Guest Post: Time for Global Standards on Corporate Settlements in Transnational Bribery Cases

Susan Hawley, Policy Director of Corruption Watch, a UK-based anticorruption organization, contributes the following guest post:

Earlier this month, the OECD held a Ministerial meeting on its Anti-Bribery Convention, which culminated with Ministers from 50 countries signing a Declaration that reaffirmed their commitment to fighting transnational bribery. Despite that statement of renewed commitment, however, the fact remains that only four countries out of the 41 signatories have shown any attempt at actively enforcing the Convention, and pressure is rightly mounting on countries to show they are taking some kind of action. As a result, an increasing number of countries are looking to deferred prosecution agreements (DPAs), non-prosecution agreements (NPAs), and similar forms of pre-indictment corporate settlements as a way to achieve better results. The United States—by far the most active enforcer of its law against foreign bribery—has used such agreements to produce its impressive enforcement record over the last 10 years. The OECD Foreign Bribery Report noted that 69% of foreign bribery cases have been resolved through some form of settlement since 1999. And it’s not just the US. Various European countries have used some form of out-of-court settlement procedure as a way of dealing with the few cases against companies that they have brought. The UK has recently introduced DPAs, based on the U.S. model (though with some important differences), and countries like Australia, France, Ireland, and Canada are all considering doing something similar.

Yet the widespread use of DPAs and NPAs has prompted concerns. The OECD Working Group on Bribery, in its reviews on implementation of the Convention, has sometimes questioned whether these settlements are sufficiently transparent and effective, and whether they instill public confidence. My own organization, Corruption Watch, recently produced a report on corporate settlements in foreign bribery cases, “Out of Court, Out of Mind: Do Deferred Prosecution Agreements and Corporate Settlements Fail to Deter Overseas Corruption?” that raised similar questions. Corruption Watch, along with Global Witness, Transparency International, and the UNCAC Coalition (a network of over 350 civil society organisations across the world) wrote a joint letter to the OECD Secretary General ahead of the Ministerial meeting urging the Working Group on Bribery to assess whether corporate settlements have sufficient deterrent effect, and to develop global standards for corporate settlements in foreign bribery cases.

Why the need for greater scrutiny, and the call for global standards? Several reasons:

  • First, these sorts of settlements allow culpable individuals off the hook, undermine the deterrent effect of the law by shielding companies from debarment from public contracting, and more generally fail to deter economic crime and prevent recidivism. The concern is that the fines and other penalties associated with DPAs/NPAs are just seen by firms a “cost of doing business,” rather than an impetus for meaningful change. Recent research by Karpoff, Lee, and Martin (discussed previously on this blog) suggests that in the US, which has imposed the highest fines and taken the most enforcement actions globally, detection would have to increase by 58.5% or fines increase by 9.2 times to offset the incentive to bribe. Indeed, there are signs that the U.S., despite having relied so extensively on diversionary corporate settlements, has recognized some of these weaknesses: The introduction of the Yates memo, with its emphasis on individual accountability, and the beefing up of the FBI’s resources for investigating corruption (and thus reducing the government’s reliance on corporate self-reporting), are examples of how the U.S. is taking note of the criticism of its reliance on DPAs and NPAs.
  • Second, in addition to their inadequacy for deterring foreign bribery, in many countries the negotiation of corporate settlements lacks adequate regulation or oversight.
  • Third, these corporate settlement agreements rarely provide any sort of compensation for victims of corruption.
  • Fourth, clear discrepancies are emerging about how different countries use corporate settlements to deal with foreign bribery, creating an uneven enforcement playing field.

Proponents of settlements argue that they are necessary because corruption cases are incredibly difficult and costly to investigate and prosecute; unless enforcement authorities encourage companies to come forward with evidence of their wrongdoing, the argument goes, enforcement rates will remain low and corruption will go undetected. Clearly encouraging companies, who often hold all the information required as to whether wrongdoing was committed, to report their own wrongdoing by offering some form of incentive needs to be a part of any enforcement strategy. But there are serious questions as to whether relying solely on settlements to deal with foreign bribery cases can provide real deterrence. Unless enforcement bodies beef up their ability to detect corruption and are willing to prosecute, there is little incentive for companies to report wrongdoing that they might otherwise get away with.

So what would global standards for corporate settlements look like? The NGOs’ joint letter to the OECD, referenced above, suggested 14 standards to the OECD. At the top of the agenda were the following:

  1. Settlements should be one tool in a broader enforcement strategy in which prosecution also plays an important role;
  2. Settlements should only be used where a company has genuinely self-reported, and cooperated fully;
  3. Judicial oversight which includes proper scrutiny of the evidence and a public hearing should be required;
  4. Prosecution of individuals should be standard practice;
  5. Settlements should only be used where a company is prepared to admit wrongdoing;
  6. Compensation to victims, based on the full harm caused by the corruption, must be an inherent part of a settlement.

These are high standards, but unless settlements are based on such standards, and unless they are used as part of a broader enforcement strategy which ensures that companies that don’t cooperate or self-report do get prosecuted, public confidence that justice is really being done when it comes to corporate bribery is going to be undermined.

When Should Governments Keep Stolen Assets?

The Swiss government agreed in early March to return $321 million to the Nigerian government that was stolen by the late Sanni Abacha during his kleptocratic reign as the country’s president.   The agreement provides that the funds will be used for programs to benefit the Nigerian people in “an efficient and accountable way” and, to ensure the funds do indeed go to such programs, the World Bank will monitor their use.

World Bank oversight is one way to ensure returned assets are not again stolen, and in the case of Nigeria — a relatively open society with an elected government, a lively, unconstrained media, and a vibrant civil society – World Bank monitoring, when coupled with these conditions, may be sufficient to guarantee the funds are put to good use.  But what about in closed societies?  Those without elections, free media, an independent civil society.  Countries where the same tight-knit, authoritarian group which stole the assets in the first place remains in power?  Is there any way to ensure stolen assets returned to these countries will be used to benefit the nation’s citizens rather than going straight back into the pockets of the thieves? Continue reading

The Roles of Anticorruption Academics and Advocates: Insights from the NGO Side

One of the purposes of this blog (as noted in our mission statement) is to promote the interchange of ideas across disciplinary boundaries, including–indeed, especially–between researchers and practitioners. It turns out that despite our shared interests in understanding and fighting corruption, there’s often quite a gulf between the academic and advocacy communities. I’ve commented this difference in perspectives in the past (from the perspective of an Ivory Tower academic), both in general terms, and with respect to some particular topics, such as the optimal degree of simplification, the role of university education, and the use of eye-catching statistics. While I recognize that discussion of these issues may seem like navel-gazing, I actually think these conversations are quite important, given the complementary but distinct roles that academic research and advocacy work have in the overall anticorruption project.

I was therefore delighted to read a recent speech by Robert Barrington, the Executive Director of Transparency International UK, on precisely this topic. It’s one of the best discussions of this issue that I’ve come across. (And I’d say that even if he didn’t reference one of my posts on this blog!) Whereas I come at this issue from an academic perspective, Mr. Barrington is a leading voice in the advocacy community, and he has some good advice for all of us. The speech is very short, so instead of attempting to summarize it I’ll just encourage interested readers to click on the link above. But let me close here by quoting Mr. Barrington’s summation, with which I wholeheartedly concur:

We should be two communities that work closely together. There is little excuse not to. As an advocate, this is my message: our subject is too important for academics to be obscure or self-referential, or for NGOs to be ill-informed, misguided or unchallenged. Our choice is not whether to work hand-in-hand, but how we should do so.

Diamonds are an Autocrat’s Best Friend: Corruption in Zimbabwe’s Mining Industry

Earlier this month, Robert Mugabe, Zimbabwe’s president of nearly 30 years, announced his intention to nationalize diamond mining. He explained the decision by blaming corruption in the industry for “robbing [the Zimbabwean people] of our wealth,” estimating the government’s loss in the past seven years as upwards of $13 billion. For a country with an annual budget of $4 billion, 30% of which comes from the money that does make its way from the diamond mines to the government’s coffers through taxes and other fees, this move has enormous economic significance. Factor in Zimbabwe’s recent attempts to convince international donors and investors that its basket case economic days are behind it, and the ripple effects of Mugabe’s decision are likely to be even more important.

Undoubtedly, Mugabe is right about one thing: there’s been plenty of corruption surrounding the diamonds of Marange, a district in eastern Zimbabwe, since the 2006 realization that the pebble-like objects “so common that children were using them in their catapults to shoot birds” actually represented “the richest diamond field ever seen by several orders of magnitude.” The trouble is that Mugabe is the one mostly responsible for that corruption. In fact, this nationalization plan is best understood as the next step in Mugabe’s utilization of corruption at the mines for his own benefit.

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Claims Against Petrobras Highlight Prospects for Shareholder Enforcement in US Courts

The fallout continues from the ongoing investigation of corruption at Petrobras, Brazil’s giant state-owned oil company. (See New York Times coverage here, and helpful timelines of the scandal here and here.) In March of 2014, Brazilian prosecutors alleged that Petrobras leadership colluded with a cartel of construction companies in order to overcharge Petrobras for everything from building pipelines to servicing oil rigs. Senior Petrobras executives who facilitated the price-fixing rewarded themselves, the cartel, and public officials with kickbacks, and concealed the scheme through false financial reporting and money laundering. The scandal has exacted a significant human toll: workers and local economies that relied on Petrobras contracts have watched business collapse: several major construction projects are suspended, and over 200 companies have lost their lines of credit. One economist predicted unemployment may rise 1.5% as a direct result of the scandal.

The enormous scale of the corruption scheme reaches into Brazil’s political and business elite. The CEO of Petrobras has resigned. As of last August, “117 indictments have been issued, five politicians have been arrested, and criminal cases have been brought against 13 companies.” In recent months, the national Congress has initiated impeachment proceedings against President Dilma Rousseff, who was chairwoman of Petrobras for part of the time the price-fixing was allegedly underway. And last month, federal investigators even received approval from the Brazilian Supreme Court to detain former President Luiz Inácio Lula da Silva for questioning. (Lula was President from 2003 to 2010—during the same period of time that Ms. Rousseff was chairwoman of Petrobras.) Meanwhile, the House Speaker leading calls for President Rousseff’s impeachment has himself been charged with accepting up to $40 million in bribes.

As Brazilian prosecutors continue their own investigations, another enforcement process is underway in the United States. Shareholders who hold Petrobras stock are beginning to file “derivative suits,” through which shareholders can sue a company’s directors and officers for breaching their fiduciary duties to that company. Thus far, hundreds of Petrobras investors have filed suits. In one of the most prominent examples, In Re Petrobras Securities Litigation, a group of shareholders allege that Petrobras issued “materially false and misleading” financial statements, as well as “false and misleading statements regarding the integrity of its management and the effectiveness of its financial controls.” (For example, before the scandal broke, Petrobras publicly praised its Code of Ethics and corruption prevention program.) The claimants allege that as a result of the price-fixing and cover-up, the price of Petrobras common stock fell by approximately 80%. In another case, WGI Emerging Markets Fund, LLC et al v. Petroleo, the investment fund managing the Bill & Melinda Gates Foundation has alleged that the failure of Petrobras to adhere to U.S. federal securities law resulted in misleading shareholders and overstating the value of the company by $17 billion. As a result, the plaintiffs claim they “lost tens of millions on their Petrobras investments.”

Thus, in addition to any civil or criminal charges brought by public prosecutors, private derivative suits offer a way for ordinary shareholders to hold company leadership accountable for its misconduct. In these derivative suits, any damages would be paid back to the company as compensation for mismanagement; the main purpose of the suits is not to secure a payout for shareholders, but to protect the company from bad leadership. The Petrobras cases illustrate how derivative suits can offer a valuable mechanism for anticorruption enforcement, but they also face a number of practical challenges.

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Guest Post: Structuring Effective Corporate Pay-Back To Help Fight Corruption

GAB is pleased to welcome back Alan Doig, Visiting Professor at Newcastle Business School, Northumbria University, who contributes the following guest post:

In recent years, there has been a swelling call for a substantial portion of the fines, disgorged profits, and other payments recovered from corporations in foreign bribery cases to be used to fund anticorruption initiatives, particularly those designed to fight corruption in the “victim” countries. If this recommendation were taken seriously, the potential funding resources could be substantial. While the recoveries from corporate settlements are miniscule (and ad hoc) contributions to national treasuries, they often dwarf what even big donor agencies spend. For example, the UNDP’s 2014-2017 GAIN (Global Anti-Corruption Initiative) had a total budget of $16 million, an amount much less than the fine and disgorgement from the first Deferred Prosecution Agreement (DPA) between the UK’s Serious Fraud Office (SFO) and ICBC Standard Bank in December 2015. Just think how such funds could provide badly-needed resources for anticorruption work, particularly for areas or organizations seeking new sources of funding, or for innovative work, in what is a very competitive environment. Thus while Integrity Action has managed to win competitive funding from soruces as diverse as Google’s Global Impact Challenge and the UK Comic Relief charity, the chair of the Board of Governors of the International Anti-Corruption Academy (IACA) recently bemoaned the fact that IACA’s “last two general budgets never received 90% of the funding that was unanimously agreed upon” by member states, without which there would be no opportunity for the implementation of its ambitious programs.

While corporate settlements would provide a regular and substantial resource beyond the usual multilateral and bilateral donors (and the occasional big private foundation), there are, of course, a number of practical, legal, and political problems with getting countries to agree to divert substantial portions of such settlement funds to support anticorruption efforts. But even assuming these obstacles are overcome, another set of problems remains: Assuming that a given country (say, the US or UK) has decided that a substantial portion of a corporate penalty for bribery should be redirected to fund anticorruption efforts, how should the arrangement be structured? Which entities should be responsible for any settlement funds? Who will make the key decisions? What will be funded, by whom, and for how long? Our limited experience to date illustrates several options that have been attempted so far: Continue reading

WAGs: What’s the Harm?

GAB is pleased to publish this Guest Post by Maya Forstater, well-known analyst on business and sustainable development, on a topic of continuing concern to scholars and activists working on corruption and development matters.

Are unreliable guesstimates  and made-up statistics mildly irritating, indispensably powerful  or potentially dangerous in the public debates on corruption? The topic comes up so often on the Global Anti-Corruption Blog that it has been given its own own three-letter acronym: WAGs (or Wild Ass Guesses).

Those at the sharp end of advocacy maintain, with some justification, that in the battle for attention, an arrestingly big number makes all the difference. But as Rick has argued, overinflated figures can also cause harm.

Something similar happens on the related topic of tax and illicit flows. One example of this is the widespread belief that ‘developing countries lose three times more to the tax avoidance by multinational companies than they receive in aid’. This much quoted WAG gives the impression of huge potential gains for the poorest countries, but is based on a chain of misunderstandings .  In practice the magnitudes of revenues at stake are likely to be several times smaller than aid  for the countries where that comparison matters.

Similarly, broad estimates of illicit flows or the scale of the black economy (“trillions”) are often presented in ways that suggest that the sums to be gained from tackling corporate tax avoidance are larger than any serious analysis supports.

I have written about these big numbers previously in a paper published by the Centre for Global Development here (or here  for the short version).

But what harm do such numbers do, compared to their power at getting people talking about the issues? Is it really worth pointing out misunderstandings and myths in pursuit of a more rigorous and careful approach to evidence? (Or as I have been asked‘ Do you ever wonder how much you help the tax abusers?’)

I see four key dangers from inflated perceptions of the numbers:  Continue reading