and commentators–including many contributors to this blog (see here, here, here, and here)–dream of a world in which acts of transnational bribery would trigger not only an enforcement by the “supply-side” state (that is, the home or listing jurisdiction of the bribe-paying firm) but also parallel enforcement against the bribe-taking public officials by the “demand-side” government. In such a dream world, if a large US multinational were to bribe a public official in a developing country to obtain contracts, two things would happen: the US would prosecute the firm under the Foreign Corrupt Practices Act (FCPA) and the government official who took the bribes would be prosecuted by their domestic authorities. This would create a strong deterrent effect, both for the companies for the government officials.

I, too, support the vision of a truly global fight against corruption. But perhaps some caution is warranted. This is one of those areas where the old adage to “be careful what you wish for” may apply.

Implicit in the vision of increased demand-side prosecutions is the notion that the labor of fighting corruption will be neatly divided, with the supply-side enforcer punishing the multinational and the demand-side enforcer punishing the local official. Admittedly, this arrangement does have a certain appeal — but why should a demand-side prosecutor stop at punishing just the local officials? It is entirely within their legal right to launch a parallel investigation against the foreign multinational as well.

Put differently, if demand-side countries do become much more aggressive in pursuing transnational bribery cases, they are as much or more likely to go after the foreign company as they are to go after the local public official. More aggressive demand-side enforcement against public officials will subject bribe-paying firms to greater legal exposure overall. For a vivid recent illustration of this, consider the nearly half-billion dollar fine that China levied on the pharma giant GlaxoSmithKline for allegedly bribing Chinese doctors and hospital officials–and while we can only hope that the corrupt officials are being prosecuted in China, we know all too well that GSK is still under FCPA investigation by the US authorities for the same conduct.

This may seem like a good thing–a developing country should exercise its sovereign authority to penalize bribes paid on its soil, and heavier penalties would strengthen deterrence (especially as some studies of current FCPA penalties suggest that they are far too low to offset the economic benefits of foreign bribery). However, as Matthew pointed out in an earlier post, demand-side prosecutions of bribe-paying firms might discourage companies from self-disclosing potential violations to supply-side enforcers (such as the US DOJ and SEC), and if this perverse effect is strong enough, it might weaken rather than strengthen deterrence overall. Self-reporting is already unpalatable, but at least it leads to a predictable settlement with supply-side enforcers — if self-reporting also started triggering unpredictable demand-side prosecutions, then the calculus may change.

Even if multinationals were not concerned with saving their own skin, they may avoid self-reporting to protect the demand-side officials who gave them the undue benefit in the first place. If it became clear that supply-side prosecutions from certain countries (like the US) triggered demand-side prosecutions as well, officials in developing countries may avoid doing business with American firms. Better to deal with multinationals from jurisdictions that don’t prosecute transnational corruption at all. Faced with the unappealing prospect of losing foreign government contracts to firms from less parsimonious jurisdictions, supply-side firm may choose to avoid self-disclosure altogether.

Matthew’s earlier post, which cautions against rushing headlong into an analogous set of mis-incentives, is well worth the read to understand why a decline in self-disclosures could be disastrous for the global anticorruption movement. While I absolutely support the movement to encourage prosecution of officials who take bribes (my organization LIDS Global is exploring Ignacio Boulin-Victoria’s proposal to do just that), I raise these sobering possibilities so that us dreamers can carry on undisturbed.

12 thoughts on “Demand-Side Prosecutions: Be Careful What You Wish For

  1. If I remember my public international law correctly, “comity” is the term states and their courts use when respecting the decisions of enforcement authorities in other states in making their own decisions. The desire to recover large sums of money, and perhaps to make a statement to others about one’s anticorruption credentials, are likely to make for less comity over the coming years in the anticorruption arena.

    The only solution I see is agreement on some basic rules of the road spelled out, perhaps, in a protocol to UNCAC. That would require a good deal of preparation, starting with scholarly analysis of the various pros and cons of how best to resolve conflicts between demand and supply states. Chris’ post and the several others on GAB on this topic are a great start. But much more is required. International law scholars need to put their word processors in high gear.

    • Thanks for the comment Rick. I agree that something needs to be done — perhaps as you say an addition to the UNCAC is needed to aid coordination. Jordan’s recent post about the Chinese prosecution of GlaxoSmithKline also touches on this, and I think it raises the spectre that it is going to be hard to find a one-size-fits-all approach. A reversal in the significant gains we have seen in comity and law enforcement cooperation in general would be a real setback to global anticorruption efforts.

  2. Chris, I share many of your concerns regarding the potentially negative repercussions of the rise of demand-side prosecution and I agree completely with Rick that this is a fascinating topic – and one rife with possibilities for additional scholarship by anticorruption experts. However, while I agree with Rick that in the short term it’s vital that the anticorruption community turn its attention to how best to harmonize the anticorruption efforts of demand and supply-side countries, I’m somewhat dubious about the possibility of ever laying out an optimal set of rules to respond to this situation. Obviously this does not mean that we should not try to address some of the concerns you’ve raised in this post. However, I wonder if the rise of demand-side prosecution (and the increased interest in anticorruption prosecution amongst the international community it suggests) should instead be interpreted as an indication of the potential benefits of a global anticorruption agency or institution that will have the authority to oversee both the demand and supply side of a prosecution. We’re obviously very far away being able to implement this kind of solution, however it seems like a possible means of extricating ourselves from the numerous complications raised by the advent of demand-side prosecution.

    • Ah, you pick up where Rick and I left off right above! Yes, there is no doubt about it (and I’m sure Rick would agree) that an overarching set of rules to govern multi-country corruption prosecutions is going to be tricky to devise. I’m somewhat surprised, however, that you would take Rick’s suggestion to the next level and call not just for international-level rules, but also for an anticorruption agency! No doubt that *would* be a solution, at least in terms of coordinating enforcement. Are you a supporter of Judge Wolf’s International Anticorruption Court (IACC) proposal?

  3. This is definitely a tricky problem Chris, and I don’t envy the policy makers trying to determine where to draw the line. A few of your premises made me re-think, however, whether we should be trying to divvy up responsibility at all. We’re balancing a few things in this equation: the company’s interests, the states’ interests, and (sadly) further down the line, the peoples’ interests. I think our concern with over-punishment/over-deterrence stems from the fact that the anti-corruption movement has long been driven by jurisdictions which are also home to the companies often caught paying the bribes. For political, economic and other reasons, these countries are rightly attempting to balance integrity concerns with economic concerns. The picture, however, looks a bit different from the demand-side perspective. If a government employee takes a bribe from a foreign company in return for awarding a government contract, the country loses in various ways: it gets a lower quality product, wastes funds, has it’s laws affronted and it’s public officials corrupted. I think many demand-side countries would bristle at the idea that, though they are the country more harmed, they should accept less than full recompense in order to protect the foreign, bribe-paying company from over-punishment, but if for reasons of comity or economic development harmonization needs to happen, it makes sense to me to that the harmonization skew heavily in favor of the demand side country (assuming that country is able to effectively prosecute). I take the point that we may see a decrease in self-reporting in supply-side countries, but in terms of overall prosecutions/reductions in bribery it’s reasonable to believe that this would be offset by the degree to which demand side countries have the home side advantage in being able to detect and investigate corruption (again, assuming both capacity and political will to do so). The end goal, I should think, would be for demand-side countries to have the lions share of anti-corruption enforcement and punishments, as they bear most (though not all) of the harms. This being my starting point, I’m hesitant to endorse any proposal (be it line drawing or a supranational organization) which effectively curtails demand-side sovereignty. These options are appealing given the lag in capacity and political will in many of these jurisdictions (hence a few larger economies taking the lead), but they could also end up hobbling anti-corruption efforts in the long term.

    • To be honest, I agree with you completely. I just think the interim, growing-pains period is going to be very bumpy and I suppose the idealist in me wishes (like Lauren above) that we could come to agree on some overarching set of rules —- but such is the classical dilemma of international law. Absent that wish coming true, you are certainly right that we ought to be encouraging demand-side prosecutions. This is exactly the robust set of justifications that I wished my post would prompt! Thanks so much for your thorough response, and to carry on the (cheesy) theme of my post’s last line: I can sleep better now.

  4. Chris, while I agree with your reasoning, I found myself having similar thoughts to Melanie when reading this. I think you’re right that the incentives could cut against having more robust demand-side prosecutions, but I think that’s also the more sustainable route. At the end of the day, its the on the demand-side countries’ soil (so to speak) that these bribes are taking place. The demand for bribes is only a symptom of larger systemic issues that need to be dealt with from inside-out and bottom-top rather than the other way around. It seems to be like building local capacity to carry out domestic-prosecutions while slowly cutting down on supply-side prosecutions might hit that delicate balance to provide incentives to self-report since the company is facing the same or less liability in total, just more from liability the demand-side enforcer and less liability from the supply-side. Might domestic prosecutions of international companies provide demand-side countries the right incentives to strengthen their anticorruption efforts more sustainably than international prosecutions?

  5. I found this pretty interesting too!
    I however remain firmly “undisturbed” – and even before the Huang Fengping sentencing – considered it all of a great thing that China fined a Chinese subsidiary of a multinational company. As with GSK and others, I suspect that increased prosecutions from demand and supply side jurisdictions will make corruption more expensive and strengthen deterrence. Again, flowing from more recent comments from the DOJ, self-reporting is no longer as significant for effective enforcement as it used to be. The DOJ actively investigates so that the decision to disclose is often a rational one, made in search of cooperation credit for the inevitable prosecution.

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