Dollar for Dollar, Procurement Collusion Is Still Better Than Outright Bribery

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In a piece on this blog last March, Rick highlighted a perverse consequence of requiring transparent bidding in government procurement. Although bid disclosure is intended to prevent public officials from secretly favoring companies that pay bribes, it can facilitate collusion among bidders by making it impossible for cartel members to defect from collusive agreements without getting caught.  As a result, the cartel is easily enforced and the public pays an inflated price for the goods or services being supplied, yielding improper profits for the winning firm just as if it had paid a bribe to secure the contract.

Rick’s example reminds us of the importance of considering the collateral consequences of anti-corruption remedies before employing them.  Nonetheless, public procurement reform could be an instance in which it is desirable to shift the method of corruption, even if we can’t reduce the total loss to corruption on a dollar-for-dollar basis.  Even if the private cartel problem worsens, this could be a cost worth bearing if it leads to less collusion between government procurement officers and favored private firms.

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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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America’s Broken System for Helping Friendly Nations Prosecute Corruption Cases

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Gaborone, Botswana, is not the place one would expect to find a group advocating that the United States government get tough on crime, but then the advocates were not the typical Washington cabal of interest group representatives, activists, lawmakers, and media.  Rather, they were investigators and prosecutors from 14 African anticorruption agencies attending a workshop on corruption investigations sponsored by the Association of Anticorruption Agencies in Commonwealth Africa.  Why the advocacy?  What is the complaint with the U.S.?

Especially in the smaller African countries, any significant corruption case almost inevitably requires a cross-border investigation.  The alleged corrupter is in one jurisdiction, the alleged corruptee in a second, and what may be the proceeds of the crime in a third.  Although the U.S. would seem to be a long way from Lesotho, Namibia, Malawi, and other Sub-Saharan nations, workshop participants explained that not only are corrupters sometimes located in the U.S., but many African elites favor parking assets acquired corruptly in American banks, real estate, and financial assets.  Hence the anticorruption authorities of Sub-Saharan states frequently seek help from the U.S. to locate stolen assets, obtain business records, and depose witnesses.  In a session devoted to the mechanics of investigating cross-border cases, however, not one of the 30 participants identified a single instance where the U.S. had timely responded to their request to provide evidence they needed to help convict corrupt public officials or freeze or seize his or her assets.  Indeed, several said they had been forced to dismiss charges or allow freezing orders to lapse because the U.S. had failed to reply to their requests. Continue reading →

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.

Improving OECD Convention Enforcement While Respecting Voluntariness: The Case for an Optional Protocol

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Jordan recently floated a very interesting idea on this blog about how to move forward in strengthening enforcement of the OECD Anti-Bribery Convention. As he pointed out, the Convention itself allows extremely limited means of enforcement: other than shaming noncompliant countries with scathing reports, there’s nothing that can be done within the existing framework. Since changing the Convention to include new sanctions is a nonstarter because noncompliant nations would need to accede to those changes, he suggested that willing members of the Convention “[d]evelop an extra-Convention agreement” to reward countries that live up to the terms of the Convention and “impose collateral consequences upon those who don’t.” The upshot of this extra-Convention agreement is that it would allow states to punish and pressure countries like South Africa, which has resisted the shaming effects of the Convention’s reports.

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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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Illicit Financial Flows: Tax Fraud, Evasion, Avoidance, Abuse, Mitigation, and Planning

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Thanks to high profile reports by Global Integrity, Eurodad, the OECD, and the African High Level Panel spotlighting losses developing countries suffer from the manipulation of tax laws and other forms of illicit financial flows, questions about “tax fraud,” “tax evasion,” “tax avoidance,” and “tax abuse” are now on the development policy agenda.  These terms and their equivalents in other languages are, with the exception of “tax fraud,” ambiguous — sometimes used to mean actions that are unlawful and sometimes used to refer to legal ones.  Before the debate on how to ensure developing countries receive the tax revenues they are due goes any farther, it may be helpful to explain how the ambiguity arises. Continue reading →

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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Looking Where They Shouldn’t: China’s Crackdown on Due Diligence Investigators

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As Meng suggested in a recent post, there is something admirable about Chinese President Xi Jinping’s anticorruption crusade. With nearly 182,000 party members reprimanded during his first 18 months in office, President Xi’s program appears both more ambitious and enduring than those of his predecessors. Unfortunately, though, the core of corruption surrounding China’s senior leadership remains largely untouchable. Even as China cracks down on the abusive practices of low-level officials, billions of dollars in “suspicious” funds sit in the foreign accounts of that nation’s “princelings,” protected by the fact that, as Matthew notes, discussion of the corruption of China’s senior leaders remains “absolutely taboo.” After all, shedding too much light on the misbehavior of the nation’s elite threatens to defeat the leadership’s paramount concern: maintaining the legitimacy that undergirds China’s political stability. And this leads to what it is that positive accounts of President Xi’s battle against corruption often overlook: the contemporaneous willingness of China’s senior leaders to crack down on anticorruption efforts whenever those efforts threaten to step on the wrong political toes.

One of the best examples of this phenomenon is the Chinese government’s recent crackdown on investigative companies who perform due diligence. Continue reading →

Putin’s “Power Vertical”: Blanchard and Shleifer Revisited

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In 2000, Olivier Blanchard and Andrei Shleifer wrote a seminal paper comparing the impact of federalism on economic development in Russia and China. Blanchard and Shleifer aimed to solve the puzzle of why federalism–and, in particular, inter-jurisdictional competition–fostered economic growth in China but hampered it in Russia. Simplifying somewhat, their key conclusion was that the absence of political centralization in Russia was the culprit. With no strong national government to act as a disciplinarian, Russian localities were prone to a particular form of corruption–capture by local special interests–and localities competed for rents instead of competing for firms by making improvements we associate with open governments and economies. In Meng’s recent post about political decentralization in China, she endorses Blanchard & Shleifer’s analysis, and advises against granting Chinese regional and local governments more autonomy from the center. Implicitly, her post is a caution against moves that would make China in 2014 look like Russia looked in 2000.

But what about Russia? Fourteen years after Blanchard & Shleifer wrote their paper, political centralization is a reality in Russia — in terms of the strength of the ruling party, Russia resembles China much more closely now than it did in 2000.  So one might expect, if Blanchard & Shleifer’s analysis were correct, that local corruption in Russia should have abated, and competition between Russia’s different regions should now be growth-promoting rather than growth-retarding.  Alas, Russia’s experience over the past 14 years suggests that this has not come to pass.

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