Tag Archives: foreign anti-bribery law

FACTI Background Paper: Current Trends in Foreign Bribery Investigation and Prosecution

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The United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda Financing for Sustainable Development (FACTI) will recommend reforms to tax and anticorruption laws, asset recovery rules, beneficial ownership disclosure requirements, and other international norms to staunch the outflow of illicit funds from developing nations and speed the return of corrupt monies held abroad. A link to the panel’s interim report and instructions for submitting comments is here. 

As explained in an earlier post, the panel’s recommendations will draw on background papers commissioned by the United Nations Department of Economic and Social Affairs, the panel’s Secretariat.  A link to the papers is here. 

Dr. Abiola Makinwa of the Hague University of Applied Sciences authored a very fine one analyzing trends In the investigation and prosecution of foreign bribery cases (here).  Her summary of the paper is below.

Current Trends in Foreign Bribery Investigation and Prosecution

My paper examines systemic issues, such as lack of political will, profound information asymmetries, and the overarching general insufficiency of traditional criminal punishment as a response to the ‘true costs’ of corruption. I draw attention to Article 39 of the UN Convention against Corruption which calls for cooperation between national authorities and private sector entities as an integral aspect of anti-corruption enforcement. In practice, such cooperation between alleged offenders and prosecuting authorities may result in an agreement or resolution that reduces eventual sanction or penalty. These agreements are variously referred to as non-trial resolutions (NTRs), negotiated settlements, or structured settlements.

I show in the paper how the use of NTRs in foreign bribery cases is spreading across jurisdictions and is dramatically changing the face of anti-corruption enforcement.  While NTRs may be a pragmatic, new mechanism to overcome the limitations of traditional criminal prosecution of foreign bribery, they must not be seen as a get-out-of-jail card or lead to the decriminalization of the grievous crime of foreign bribery. Nonetheless, it is clear that NTRs provide a development-friendly response to foreign bribery enforcement by overcoming historic impunity and lack of enforcement. The most important “development dividend” of NTRs, is, in my opinion, the fact that NTRs shift the focus of anti-foreign bribery enforcement to corruption prevention.

There are 4 KEY arguments that support countries buying into NTR regimes for anti-foreign bribery enforcement.

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It’s in China’s Interest to Fight Corruption on the Belt and Road

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The Belt and Road Initiative (BRI), first proposed by Chinese President Xi Jinping in 2013, is a program through which China will spearhead the funding and construction of new infrastructure and trade networks across Eurasia and Africa. The centerpiece of the BRI is hard infrastructure: roads, railroads, ports, pipelines, and power plants. The scale of the proposed investment is immense: $1 trillion for projects spanning 75 countries.

The risk of corruption in such large-scale infrastructure is also immense, but at least initially, the BRI ignored corruption. When China’s National Development and Reform Commission (NDRC), the powerful government organ in charge of economic planning, issued the first comprehensive statement of the principles and framework undergirding the BRI back in March 2015, anticorruption principles were nowhere mentioned, nor did the published framework include any anticorruption measures. A later, more detailed policy document, published in 2017, also failed to include any mention of anticorruption. This posture is generally consistent with China’s traditional “non-interference” foreign policy, which makes Chinese authorities reluctant to go after overseas corruption.

More recently, though, Beijing has begun to respond to the BRI’s corruption risks. President Xi himself urged greater international cooperation on anticorruption at the June 2017 Belt and Road Forum. In September 2017, China’s Central Commission for Discipline Inspection helped organize a symposium called “Strengthening International Cooperation for a Clean Belt and Road.” And last December, the NDRC and other regulatory bodies issued new rules governing overseas investment by private Chinese companies, including a prohibition on “brib[ing] local public officials, or personnel from international organizations or related enterprises.” That same month, China’s State-Owned Assets Supervision and Administration Commission issued new guidance that requires state-owned enterprises to strengthen their anticorruption compliance procedures.

These are steps in the right direction. The question is whether the government’s newfound focus on corruption in the BRI is serious. Skeptics point out that Chinese authorities have never prosecuted a Chinese company or official for foreign bribery. Others suggest that the new regulations are more about controlling Chinese outbound investment than combating overseas corruption. I’m somewhat more optimistic, though, that Chinese authorities are serious about tackling corruption in the BRI. In my view, taking BRI corruption seriously is in the Chinese government’s interest for four reasons:

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France’s Failure to Fight Foreign Bribery: The Problem is Procedure

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When it comes to effective implementation of the OECD Anti-Bribery Convention, France is the black sheep of the herd. In 2012, the OECD’s Working Group on Bribery’s Phase 3 Report praised France’s efforts to enact an adequate legal framework, but expressed concerns on the low number of convictions. Two years later, the Working Group reiterated its concerns that France was insufficiently compliant with the Anti-Bribery Convention, and the EU’s 2014 Anti-Corruption Report expressed similar worries. In 2015, Transparency International placed France in the category of “limited enforcer” and has stated that France had failed to prosecute foreign bribery cases efficiently. Indeed, in the 16+ years since the OECD Convention came into force, no companies have ever been convicted in France for foreign bribery, and only seven individuals have been found guilty. The only French-led conviction against a company–Safran–was overturned on appeal last January. Even in this case, on appeal, the prosecution did not seek the conviction of the corporation, stating that the conditions to corporate criminal liability were not met (the court of appeal did not rule on that specific issue, and overturned the conviction on factual grounds).

The low number of French convictions for foreign bribery offenses is not due to the fact that French corporations do not bribe. In fact, a recent study on purchasing activities in the private sector showed that 25% of the Chief Purchasing Officers in France have been offered bribes by other French companies. And French companies have often been penalized by more aggressive enforcers, particularly the United States, when they have jurisdiction. (Most recently, Alstom agreed to pay a $772 million fine for violating the U.S. FCPA by bribing officials in several countries.) While some in France have grumbled about U.S. overreach, others in France share the views of the President of Transparency International France, who declared (in reference to cases like Alstom), “It’s humiliating for everyone in France that our judiciary is not capable of doing the work themselves”.

Why is France such a laggard with respect to its enforcement obligations under the OECD Convention? The issue is not France’s domestic legislation criminalizing foreign bribery, which is more than adequate. The real issue resides in France’s failure to enforce these laws. And the explanation for this lies not in France’s substantive criminal law on corruption, but rather in a number of important aspects of French criminal procedure and prosecutorial practices. Continue reading →

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 →

Are Less Corrupt Countries More Faithful Enforcers of the OECD Anti-Bribery Convention?

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The failure of many signatories to the OECD Anti-Bribery Convention to enforce their new laws against the bribery of foreign public officials has been widely noted, including on this blog. There is no single factor that explains this lack of enforcement across the 30 or so countries (out of 41 total signatories) that have not yet seriously begun enforcing their anti-bribery laws. However, there is a fair amount of descriptive evidence about the extent to which signatories actually do so: Transparency International (TI) has, for the last nine years, released annual reports on progress, which provide a good deal of information on this level.

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Should FCPA Sanctions Be Nine Times Larger?

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In my post last week, I discussed a recent working paper (by Cheung, Rao, and Stouraitis) that attempted to measure the economic returns firms reap from foreign bribery — and which reached the depressing conclusion that, much as we would like to believe otherwise, bribery still “pays.”  In doing a bit more research along these lines, I came across another terrific working paper — by Jonathan Karpoff, D. Scott Lee, and Gerald Martin — that investigates a similar question, using a somewhat different (though complementary) method, and reaches a similar conclusion: in the authors’ words, “firms engage in bribery because it pays to bribe, on average.”

Let’s suppose — plausibly, in my view — that these papers are correct in their conclusions that, given the expected costs of foreign bribery (probability of detection times expected magnitude of direct and indirect sanctions), many firms will find it in their rational self-interest to bribe.  If one believes (as I do) that foreign bribery is a social cost that we should try to deter (if we can do so at reasonable cost), then this implies that we should increase the expected cost to firms of paying bribes abroad — either by increasing the probability of detection, or the size of the penalty, or both.

One of the cool things about the Karpoff, Lee, and Martin paper is that it attempts to calculate just how much higher the penalties would have to be in order to deter foreign bribery, if the probability of detection remains constant.  Their sobering answer is that the average penalties would have to by about 9.2 times larger.  So, despite all the hyperbole about the enormous size of FCPA penalties (with the US government bragging about the large penalties, and the business community and defense bar griping about same), this recent research suggests that the penalties are almost an order of magnitude too small, if we really want to deter foreign bribery. (The authors also calculate how much the probability of detection would have to increase to deter foreign bribery, if the penalties remain the same.  Their conclusion is that it would have to increase from the current estimated level of 6.4% to about 58.5% — clearly unrealistic.)

What to make of this?  A few preliminary thoughts:

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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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Corruption Risk Assessments: Some Observations on Private Sector Analyses

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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

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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:

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Can Foreign Anti-Bribery Enforcement Statistics Help Us Measure Corruption Levels Objectively?

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We’ve spent a fair amount of time, in the early days of this blog, talking about the challenges of measuring corruption cross-nationally. The well-known perception measures are useful to a point, but suffer from well-known drawbacks, chief among them concerns about how accurately perceptions capture reality. A recent working paper by Laarni Escresa and Lucio Picci, “A New Cross-National Measure of Corruption,” tries to get around these difficulties. Using data on enforcement of foreign anti-bribery laws like the U.S. Foreign Corrupt Practices Act (FCPA), Escresa and Picci they derive a new index, which they call the Public Administration Corruption Index (PACI), to make more objective cross-country comparisons in corruption levels. The paper is really clever and creative—but in the end I think it doesn’t work. Let me first say what I think is so cool about the idea, and then explain what I think are the biggest flaws. Continue reading →