Tag Archives: quid pro quo

Implicit Corruption in the Chinese Consumer Debt Industry? A Close Look at Recent Evidence

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While many country’s bribery laws require an express quid pro quo—an agreement to exchange a specific benefit for a specific exercise of government power—in practice many corrupt relationships involve implicit quid pro quos, in which the private party provides something of value to government officials, and the government officials use their power to help their private benefactors, but there is never any express agreement, or even any direct connection between any individual official act and a particular benefit conferred by the private party. The context in which such implicit quid pro quos are most widely suspected and discussed is perhaps campaign finance in democracies, but such implicit quid pro quos can occur in many other contexts as well. It is often very difficult—not only for law enforcement agencies, but also for empirical researchers—to find sufficiently clear evidence of an implicit corrupt deal. Yet quantitative empirical researchers have been making important strides in using available data to detect evidence of hidden or implicit wrongdoing—an approach sometimes dubbed “forensic economics.”

A fascinating recent paper by Sumit Agarwal, Wenlan Qian, Amit Seru, and Jian Zhang (forthcoming in the Journal of Financial Economics) illustrates both the potential and limitations of this approach. The paper, entitled “Disguised Corruption: Evidence from Consumer Credit in China,” presents quantitative evidence of an implicit quid pro quo between a large Chinese bank and government officials who wield regulatory authority over the bank. The paper finds that the bank offers unusually favorable lending terms to government employees (the “quid”) and that in those provinces where this practice is more widespread, the bank receives more favorable treatment from governments (the “quo”). While this evidence alone cannot establish that there was an implicit exchange (the “pro”), the authors suggest that this is the most plausible explanation of the data.

The data is certainly susceptible to that interpretation, but there are other, more benign possibilities. I’ll first say a bit more about the main evidence the paper offers for an implicit quid pro quo, and then suggest (though not necessarily urge) a possible alternative explanation.

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Despite Predictions of Doom, McDonnell v. United States Has Not Derailed U.S. Anticorruption Prosecutions

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In 2016, the U.S. Supreme Court decided a case called McDonnell v. United States, which unanimously vacated the corruption conviction of former Virginia governor Bob McDonnell. McDonnell, according to prosecutors, had accepted a variety of gifts and other benefits from a businessman in exchange for using his influence as governor to help that businessman obtain assistance from various state agencies. The federal statute at issue made it a crime for a public official to perform (or offer to perform) an “official act” in exchange for something of value. But the problem, as the Supreme Court saw it, was that the jury in McDonnell’s case was told an “official” act could include something like setting up a meeting, making an introduction, or speaking favorably about a project to the government official responsible for making the relevant decision. This understanding of “official act,” the Supreme Court said, was too broad. An “official act,” the Court held, involves “a formal exercise of governmental power,” and while this could include ordering or pressuring another official to take or refrain from some action, other activities, like “[s]etting up a meeting, talking to another official, or organizing an event—without more—does not fit that definition of ‘official act.’”

How big a deal was the McDonnell decision? In the immediate aftermath of the decision, many anticorruption activists decried the holding as permitting “[a]ctions by U.S. politicians that look wrong, smell wrong and raise profound ethical issues.” Indeed, many critics characterized the McDonnell decision as having effectively “legalized” all but the most egregious and clumsy forms of bribery (see, for example, here, here, here, and here.) However, as Professor Stephenson observed on this blog at the time, the McDonnell holding could be read more narrowly. The opinion did make prosecutors’ job somewhat more difficult in holding that merely setting up a meeting or speaking with subordinates would not, without more, count as “official acts,” but the opinion did not appear to rule out the possibility that an official act might include, for example, ordering or pressuring a subordinate to take some specific action on behalf of the bribe-payer. The jury instruction in McDonnell had been (in the Supreme Court’s view) overly broad, but most corruption prosecutions would probably still be able to proceed, so long as the jury was properly instructed. Professor Stephenson acknowledged at the time, though, that this “glass-half-full” view of McDonnell was only one possible reading, and that the decision might end up sweeping much more broadly in practice.

Now, over three years since McDonnell, what can we say about the decision’s impact? In the initial aftermath of the decision, it did indeed seem that McDonnell would prove a major impediment to corruption prosecutions. In the McDonnell case itself, the government decided not to retry McDonnell. This might be read as a tacit admission that under the Supreme Court’s newly-announced understanding of “official act,” the government probably wouldn’t be able to get a conviction. Furthermore, the decision was seen as triggering a string of significant defeats for public integrity prosecutors. For example: The government failed to obtain a guilty verdict against New Jersey Senator Robert Menendez on federal corruption charges (the trial ended in a hung jury, and the government subsequently dropped the case); a federal appeals court, citing McDonnell, vacated two hard-won guilty verdicts for corruption against the prominent New York politicians Sheldon Silver and Dean Skelos; and federal prosecutors in New York decided not to pursue charges after a long public corruption investigation into New York City Mayor Bill De Blasio, because of “the high burden of proof, the clarity of existing law” and the challenge of proving corruption without “evidence of personal profit.” The De Blasio case is especially pertinent given that two men, Harendra Singh and Jona S. Rechnitz, pled guilty to giving De Blasio’s campaign and Political Action Committee tens of thousands of dollars in return for the mayor helping them negotiate favorable settlements for businesses that owed the city millions in rent and property charges. Even with these two witnesses, prosecutors dropped the case because they appeared unsure Mayor De Blasio took an “official action” as defined in McDonnell.

But these initial indicators did not develop into a larger trend, and McDonnell has not turned out to be as much of an impediment to federal corruption prosecutions as some critics feared. Subsequent government prosecutions and court decisions have made this clear. Consider the following examples: Continue reading →

The Stream of Benefits Theory of Bribery Doesn’t Criminalize Ordinary Politics

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Bribery of a public official can take one of at least two forms. In the most straightforward case, a public official accepts a one-off bribe in exchange for a particular official act. This kind of one-to-one exchange is illustrated by a recent case out of Puerto Rico, in which a territorial senator agreed to a direct trade: he would support legislation favorable to a local businessman’s security company, and in return he would receive an all-expenses-paid trip to Las Vegas. Things aren’t always so neat, however. Sometimes bribery involves a series of gifts to a public official in exchange for a series of official acts, and seldom do these gifts and official acts line up in a one-to-one fashion. An example of this kind of bribery can be seen in a recent case out of Texas, where, over an extended period of time, a local developer provided a town mayor cash, home renovations, hotel stays, airline upgrades, and even employment, and the mayor repeatedly voted for zoning changes that ultimately allowed a developer to build apartments.

Anticorruption officials in the United States prosecute the latter form of bribery under a “stream of benefits” theory of liability. Rather than requiring prosecutors to demonstrate tit-for-tat trades—in which a specific “thing of value” is offered or exchanged for a specific official act—under the stream of benefits theory unlawful bribery has also occurred when the prosecution can show a “course of conduct of favors and gifts flowing to a public official in exchange for a pattern of official actions favorable to the donor.” Some courts and commentators have described the idea as the briber regularly paying the public official to keep her “on retainer” with the expectation that she will help the briber out as opportunities arise. The stream of benefits theory recognizes that most bribes aren’t one-off trades of a thing of value for a particular official act. Instead, bribery often takes place in the context of a long-term, multifaceted relationship where there’s a general understanding along the lines of “I’ll scratch your back if you scratch mine.” Where gifts flow regularly to the official and the official occasionally acts for the benefit of the gift-giver, it would be difficult for prosecutors to prove that any particular gift instigated a particular official act. But as then-Judge Sonia Sotomayor once reasoned: “[A] reading of the [bribery] statute that excluded such schemes would legalize some of the most pervasive and entrenched corruption, and cannot be what Congress intended.” Accordingly, the stream of benefits theory has been approved by every federal circuit court that has ruled on the issue.

Yet despite the stream of benefits theory’s intuitive appeal, it has recently come under attack. Most prominently, a federal judge threatened to derail the trial of U.S. Senator Robert Menendez before it began by questioning the theory’s continued validity in light of the U.S. Supreme Court’s 2015 decision in the McDonnell case (which, as explained in more detail below, adopted a strict interpretation of what constitutes an “official act” under the U.S. bribery statute). Although the judge in the Menendez case ultimately determined that the stream of benefits theory was still good law, many commentators aren’t so sure. The Cato Institute, for one, speculates that McDonnell’s strict reading of the bribery statute requires the identification of a specific official act to be performed, rather than accepting as adequate the promise of future, undefined official acts in the briber’s favor. Others, like Professor Randall Eliason, argue that the Supreme Court already (albeit implicitly) rejected the stream of benefits theory on those grounds in a 1999 case called Sun-Diamond.

These attacks reflect a broader policy concern: fear that overly broad bribery statutes criminalize ordinary politics. Professor Albert Alschuler, for instance, asserts that the “principal danger” with the stream of benefits theory is that it “invites slippage” from a “quid pro quo requirement” to a “favoritism” standard. Favoritism, he argues, is endemic in politics––a politician will naturally favor allies and stakeholders who have supported him politically (and financially). Criminalizing favoritism is akin to criminalizing innocent political conduct, which, in turn, has far-reaching secondary effects, such as deterring good people from government service and giving prosecutors too much power to enforce the law selectively. The Supreme Court’s decision in McDonnell, though technically on a different issue, also expressed worries about how a “boundless interpretation of the federal bribery statute” could wind up criminalizing ordinary politics.

These fears are overblown. As other commentators have persuasively argued, the stream of benefits theory remains viable, and has not been expressly or implicitly repudiated by the Supreme Court in McDonnell, Sun-Diamond, or elsewhere. (See, for example, here and, on this blog, here.) I agree, but my main argument here concerns the detractors’ underlying policy concern. Put simply: the stream of benefits theory doesn’t criminalize ordinary politics.

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Expediting Corruption: The Dangers of Expediters in Licensing Markets

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The scheme was as simple as it was brazen, and as brazen as it was frightening. On April 24, 2018, a New York City jury convicted attorney John Chambers of bribing New York Police Department (NYPD) personnel in exchange for gun permits for his numerous clients. Calling himself a “gun license expediter,” Mr. Chambers acted as an intermediary for individuals hoping to pass the necessary background check and obtain the mandatory permit in order to legally own a firearm in the city. But in a decentralized scheme involving numerous individuals inside and outside the police department, NYPD officers approved hundreds of licenses while skipping background checks, shortening license suspensions, and waving through applications containing glaring red flags—including improperly approving licenses for individuals convicted of illegal weapons possession. In return, the officers received expensive gifts, tickets to sporting events, lavish vacations, envelopes stuffed with cash—and even free guns.

At the center of the web of bribery were so-called “gun license expediters” like Chambers, who advertised their ability to help clients navigate the demanding and complex process of obtaining, renewing, or retaining a handgun license in New York City. Several of the expediters indicted in the scandal were retired police officers who had served in the NYPD Licensing Division, bribing former colleagues after leaving the police force in order to open their own expediting businesses. Fees varied depending on the difficulty and timing of the requests, but clients were routinely charged thousands of dollars per license—on top of the hundreds of dollars in mandatory city-imposed application fees. By leveraging experience, relationships, and sometimes illegal gifts, expediters such as Chambers were able to not only expedite but also to influence the outcome of applications.

In response to the revelations, the NYPD announced substantial changes to its licensing program. First and foremost, the department barred any expediter from physically visiting the Licensing Division on behalf of a client—instead requiring that all applicants appear in person to submit their own paperwork. (Expediters, however, would presumably not be barred from contacting members of the Licensing Division or directing their clients whom to talk to when they arrive.) Second, the department mandated that all gun permit approvals could only be made by the top two officers in the unit. Despite these seemingly sweeping changes, the new policies sidestep the root causes of corruption in this instance—which reveal the danger of expediters in general. Continue reading →

Thoughts from the Menendez Trial: Preventing Corruption from the Start

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Last fall’s corruption trial of U.S. Senator Robert Menendez (D-NJ) ended rather anticlimactically, with the presiding judge declaring a mistrial after the jury announced that it couldn’t reach a decision, and the Department of Justice eventually deciding not to retry him. Senator Menendez had been accused of taking donations and gifts from Florida ophthalmologist Salomon Melgen in exchange for advocating for visas for Melgen’s foreign girlfriends, the award of a government contract, and the resolution of a Medicare billing dispute. Plenty of digital ink has already been spilled on the broader implications of the Menendez case for other bribery prosecutions (on this blog here, and elsewhere here and here).

But putting aside the specifics of the case, what caught my eye about the allegations against Senator Menendez was a background feature of U.S. law that seems to have gone largely undiscussed: It’s perfectly legal (and normal) for non-constituents to contribute to political candidates. In other words, even if you are barred from voting for a candidate because you live outside that candidate’s district, you can still express your support by pulling out your checkbook. That lack of constraint on donations seems to invite the very kind of corruption the government alleged in the Menendez case, because it allows a wealthy donor to find and purchase his or her own “personal United States senator.”

I’m certainly not the first person to voice the concern that allowing non-residents to contribute to political candidates may facilitate corruption. Two states—Alaska and Hawaii—have recognized the risk posed by allowing non-residents to contribute to political candidates. They’ve responded by limiting those donations. But in the Lower 48 and in all federal elections, there are no differential limits on contributions from people residing outside the state, so long as they are American citizens or permanent residents. (Alaska’s law is currently facing a First Amendment challenge from an aspiring donor whose gift was returned because the candidate he supported had already reached the out-of-state contribution limits. A federal judge upheld the law as a “closely drawn” effort by the state to prevent “quid pro quo corruption or its appearance,” but the would-be donor has appealed.) Putting aside the constitutional defenses of the sorts of laws that Alaska and Hawaii have adopted (which you can find in the amicus briefs filed in the Alaska case here, here, and here), there are strong policy reasons for limiting contributions by people living outside a state or district—not least because such limits, as the judge in the Alaska case noted, can be a useful tool for preventing corruption or its appearance:

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Does an FCPA Violation Require a Quid Pro Quo? Further Developments in the JP Morgan “Sons & Daughters” Case

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One of the Foreign Corrupt Practices Act cases we’ve been paying relatively more attention to here on GAB is the investigation of JP Morgan’s hiring practices in Asia (mainly China), in connection to allegations that JP Morgan provided lucrative employment opportunities to the children of powerful Chinese officials–both in the government and at state-owned enterprises (SOEs)–in exchange for business. A couple weeks back the Wall Street Journal published a story about the case, indicating that the government and JP Morgan were likely to reach an agreement soon in which the firm would pay around $200 million to settle the allegations. (The WSJ story is behind a paywall, but Thomas Fox has a nice succinct summary of both of the case generally and of the recent developments reported by WSJ.)

I’ll admit that my first reaction, on seeing the WSJ report, was skepticism that we were actually on the verge of seeing a settlement announcement. After all, the last time the WSJ broke a story about an imminent settlement of an FCPA case we’ve been following here on GAB, it was a story about the Walmart investigation last October; that report said that “most of the work had been completed,” and hinted that the announcement of a (smaller-than-expected) settlement was imminent. It’s now nine months later… and still no settlement. Apparently the Walmart case may have gotten more complicated since the WSJ‘s October report, but still, I think there are sometimes good reasons to season these inside scoops with the appropriate grains of salt. But, back to the reports on JP Morgan’s Asian hiring practices.

To me the most interesting feature of the recent report concerns the legal issue that is reportedly the sticking point between the government and JP Morgan. That issue is not the question whether an SOE official is a “foreign official” for FCPA purposes: According to the WSJ report, JP Morgan is not disputing the government’s position that SOE executives, at least in this case, are foreign officials, even though that issue is a major focus of critics who believe the government’s interpretation of the FCPA is too broad. And, the question whether a job for a relative counts as “anything of value”–the question that provoked the extended blog debate between Professor Andrew Spalding and me, as well as a good chunk of the other commentary on the case–also does not seem to be something that JP Morgan is contesting. Rather, at least according to the WSJ report, the big question seems to be whether an offer of a job to an official’s relative, given with the intent to influence that official’s exercise of her duties, is a violation of the FCPA even if there is no quid pro quo–at least if the conduct takes place in a country where preferential hiring for official’s relatives is “standard business practice.”

This seems to be to be a legitimately hard legal question, and one where I’m not yet sure what I think. As our regular readers may know, I’m generally fairly “hawkish” on FCPA enforcement, usually sympathizing with the government’s broad reading. And the text of the FCPA can certainly be read not to require any quid pro quo–indeed, that might be the more natural reading. But in contrast to some of the other accusations of alleged overreach lodged against the US FCPA enforcement agencies, here (if the reports are to be believed) the argument on the other side is fairly strong, both as a matter of law and as a matter of policy. In the end, I think I still come down on the government’s side, both on the legal question and the policy issue. But I’m genuinely conflicted, and would very much like to hear what others think on this one. Continue reading →

The Supreme Court’s McDonnell Opinion: A Post-Mortem

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I’m a bit late to the party, but I thought I should perhaps say something about last month’s unanimous U.S. Supreme Court decision to vacate the conviction of former Virginia governor Bob McDonnell, on the grounds that the trial judge had not properly instructed the jury on the meaning and scope of the term “official act” in the relevant anti-bribery statutes. (As readers of this blog are likely aware, I thought that McDonnell’s conviction ought to be affirmed. This is not the first time the U.S. Supreme Court’s views differ from my own, nor will it be the last.) There has already been a spate of helpful commentary on the decision—including a succinct summary of the opinion’s likely impact from the Center for the Advancement of Public Integrity, and an insightful commentary from Daniel Richman and Jennifer Rodgers on the NYU Compliance & Enforcement Blog (a new blog that’s worth following). I’m not sure I have all that much new to add, but let me throw in my two cents.

While it would have been satisfying to see McDonnell get his just desserts, what happens to McDonnell himself is less important that the broader impact of the decision on the enforcement of anti-bribery laws more generally. So what does the Supreme Court’s opinion portend for anti-bribery enforcement in the U.S. going forward? After reading the opinion, my reaction is mixed. On the one hand, the decision rests on fairly narrow grounds, which might well cabin its impact on the mine-run of federal bribery prosecutions. On the other hand, the Court’s opinion both bespeaks an unrealistic view of how senior politicians exert influence over policy, and places undue weight on concerns about chilling (allegedly) desirable conduct. Continue reading →

Guest Post: Fixing the Federal Definition of Bribery–From “Intent to Influence” to “Illegal Contract”

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Albert W. Alschuler, the Julius Kreeger Professor Emeritus at the University of Chicago Law School, contributes the following guest post:

In the United States, the principal federal criminal statute prohibiting the bribery of federal officials, 18 U.S.C. § 201(b), forbids “corruptly” offering or giving anything of value to an official “with the intent to influence any official act.” Yet, as I argue in a recent article, defining bribery primarily in terms of the payer’s “intent to influence” is overbroad. The phrase “intent to influence” not only seems on its face to reach common and widely accepted practices; it also invites speculation about motives and may produce prosecutions and convictions based on cynicism.

There’s an alternative: The American Law Institute’s 1962 Model Penal Code defines bribery as offering, giving, soliciting or accepting any pecuniary benefit as “consideration” for an official act. As a Texas court said of a state statute modeled on this provision, the Code “requir[es] a bilateral arrangement—in effect an illegal contract to exchange a benefit as consideration for the performance of an official function.” More than two-thirds of the states now embrace an “illegal contract” definition of bribery; the federal government and the remaining states should follow suit. Continue reading →