Category Archives: Commentary

Corruption Risk Assessments: Some Observations on Private Sector Analyses

Posted on by
1

As the pressure to curb corruption has grown, so too has the demand for “corruption risk assessments,” efforts to predict what form corruption in a public agency or private firm is likely to take and what can be done to reduce if not to eliminate it.  In the private sector risk assessments have been fueled by national laws that reduce penalties for corruption violations if a firm has a risk management program in place.  In the public sector risk assessments help assure citizens that their money is not being stolen and provide an agency leader unlucky enough to be at the helm when a corruption scandal breaks at least a partial defense to charges of incompetence or venality.

Public sector assessments come in several varieties: those which examine the risks faced by a single organization, say the Albanian tax agency, others which assess risks in a publicly-funded program, for example a de-forestation project in the Democratic Republic of the Congo, and still others which consider overall risk in a sector with a large public presence such as water or education.  While public sector assessments are almost always readily available, private sector assessments are not, presumably for proprietary or competitive reasons.  What is available on private sector risk assessment are hundreds (thousands?) of tomes advising firms on how to conduct a risk assessment — often written by those looking to assess the corruption risks a corporation faces for a fee.

A Google search for “corruption risk assessment” produced 300,000 hits, one for “assessing corruption risks” 48 million!  I won’t pretend to have read even a representative sample of the reports or “how to” manuals, but the many I have read so far have been a disappointment. Continue reading →

The Irrelevance of an FCPA Compliance Defense

Posted on by
5

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:

Continue reading →

Is China’s Anticorruption Crackdown Really a Crackdown on Anticorruption Activists?

Posted on by
1

In my last post I noted that political decentralization, and the inter-jurisdictional competition it fostered, could potentially suppress local corruption and promote economic growth. My enthusiasm was fanned by the Chinese Communist Party’s (CCP’s) aggressive anticorruption campaign. Since President Xi Jinping took power, there has been a wave of anticorruption purges against powerful military and government officials. The very public purge of Zhou Yongkang, a retired official described as “the most powerful man in China,” seems to be an indication that Xi is fulfilling his promise of zero tolerance against “tigers” and “flies.”

However, my optimism has been tempered by recent news that two more anticorruption activists have gone on trial in China. The fact that the two activists from New Citizens Movement—Ding Jiaxi and Li Wei—campaigned for officials to disclose their assets, a cause that echoed CCP’s official aspiration (see here and here) only made the arrests more perplexing.

This seems like a glaring contradiction.  Why does the Chinese leadership continue to trumpet on about anticorruption and simultaneously arrest anticorruption activists?

Continue reading →

Why FCPA Opinion Procedure Releases Are Broken and How to Fix Them

Posted on by
1

A couple months ago there was a rare sighting in the world of the Foreign Corrupt Practices Act (FCPA): a Department of Justice (DOJ) opinion procedure release. If you have no clue what an opinion procedure release is, don’t feel bad – if you aren’t an FCPA specialist, there’s a good chance you’ve never heard of them. Under 15 U.S.C. § 78dd-1(e), the DOJ is required to establish a procedure to provide advisory opinions to companies on whether contemplated conduct would conform with FCPA requirements. Regulations promulgated under this provision established “opinion procedure releases” – non-binding, public guidance opinions that provide companies with an indication of how the DOJ would treat a particular action. The releases are quite rare, however. Only 38 have been issued since 1993, and only four have been issued since 2012.

It’s probably fair to say that opinion procedure releases aren’t serving the purpose Congress originally intended for them. Congress presumably recognized that because the FCPA’s provisions are vague and consequences of violation can be severe, businesses require a way of ensuring that their contemplated conduct is within legal bounds. These concerns are even more pressing in 2014 as they were when the FCPA was passed in 1977, given that the DOJ and SEC are attempting to expand the FCPA’s reach through creative legal arguments, and multinational companies expanding into emerging markets that present new cultural and legal challenges. Companies constantly complain about legal uncertainty under the FCPA, yet the statutory mechanism designed to alleviate this problem is hardly used. Why? Continue reading →

Corruption Measurement: A Primer

Posted on by
3

In an early post Matthew predicted that the measurement of corruption was likely to be a major topic of discussion on this blog.  So far his prediction has proved correct.  Ten of the sixty plus posts that have appeared since this blog was launched in mid-February have been devoted in whole or part to measurement issues:  Are perception measures accurate?  Useful whether accurate or not?  What’s the source of the $1 trillion bribe estimate?  Shouldn’t someone develop sub-national corruption perception measures?   And so forth.

This eleventh post steps back from the policy issues examined in earlier ones to address a much more straightforward question:  What are the different ways corruption can be measured? Continue reading →

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

Posted on by
2

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.

Continue reading →

The Corruption-Security Nexus: Lessons from Afghanistan (Part 2)

Posted on by
Reply

This spring has been a season of reckoning with regard to anticorruption efforts in Afghanistan, with two important reports on that topic released last February. The first report, a study on the relationship between corruption and stability in conflict and post-conflict zones from Transparency International (TI) Germany, was the subject of my last post. The second study, was  the U.S. military published a report prepared by the Joint and Coalition Operational Analysis (JCOA) Division of the Joint Staff. The JCOA study is disheartening, with the report’s key findings amounted to an admission that U.S. forces initially contributed to corruption in Afghanistan. Indeed, the report finds that actions on the part of the International Security Assistance Force, the Afghan government, and the Afghan population fostered a “culture of impunity,” and that even where military taskforces made progress in fighting corruption, lack of unity and a lack of Afghan political will frustrated the taskforces’ headway.

The JCOA report offers recommendations for operationalizing what it refers to as Counter/Anti-Corruption (CAC) in the future term in Afghanistan and suggesting ways to optimize CAC from Day 1 in future missions. One of the major, and potentially fruitful tasks, will be to integrate fully CAC into counterinsurgency (COIN). I would supplement the JCOA Division’s recommendations with several additional suggestions: Continue reading →

Can Federalism Curb Corruption in China?

Posted on by
2

Many commentators have credited China’s political decentralization, and the inter-jurisdictional competition it fosters, with suppressing local corruption and promoting economic growth. Other commentators have been similarly enthusiastic about the prospects for Chinese “federalism” to improve both economic and government performance, and urge China to go even further in embracing a federalist model.  For instance, an op-ed in the New York Times a few months back suggests that “[I]f China’s leaders want to ensure their country’s peace and prosperity over the long run, they would do well to chart a course toward a federal future.”

The main argument for why political decentralization, and the associated inter-jurisdictional competition, can improve governance and growth is straightforward: Local officials compete for mobile capital and labor, and this competition disciplines government officials because bad behavior (such as corruption) can cause voters and firms to move to another jurisdiction. The greater the mobility of firms and citizens, the stronger the disciplining effect. And there’s some rigorous recent academic research substantiating the hypothesis that political competition can improve governance, including an excellent recent paper that examines recent data from Vietnam and finds that economic growth, coupled with political decentralization and competition, has indeed reduced local government corruption.

So does this mean that China’s best hope for improving its governance performance is to decentralize even further, granting provinces and municipalities greater autonomy in setting policy within their jurisdictions?

The short answer is likely to be no.

Continue reading →

America’s Pursuit of Absolute Integrity

Posted on by
2

Attempts to control corruption have a long history in the United States.  Since the late 19th century numerous laws have been enacted at the federal, state, and local level to end patronage and nepotism in government employment, control conflicts of interest by public servants, and reduce opportunities for bribery and kick-backs.  Although the current corruption landscape differs from that of 20th century America, policymakers considering anticorruption legislation today can profit from a look at the U.S. experience.

A useful, if sobering, place to start is with Professors Frank Anechiarico and James B. Jacobs’ 1997 analysis based on New York City’s century long effort to combat corruption supplemented by the federal government’s more recent experience with ethics laws.  Useful because the authors analyze many of the same interventions now commonly advocated to combat corruption around the globe: conflict of interest legislation, financial disclosure requirements for public servants, whistleblower protection, the creation of inspectors general, the reduction of officials’ discretion.  Sobering, not only because they conclude these reforms have done little to combat corruption, but also because the authors contend that together these laws have contributed to the current dysfunctional state of American government.  In short, they say, America’s effort to suppress corruption has produced little benefit at great cost.

Continue reading →

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

Posted on by
3

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.

Continue reading →