Author Archives: Matthew Stephenson

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About Matthew Stephenson

Professor of Law, Harvard Law School

Guest Post: Compliance, No Science

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Liz David-Barrett, the Director of the Oxford Centre for the Study of Corruption and Transparency, contributes the following guest post:

More and more countries are introducing and enforcing anti-bribery laws these days, as governments implement their commitments under the OECD Anti-Bribery Convention and the UN Convention Against Corruption.  By making companies liable for prosecution if they pay bribes to foreign public officials, the drafters hope to persuade companies to stop paying bribes and take measures to ensure that no bribes are paid on their behalf.  But do they work?   What do companies do when faced with a new anti-bribery law?

The United Kingdom since the introduction of the Bribery Act is a good laboratory for researching this question.  Passed in 2010, the Act came into effect only in July 2011.  But companies had ample time to prepare, given the prolonged hype as the Bill was debated in parliament. Some companies were — and still are — in denial, perhaps because they think they are not at risk, or the chances of being caught are slim. At the other end of the spectrum, some companies concluded that the Bribery Act created such serious legal risks that they opted to withdraw from certain high-risk markets entirely. But the vast majority of companies have responded to the Bribery Act by introducing or reforming their anti-bribery policies — that is, by amping up their corporate compliance programs.  So what have we learned so far from research on UK firms’ anti-bribery compliance programs? Continue reading →

Updated Anticorruption Bibliography

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An updated version of my anticorruption bibliography is available from my faculty webpage.  Now with over 3,000 sources!  A direct link to the pdf is here.  As always, I welcome suggestions for other sources that are not yet included, including any papers GAB readers have written.

More Confused & Confusing Commentary on Corruption, Earmarks, and Campaign Finance

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When a prominent platform like the New York Times Op-Ed page features a piece on corruption, I feel like I should say something about it.  (Furthering the public dialogue and all that.)  But it’s hard for me to come up with something productive to say about Thomas Edsall’s rambling editorial on “The Value of Corruption,” published last week. So far as I can make out, Edsall makes three main points:

  1. The Congressional ban on legislative earmarks, intended as a means of fighting one form of perceived “corruption,” has in fact undermined one of the key tools legislators can use to build compromise and overcome gridlock.
  2. The Supreme Court’s campaign finance decisions in cases like Citizens United and McCutcheon have given wealthy interests more power to influence elections (which some characterize as “legalized corruption”).
  3. Sometimes corruption can be “good” — the “honest graft” praised and defended by George Washington Plunkitt — particularly when it helps certain excluded groups overcome barriers established by entrenched interests.

If your first reaction to this is that these points have little to do with one another — other than the fact that they all use the word “corruption” — then we’re on the same page. But instead of just trashing the Times Op-Ed page (much fun as that is), let me see if I can try to say something substantive.  Not sure if I’ll succeed — here goes: Continue reading →

More on Compliance Program Certification/Verification: The Proposed ISO Standard

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My last post, inspired by Transparency International USA’s recent publication of a report on verifying the effectiveness of corporate anti-bribery programs, talked a bit about the emergence of a set of private firms that provide “certifications” for such programs. I expressed some skepticism about the value of these certification services. Some of my concerns — also expressed in the TI-USA report — had to do the opacity and apparent inconsistency in the methodology that certification firms employ. One possible response to this concern might be to develop an “official” international standard for anti-bribery compliance, and to provide certification that firms meet that standard.

Such an effort is already underway, through an organization called the International Organization for Standardization (ISO), a consortium of national (generally private) standard-setting bodies in 163 different countries. Traditionally, the ISO promulgates international standards with respect to quality control, safety, and technical compatibility. External auditing firms then provide certifications that a firm meets the ISO standard(s) in the relevant areas. The ISO is now already in the process of developing an ISO standard (ISO 37001) for anti-bribery programs — which would be the first ISO standard to deal with a topic like bribery. The draft standard is supposed to be available for public comment by 2015.

Before proceeding further, I should disclose that I’ve been involved — very marginally — in the U.S. Technical Assistance Group that’s supposed to provide commentary on this developing standard. (Basically, I’ve listened in on a few phone calls and seen a few documents circulated to the group.) So I need to be careful what I say on this subject, so as not to disclose anything confidential. I actually think there’s little risk of that, because what I really want to do in this post is not to focus on specific features of the proposed standard, but rather to raise questions about the whole enterprise. The more I think about it, the less justification I can imagine for promulgating an international standard like this. Indeed, it strikes me as entirely the wrong way to go about promoting the very worthy cause of improved corporate anti-bribery compliance programs.

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Some Thoughts on Certification of Corporate Anticorruption Programs

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Last week, I posted a brief announcement about an interesting new report from Transparency International USA about verification of corporate anticorruption compliance programs — that is, efforts to ensure that the measures companies put in place to ensure compliance with anti-bribery law (and other legal and ethical requirements) are actually working. One particularly interesting facet of the report, at least for me, was the discussion of the emerging “certification” industry: private firms that companies can hire to review their compliance programs, and that provide a public certification — basically, a statement saying “we’ve reviewed this company’s compliance program and we think it’s up to scratch.” These certification services are different from more familiar consulting services, where firms assist companies in designing or evaluating their compliance programs (though the firms that offer certification also often offer consulting services as well).

While I’m all for private sector initiative to improve corporate anti-bribery compliance, I’ll admit I’m a bit skeptical as to the value of these services. Indeed, I worry a bit about whether they might in some cases prove counterproductive. And while the TI-USA report uses careful language, I read the report as evincing a fair amount of skepticism as well. I also want to be appropriately circumspect, as I don’t really know enough to have strong views, but let me raise a few concerns about the private anticorruption certification industry.

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The Case Against an International Anti-Corruption Court

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Judge Mark Wolf recently published a Brookings Paper, and an accompanying Op-Ed in the Washington Post last week, calling for the creation of an “International Anti-Corruption Court” (IACC), modeled on the International Criminal Court (ICC). The proposal is motivated by the twin observations (1) that corruption is incredibly damaging (not only in its economic costs, but also in its link to human rights abuses), and (2) that although corruption is illegal everywhere, in many countries “grand” corruption at the highest levels of government creates a culture of impunity in which the corrupt need not fear punishment.

Judge Wolf is not only a distinguished jurist, but also an experienced prosecutor of corruption cases within the United States, and for these reasons alone his proposal is worth taking seriously. And I am very much in agreement with him about the insufficiency of current anticorruption measures, particularly in those countries beset by the culture of impunity that he and others have so vividly described. Yet I find myself deeply skeptical of his proposal for an independent IACC. Indeed, I think the proposal is at best unhelpful, and at worst counterproductive. Let me explain why.

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TI Report on Verification of Corporate Anticorruption Compliance Programs

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Last week Transparency International-USA released a new report entitled Verification of Anti-Corruption Compliance Programs. The report is available for download on TI-USA’s website (the link there opens the document as a pdf, so I can’t do a direct link). It’s a helpful document on an important but surprisingly neglected topic: although there’s a ton of material out there about how to design a corporate compliance program (for anti-bribery and related matters), there’s much less out there on how to go about assessing these programs to ensure they’re actually working as they’re supposed to.

I won’t bother summarizing the document here. Shruti Shah, the TI-USA Senior Policy Director who was one of the driving forces behind the report, has a nice succinct summary over at the FCPA Blog. I’ll try to do a more substantive post within the next week or two on my reactions to the report and the more general issues it raises, but for now I just wanted to bring this document to the attention of GAB readers.

Indonesia’s Election Results–Some Snap Reactions on Implications for Anticorruption

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Two days ago, after about two weeks of wrangling, accusations, and general uncertainty, Indonesia’s General Election Commission declared Joko Widodo the winner of the July 9 presidential election. Mr. Joko, the populist governor of Jakarta and former mayor of Surakarta, defeated Probowo Subianto — a retired army general and son-in-law of former President/dictator Suharto — by about 8 million votes (out of almost 135 million total votes cast). Mr. Probowo is still contesting the election result, asserting widespread fraud, but most observers doubt that the Constitutional Court will overturn the result, particularly given the margin of victory and the fact that the outcome was consistent with a number of independent polls conducted by reputable organizations.

This result is a big deal for many reasons–including the implications for the struggle against corruption in Indonesia and elsewhere. I am certainly no expert on Indonesian politics, so there’s much about this development that I don’t understand. But, having followed the Indonesian election from a distance, let me toss out some off-the-cuff thoughts on how one might think about the result from an anticorruption perspective. I hope that people who know this stuff better than I do will weigh in with their own reactions. Here goes:

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The World Bank’s Office of Suspension and Debarment Is a Model of Transparency–But I Still Want More!

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As many readers of this blog are likely aware, the World Bank (and the other multinational development banks) have their own procedures for identifying and sanctioning firms that engage in unethical behavior (corruption, but also fraud, collusion, etc.) in Bank projects.  At the World Bank, responsibility for addressing corruption and other unethical practices by Bank contractors and partners is handled by the Integrity Vice Presidency (INT), which has investigative and quasi-prosecutorial functions, and the Office of Suspension and Debarment (OSD), an independent adjudicative body, as well as the Sanctions Board, an appellate body.

A few weeks ago, the OSD released a comprehensive report on its office’s activities and performance over its first seven years in operation (fiscal years 2007-2013).  It’s a very useful report, and well worth reading.  It includes a clear, succinct summary of the World Bank’s sanctions and procedures (including both their history and current structure), and also–most notably–a great deal of descriptive quantitative data about the OSD’s activities.  In many ways, the report is a model of transparency, allowing observers both inside and outside the Bank to understand the activities of OSD (and, to a lesser extent, INT and the Sanctions Board), and perhaps to identify weaknesses and areas for improvement.

But because no good deed goes unpunished, my main initial reaction to the report is to wish there were even more data provided!  Here are a few open questions that the data in the OSD report does not address, but that OSD might consider providing in future reports:

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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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