Tag Archives: SMEs

Chinese NPAs Target the Wrong Firms

Posted on by
7

Settlement agreements, such as non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs), have come to play a central role in resolving corporate criminal cases, including bribery cases. These settlement mechanisms are thought to improve overall enforcement by encouraging companies to voluntarily disclose wrongdoing and cooperate with investigators, in order to avoid the reputational and economic harm that would come with a criminal prosecution. The United States pioneered the use of NPAs and DPAs, but variants on these mechanisms have been adopted by many other countries as well (see here, here, and here).

The People’s Republic of China has also begun to explore a version of this mechanism. After some initial pilot programs at the local level, in June 2021 the Supreme People’s Procuratorate Office, together with eight other top authorities, promulgated Guiding Opinions on Establishing a Mechanism for Third-party Monitoring and Evaluation of Corporate Compliance Programs for Trial Implementation (or, more succinctly, the “Non-Prosecution for Compliance” mechanism). This mechanism, which can be used to resolve bribery cases as well as cases involving other types of corporate crime, resembles the NPA mechanism used in the United States: If a company accused of criminal violations admits wrongdoing, cooperates with the government’s investigation, agrees to pay certain fines, implements a compliance program that satisfies the requirements of the procuratorate office, and is overseen by a third-party monitor for up to one year, then prosecutors will agree not to prosecute the company, thus sparing the company not only the risk of criminal conviction but also the costs associated with defending against a criminal prosecution.

But there’s a big difference between the U.S. NPA system and the Chinese version: The U.S. (and other countries, like the U.K.) have used NPAs and DPAs to settle major cases against giant firms. In China so far, prosecutors (in the ten provinces and municipalities that piloted the NPA system) have only concluded NPAs with small and medium enterprises (SMEs), and have done so only when the offenses involved were minor crimes (those for which the responsible persons may be sentenced to less than three years in prison, the lowest permissible punishment for most crimes). This enforcement approach gets things exactly backwards: While the availability of NPAs can be very helpful in combating corruption and other crime in large companies—by giving those companies stronger incentives to disclose and cooperate, and by inducing them to enhance their compliance systems—offering NPAs to SMEs adds little value and is costly to the government. Rather than offering NPAs only to SMEs, as seems to have been the approach of Chinese prosecutors thus far, it would be better if SMEs were deemed ineligible for NPAs.

continue reading

Presidential Power Grab: Corruption and Democratic Backsliding in Mongolia

Posted on by
2

Mongolian democracy is in trouble. On March 26, President Khaltmaa Battulga proposed emergency legislation that would grant the presidency unprecedented powers to dismiss members of the judiciary, the prosecutor general, and the head of the state anticorruption agency (the Independent Authority Against Corruption, or IAAC). One day later, parliament approved this legislation by a vote of 34-6 (with 36 members of parliament either absent or abstaining), despite the fact that President Battulga hails from the Democratic Party (DP) while the rival Mongolian People’s Party (MPP) controls parliament. Technically the law doesn’t grant the dismissal powers directly to the president, but rather to a three-member National Security Council (NSC) composed of the president, prime minister, and speaker of parliament, and an oversight body called the Judicial General Council. But President Battulga dominates the NSC and personally appoints the members of the Judicial General Council, giving him effective authority to remove Mongolia’s judges and chief law enforcement officials at will. Sure enough, promptly after the law was passed, Battulga dismissed the head of the IAAC, the Chief Justice of the Supreme Court, and the prosecutor general.

This new legislation, a crippling blow to Mongolian democracy, has its origins in corruption, and corruption is likely to be its effect. President Battulga induced parliament to grant him such extraordinary powers by claiming that he alone can really take on Mongolia’s severe corruption problem. In his statement to parliament introducing the new legislation, Battulga alleged that the country’s law enforcement leaders were “part of a conspiracy system” that “fabricat[ed] criminal cases with a political agenda” while covering up others. The president pointed to Mongolia’s numerous unresolved corruption scandals to argue that the institutions of justice were “serving the officials who nominated and appointed them” rather than the public, and he argued that reducing the independence of the judiciary, the prosecutorial apparatus, and the IAAC would make those institutions more responsive to the popular will to fight corruption.

President Battulga is correct when he asserts that Mongolia has a corruption problem of serious, perhaps epidemic, proportions. Mongolians regularly list corruption as one of the country’s biggest issues (second only to unemployment in a 2018 survey) and political institutions such as parliament and political parties as among the most corrupt entities. The past few years have been especially scandal-plagued. During the 2017 presidential campaign, all three candidates faced accusations of corruption; most egregiously, the MPP candidate—who, until January 2019, served as speaker of the Mongolian parliament—was caught on video discussing a plan to sell government offices in a $25 million bribery scheme. Further, late in 2018, journalists discovered that numerous politically-connected Mongolians, including somewhere from 23 to 49 of the 75 sitting members of parliament, had been treating a government program designed to provide funding for small- and medium-sized enterprises (SMEs) as a personal piggy bank, taking out over a million dollars in low-cost loans. Beyond these scandals, Mongolia’s poor enforcement record compounds its corruption problem. For example, in 2015, only 7% of cases investigated by the IAAC resulted in convictions, and in 2018 public approval of the IAAC reached an all-time low.

But is there any reason to believe that President Battulga is right that giving him greater personal control over law enforcement and the judiciary will lead to less corruption? All the evidence points to no:

Continue reading →

How For-Profit Businesses Can Reduce Corruption in Development Aid

Posted on by
1

Although for-profit businesses often are epicenters of corruption-related problems, there are opportunities for small and medium enterprises (SMEs) to reduce corruption in development aid—particularly in locales and sectors where NGOs and the government do not seem to have an impact, or where the NGOs and governments are themselves part of the problem. Development practitioners and policymakers should consider greater use of for-profit businesses, as opposed to non-profit NGOs, for implementing development projects.

There are several reasons why SMEs may be able to successfully run for-profit social ventures that are potentially more resistant to corruption: Continue reading →

Entrepreneurs Care About Corruption – Here’s How to Help Them Fight It.

Posted on by
2

A friend of mine has been trying to start an artisanal liquor business in a small Latin American country. He learned to ferment fruit, crafted a logo, scrounged for and sanitized several hundred glass bottles, registered his corporation with all the various agencies, and paid all of his initial taxes. After producing his first batch and selling it to a number of small shops, he decided it was time to expand. Unfortunately, when he began to negotiate sales to larger restaurants and grocery stores he ran into a major complication: liquor taxes. The high level of liquor taxation made his business model completely unprofitable. Trying to understand how any other liquor business stayed afloat, he discovered that one liquor manufacturer and importer dominated the market, and didn’t pay any taxes. How? Corruption. In order to stay in business, my friend had a choice: (A) he could stay small, fly under the radar, and avoid paying taxes, or (B) he could navigate the perilous and uncertain process of bribing his way out of paying taxes. He ended up choosing a third option: he closed up shop and went back to his day job.

Ultimately, the fate of one small liquor business is not that important. But my friend’s experience illustrates a much more general phenomenon, one that is likely familiar to readers with experience in countries where corruption is widespread: corruption protects incumbent firms, undermines entrepreneurship, and constrains growth and job creation—particularly by small and medium-sized enterprises (SMEs), which are often the primary drivers of economic growth, employment, and innovation. Corruption can be a critical roadblock to entrepreneurs and small business owners who can’t bribe their way out of regulation. In fact, pervasive corruption can shift business incentives to such a significant extent that it can impact the shape of an economy dramatically. Continue reading →

Equity Crowdfunding: Considerations for Anti-Money Laundering Regulation

Posted on by
1

Equity crowdfunding involves the use of an internet-based platform to market equity shares in a given company to a wide range of potential investors (the “crowd”). The result is financial democratization of sorts – harnessing the power of the crowd to make many small investments instead of relying on large capital infusions from a relatively small number of sophisticated investors. The key to equity crowdfunding is to keep transaction costs low, so that small businesses are able to participate, without sacrificing investor protection. This latter consideration is especially important given the potentially low financial sophistication of the crowd.

In my last post, I discussed how equity crowdfunding could help small and medium-sized enterprises (SMEs) in developing countries overcome corruption-related barriers to accessing finance. Because equity crowdfunding makes use of internet-based platforms, it is particularly useful for cross-border transactions. As a result, SMEs in developing countries that are unable to access finance through traditional means (often because of corruption in domestic capital markets) can use equity crowdfunding platforms to connect with investors outside of their home countries. As with other technology-based tools that have the potential to sidestep the effects of corruption and contribute to economic development, though, there is also reason to be concerned about the opportunities for corruption for which equity crowdfunding could be abused. In particular, equity crowdfunding platforms could be used to facilitate money laundering, in at least two ways: Continue reading →