A BUSINESS CASE FOR COMPLYING WITH BRIBERY LAWS[40][41]

P.M. Nichols

The Wharton School of the University of Pennsylvania

Businesspeople report that bribery presents one of the most frequent and per­plexing issues that they encounter.

A contradiction, however, does not exist. In the last few years, research has revealed that the payment of bribes actually imposes costs rather than conferring a benefit. This paper discusses those costs.

1. Defining and analyzing corruption

1.1. Definitions

This paper deals with bribes paid by businesses to government officials. Bribery is a subset of corruption. In general, corruption consists of the abuse or misuse of a position of trust or responsibility for personal gain rather than the purpose for which

2 that trust or responsibility was conferred . The bribe may be offered by the business or demanded by the government official.

1.2. Dynamic versus static analysis

In order to understand corruption, one must understand that corruption has a dynamic effect rather than a static effect. Corruption is not separate from the rela­tionship between a business and government; corruption becomes part of that rela­tionship, and has an effect on that relationship.

A fundamental misunderstanding of the nature of corruption perceives each bribe paid as affecting only that particular transaction. As the study of corruption becomes more sophisticated, scholars and observers realize that the payment of a bribe in one transaction has an effect on other transactions, on other decisions, and on the reputation and other relationships of a business.

2. Engaging in bribery increases direct costs and indirect costs

2.1. Bribery increases direct costs

The most starkly demonstrated cost imposed by paying bribes is an increased amount of time and money spent dealing with government bureaucracy. Corruption creates a relationship, perhaps between the bribe payer and a bribe-taking official, but certainly between the bribe payer and the bureaucracy. In this relationship the government/bureaucracy has the real power (even if the business seems more power­ful): the government official has control over a resource or service desired by the firm whereas the firm only has money. The government official has all of the powers of the state for purposes of controlling the resource or service, but makes decisions about disbursing those resources or services based on his or her own self-interest. Thus, there are hardly any constraints on the government official’s behavior. The firm has already indicated a willingness to pay an illicit fee in order to avoid bu­reaucratic delay or to secure administrative approval; nothing exists to prevent the official from creating new and greater delays or from simply re-negotiating the size of the illicit fee. Jay Pil Choi and Marcel Thum label this process the «ratchet effect» of corruption .

Daniel Kaufman and Shang-Jin Wei developed one of the first empirical tests that showed the dynamic effects of paying bribes. Using data from several thou­sands of responses to surveys conducted for the Global Competitiveness Report and

the World Development Report, holding other factors constant and comparing bribe­paying and non-paying firms within same countries, Kaufman and Wei found that «firms that pay more bribes, in equilibrium, experience more, not less, time wasted with the officials on matters related to regulations»^{[42][43][44][45][46]}.

9 have paid bribes also have higher, not lower, cost of capital» .

Since Kaufman and Wei's groundbreaking study, many other economists and sociologists have conducted similar studies. These studies have used a variety of data sets, and have examined various regions, various countries, various industries, various-sized businesses, and have even looked specifically into the effects of paying bribes in countries with high levels of corruption. Every study has found the same fact: companies that pay bribes have higher, not lower costs associated with govern­ment interactions than do companies that do not pay bribes. Studies have also found that corruption increases the cost of raising capital through bonds and decreases the value of equity^[47][48].

2.2. Bribery lowers rates of growth

Empirical studies indicate that firms that pay bribes experience lower rates of growth. Raymond Fisman and Jakob Svensson studied the effect of the payment of bribes and the payment of taxes on the rate of growth of firms in Uganda. They found that greater corruption is associated with lower rates of growth; specifically, a one percent increase in the rate of bribery «is associated with a reduction in firm growth of more than three percentage points . They also found that the payment of

bribes is three times more damaging to growth than payment of an equal amount of

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taxes . They conclude: «the evidence we have presented and complementary, qua­litative information from firm managers, points in one direction - corruption is a serious constraint on doing business»^[49][50].

Alejandro Gaviria examined the effects of bribery on sales growth in busi­nesses from more than twenty countries across Latin America.

2.3. Bribery is related to lower productivity

Johann Graf found that corruption significantly reduces productivity: a ten percent increase in the average amount of corruption experienced by firms in the aggregate reduces productivity by two percent^[52]. Ernesto Dal Bo and Martin Rossi explain the relationship in another way: «in a corrupt environment the fate of a firm is not tightly related to managerial efforts devoted to supervising and coordinating the use of productive factors»^[53][54]. They found that if electric utilities in Brasil experi­enced corruption only to the extent that companies in Costa Rica experienced cor- 17

ruption, Brasilian utilities would use seven percent fewer workers .

3. Paying bribes negatively affects relationships

3.1. Bribery damages internal relationships

The payment of bribes by managers of a firm creates a workplace in which em­ployees are more likely to steal materials or opportunities from the employer. A firm's «ethical climate» sends very powerful signals to employees about appropriate and acceptable behaviors^[55]. One type of «ethical climate» is one in which workers break

the rules of the firm and act only in their own self-interest. The behavior of managers

19 plays a very important role in creating the ethical climate of large firms and of small firms. In a survey of small enterprise professionals, «[t]he majority of respon­dents reported that top management set the ethical tone for the organization and had

20 the most influence on unethical decisions» .

Empirical studies have directly linked the payment of bribes by firms to self­serving misbehaviors by employees. In controlled laboratory experiments, partici­pants who were rewarded by supervisors for offering bribes during games were more likely than other participants to engage in self-serving behaviors^{[56][57][58][59][60]}. A survey of municipal office workers found that the single greatest factor contributing to self- 22

serving behavior was the observation of bribe-taking by managers . Indeed, mere exposure to the tolerance of bribe-giving in a firm has been found to significantly contribute to self-serving misbehavior^[61].

3.2. Bribery damage or precludes

external relationships

The payment of bribes precludes relationships with a growing number of spe­cific entities. The World Bank, IMF, regional development banks, and numerous governments debar firms that have paid bribes; these institutions represent trillions of dollars of activity each year.

Firms that pay bribes also severely restrict the number of foreign parties with whom they can form relationships. A 2011 survey of international businesses by Deloitte reports that two thirds of those firms had abandoned projects involving the

creation of an international relationship due to concerns over potential liability for the payment of bribes²⁴.

When a firm pays a local bribe it gives up most chances of entering into rela­tionships with responsible businesses from the most active business countries. Rela­tionships with other entities often represents the most effective means of acquiring new machineries or technologies, of developing and implementing management and governance skills, of creating broader networks of relationships, and of accessing capital. A firm that pays bribes risks cutting itself off from factors that will allow it to grow and to flourish in the future.

4. Criminal liability

4.1. Local law

Every country in the world criminalizes the bribery of its own officials. A per­son or company who pays a bribe anywhere in the world risks criminal liability. Some countries do not enforce these laws with vigor, which may lead some firms to believe that the risk of prosecution equals zero. Such thinking grossly miscalculates the risk. Prosecution for violation of a generally unenforced statute always remains a possibility. Indeed, aggressive prosecutors can use rarely enforced corruption laws to target or harass people or firms.

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The following table outlines the criminal penalties for simple bribery econo­mies that are among the twenty most active in international trade or are among the twenty greatest destinations for inward foreign investment - in other words, coun­tries with which an expanding business is most likely to interact.

Table 1. Criminal penalties for bribery of domestic

public officials

²⁴ Deloitte. Look Before You Leap: Managing Risk in Global Investments. 2011. 7.

²⁵ Some jurisdictions apply additional penalties for bribery of specific officials, or for bribery that occurs in specific circumstances.

Continued

4.2. Laws prohibiting bribery of foreign officials

A person or firm that pays a bribe also exposes itself to prosecution under ex­traterritorial laws forbidding payments of bribes. Generally, these laws prohibit bribery of foreign officials, but in operation they often apply to a local firm or per­son who bribes a local official. Jurisdiction extends to citizens, residents, and resi­dent firms, and also to a broad range of foreign persons and businesses: to firms with securities listed or registered on domestic exchanges; to employees and agents of firms subject to jurisdiction; and to persons involved in the payment of a bribe which in any way is connected to the home territory - including, for example, an email or a payment whose routing includes the home country.

More than fifty countries criminalize bribery of foreign officials. These coun­tries include:

Many of these laws have not been enforced. This is not because prosecutors are not fully prepared to enforce these laws, rather, it is because many of these laws are relatively new. All available information suggests that most countries are fully prepared to prosecute foreign businesses that violate these laws. Even in their nascent

mum term of imprisonment for the latter is two years, although the fine continues to be three times the benefit obtained. 18 U.S.C. § 201(c).

stages, enforcement of these rules has resulted in very large fines or settlements. In just the past few years, Siemens has paid more than a billion dollars, BAE more than fifty million, Halliburton more than fifty million, Eni SpA more than thirty million, JGC Corp more than thirty million, and Willis Holding Group more than eleven million pounds sterling. This is just a partial list; many dozens of businesses around the world have paid fines or settlements, and even more have paid the costs associated with investigations and proceedings.

Conclusion

Bribery presents more than just a question of whether or not to follow the rules or obey the law. The payment of bribes imposes real costs on a business. The payment of bribes increases the cost of and amount of time spent dealing with govern­ment officials and bureaucracies; negatively affects productivity and growth; and increases the likelihood that employees will steal and engage in other forms of mis­conduct. A business that pays bribes forgoes the opportunity to enter into interna­tional relationships. That business, and the individuals who pay, approve, or know of bribes, expose themselves to criminal prosecution by the local government and by a growing network of foreign legal regimes.

Businesses can create programs to anticipate and provide guidance for em­ployees and agents facing bribe requests. Although these programs do require ex­penditures of time and money, the costs imposed by bribery justify the expenses of creating and implementing effective programs.