Tag Archives: China

The OECD Report on Corruption in Sectors: Will it Hurt the Brand?

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Consequences of Corruption at the Sector Level and Implications for Economic Growth and Development is the OECD’s latest report on corruption. Released March 25, it was written at the request of G-20 governments and follows an earlier one the organization did for the G-20’s September 2013 meeting.  Whereas that report examined the impact of corruption on rates of economic growth and levels of development, this one adopts a micro perspective, analyzing the effect of corruption and suggesting ways to fight it for four sectors of national economies: i) extractive industries, ii) utilities and infrastructure, iii) health, and iv) education. Among its more striking conclusions:

  • ”independent, competent and better regulatory and law enforcement systems” are critical for combating corruption;
  • “transparency should be an integral component of all anti-corruption strategies;” and
  • “anti-corruption measures must . . . be targeted and tailored.”

Additional examples of focused, cutting edge policy recommendations can be found by clicking “Continue reading.” Continue reading →

Whistling in Chorus: The Potential Impact of the Rise of Parallel Prosecutions on Whistleblower Regimes

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A few months ago, Chinese officials announced a number of new incentives for whistleblowers to come forward to disclose corporate wrongdoing: pledging to develop protection plans for whistleblowers when necessary to “prevent and end acts of retaliation” and increasing the rewards whistleblowers could potentially receive to approximately $33,000 for “actionable information” (with even greater sums available for “significant contributions of information”).  While these policies are fascinating in their own right, they also feed into a larger discussion that has been taking place both on this blog and in other forums, regarding what impact, if any, an increased commitment to anticorruption norms by demand-side countries may have upon the current anticorruption regime. A number of authors have already discussed this phenomenon both in broad strokes and specifically within the context of China’s increased enforcement of anticorruption laws (though some have suggested China’s recent, high-profile corruption prosecutions, including a $490 million fine of GlaxoSmithKline, may serve as a cover for protectionist policies).  One area that may warrant further consideration, however, is the likely impact that the rise of demand-side prosecutions and the resulting potential for parallel enforcement by demand-side and supply-side countries may have upon these states’ whistleblowing regimes.

While the ways in which the increased prevalence of demand-side corruption prosecutions will impact the interactions between supply- and demand-side countries’ anticorruption regimes remains unclear, this phenomenon seems likely to result in one of two possible outcomes with respect to states’ attitudes towards whistleblowers. First, countries may perceive some benefit to ensuring that they are the only–or, at the very least, the first–government to receive a whistleblower’s report.  Second, states may alter their whistleblowing policies to reflect the fact that whistleblowers can potentially report to, and be rewarded by, both demand- and supply-side countries.  While the impact of these different scenarios on the ways in which whistleblowing protections and incentives will develop over time may be quite different, both appear disadvantageous to states’ anticorruption efforts, to the whistleblowers themselves, or both.

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There Is No “East Asian Paradox” of Corruption and Development

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Imagine that you’re talking to a friend, and you mention that smoking shortens average life expectancy, and that smokers should therefore be encouraged to quit. Suppose your friend replies, “Well, but my uncle Fred smoked every day, and he lived into his 80s.” If your friend means this either (a) as a serious challenge to your empirical claim that smoking is bad for you, or (b) as a critique of your prescriptive argument that smokers should therefore be encouraged to quit, then you would probably find his response absurd on its face. And if your friend were to say that he has posed a serious conceptual conundrum—say he calls it the “Uncle Fred Paradox”—you would probably laugh at him. His argument might seem marginally less ridiculous if he pointed not to his Uncle Fred but to, say, France—which has relatively high smoking rates and relatively high life expectancy—but we probably still wouldn’t view this as a serious challenge to the view that smoking is bad for you, nor would we spend a lot of time wringing our hands worrying about the “France Paradox” in the smoking-health relationship.

Yet for some reason, in serious discussions about the relationship between corruption and economic development, people seem to make precisely this sort of specious argument, and the argument gets taken very seriously by people who should know better. The form the argument takes in this context goes something like this: “It may be true that high corruption seems to be correlated with lower levels of economic development on average. However, many countries in East and Southeast Asia—such as China, South Korea, Japan, Taiwan, Thailand, and Indonesia—either achieved or currently are achieving impressively rapid economic growth despite widespread corruption.” This is the so-called “East Asian Paradox” (a term coined, as far as I know, by Professor Andrew Wedeman — see also his recent book). The somewhat more sophisticated version of the argument, developed most prominently in an article by Professor Michael Rock and Heidi Bonnett, notes that although perceived corruption has a negative relationship with growth and investment in most countries (especially small developing countries), this relationship becomes positive in a subsample consisting of five large, newly-industrializing Asian countries (China, Indonesia, South Korea, Thailand, and Japan), using data drawn from the early 1980s through the mid-1990s.

One encounters more-or-less sophisticated versions of the “East Asian Paradox” argument all the time when talking about the adverse impact of corruption on development. When someone says something like, “Corruption is a major threat to economic development,” someone almost invariably responds with something like, “But what about China? It has achieved impressive economic growth despite widespread corruption.” As far as I’m concerned, this is equivalent to saying, “But what about my Uncle Fred, the lifelong smoker who lived into his 80s?” But in case this is not completely obvious, let me explain why I think the “East Asian Paradox” argument, at least in its usual crude form, is mostly bogus. Continue reading →

Why International Double Jeopardy Is a Bad Idea

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In a recent post, I argued that U.S. authorities investigating British pharma giant GlaxoSmithKline (“GSK”) should consider criminally prosecuting GSK but partially offsetting any attendant penalty in light of the $490 million fine already imposed by China. This option is only available to the DOJ, though, because it stands on one side of a crucial divide in the global anticorruption regime: the U.S. — unlike Canada, the U.K., and the European Union — does not recognize an international variant of ne bis in idem (“not twice for the same thing”) (also known as “international double jeopardy”).

Recognizing an international double jeopardy bar can have a dramatic impact on a country’s capacity to combat international corruption. For countries like the U.K., being second-in-line to target an instance of transnational bribery often means not being able to prosecute the conduct at all. (For example, in 2011, the U.K. had to forego criminal sanctions against DePuy International because the U.S. had already prosecuted the British subsidiary.) In recent years, though, a spike in the number of parallel and successive international prosecutions has inspired a small but growing chorus of commentators calling for countries like the U.S. to formally embrace international double jeopardy.

To these commentators’ credit, many of their arguments sound in basic notions of fairness: you shouldn’t punish someone twice for the same crime. But before we jump on the double jeopardy bandwagon, I want to spend a few minutes explaining why, when it comes to the global fight against transnational bribery, double jeopardy probably isn’t all it’s cracked up to be.

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The 2014 CPI Data Demonstrates Why, Even Post-2012, CPI Scores Cannot Be Compared Over Time

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A little while back, I expressed some skepticism about whether Transparency International’s Corruption Perceptions Index (CPI) scores can be compared across time, even after TI changed its methodology in 2012 and claimed that its new scores would now be comparable across years.  More recently, I criticized TI’s 2014 CPI for burying the information on the margins of error associated with the CPI values, and for wrongly asserting that changes in the CPI score between 2013 and 2014 for certain countries (most notably China) were substantively meaningful.  (In fact, not only does the change in China’s score between 2013 and 2014 seem not to be statistically significant, but the change was due almost entirely to the dropping of a source in which China did abnormally well in 2013, and an abnormally large movement in a single other source.) I decided to follow up on this by taking a closer look at the other ten countries that TI singled out as having experienced significant CPI changes (in either direction) between 2013 and 2014.

Upon closer examination, I’m even more certain that CPI scores cannot be compared over time. I’m also more confident in my judgment that TI has been unforgivably sloppy — and downright misleading — in how it, and its representatives, have portrayed the substantive significance of these CPI changes. It turns out that the problem I found with the China calculations was not unusual. For almost all of the eleven countries TI identified as big movers, the CPI changes were driven by (1) the addition or elimination of sources from year to year for particular countries, and/or (2) abnormally large (indeed, implausibly large) movements in a single source. Until TI fixes its methodology, the safest thing to do is to ignore year-to-year changes in the CPI. And for the sake of preserving its own integrity and credibility, TI should either (A) persuasively explain why I am wrong in my analysis of the data (in which case I will gladly concede error), or (B) issue some sort of retraction or correction to its earlier press releases, and either drop the claim that post-2012 CPI scores can be compared across time or fix its methodology going forward.

Allow me to elaborate my analysis of the data: Continue reading →

Prosecuting GSK: How to Deal with Being Second in Line

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As followers of the anticorruption blogosphere know, China recently fined British pharmaceutical giant GlaxoSmithKline (“GSK”) $490 million for bribing Chinese doctors and hospital administrators. There is no need rehash here what many others have already said: this case is likely a watershed moment marking China’s emergence as a force in the global fight against corruption.

But there is another aspect of the story that has gone unnoticed: With rare exceptions, the U.S. Government’s corporate FCPA settlements have either preceded any foreign enforcement action (e.g., Total) or been announced as part of a coordinated global settlement (e.g., Siemens). But China’s prosecution of GSK has put U.S. regulators in a relatively unfamiliar position: that of the second mover. And in doing so, China has forced the Department of Justice to confront a difficult question: Should it care that China has already fined GSK for the same conduct that DOJ is investigating.

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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 →

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 →

The Giving Trees: Fighting Corruption in the Timber Industry with Technology

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The 3-hour drive from the port city of Douala, Cameroon to the capital, Yaoundé, is unsettling–and not just because drivers hurtle down the road, careening around blind curves into oncoming traffic. What is more worrying is that the oncoming traffic is comprised largely of huge lorries on their way to the shipyards transporting some of the biggest trees I’ve ever seen. After passing 10-15 trucks on my first trip, I started to wonder where the trees were coming from and how they could possibly be arriving in such a steady stream. Perhaps this large-scale lumber harvesting is not by itself all that unusual. But the facts that Cameroon ranks 144/177 on Transparency International’s Corruption Perception Index, and that nearly two-thirds of these round logs leave the country destined for China–the world’s largest importer of illegally-sourced timber–raise red flags.

Indeed, illegal logging in southern Cameroon and the rest of the Congo Basin is a serious problem, contributing to the destruction of 2.5% of the world’s second largest rainforest over a single decade. Studies show that in two of Cameroon’s nearest neighbors, Gabon and the Democratic Republic of Congo (DRC), illicit logging could account for as much as 70% of the timber market. In fact, the entire greenbelt envelops countries where corruption is rife – India, China, Brazil, Peru, Indonesia, Ethiopia, DRC, Nigeria – and the links between corruption and over-logging have been widely studied by the likes of TI, U4, UNODC, and the World Bank.

Current efforts to address poor governance of the timber industry are admirable but insufficient. The EU FLEGT Action Plan and the US Lacey Act regulate trade in wood and ban the importation of illegally sourced goods. Under the FLEGT Plan, Cameroon and the EU agreed to a licensing scheme to promote proper forest management. But no such regulation exists in China, a market that has boomed over the past 15 years largely in response to American demand for manufactured wood products. Furthermore, as the US Environmental Investigation Agency has shown in the Peruvian market, transparent trade depends on formal paperwork – export permits, certificates of origin, etc. – that are easily forged and exchanged on the black market. As a result, the same study points out, American importers often remain culpable, despite regulations.

We need a coordinated global response that can be effective independent of manipulable documents. What might this answer look like? A major component might well be the deployment of new technologies and scientific techniques to verify the origin of timber and timber products. Continue reading →

JP Morgan, Sons & Daughters, and the Rule of Law

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One of the more interesting ongoing Foreign Corrupt Practices Act investigations involves allegations that the investment banking giant JP Morgan’s “sons and daughters” program in China. According to media reports, JP Morgan’s China and Hong Kong offices offered jobs, and in some cases consulting contracts, to the children of well-connected officials in China (including the heads of state-owned enterprises and senior party officials) in return for lucrative business opportunities in the Chinese market (see, for example, here and here). The case is still under investigation, the facts are still in dispute, and the government enforcement agencies have not yet accused JP Morgan of any of its executives of any wrongdoing. Yet there have been hints that if the facts turn out to be as bad as they look, the U.S. government will consider JP Morgan’s so-called “sons & daughters” hiring program to have violated the FCPA’s anti-bribery provisions. That conclusion would depend crucially on the premise that providing a job to the (adult, non-dependent) child of a foreign official counts as providing “anything of value” to the official. (Things would be different if there were evidence that the officials’ children funneled some of the money back to their parents, but at the moment no such evidence has come to light.)

About six months ago, Professor Andrew Spalding (who has also contributed a number of insightful posts to this blog – see here, here, and here) published a provocative four-part series at the FCPA Blog (see here, here, here, and here) raising serious concerns about this legal theory, and suggests that applying it in JP Morgan’s case would be not only inappropriate, but a serious affront to fundamental legal principles. Somewhat unusually, I find myself in disagreement with Professor Spalding. Indeed, if the facts turn out to be as bad as early media reports suggest, I think that this is an easy case. To my mind, it’s straightforward that offering a benefit to a third party can count as offering “anything of value” to a foreign official under the FCPA, and nothing in the DOJ’s prior opinion releases would constrain the U.S. government from applying that principle in this case. Continue reading →