American law offers victims of corruption several advantages: a range of legal theories on which to bring suit for damages; a low cost procedure for recovering damages in a criminal prosecution; the ability to aggregate many small claims into a class action; rules permitting lawyers to represent claimants in return for a share of any recovery. Each has contributed to a decent corpus of corruption victim compensation law (reviewed here), and each merits consideration by judges and policymakers elsewhere searching for ways to reduce obstacles to the recovery damages for corruption.
One feature of American law should, however, be avoided at all costs. Too often courts demand victims show exactly how much harm they suffered to recover damages. The exercise is inherently imprecise. Advanced econometric techniques fed the best data imaginable yield nothing but a rough approximation. U.S. courts are beginning to opt for common sense rules of thumbs in some settings, but the demand for precision where precision is not possible still frequently stands in the way of the victim compensation.
The most egregious cases are where an employer seeks damages caused when a supplier bribes an employee.
The most straightforward route to compensation in such cases is to award the employer damages equal to the bribes the employee took, the assumption being the supplier raised its price by the total bribes it paid. That was the justification the trial court used in United States v. Finazzo to award clothing retailer Aeropostale damages of $25,790,822.94, the total kickbacks its head purchasing agent had received to steer business to a supplier of T-shirts and fleece-covered apparel.
On appeal, the Second Circuit rejected this simple, straightforward method for estimating damages. An employer’s damages do not necessarily equal the total bribes its employee took the court explained. Even without inflating the price — and thus inflicting a pecuniary loss on Aeropostale, the T-shirt supplier would profit some from any sale to the company. Indeed, it might simply have bribed the purchasing agent to push additional business to it at a non-inflated price. The bribe-taking employee might even have reduced the supplier’s costs as it would have had to spend less on marketing.
The court thus returned the case to the trial court, ordering it to devise a method for determining whether the entire amount of bribes the employee received was derived solely from activity that caused loss to the employer. The court, however, offered no guidance on what that method might be.
In United States v. Kilpatrick, the Sixth Circuit Court of Appeals overturned a similar common-sense shortcut for estimating Detroit’s losses from an extortion racket its mayor and a local construction company ran. The two forced other companies wanting to do business with the city to hire the local company as a subcontractor. The scheme involved multiple contracts. On some the company actually did the work it was contracted to do; on others it either did no work or substandard work.
The average profit margin on the city construction contracts during the life of the scheme was ten percent. Applying this figure to the total the local firm earned from its subcontracts, Detroit urged, “was a reasoned approximation of the amount of money [it] was unknowingly forced to spend for contracts obtained through fraud and deceit.” While the trial court agreed, the Sixth Circuit did not, returning the case to the trial court with instructions to devise a better estimate.
Unlike the Second Circuit in Aeropostale, the Sixth Circuit sympathized with the challenge the trial court faced in devising a better estimate; it even offered guidance on how to produce one. That is, if what it suggested can be termed guidance. The learned appellate court judges counseled the trial judge to ask Detroit to produce more evidence of its losses and then hold a hearing on what the city provided.
While the courts in Finazzo, Aeropostale and those following those decisions show that U.S. courts can lose sight of practical matters, another line of corruption damages cases, those where the employer seeks to recoup as damages the salary paid a corrupt employee, shows appellate courts are not always blind to the realities of litigation. The precedent was set in United States v. Sapoznik, an opinion written by the Richard Posner, then chief judge of the Seventh Circuit Court of Appeals and renown for urging a pragmatic approach to judging.
Seymour Sapoznik had accepted $500/month to protect an illegal gambling racket run by a criminal gang while sheriff of Northlake, Illinois. He was found guilty of racketeering, and at sentencing Northlake sought to recover what it had paid Sapoznik as sheriff. The town had hired him thinking it was getting an honest sheriff but had instead gotten a dishonest one, and thus, it argued, it was entitled to a full refund of what it had paid him.
The trial court refused to go that far, awarding the town one year of his salary instead. In his opinion by for the Seventh Circuit, Judge Posner upheld the trial judge’s compensation order, ruling she was well within her discretion to limit the town’s recovery to one-fourth of Sapoznik’s total salary.
Had the town not hired Sapoznik, Judge Posner reasoned, it would still have had to hire a sheriff — albeit hopefully an honest one. Hence, “what Northlake lost as a consequence . . . [was] the difference in the value of the services that he rendered Northlake and the value of the services that an honest police chief would have rendered.” Importantly, Judge Posner went eschewed the need for a study to showing the difference, observing that the result would be speculative at best. The trial court’s “rough approximation” was “all that is feasible in the computation of loss in a case such as this.”
Judge Posner’s acceptance of a rough approximation of the compensation due the employer of a corrupt employee has been followed in similar cases. In United State v. Bahel, the U.S. Court of Appeals approved the trial court’s decision to require a corrupt UN employee to repay the United Nations $86,000 in salary, the amount earned while suspended pending an investigation into his bribe taking. In one of the several decisions handed down in the FIFA case, two executive committee members found guilty of bribery were required to repay 20 percent of the salary and benefits they received. It would, the court ruled, be “unduly complex” to try to delineate what amount of salary and benefits went for honest work done for the FIFA and what amount went for corrupt work.
There is simply no way to demonstrate with any precision the damages inflicted by corruption. Insisting victims do so is a waste of resources, both human and economic. Other nations should decline to follow those American cases insisting upon precision, especially less wealthy countries beset by corruption and where resources of all kinds are scarce. The best a corruption victim will ever be able to produce is a “rough approximation” of the damages suffered. Simple, common sense rules like accepting the amount of the bribe or the perpetrator’s gain from the corruption should be the global norm when calculating damages.
Interesting post – while I agree that rough estimates are the best we get, I suspect using just the amount of the bribe or the gains to the perpetrator as a proxy is an underestimation. The “lost revenue” from corruption is presumably the size of the bribe AND the additional profits to the perpetrator. Wouldn’t it be better to use a rough approximation that includes both rather than just one? This still leaves out all costs of negative externalities, where I agree we might be venturing into very uncertain domains.
The additional profits to the perpetrator might be difficult to calculate in some cases, but couldn’t we practically assume they are at least equivalent to the size of the bribe?