us foreign corrupt practices act and the economics of bribery by @ericpesik
DESCRIPTION
This lecture was originally presented October 25, 2014, by Eric Pesik, Adjunct Assistant Professor, University at Buffalo, State University of New York School of Management. International Executive MBA Program, International Business Law, Politics, & Ethics, Module 13, MGT 612, Intake 18. Presented at SIM Management House, Singapore Institute of Management, 41 Namly Avenue, Singapore 267616TRANSCRIPT
US Foreign Corrupt Practices Act
Image: Money in hand - Stock Image from iStockPhoto http://www.istockphoto.com/photo/money-in-hand-2484226
and the Economics of Bribery Eric R. Pesik Adjunct Assistant Professor, School of Management University at Buffalo, The State University of New York
This lecture was originally presented by Eric Pesik, Adjunct Assistant Professor
University at Buffalo, State University of New York School of Management
October 25, 2014
International Executive MBA Program International Business Law, Politics, & Ethics
Module 13, MGT 612, Intake 18
SIM Management House Singapore Institute of Management
41 Namly Avenue, Singapore 267616
Protect Yourself
FCPA and others
Economics of Bribery
Impact on Corporate
Performance
The Solution to Bribery
Current Events
NBC News by Anthony Quintano by OFFICIAL LeWEB PHOTOS http://www.flickr.com/photos/quintanomedia/4878251402/
Glaxo Smith Kline Building at Brentford by Maxwell Hamilton https://www.flickr.com/photos/mualphachi/4938443323
http://office.microsoft.com/en-us/images/results.aspx?qu=medical&ex=1#ai:MP900390537|mt:2|
China RMB by Eric Pesik https://www.flickr.com/photos/pesik/15418462009/
Walmart by Mike Mozart https://www.flickr.com/photos/jeepersmedia/13753807413/
Teotihuacan - Pyramid of the Moon by Artotem https://www.flickr.com/photos/artotemsco/11177757606/
Siemens Schweiz by Surber https://www.flickr.com/photos/44431572@N00/4042504420
Euros by Images of Money http://www.flickr.com/photos/59937401@N07/5930032284/
Top 10 FCPA Fines of All Time
Image: Arms Folder by D Planet: http://www.flickr.com/photos/dplanet/94441584/ Data: http://www.fcpablog.com/blog/2014/1/10/alcoa-lands-5th-on-our-top-ten-list.html
$153 Million
$185 Million
$219 Million
$338 Million
$365 Million
$384 Million
$395 Million
$400 Million
$579 Million
$800 Million
Weatherford Intl (Swiss)
Daimler AG (Germany)
JGC Corporation (Japan)
Technip S.A. (France)
Snamprogetti/ENI (Holland/Italy)
Alcoa (USA)
Total S.A. (France)
BAE (UK)
KBR/Halliburton (USA)
Siemens (Germany)
Top Corporate Fines
Data: http://www.therichest.com/rich-list/the-biggest/busted-10-biggest-corporate-fines-ever/ Data: http://blogs.wsj.com/moneybeat/2013/10/19/where-j-p-morgans-settlement-sits-in-history-of-corporate-fines/ Image: $20 Down the Drain by Images Money: https://www.flickr.com/photos/59937401@N07/5857412037/
$1.6 Billion
$1.6 Billion
$1.9 Billion
$2.2 Billion
$2.3 Billion
$2.4 Billion
$3.0 Billion
$4.0 Billion
$7.0 Billion
$8.9 Billion
$13.0 Billion
$16.7 Billion
Bribery (Siemens)
Securities Fraud (AIG)
Money Laundering (HBSC)
Drug Marketing Fraud (Johnson & Johnson)
Drug Marketing Fraud (Pfizer)
Securities Fraud (Time Warner)
Drug Marketing Fraud (GlaxoSmithKline)
Deepwater Horizon Oil Spill (BP)
Mortgage-Backed Securities Fraud (Citigroup)
Violating US Economic Sanctions (BNP Paribas)
Mortgage-Backed Securities Fraud (JP Morgan)
Mortgage-Backed Securities Fraud (BofA)
$246 Billion Settlement
Cigarette by SuperFantastic https://www.flickr.com/photos/superfantastic/166215927
Where did it all begin?
Corporate logos are property of their respective companies, used here under the doctrine of fair use for purposes of identification, education, and critical commentary.
Corporate logos are property of their respective companies, used here under the doctrine of fair use for purposes of identification, education, and critical commentary.
Flashback 1970s
Pedestrians on First Avenue 1972 by Seattle Municipal Archives https://www.flickr.com/photos/seattlemunicipalarchives/4948398055/
Cold War Politics
Image: http://en.wikipedia.org/wiki/File:Leonid_Brezhnev_and_Richard_Nixon_talks_in_1973.png As a work of the U.S. federal government, the image is in the public domain
Image: B-52 Stratofortress with bombs http://en.wikipedia.org/wiki/File:B-52G_with_bombs.jpg As a work of the U.S. federal government, the image is in the public domain.
Image: Same Year Different Weather, Author Unknown, Year Unknown Image: http://www.designer-daily.com/10-amazing-cold-war-propaganda-posters-2901
Image: http://en.wikipedia.org/wiki/File:Nixon_Mao_1972-02-29.png As a work of the U.S. federal government, the image is in the public domain
Viktor Koretsky, A Solid Peace for the World!, 1965, Poster on paper. Ne boltai! Collection. http://blog.expositionchicago.com/art-seen-chicago/smart-museum-of-art-%E2%80%93-vision-and-communism/
Songs of the Italian Communists., revolutionary songs released on 7″ singles by the Italian label ‘i dischi del sole’ Image: http://waxidermy.com/canti-comunisti-italiani/
Corporate logos are property of their respective companies, used here under the doctrine of fair use for purposes of identification, education, and critical commentary.
Lockheed is not . . . just another American company. It is the largest U.S. defense contractor, and it owes its existence to federally guaranteed loans. It is seen abroad as almost an arm of the U.S. government. Washington Post, August 21, 1976
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900400667&ex=2#ai:MP900400667|
A 1960 comic book cover presenting communism as the iceberg that could sink America. Image: http://www.designer-daily.com/examples-of-american-cold-war-propaganda-2918
Image: Secrets and corruption by Adán Sánchez de Pedro http://www.flickr.com/photos/aesedepece/8176804808/
December 1977
President Jimmy Carter signing the Foreign Corrupt Practices Act into law in December 1977 (photo courtesy of Carter archives) See http://www.presidency.ucsb.edu/ws/?pid=7036
Protect Yourself
FCPA and others
Economics of Bribery
Impact on Corporate
Performance
The Solution to Bribery
US FCPA
http://office.microsoft.com/en-us/images/results.aspx?qu=flag&ex=1#mt:2|
What is the law?
What is Bribery?
Wedding gift by julian wylegly https://www.flickr.com/photos/quattro_ftw/3424691075/
Giving or offering to give ...
... anything of value ...
... to obtain or retain an improper business
advantage
Government Officials
Image: Secrets and corruption by Adán Sánchez de Pedro http://www.flickr.com/photos/aesedepece/8176804808/
Top 10 FCPA Fines of All Time
Image: Arms Folder by D Planet: http://www.flickr.com/photos/dplanet/94441584/ Data: http://www.fcpablog.com/blog/2014/1/10/alcoa-lands-5th-on-our-top-ten-list.html
$153 Million
$185 Million
$219 Million
$338 Million
$365 Million
$384 Million
$395 Million
$400 Million
$579 Million
$800 Million
Weatherford Intl (Swiss)
Daimler AG (Germany)
JGC Corporation (Japan)
Technip S.A. (France)
Snamprogetti/ENI (Holland/Italy)
Alcoa (USA)
Total S.A. (France)
BAE (UK)
KBR/Halliburton (USA)
Siemens (Germany)
Image: Greed by Liz West http://www.flickr.com/photos/53133240@N00/2207307656/
Image: Cut your Bills by Images of Money http://www.flickr.com/photos/59937401@N07/5857660216/
UK Bribery Act
UK Flag http://office.microsoft.com/en-us/images/results.aspx?qu=uk+flag&ex=1#ai:MP900422830|
Facilitation Payments
Cash By JMR Photography http://www.flickr.com/photos/jmrosenfeld/2903513401/
Commercial Bribery
Meeting Nieuwe Leden by Voka Kamer van Koophandel Limburg http://www.flickr.com/photos/vokakvklim/4522913512/
The value of a dollar by rahims http://www.flickr.com/photos/rahims/2110236034/
China Bribery Amendments
National flag of the Peoples Republic of China http://office.microsoft.com/en-us/images/results.aspx?qu=china+flag&ex=1#ai:MP900400801|
http://commons.wikimedia.org/wiki/File:Xi_Jinping,_Sept_19,_2012.jpg
http://en.wikipedia.org/wiki/File:Modi_at_the_69th_UN_general_assembly.jpg
http://en.wikipedia.org/wiki/File:JokowiPresidentialOath.jpg
Every Country Prohibits
Bribery
Signpost by Andrea_44 http://www.flickr.com/photos/8431398@N04/2680944871/
Protect your company
Protect yourself
Individual Liability
UK Border Agency raid by UK Home Office http://www.flickr.com/photos/49956354@N04/5114138896/
51
THE COURT: ...you seem like such an unlikely person to be here. THE DEFENDANT: I agree with that assumption. THE COURT: Was it just everybody was doing this? THE DEFENDANT: I think that's a fair comment. THE COURT: Where is your family, sir? THE DEFENDANT: My family is -- my wife and one daughter live in
London, England. And my other daughter lives in Israel. . . .
THE COURT: Is there anything more you would like to say or anything more you would like to ask us...
THE DEFENDANT: Not at this time, Your Honor.... . . .
THE COURT: You wish to plead guilty? THE DEFENDANT: I do, yes, Your Honor.
http://office.microsoft.com/en-us/images/results.aspx?qu=crime&ex=1#ai:MP900440905|mt:2|
The odds of getting caught?
Mandatory Hotlines
Hotline by Alex https://www.flickr.com/photos/eflon/3261104775
It is now possible to make a lot of money by being a whistleblower... employees who know about compliance problems are very, very likely to file a whistleblower report... Richard L. Cassin “What are the odds of getting caught?” January 23, 2014
Social Media
Image: Texting waiting texting waiting by Eric Flexyourhead https://www.flickr.com/photos/ericflexyourhead/12896514575/
The odds of getting caught used to be 10%. Now I think the odds of getting caught are probably close to 90%. Richard L. Cassin “What are the odds of getting caught?” January 23, 2014
UK Border Agency raid by UK Home Office https://www.flickr.com/photos/49956354@N04/5114138894/
Press conference by Eneas De Troya https://www.flickr.com/photos/eneas/3488154090
UK Border Agency raid by UK Home Office http://www.flickr.com/photos/49956354@N04/5114138896/
Image: Dark Room by Carlos Luz http://www.flickr.com/photos/carlosluzz/3934285538/
He was starved, pummelled and interrogated for days on end in an ice-cold room where sleeping, sitting or even leaning against a wall were forbidden. As China wages war on corruption, targets suffer abuses, Today Online, October 21, 2014
http://www.todayonline.com/chinaindia/china/china-wages-war-corruption-targets-suffer-abuses?singlepage=true
Image: Dark Room by Carlos Luz http://www.flickr.com/photos/carlosluzz/3934285538/
Image: Peter Humphrey televised confession on China's central broadcaster CNTV
Protect Yourself
FCPA and others
Economics of Bribery
Impact on Corporate
Performance
The Solution to Bribery
Never Pay a Bribe to Anyone
Talk to the hand by John Lambert Pearson http://www.flickr.com/photos/orphanjones/2123340817/
Know your Customers
No Pictures by Dplanet http://www.flickr.com/photos/dplanet/94442623/
Who is a Government Official?
Parlament by Convergència Democràtica de Catalunya http://www.flickr.com/photos/convergenciademocratica/6197445493/
Be Careful of Intermediaries
Businessman by Kripptic http://www.flickr.com/photos/kripptic/1954828422/
Keep Accurate Records
Midvale Company employee by Kheel Center Cornell University http://www.flickr.com/photos/kheelcenter/5279251361/
The Problem of Fake Receipts
Chinese Receipt by Phoebe Baker http://www.flickr.com/photos/phoebe_photo/5541278078/
Don’t get Trapped
Businessman Behind Web by Internets Dairy http://www.flickr.com/photos/16339684@N00/2784622731/ 7
0
11%
11% of companies
admit “firms like theirs” bribe
Image: Don by D Planet : http://www.flickr.com/photos/dplanet/94442620/ Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
20% Corruption
costs the equivalent of a
20% tax
Image: We Want You by D Planet: http://www.flickr.com/photos/dplanet/94442625/ Data: Six Questions on the Cost of Corruption With World Bank Institute Global Governance Director Daniel Kaufmann: http://go.worldbank.org/KQH743GKF1
40%
40% of companies
claim to have lost business to
competitors who won contracts
unethically
Image: Adjust Tie by Dplanet: http://www.flickr.com/photos/dplanet/94441582/ Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
64%
64% see bribery and corruption
as having a negative
impact on business
Image: Don by D Planet : http://www.flickr.com/photos/dplanet/94442620/ Data: Association of Chartered Certified Accountants (ACCA) Combating bribery in the SME sector: http://www.accaglobal.com/en/research-insights/small-business-resource/combating-bribery.html
Bribery short-circuits the marketplace. Where bribes are paid, business is directed not to the most efficient producer, but to the most corrupt. Robert Dorsey Chairman Board of Directors Gulf Corporation http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2185406
Who is making money?
The World Bank estimates that the equivalent of $1 trillion is offered in bribes every year. Carmen Nobel The Real Cost of Bribery Harvard Business School, Working Knowledge http://hbswk.hbs.edu/item/7325.html
Why do we bribe?
Protect Yourself
FCPA and others
Economics of Bribery
Impact on Corporate
Performance
The Solution to Bribery
Economics of Bribery Who bribes? How much do they pay? What value do they get?
Theatrical poster for Fight Club, copyright © 1999 by 20th Century Fox. The copyright is owned by either the publisher or the creator of the work depicted.
http://en.wikipedia.org/wiki/File:Fight_Club_poster.jpg
Image: St Munchins Contract Signing 60 by St Munchin's College http://www.flickr.com/photos/stmunchins/6864640994/
Image: Money and Magnifying Glass by Images of Money http://www.flickr.com/photos/59937401@N07/5858011914/
Economics of Bribery Who bribes? How much do they pay? What value do they get?
Who bribes?
1,388 fraud cases
100 countries 6 continents 2 year period
ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
Companies don’t pay bribes. People pay bribes
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=serious#ai:MP900448686|
Pressure
Fraud Triangle
4.1%
4.7%
4.8%
5.3%
6.5%
6.5%
7.9%
8.1%
8.4%
12.6%
14.8%
14.8%
18.2%
19.2%
31.5%
35.6%
Instability in Life Circumstances
Excessive Pressure from Family or Peers
Complained About Lack of Authority
Past Legal Problems
Refusal to Take Vacations
Excessive Pressure from Organization
Complained About Inadequate Pay
Past Employment Related Problems
Addiction Problems
Irritable, Suspicious, Defensive Attitude
Divorce or Family Problems
Wheeler-Dealer Attitude
Control Issues, Unwilling to Share Duties
Unusually Close with Vendor or Customer
Financial Difficulties
Living Beyond Means
Image: http://office.microsoft.com/en-us/images/reults.aspx?qu=MP900431223 Data: ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
Living Beyond Means
Control Issues,
Unwillingness to Share Duties
Financial Difficulties
Unusually Close with Vendor/Customer
Wheeler-Dealer Attitude
Asset Misappropriation
Corruption
Financial Statement Fraud
ACFE Report to the Nations on Occupational Fraud and Abuse (2012) Top 5 Behavioural Red-Flags
Never a 1:1 relationship
0.6%
0.6%
0.7%
1.1%
1.2%
1.4%
1.9%
2.0%
3.7%
4.2%
5.7%
5.9%
6.9%
11.9%
12.8%
17.4%
22.0%
Legal
Internal Audit
Research and Development
Marketing/Public Relations
Human Resources
Board of Directors
Manufacturing and Production
Information Technology
Finance
Warehousing/Inventory
Purchasing
Other
Customer Service
Executive/Upper Management
Sales
Operations
Accounting
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422882 Data: ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
Data: ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
Gender of Perpetrators
Male 65%
Female 35%
Female 52%
45%
29%
25%
18%
18%
16%
48%
55%
71%
75%
82%
82%
Male 84%
Canada
United States
Oceanina
Central & S.America
Africa
Asia
Europe
ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
Gender of Perpetrators
ACFE Report to the Nations on Occupational Fraud and Abuse (2012) - Scaled Risk Factor (Frequency * Amount)
Risk Factor (1-10) by Tenure
1.0
7.4
9.4
10.0
Less than 1 year
1 to 5 years
6 to 10 years
More than 10 years
ACFE Report to the Nations on Occupational Fraud and Abuse (2012) - Scaled Risk Factor (Frequency * Amount)
Risk Factor (1-10) by Education
1.0
3.3
4.1
10.0
7.2
Other
High School or Less
Some College
College Degree
Postgrad Degree
Who Pays Bribes?
Image:http://office.microsoft.com/en-us/images/results.aspx?qu=smile&ex=1#ai:MP900424431|
*Except in Canada
Image:http://office.microsoft.com/en-us/images/results.aspx?qu=businesswoman&ex=1#ai:MP900431737|\
Reality Check
What is the percentage of men prosecuted by US Dept of Justice since January 2008?
96.7%
What is the average age of persons currently in prison for FCPA violations?
58
Look around your company
Economics of Bribery Who bribes? How much do they pay? What value do they get?
How much do they pay?
166 historical bribery incidents
107 publically listed firms 20 stock markets 52 countries 36 year time period
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
Median Bribe Amount
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442178 Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
$1.06 M
$11.43 M
Low Rank Officials High Rank Officials
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422532 Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
$16.77 M
$13.77 M
$7.63 M
$5.32 M
$5.00 M
$0.50 M
$0.19 M
Head of State
Member of Parliament
Government Minister
Military Officer
Judge
Head of Agency
Governor/Mayor
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900448685 Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
1.9%
Bribe as % of Project Awarded
Image: http://www.flickr.com/photos/34728058@N08/4818131438/ Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
1.22% 4.42%
Bribe % Low Rank
Official
Bribe % High Rank
Official
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900401019 Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
Economics of Bribery Who bribes? How much do they pay? What value do they get?
What value do they get?
Does crime pay?
What is the ROI of bribery?
http://office.microsoft.com/en-us/images/results.aspx?qu=crime&ex=1#ai:MP900440905|mt:2|
Bribed and Got Caught
Bribed and got away with it
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900443285&ex=1
Theatrical poster for Fight Club, copyright © 1999 by 20th Century Fox. The copyright is owned by either the publisher or the creator of the work depicted.
http://en.wikipedia.org/wiki/File:Fight_Club_poster.jpg
Image: http://www.fanpop.com/clubs/marlon-brando/images/9109847/title/godfather-fanart
Don’t write if you can talk, don’t talk if you can nod your head, don’t nod your head if you don’t have to. The Family Corleone Prequel to Mrio Puzo's The Godfather
Use the records of firms that
got caught
Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047
I’m not interested in what happened after they got caught
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900414039
Look backwards in time... to when the
contract was awarded
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442939
Look at the time when they were bribing and getting away with it
Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900430507
Example:
In 1992, Elf Aquitaine paid $46M to bribe government officials to allow them to acquire German oil refinery assets At the time the deal was originally announced, Elf earned $327M cumulative abnormal returns or a 7x return (The bribe was later discovered later and numerous executives received jail terms in 2002-2003)
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
Abnormal returns
Shareholder value
166 actual bribery incidents
107 publically listed firms 20 stock markets 52 countries 36 year time period
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
Image: US Dollar Bill Notes: http://upload.wikimedia.org/wikipedia/commons/6/64/USDnotes.png Image: US Quarter http://en.wikipedia.org/wiki/File:2006_Quarter_Proof.png Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
For the 166 bribes studied, the average return was 10.5 x
10.5 X
5.5 X
All Bribes
High-Rank Politicians
Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
The more you pay, the less value you get
But that’s not the end of the story
Do firms that bribe perform better?
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900443251&ex=1
Protect Yourself
FCPA and others
Economics of Bribery
Impact on Corporate
Performance
The Solution to Bribery
Bribery impact on corporate performance
Research 3 years before and 3 years after
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=reports&ex=1#ai:MP900422411|mt:2|
2.70%
5.10%
3.20%
0.90%
2.30%
1.40%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Sales Growth
Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
Companies that bribe have greater sales growth compared to control firms
-1.20%
-1.50%
-0.90%
-0.70% -0.70% -0.60%
-0.30%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
ROA
Companies that bribe have poorer return on assets (ROA = EBIT divided by total assets) Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
-12.10% -11.80%
-9.70%
-14.20%
-10.60%
-6.60%
-2.40%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Asset Turnover
Companies that bribe have poorer asset turnover (sales revenue divided by total assets) Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
-0.90% -0.90%
-0.50%
-0.40%
-0.80%
0.00%
-0.30%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Operating Profit Margin
Companies that bribe have poorer operating profit margin compared to control firms (operating profit divided by sales revenue). Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
0.00%
-0.50%
-0.10% -0.20%
-0.40%
-1.20%
-0.60%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Net Profit Margin
Companies that bribe have poorer net profit margin (net income divided by sales revenue) Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
-2.90%
0.50% 1.50% 1.60%
0.30%
-4.60%
-6.80%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Cumulative Abnormal Returns
Companies that bribe have poorer cumulative abnormal returns (difference between the sum of the monthly returns for bribing firms versus control firms) Data: Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
Crime does not pay
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=handcuffs#ai:MP900402864|
Bribe-paying firms underperform the market
Why?
Effect of Corruption
Culture of Corruption Noncompliance Spill-over Compromised Internal Controls Short Term Planning Agency Problem Prisoner’s Dilemma
Image: Reduce designed by Qing Li from the Noun Project http://thenounproject.com/term/reduce/20396/
Culture of Corruption
Lab meeting going on by Jun Seita http://www.flickr.com/photos/jseita/5407005494/
Noncompliance Spill-over
Bank of England by Duncan Harris https://www.flickr.com/photos/duncanh1/5647094748
Compromised Internal Controls
Hacking by Johan Viirok https://www.flickr.com/photos/viirok/2498157861
Short Term Planning
Check Writing by David Goehring http://www.flickr.com/photos/carbonnyc/2204277278
Agency Problem
Thug by Paleontour https://www.flickr.com/photos/paleontour/446315283
Prisoner’s Dilemma
Placing the go stone by Luis de Bethencourt http://www.flickr.com/photos/luisbg/2094497611/
Effect of Corruption
Culture of Corruption Noncompliance Spill-over Compromised Internal Controls Short Term Planning Agency Problem Prisoner’s Dilemma
Image: Reduce designed by Qing Li from the Noun Project http://thenounproject.com/term/reduce/20396/
Protect Yourself
FCPA and others
Economics of Bribery
Impact on Corporate
Performance
The Solution to Bribery
The solution to bribery
It’s only when the certainty of getting caught and punished exceeds the potential rewards that corruption will be stamped out. Peter Coleman Partner, Forensic, Deloitte Indonesia
Risk Versus Reward
Image: Money Scales by Images Money http://www.flickr.com/photos/59937401@N07/5857910508/
Even if you don’t get caught, bribe-paying firms
underperform the market
Bribery is a lose-lose proposition
Rational Utility-Maximizers
Abandoned Art School 24 by Tiffany Bailey http://www.flickr.com/photos/xshamethestrongx/6342359807/
Image: Adam Smith’s Wealth of Nations see http://en.wikipedia.org/wiki/Invisible_hand
Individuals maximizing their own personal profit can benefit society as a whole without the need for government intervention. Adam Smith’s Wealth of Nations see http://en.wikipedia.org/wiki/Invisible_hand
Bribery is a lose-lose proposition
Talk to the Hand by NMR Photo http://www.flickr.com/photos/jinx1380/4983207375/
The Smartest Guy in the Room
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442989&ex=1
Talk to the Hand by NMR Photo http://www.flickr.com/photos/jinx1380/4983207375/
Image: Dark Room by Carlos Luz http://www.flickr.com/photos/carlosluzz/3934285538/
Image: http://www.britannica.com/EBchecked/topic/551948/Socrates
Ethical virtue is the only thing that matters Socrates
Protect Yourself
FCPA and others
Economics of Bribery
Impact on Corporate
Performance
The Solution to Bribery
Source Acknowledgements
Culture, Compliance, and the C-Suite - How Executives, Boards, and Policymakers Can Better Safeguard Against Misconduct at the Top Michael D. Greenberg, RAND Corporation (2013) http://www.rand.org/pubs/conf_proceedings/CF316.html
How Much do Firms Pay as Bribes and What Benefits do They Get? - Evidence from Corruption Cases Worldwide Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, (March 30, 2012). http://ssrn.com/abstract=1772246
Bribes and Firm Value - Evidence from Anti-Bribery Regulation Zeume, Stefan (August 18, 2013). http://ssrn.com/abstract=2179437
Report to the Nations on Occupational Fraud and Abuse Association of Certified Fraud Examiners (2012) http://www.acfe.com/rttn.aspx
Image Acknowledgements
Flickr Creative Commons Images from Flickr Creative Commons are used under Creative Commons license http://www.flickr.com/creativecommons/
Microsoft Office Online Images from microsoft.com are used with permission from Microsoft; no rights to further license or distribute http://office.microsoft.com/en-us/images/
All images have been modified from their original version by cropping, resizing, recoloring, or reformatting to match the slide layout and style.
All other sources and images are acknowledged where they appear
Professor Pesik Eric Pesik is an Adjunct Assistant Professor with the University at Buffalo, State University of New York, in the School of Management. He is also the Associate General Counsel and Compliance Officer for Seagate Singapore International Headquarters Pte Ltd. This work represents the opinions of the author alone, and not the opinion his employer or clients. Many of his presentations are available online: http://www.slideshare.net/ericpesik/presentations/ Presentation Background This lecture was originally presented on October 25, 2014 at the University at Buffalo’s Executive MBA class “International Business Law, Politics, & Ethics,” Module 13, MGT 612, Intake 18, at SIM Management House , Singapore Institute of Management, 41 Namly Avenue, Singapore 267616 Creative Commons Attribution License You are free to share, copy, distribute, and transmit this work; to remix or adapt this work; and to make commercial use of this work, under the condition that you must attribute this work to Eric Pesik (but not in any way that suggests that I endorse you or your use of this work). Each slide contains source attributions and URL; before reusing, you must obtain the original images from the original sources, and you must comply with any applicable license restrictions imposed by the original source. http://creativecommons.org/licenses/by/4.0/
About the Author