Author Archives: Matthew Stephenson

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About Matthew Stephenson

Professor of Law, Harvard Law School

Maybe Brazil’s Painful World Cup Defeat Was a Blessing in Disguise

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So the 2014 World Cup is over (congratulations, Germany), and the result was a disappointment for the host nation, to say the least.  Brazil’s ignominious 7-1 defeat in the semi-finals will probably go down as one of the worst sports losses in the country’s history.  As someone with many very close Brazilian friends, I’m hesitant to suggest that there may be anything good about Brazil’s loss.  But I’m going to anyway, from the perspective of anticorruption activism.  Here goes:

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Does Bribery Pay? For Whom? And How Much?

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Anticorruption advocates—including those in the private sector who have taken the fight against corruption seriously—insist that bribery is bad for business. That’s likely true in the aggregate, and perhaps it’s true for some individual firms. But it’s probably not true for all firms—otherwise, why would so many of them pay bribes? But it’s hard to know how much firms benefit from bribery. Likewise, while would be useful to know more about the factors that affect the size and probability of bribery, figuring this out is a challenge because of the secrecy of corrupt transactions.

In a recent working paper, Yan Leung Cheung, P. Raghavendra Rau, and Aris Stouraitis try to get at these questions by looking at enforcement data for anti-bribery laws–both laws that apply domestically and those (like the U.S. FCPA and the UK Bribery Act) that prohibit foreign bribery. In particular, the study examines a subset of reported cases where (1) a bribe was (allegedly) paid for a particular, identifiable public contract, announced on a specific date, (2) there is stock and financial data for the firm, available on a day-to-day basis, and (3) the enforcement data contains information on the size of the bribe paid to secure the contract. Armed with that information, the authors reason that we can use the abnormal increase in firm market capitalization that coincides with the announcement of the contract as a measure of the gross benefit of the bribe to the firm (the authors assume that bribe-paying firms would not have gotten the contract without paying the bribe). We can then subtract the size of the bribe from that gross benefit to get the net benefit of bribery for the firm. On top of that, the authors reason that we can learn something about how the total gains from the bribe transaction are allocated between the firm and the corrupt public official by dividing the size of the bribe payment by the sum of the bribe payment plus the gross benefit of the bribe. The higher this ratio, the more the benefits of bribery go to the public official; the lower this ratio, the more the benefits of bribery accrue to the bribe-paying firm.

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Updated Anticorruption Bibliography

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An updated version of my ever-expanding bibliography on corruption and anticorruption is now available from my website, and a direct link to the pdf is here. I’m always looking for new sources to add, so if you have suggestions for additions, please send them using the Contact page.

Corruption and Liberalization: Two Paradoxes

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Some aspects of a comprehensive anticorruption strategy are specifically targeted at corruption itself. But sometimes it makes sense to consider how broader political or economic reforms might ameliorate or exacerbate the corruption problem. Indeed, fighting corruption is often invoked – perhaps sincerely, perhaps strategically – as a justification for more general political and economic liberalization. But the relationship between political and economic liberalization, on the one hand, and corruption, on the other, is complicated, and beset by two seeming paradoxes:

Here’s the first paradox: On the one hand, longstanding democracies seem to have lower levels of corruption than do non-democracies. However, the process of democratization – the introduction of democratic reforms, along with a general liberalization of the political system – often seems associated with a significant increase in corruption. Indeed, countries going through democratic transitions, or those that have been democratic for a shorter time, seem not only to have more corruption than established democracies, but also to have worse corruption problems, on average, than non-democracies.

The second paradox, on the economic side, is similar: Some research suggests that more open economies – with more market competition, fewer state-owned enterprises, and less central economic planning – have lower levels of corruption than more statist economies. (This should not be overstated: it’s not that more regulation always increases corruption, nor is there convincing evidence that “bigger” governments, measured by the size of the public sector relative to GNP, have more corruption. Still, the balance of the evidence suggests that more open, liberal economies have less severe corruption than more statist economies.) However, the process of economic liberalization—including privatization, deregulation, etc.—often appears associated with an increase, often a dramatic increase, in corruption.

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A Greater Role for HR and Ethics Screening in Corporate Anticorruption Compliance?

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In my last post, I discussed recent research suggesting that combating corruption in government bureaucracies requires attention to the selection of personnel – trying to recruit not only the most capable, but also the most honest.  Might the general principle apply to private corporations?  Should corporate compliance programs place more emphasis than they do on assessing candidates’ integrity at the selection stage (initial hiring or subsequent promotion)?  And should law enforcement consider a firm’s efforts at integrity screening when assessing the adequacy of a firm’s compliance program?  I don’t have the answers to these questions – I simply don’t know enough about human resource management issues – but I want to raise them in the hopes of starting a discussion of the issue.

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The Importance of Personnel Selection in Promoting Government Integrity: Some Evidence from India

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Much of the focus in combating corruption in government bureaucracies focuses on creating the right incentives for public servants after they’ve assumed their positions.  The goal is usually to create a system of rewards and punishments – and perhaps also a professional culture – that incentivizes honest behavior and deters wrongdoing.  Creating those incentives is obviously crucial, but it’s also important not to neglect the selection process – choosing who gets to become a civil servant or public official in the first place.  After all, it’s probably a lot easier to help a basically honest person to resist temptation than it is to discourage a venal opportunist from abusing her position.  Moreover, selecting the wrong people into public service can create a vicious cycle: a government agency with a reputation for corruption will tend to attract individuals who more interested in abusing their positions, while an agency with a reputation for probity will be more likely to attract individuals interested in serving the public good.

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The Irrelevance of an FCPA Compliance Defense

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The U.S. Foreign Corrupt Practices Act (FCPA) exposes corporations to criminal (as well as civil) liability for acts committed by the corporation’s employees, pursuant to the standard principle of U.S. law the corporations are liable for the acts of their employees, if those acts were committed in the course of employment and for the benefit of the employer. This principle, in the FCPA context and elsewhere, has familiar advantages and disadvantages. The most straightforward advantage is that this “vicarious liability” gives corporations an incentive to establish robust compliance programs and to monitor their employees. The main disadvantage is that, because no compliance system is perfect, corporations might find themselves faced with substantial liability for acts committed by “rogue employees”. Moreover, precisely because of this concern, corporations might over-invest in anticorruption compliance, or might forgo certain transactions or investments, because of worries about FCPA exposure. This may be bad for society, not just the firm.

In the FCPA context, a range of critics have argued that the FCPA should be amended to add a “compliance defense,” so that a corporate defendant would not face criminal liability for the acts of its employees, so long as the corporation maintained an adequate system for promoting compliance with the FCPA’s restrictions. (The United Kingdom’s 2011 Bribery Act has such a defense.) Advocates of an FCPA compliance defense have suggested a range of possible forms the defense might take; critics have pushed back, arguing that the existence of the defense would undermine the fight against corporate corruption. My take on the debate over the compliance defense is somewhat different: I think the addition of an FCPA compliance defense, under current conditions, would have no significant effect on FCPA enforcement actions. A compliance defense would probably be neither good nor bad, but rather (mostly) irrelevant. Here’s why:

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Guest Post: Reaching Bribery’s Victims (Part 3)

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This month GAB is delighted to feature a series of guest posts from Andy Spalding, Assistant Professor at the University of Richmond School of Law and Senior Editor of the FCPA Blog.  This is the third and final post in the series on how to compensate the victims of transnational bribery:

I began this series of guest posts by applauding the StAR Initiative’s recent report, Left Out of the Bargain, for calling attention to the need for settlements in anti-bribery cases to provide more compensation to the overseas victims of bribery. In my last post, I explored a series of encouraging, but perhaps not quite promising, ways of doing so in the specific context of US FCPA enforcement actions.

What we’re looking for is an enforcement mechanism that satisfies these criteria: 1) it benefits the citizens of the bribed government; 2) it funds initiatives to remedy past bribery (to the extent possible) and to curb future bribery; 3) it reallocates a portion of the penalty money, rather than relying on recovered assets; 4) the money goes to private-sector organizations and programs, rather than the host governments; and 5) the mechanism is authorized under existing US law, requiring no new statutes or regulations.

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The FCPA’s “Facilitating Payments” Exception: Mostly Harmless

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The U.S. Foreign Corrupt Practices Act (FCPA) contains a sweeping prohibition on paying bribes to foreign officials—but also contains an exception for so-called “facilitating payments” (also sometimes called “grease payments”) meant to secure non-discretionary “routine government action.” The exception was included in the FCPA to respond to complaints by representatives of the U.S. business community that it was impossible to do business in certain countries without making these “grease payments” to low-level bureaucrats. The exception has been criticized—occasionally by those who think that the exemption is too narrow and should be expanded (or, to use their preferred euphemism, “clarified”), but more recently by a growing chorus of voices that has called for the elimination of the FCPA’s facilitation payments exception. This chorus has included, perhaps most prominently, the OECD’s Working Group on Bribery (responsible for the peer-review process under the OECD Anti-Bribery Convention), along with several of the OECD’s senior officials. And, notably, more recent foreign bribery legislation—most prominently the UK Bribery Act—contains no exception for facilitating payments. Possibly for this reason, at several recent international anticorruption conferences I’ve attended, participants (especially from outside the U.S.) have asked whether (or when) the U.S. will eliminate the grease payment exemption.

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Guest Post: Reaching Bribery’s Victims (Part 2)

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This month GAB is delighted to feature a series of guest posts from Andy Spalding, Assistant Professor at the University of Richmond School of Law and Senior Editor of the FCPA Blog.  This is the second in the series of three posts on how to compensate the victims of transnational bribery:

In my last post, I weighed in on the discussion concerning whether the UN Convention Against Corruption (UNCAC) Article 53(b) (or any other provision), establishes a duty to allocate anti-bribery penalty money to the overseas victims. I’d like to suggest now that regardless of how one answers that question, using enforcement monies to benefit those victims is a good idea. We could engage any number of ethical, economic, foreign policy, or other arguments on this point; I’ll save those for another day. For the remainder of my post, I’ll assume that: 1) the citizens of corrupted governments are the principal victims of transnational bribery; and 2) enforcement should somehow benefit them. The next question, which is no less difficult, is how.

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