Author Archives: Matthew Stephenson

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About Matthew Stephenson

Professor of Law, Harvard Law School

Let’s Create Sub-National Corruption Perception Indexes for the BRICS

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For all their flaws, the major cross-country corruption indexes—Transparency International’s Corruption Perceptions Index (CPI), the World Bank Institute’s Worldwide Governance Indicators (WGI), and the like—have been quite useful, both for research (at least when used appropriately) and for advocacy.  But one important limitation of these datasets is that by focusing on corruption (or perceived corruption) at the country level, they may obscure the fact that there can be substantial within-country variation in the level of (perceived) corruption.  This variation may occur across government institutions—the same country may have quite different degrees of corruption in the health sector, the police force, the judiciary, customs, etc.  More pertinent here, there may also be significant heterogeneity across regions, particularly in large countries with substantial political decentralization.  Indeed, numerous studies have exploited within-country regional variation in corruption levels to test various hypotheses about corruption’s causes and consequences; such studies include research on Italy, Russia, China, the Philippines, and the United States, among others.  But these studies typically make use of particular data sets that are not reproduced year-to-year.

As we’re starting to see rapidly diminishing returns from the major cross-country corruption datasets, it is high time for those organizations with the resources and capacity to compile information on corruption perceptions on an ongoing basis to turn their focus to within-country regional variation in corruption.  I propose the creation of a sub-national corruption perceptions index (snCPI), starting with the so-called BRICS countries (Brazil, Russia, India, China, and South Africa), which would gather and compile data (primarily perception-based data, perhaps supplemented with more objective data when available) on perceived corruption levels within the major sub-national units (states/provinces, autonomous regions, and municipalities) within each of those countries.

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Guest Post: Reaching Bribery’s Victims (Part 1)

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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 first in the series of three posts on how to compensate the victims of transnational bribery:

Who are the victims of transnational corporate bribery? Do existing anti-bribery laws help them? And should they? The answers may not be as intellectually crisp as our gut feelings are strong. But the questions are now unmistakably central to anti-bribery debates, as illustrated by the lively exchange concerning the StAR Initiative’s Left Out of the Bargain report.  (On this debate, see Matthew’s original critique, the rejoinder by two of the report’s authors, and Matthew’s subsequent reply.) In this three-part series of posts, I’ll consider who the victims of bribery are, briefly weigh in on the StAR report debate, and then see if I can’t broaden this discussion a bit.

Most of us would agree that overseas corporate bribery is not a victimless crime. Though there are many possible victims–the bribed governments, the shareholders in the defendant companies, even the companies themselves (which often pay bribes in response to near-extortionate demands)–the principal victims of overseas bribery are the citizens of those countries – almost always developing countries – whose governments have been corrupted. Yet the profound irony of modern anti-bribery enforcement: those substantial monetary penalties are deposited in the public fisc of the perpetrator. They hardly touch the victims at all. And this isn’t by design. It’s a sort of accident of extraterritorial white-collar crime. Continue reading →

Guest Post: India’s Whistleblower Protection Act — An Important Step, But Not Enough

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Christine Liu, an associate at Cravath, Swaine & Moore’s New York Office, contributes the following guest post:

As Raj noted in his last post, the recent election of Narendra Modi as prime minister of India demonstrates that the Indian population wants change and supports actions against corruption (as do recent polls, such as the Lowy Institute study, which found that 96 percent of Indians believe corruption is holding the country back, and 92 percent believe that reducing corruption should be one of the government’s top priorities). One of the most important obstacles to fighting corruption in India has been the lack of adequate whistleblower protections. Individuals reporting incidents of bribery or corruption faced numerous hurdles, including verbal threats, physical violence, and ostracism. Others encountered workplace retaliation. Confronted with these risks, many potential whistleblowers chose to remain silent.

But there are encouraging signs that this may change. On May 14, 2014, Indian President Pranab Mukherjee cleared the way for the Whistleblowers Protection Act. This action represents a much-needed change from the history of delay surrounding the original bill, which was first introduced in August 2010 and then took years to pass the two Houses of Parliament—it passed in Lok Sabha on December 11, 2011 and in Rajya Sabha on February 21, 2014. The new whistleblower law is a significant achievement. Nonetheless, the law has some important limitations, and there are outstanding concerns about whether the law will be enforced effectively and foster public confidence. Continue reading →

My Remarks at IBA Mexico City Conference

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A few weeks ago, the International Bar Association hosted a conference in Mexico City on the future of anti-bribery law in Latin America and beyond.  I delivered a short, fairly informal keynote speech at the conference.  Although I didn’t prepare a written version of my speech, Matteson Ellis, who runs the very useful FCPAmericas Blog, was kind enough to post a summary of my remarks on that blog.  For those who are interested, you can find the summary here.

Klitgaard’s Misleading “Corruption Formula”

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I guess I’m engaging in the “ritual slaying of the elders” in which professors often indulge. Having gone after Paolo Mauro in an earlier post, here I want to take on (a small part) of Robert Klitgaard’s work.

Klitgaard, who is one of the giants of academic anticorruption research over the last half-century, once pithily (and influentially) summed up his perspective on the causes of corruption in a “corruption formula”: C = M + D – A, or (to put this back into words): “Corruption equals monopoly plus discretion minus accountability.”  (The formula originally appeared in Klitgaard’s 1975 1988 book, Controlling Corruption.  You can find a more recent version here.)  Much as I respect Klitgaard’s work, I think this anticorruption “formula” is not merely trite, but affirmatively misleading and therefore dangerous.

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Guest Post: The Alibaba IPO–Open Sesame Time for Anticorruption?

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Dieter Zinnbauer, Senior Program Manager for Emerging Policy Issues at Transparency International, contributes the following guest post on the pending Alibaba IPO:

The anticipated listing of Alibaba, China’s rising corporate tech star, on a U.S. stock exchange is likely to be the IPO of the year. The business press is awash in speculations about the financial and economic impact of this much hyped IPO. Will this listing also create a big splash in the fight against corruption? What will be the impact on business integrity when this fast-growing Chinese tech company lists in the US and, as a result, directly subjects itself to the Foreign Corrupt Practices Act (FCPA) and other corporate governance rules?

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U.S. v. Esquenazi: Some Knee-Jerk Reactions

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As those who follow the world of Foreign Corrupt Practices Act (FCPA) enforcement are no doubt well aware, earlier this week the U.S. Court of Appeals for the 11th Circuit decided U.S. v. Esquenazi. The decision affirmed the convictions of two individuals involved in a complicated scheme to bribe officials of Teleco, the Hatian state-owned telecommunications company. Though the appeal involved several issues, the most significant aspect of the case–and the reason it had been so closely followed by so many people–was the defendants’ claim that Teleco was not an “instrumentality” of the Hatian government, and therefore that the Teleco employees whom the defendants bribed were not “foreign officials” within the meaning of the FCPA. Though several district courts had considered (and rejected) claims of this sort before, Esquenazi was the first court of appeals decision to address such a claim.  And, like all of the prior district court cases, the court rejected the defendant’s argument and found that Teleco was indeed an instrumentality of the Hatian government.

Though I’m not sure there’s all that much to say about this that hasn’t already been said, let me make four quick observations about the decision and its potential significance (or lack thereof):

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Mauro (1995) Does NOT Show That Corruption Slows Growth

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One of the most influential and widely cited economics articles on corruption is Paolo Mauro’s 1995 paper, “Corruption and Growth,” published in the Quarterly Journal of Economics (Vol. 110, No. 3, pp. 681-712). It has become a standard citation for the proposition that corruption is lowers investment, and consequently lowers economic growth. The paper is important because it sparked close to 20 years (and counting) of increasingly sophisticated research on the economic effects of corruption. Furthermore, it leant critical academic support to the emerging anticorruption movement in both civil society and international organizations like the World Bank and IMF. And for those reasons alone, I think one could make a strong case that this paper has had a positive impact on the world.

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Crony Capitalism, the Asian Financial Crisis, and the Anticorruption Movement: What Are the Connections?

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A couple of weeks ago, I posted a minor diatribe responding to the related claims – which I had perceived in a number of recent blog commentaries – (1) that corruption is not really that big a problem for economic development, and (2) that the emphasis on corruption had more to do with the desire of Western countries to feel superior to the allegedly misgoverned countries in the so-called Global South. One of the targets of my critique, Michael Dowdle, has posted an interesting response that deserves careful consideration.

Dowdle explains that his original post did not claim “that everyone involved in the anticorruption movement is infected by” the impulse to claim moral superiority, did not claim that this impulse “is the only or even the predominant motor behind the global anticorruption movement,” and indeed did not claim that this impulse is “a distinctly Western mindset.” After making these helpful clarifications, Dowdle explains the root of his concern that the desire to claim moral superiority may (partly) explain (some of) the global anticorruption movement: the invocation of a particular kind of corruption – “crony capitalism” – to explain the failures of the neoliberal model of global capitalism, most prominently in the 1997 Asian Financial Crisis.

In a nutshell, Dowdle’s argument goes something like this (and I apologize in advance for what I’m sure will be a bit of an oversimplification, but I think this is basically faithful): (1) the rapid growth of the Asian economies in the 1980s and 1990s, with their allegedly distinctive approach to government involvement in the market, posed a challenge to the purported superiority of American capitalism; (2) the Asian Financial Crisis delegitimized this alleged alternative model of capitalism, and so was greeted “with a clear degree of glee” from many American commentators; (3) commentators (mostly Western) claimed that a root cause of the crisis was “crony capitalism” – the alleged tendency to make loans based on political or social connections rather than expected returns – as part of an emerging narrative about how the “Asian Alternative” had failed; (4) in fact, however, crony capitalism had nothing to do with the crisis; and (5) the global anticorruption movement more generally “was strongly catalyzed by the discourse of corruption that American observers used to describe and explain” the Asian Financial Crisis.

For the moment, let me put aside that last point about the alleged causal relationship between the discourse of crony capitalism in the context of the 1997 crisis and the emergence of the global anticorruption efforts more generally – except to say that I’m skeptical that this was more than a minor factor. (Certainly Dowdle doesn’t point to any evidence, beyond the timing, that would substantiate this claim.) I want to focus instead on his intriguing and provocative arguments (A) that crony capitalism had nothing to do with the 1997 Asian Financial Crisis, but (B) that the emphasis on crony capitalism in some quarters reflected a desire to delegitimize a perceived Asian challenge to American/Western capitalism. I find this narrower version of Dowdle’s hypothesis much more plausible than the much broader version I (mis)understood him to be advancing in his original post. But I still find myself somewhat skeptical, so in the interests of continuing what at least for me has been a very stimulating exchange, let me push back against certain aspects of Dowdle’s argument here.

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UNCAC, Asset Recovery, and the Perils of Careless Legal Analysis

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A little while back I posted a critical commentary on the Stolen Asset Recovery Initiative’s Left Out of the Bargain report.  The report described – and implicitly but clearly criticized – the fact that although the U.S. and other “supply-side” jurisdictions had recovered substantial amounts of money in settlements with bribe-paying firms, only a relatively small percentage of those settlements were transferred to the “demand-side” countries where the bribery took place.  These demand-side countries (which the report, to its credit, carefully avoids calling “victim countries”) are the ones that are “left out” of the “bargain” (that is, the settlement) between bribe-paying firms and supply-side governments.

I read the report as calling for, among other things, greater redistribution of settlement proceeds to demand-side governments, and expansion of the ability of those governments (or private parties) to pursue “follow-on” actions.  My main criticism was that the report neglected to consider the effect that either change would have on the incentives of firms and supply-side enforcers.  Two of the report’s authors, Ji Won Park and Jacinta Odour, posted an interesting reply to my post, which I recommend (along with my rejoinder, which can be found in the comments section of the original post).  But although the main focus of my critique and their response was the incentives issue, our exchange also revealed an important difference of opinion regarding the meaning and significance of the UN Convention Against Corruption, particularly its provisions on asset recovery.  It’s that issue that I want to explore here.

In my original post, I remarked in passing that the StAR report “elides … the distinction between asset recovery actions—in which a country seeks the repatriation of assets stolen by the country’s own nationals (usually former officials or their family members)—and actions for penalties or disgorgement brought against a firm or individual for allegedly bribing foreign officials.” In their response, Park and Odour “disagree that the [Left Out of the Bargain] study does not distinguish between repatriation of assets stolen by public officials and monetary sanctions imposed in foreign bribery settlements.”  The report does this, they say, “through the lens of UNCAC.” They explain that UNCAC Article 51 (the first Article in Chapter V, on asset recovery) states that “[t]he return of assets pursuant to this chapter is a fundamental principle of [UNCAC], and States Parties shall afford one another the widest measure of cooperation and assistance in this regard.”  Park and Odour then declare that this obligation to assist in the return of assets “applies not only to the mandatory return of assets that proceed from embezzlement and misappropriation […] but also to proceeds of corruption from other offences covered by UNCAC (such as Article 16 on Foreign Bribery) and compensating victims.”

If I’m reading this right, Park and Odour seem to be suggesting that, for purposes of States Paries’ obligations under UNCAC Article 51, there is no significant difference between stolen assets recovered in a forfeiture action, fines recovered in anti-bribery enforcement actions, disgorged profits, compensatory damages, and the like; they are all “assets” within the meaning of Article 51 – which implies, presumably, an undifferentiated obligation to “repatriat[e]” (in Park & Odour’s word) both stolen assets and “monetary sanctions imposed in foreign bribery settlements.”

I don’t believe this assertion can withstand close legal analysis, and I certainly think it is misguided as a matter of policy.

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