Category Archives: Commentary

Which Firms and Employees Are Most Likely to Pay Bribes Abroad? Reflections on the OECD Foreign Bribery Report

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I want to follow up on Melanie’s post last week, about the OECD’s first-ever Foreign Bribery Report, and what its findings tell us about patterns and tendencies in firms’ illegal bribe activities in foreign countries. The Report is an important and informative document that presents, as its introduction says, “an analysis of all foreign bribery enforcement actions that have been completed since the entry into force of the” OECD Anti-Bribery Convention. There’s a lot in it, and I may do another blog post at some point on some other aspect of the report. But for now I wanted to focus on one thing about the report that jumped out at me: the way in which the report’s findings seem to be in some tension with my prior beliefs/stereotypes about the contexts in which foreign bribery is most frequent.

Let me start with my prior beliefs, which are not based on much firsthand information, but which I’ve absorbed from a lot of people who work in this area, and I think are fairly widely shared. These beliefs run as follows: Whatever the world was like a decade or two ago, these days most major multinational firms recognize the seriousness of anticorruption laws like the FCPA, and most such firms have fairly robust (though often imperfect) compliance programs. When such firms run afoul of the FCPA or similar laws–which they still do, probably far too often–it is less likely these to be the deliberate policy of senior management, and more likely to be low or mid-level employees “in the field,” under pressure to increase business in high-risk emerging markets. This doesn’t mean senior managers are blameless–they may have failed to set the right “tone from the top,” or failed to implement an adequate compliance program, or looked the other way. But at major multinationals, many (including me) were of the view that bribery is usually not the firm’s policy. By contrast, the thinking often goes, small and medium-sized enterprises (SMEs), expanding in to high-risk foreign markets for perhaps the first time, are much more likely to run afoul of the FCPA. They are less likely to be familiar with the statute, less likely to have sophisticated (and expensive) compliance programs in place, and less accustomed to managing the pressures of doing business in environments where corruption is prevalent.

The OECD Report strongly implies (but does not quite say) that this is (mostly) wrong. As the report states at the outset, “[c]orporate leadership [was] involved, or at least aware, of the practice of foreign bribery in most cases, rebutting perceptions of bribery as the act of rogue employees.” More specifically, in the 427 foreign bribery enforcement actions the OECD examined, in 12% the CEO was involved, and in another 41%, “management-level employees paid or authorized the bribe.” As for the firms involved, the OECD found that “[o]nly 4% of the sanctioned companies were … SMEs,” while in 60% of cases the company had over 250 employees, and in another 36% the company size could not be determined from the case records.

So, does this mean my prior beliefs were all wrong? Are the most likely foreign bribery culprits senior executives at large multinationals, rather than lower-level employees and SMEs? Maybe. But not necessarily. Whereas Melanie treated the Report as refuting the “rogue employee myth,” and spinning out the logical consequences of that refutation, I want to take a different tack, by raising a few questions about how we should interpret the report’s findings here for the types of foreign bribery problems that are most typical. Indeed, although the OECD Report’s findings are important and ought to provoke all of us to re-examine some of our assumptions, I want to suggest a few reasons to be cautious about not drawing overly broad and unwarranted inferences on these particular points. Continue reading →

Bribery in the Boardroom: Implications for Internal Reporting Programs

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Early last month, the OECD released its first Foreign Bribery Report. According to Angel Gurria, the organization’s Secretary-General, the report “endeavors to measure, and to describe, transnational corruption based on data from the 427 foreign bribery cases that have been concluded since the entry into force of the OECD Anti-Bribery Convention in 1999.” The report as a whole is quite interesting, but I would like to hone in on the OECD’s findings regarding who engages in bribery, and how this should change how we approach arguments on whistleblower internal reporting requirements.

The report found that, contrary to popular belief, in the majority of cases senior management were aware of or endorsed the payment of whatever bribe occurred (in 41% of the cases senior management was implicated, in 12% even the highest level executives were aware of the bribe being paid). As the report notes, this “debunk[s] the “rogue employee” myth,” and this, I would argue, calls into question internal reporting requirements as a means of combating foreign bribery. Continue reading →

Trust in Government and Public Health: Corruption and Ebola Revisited

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A little while back I did a short post expressing skepticism about some claims that corruption was a significant contributor to the Ebola outbreak in West Africa. I agree that insofar as corruption diverts resources from public health and sanitation, or leads to undersupply of necessary medicines and supplies, it is likely to worsen both the frequency and magnitude of public health problems. But I was more skeptical that there was any direct evidence that the admittedly rampant corruption in places like Liberia, Sierra Leone, and Nigeria was a major contributor to that particular public health crisis.

Last month I was fortunate enough to moderate a panel on corruption and public health at the World Bank’s International Corruption Hunters Alliance meeting, and the presentations at that panel have altered my thinking about this issue somewhat. More generally, several of the presenters from countries hit hard by Ebola — including Commissioner Joseph Kamara of Sierra Leone’s Anti-Corruption Commission and Commissioner Aba Hamilton-Dolo of the Liberian Anti-Corruption Commission — made a convincing case that corruption has been, if not a primary cause, then at least a significant contributor to the extent and severity of the Ebola outbreak. Of course, there is still relatively little direct evidence, and it’s reasonable to wonder whether commissioners on anti-corruption commissions may be likely to overestimate the significance of their particular issue area for the most pressing immediate crisis facing their nations. Nonetheless, they did make a plausible case that corruption, while perhaps not a direct contributor to the outbreak, has significantly impeded the response.

On this point, Commissioner Hamilton-Dolo emphasized an important argument that I hadn’t really paid enough attention to, even though I quoted Professor Taryn Vian making essentially the same point in my earlier post: in addition to the squandering of public health resources, corruption may also impede the effective response to public health crises by undermining trust in government. The argument, as I understand it, goes something like this: Continue reading →

Why Context Matters: The Failure of the Ugandan Revenue Authority to Curb Corruption

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In his 2013 volume explaining why donor-supported reforms often go awry in developing states, Kennedy School Professor Matt Andrews lays the blame on the failure to appreciate how political imperatives, patronage networks, cultural practices, and other elements of local context affect the way reforms are implemented.  While Andrews offers telling examples of how ignorance of context doomed reforms in Argentina and Malawi, the failure to stamp out corruption in Uganda’s revenue collection service provides an even more vivid illustration of the way the very different context in a developing state can cause “best practice” reforms to fail.  The analysis is taken from Odd-Helge Fjeldstad’s classic account of the attempt to reform tax collection in Uganda, “Corruption in Tax Administration: Lessons from Institutional Reforms in Uganda,” chapter 17 of Susan Rose-Ackerman’s 2006 edited volume, International Handbook on the Economics of Corruption.

In 1991 revenue from taxes and customs duties in Uganda were seven percent of GDP, an astonishing low figure even on a continent where tax evasion was the norm.  Under pressure from the IMF, the World Bank, and other donors the then recently installed government of Yoweri Museveni took decisive action.  Following what was then considered best practice for boosting revenues and cutting corruption in a revenue service, the government made the revenue department of the Ministry of Finance into an autonomous agency.  Independent agency status allowed the Uganda Revenue Authority to implement a number of reforms to reduce corruption.  Salaries were raised above civil service levels and strictures on firing non-performing workers removed.  As a new agency, all employees were considered new hires and had to prove themselves during a probationary period; as a result almost 250, or 15 percent, of the old revenue department staff were weeded out.  In addition, “clean” expatriates were hired into senior management positions, and measures were taken to improve morale: offices were upgraded, working conditions improved, and training provided.  All in all, the Uganda Revenue Authority was considered a model for how to create an efficient, non-corruption revenue collection agency.

During the first years of its existence, the authority’s performance suggested these reforms were succeeding.  Revenue collection as a percentage of GDP improved and perceptions of corruption declined.  These early indicators of success, however, soon began to decline.  Forty-three percent of businesses surveyed in 1998 reported paying a bribe to a Uganda Revenue Authority employee; in March 2000 President Museveni termed the authority a “den of thieves,” and in 2003 its former head listed corruption as “problem number one” in the organization.  A Commission of Inquiry of C corruption in the Uganda Revenue Authority was appointed in 2002, and although its report was never released, leaks suggest the commission found massive corruption in the ranks. Continue reading →

Is China’s Anticorruption Enforcement Implicitly Protectionist?

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When a Chinese court fined GlaxoSmithKline (GSK) US$490 million last year for bribing Chinese physicians and hospital administrators, Western firms doing business in China snapped to attention. Indeed, the GSK action is likely only the tip of the iceberg, particularly given a December 2012 official legal interpretation of the Chinese Criminal Law by the Supreme People’s Court and the Supreme People’s Procuratorate that departed from the prior emphasis on bribe recipients and redirected attention to bribe payers. Thus far, multinational corporations – including GSK, Danone, and Volkswagen – have figured prominently in President Xi Jinping’s anticorruption campaign, leading many commentators to argue that protectionism is at play (see here and here). To put the point bluntly, the worry is that Chinese enforcers will go after foreign firms for conduct that is equally if not more common among domestic Chinese firms, and will do so largely to protect those domestic firms from foreign competition.

I have to admit, when I sat down to investigate the claims of protectionist bias, I more or less assumed the ulterior motives in Chinese enforcement. The typical refrain among my American friends who have lived and worked in China is: “Of course enforcers intentionally favor domestic companies. Everything is politically motivated.” That may be true. But what I found – or didn’t find – actually caused me to lean in the opposite direction: We don’t have enough evidence to substantiate claims of biased anticorruption enforcement in China. Continue reading →

Removing Barriers to Private Actions Against Corruption by Liberalizing Standing Doctrine

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Although most countries have traditionally relied on public bodies to enforce anticorruption laws, frustration with the ineffectiveness of public enforcement has led a growing number of activists and scholars to champion private lawsuits as an additional tool in the anticorruption arsenal (see, for example, here and here). Not only can private enforcement supplement government enforcement, but (as I have discussed previously) private enforcement can push public enforcers to do their job more scrupulously. However, in many jurisdictions private actions to enforce anticorruption laws face a daunting obstacle: the doctrine of standing (known in some jurisdictions by its Latin name, locus standi). The difficulty is that most corruption cases do not have an identifiable victim, or an aggrieved person in its traditional sense. For this reason, in many jurisdictions, those parties (often civil society NGOs) attempting to bring private suits against corrupt actors may be deemed not to have the requisite standing.

The question, then, is whether it is possible and desirable to adopt a broader conception of standing, one that would entitle citizens or NGOs to initiate actions against corrupt actors, even if the complainants cannot establish that they were personally and directly injured by the alleged corrupt conduct. Proponents of a restrictive interpretation of standing doctrine tend to argue that a more expansive notion of standing could inundate the courts with weak cases, including cases brought by vexatious litigants without a genuine interest in the underlying allegations. But these concerns are exaggerated. It is quite possible, as several jurisdictions have already demonstrated, to liberalize standing doctrine to empower private anticorruption plaintiffs without opening the floodgates of meritless litigation. Moreover, the legitimate concerns about abuse of the judicial process can be addressed in other ways. Continue reading →

Rescission of Contracts and Revocation of Licenses As Means to Combat Corruption

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Article 34 of the UN Convention Against Corruption (UNCAC) generally requires that each State Party “take measures … to address the consequences of corruption.” In recognition of the fact that government contracts and licensing processes have been among the areas most prone to corruption and bribery–and of the fact that the threat of criminal punishment may not be a sufficient or even viable deterrent to such corruption–UNCAC Article 34 further declares that “States Parties may consider corruption a relevant factor in legal proceedings to annul or rescind a contract, withdraw a concession or other similar instrument or take any other remedial action.” Although that second sentence of Article 34 is not mandatory, State Parties–particularly demand-side countries with an unfortunate reputation for corruption in government contracting (such as Kenya, Guinea, Indonesia and Philippines) should adopt that principle into their national laws.

Law providing for the nullification of contracts or concessions procured through corruption would be a strong deterrent to bribe-paying by firms. Although such bribery is already illegal, in some cases criminal punishments are simply insufficient to deter corrupt practices conducted in demand-side countries. Often the threat of sanctions is low, and even though some companies have been hit with substantial sanctions, this loss has been mitigated by the profits acquired by the operation of the tainted contract or license. And a company might think twice before acceding to a bribe demand from a lower-level public official (or even a high-level official) if the company knows that, by paying the bribe, they may be putting the whole contract in jeopardy if the government later decides it wants to reneg on the deal. Moreover, if a demand-side country were to adopt a law that allows for nullification of any government contract or concession procured through corruption, it would send strong signals to that international community that this country will no longer tolerate these corrupt practices. Continue reading →

Corruption in Turkey Poised to Worsen

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A year ago, a spate of corruption allegations leveled at high-ranking officials in Turkey’s ruling Justice and Democracy Party (AKP) placed the country’s graft problem and political tumult squarely in the international spotlight. Prosecutors alleged misconduct involving over $100 billion by more than 90 top officials, including then-Prime Minister (now President) Recep Tayyip Erdogan’s son. AKP supporters believe the charges were politically motivated, pursued by supporters of Islamic cleric Fethullah Gulen in an effort to undercut the AKP. (Gulenists, whose marriage of convenience with the AKP dates back to the early 2000s, had secured key positions in the bureaucracy, police, and judiciary. But Erdogan’s growing power and disagreements over foreign policy strained the alliance, and tensions between the two grew.) In a swift response many believe was led by Erdogan, thousands of police were removed from the corruption probe. Prosecutors and judges were likewise dismissed, and the AKP-dominated Parliament passed a bill restructuring the Supreme Council of Judges and Prosecutors (HSYK) to give the political branches greater control over the judiciary.

Erdogan’s government put the nail in the corruption investigation’s coffin last month with a bill that bolsters executive police powers at the expense of the judiciary’s oversight function. In brief, the new law reduces the power of incumbent judges in two top courts through a restructure and proscribes broader search and seizure power to police. Both moves are designed to give the AKP the upper hand in future disputes with the judicial branch.

The erosion of judicial independence will make anticorruption prosecutions more difficult in the future. But Turkey’s problems run deeper. In short, these recent developments are merely an extension of a corrosive pattern of governance and weakening rule of law: (1) a steady expansion of executive power and (2) infringements on freedom of expression–developments that have been countered, if at all, by (3) an illiberal counterweight, in the form of the Gulen movement. Getting corruption in Turkey under control will require tackling each of these three underlying causes.

Continue reading →

Can Giving a Benefit to a Third Party Count as Bribing a Foreign Official? Yes, No, or Maybe So?

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One of the things I enjoy most about participating in the anticorruption blogosphere is the opportunity to engage in serious, substantive debates with smart people who think differently about these issues than I do. The exchanges are helpful, even when they fail to eliminate the disagreement. Case in point: My friendly sparring with Professor Andrew Spalding about the investigation of the JP Morgan “Sons & Daughters” program in China, which raises the question about whether offering a job to a foreign official’s child (or other friend or family member) can violate the anti-bribery provisions of the Foreign Corrupt Practices Act. Professor Spalding, in a four-part series of posts on the FCPA Blog last summer (see here, here, here, and here), says no. (He further claims that the US government already took that position in a couple of DOJ Opinion Releases from the early 1980s, and that a DOJ reversal of that position would therefore be an affront to the rule of law). In my post last week, I disagreed, and argued that–depending on the facts of the case–it’s at least possible (perhaps even likely) that JP Morgan’s activities violated the FCPA, and more generally that offering something to a third party can, under some circumstances, count as offering an improper benefit to a foreign official under the FCPA.

Professor Spalding has now posted a thoughtful reply on the FCPA blog. While I continue to disagree with his analysis, the exchange has been helpful (at least for me) is elucidating an important distinction in how we analyze potential FCPA violations–that between conduct that may violate the FCPA (under the right factual circumstances) and conduct that always or never violates the FCPA. Appreciating this distinction is key–in my view–to understanding where Professor Spalding goes wrong (though I suspect he will continue to disagree!). While I don’t want to go round and round in circles on the same issues, let me take one more crack at what I view as the key point: Continue reading →

Combating Corruption in Uganda or Merely Displacing it: The World Bank’s Public Expenditure Tracking Survey

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A World Bank-initiated effort to reduce corruption in school funding in Uganda is widely, and rightly, celebrated for its results (click here and here for background).  In the early nineteen nineties on average 87 percent of the monies the Ugandan central government budgeted for textbooks and other school supplies “leaked out” somewhere between departing the Finance Ministry and arriving at the school house front door.  Yearly data revealed that 73 percent of the schools received less than five percent of the monies to which they were entitled, and only ten percent received more than half.  The 1996 Bank project had an immediate effect on the rate of losses.  By 1999 the government found schools were receiving on average 95 percent of what they were supposed to receive, and a 2002 World Bank study likewise showed a sharp drop in fund leakage.

The dramatic improvement is attributed to the enormous publicity the data on losses garnered.  Parents were outraged and the government and donor agencies embarrassed.  Within the development community, the Uganda Public Expenditure Tracking Survey, as the work to dig out and publicize the loss data became known, has been enormously influential, the story becoming a parable for how to fight corruption.  A Uganda-like PETS project is now routinely prescribed for attacking corruption in public expenditures, and a Google search on “Uganda PETS” yields over 100,000 hits and returns some 20,000 citations on Google scholar.

But for all the attention the effort has generated, there is evidence that it may not have had any impact on the level of corruption in Uganda.  It is possible that all it did was force those raking funds off the school fund program to turn elsewhere.  The Uganda PETS thus may simply have displaced the corruption in the school funding program rather than ending it. Continue reading →