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Thursday
Jul072016

Kathryn Gordon: Is foreign bribery an attractive investment in some countries?

A basic design principle for sanctions regimes is that crime should not pay. Yet, the OECD has just released a simulation study showing that foreign bribery can be an attractive investment for companies in many jurisdictions.

Specifically, 23 of the 41 Parties to the Anti-Bribery Convention have such low maximum fines that companies would still be willing to “invest” in a foreign bribery scheme even if it knew in advance that it would be caught and fined at the end of the bribery scenario. Clearly, this implies that fines for bribery are set too low in these jurisdictions.

In fact, the broader theme of the study is that sanctions regimes are highly fragmented. While fines are low in many jurisdictions, they are exceedingly high in others. In many cases, however, these high monetary penalties exist only on paper because they are not backed up by effective enforcement. For example, the three countries with the highest de jure fines have never successfully completed an enforcement action against a legal person. Only a few countries combine strong sanctions with active enforcement of anti-bribery laws.

This patchwork of incentives and disincentives for foreign bribery is explored using simulations of “net present value” for “investments in foreign bribery” under assumptions of both certainty and uncertainty. The simulations draw on maximum sanctions data produced by the OECD Working Group on Bribery for each of the 41 Parties to the Anti-Bribery Convention and on the cash flows -- including both bribes and benefits -- associated with a real-world bribery scheme that was the subject of a successful enforcement action. 

If the net present value is positive, then the company expects to have a positive return from the bribery scheme, even knowing that it will have to pay the maximum fine available in that jurisdiction. 

The simulations also show that the availability of effective systems of confiscation -- that is, the deprivation of property by a competent authority, such as a court -- has the potential to significantly reduce the fragmentation of incentives. Whereas 23 countries had positive returns the bribery scheme when only fines are considered, only six countries still have positive return if confiscation is available.  

However, an OECD-StAR study shows many countries lack the necessary expertise and legal infrastructure to establish such systems -- many schemes that exist on paper are not effective in practice.

The simulations cover only two types of sanctions -- fines and confiscation -- and therefore do not capture the full set of incentives facing companies. For example, they do not include other influences on the decision to bribe, such as reputation effects and executive liability. They also do not cover other types of sanctions such as debarment from public procurement processes.

Although the simulations do not present a full picture of all the ways that legal systems influence bribery, they are, in effect, a thought experiment that has clear strategic implications for the OECD Working Group on Bribery.

As a matter of high priority, fines in many jurisdictions need to go up and confiscation regimes need to be made more effective. Although improving legal systems is often a slow, painstaking process, countries are already taking steps to strengthen monetary sanctions for foreign bribery. France and Germany have substantially raised fines for legal persons in recent years, thanks in no small part to pressure from the OECD Working Group on Bribery. Other countries now need to follow suit.

_____

Kathryn Gordon is a Senior Economist based in Paris for the OECD in the Anti-Corruption Division of the Directorate for Financial and Enterprise Affairs. She can be contacted here.

Reader Comments (3)

As long as companies can bury their bribes in the "fees" that they pay to "consultants" who help them establish operations in the host countries, bribery will be not only an attractive investment, but a deductible expense that doesn't have to amortized.
July 7, 2016 | Unregistered CommenterMichael Deal
It is no disrespect to practitioners to repeat the old saw: "ECONOMICS IS THE PRACTICE OF TELLING YOU WHAT YOU ALREADY KNOW IN WORDS YOU CANT UNDERSTAND AND FORMULAE YOU CANNOT DECIPHER OR CHALLENGE". Which company or person pays a bribe in the expectation that it is a bad investment? I was fortunate to work in a company where the npv calculation of bribery was never on the table, much less in the format that includes the cost of a fine or legal defense. But I would love to see a survey or other proof that companies do that equation - all my experience suggests that the benefits of bribery are immediate and the economic return immediate and higher than the bribe, and those involved don't expect to be caught, or figure that if the company is caught down the road, they will have collected their bonus and be able to move on. It is only the personal risk and high certainty of sanction that deters bribery in cases of individuals who would consider applying the npv formula and who don't reject bribery because of VALUES.
July 7, 2016 | Unregistered CommenterHJH
MEXICO is one of those where "consultants" help them establish operations and bribery will be deductible and disguised as fees for services. KYC is so important for tax, legal, accounting, marketing and outsourcing services. Blacklists have been of little use.
July 8, 2016 | Unregistered CommenterLuis Ortiz

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