economics of bribery by @ericpesik

Secrets and corruption by Adán Sánchez de Pedro http://www.flickr.com/photos/aesedepece/8176804808/

Economics of Bribery

Eric Roring Pesik

http://www.amcham.org.sg/

Foreign Corrupt Practices Act

Dollar by Images of Money http://www.flickr.com/photos/59937401@N07/6022835400/

Student Sleeping by D. Sharon Pruitt http://www.flickr.com/photos/pinksherbet/6961676525/

FCPA Training

When the big people get in trouble, the little people get ethics training Former Compliance Officer RAND Symposium, Culture, Compliance and the C-Suite

http://www.rand.org/pubs/conf_proceedings/CF316.html

American Cash - public domain image. Source: http://commons.wikimedia.org/wiki/File:American_Cash.JPG

Why do we bribe?

Neoclassical Microeconomics

Model

Abandoned Art School 24 by Tiffany Bailey http://www.flickr.com/photos/xshamethestrongx/6342359807/

Money on a Hook by Tax Credits http://www.flickr.com/photos/76657755@N04/7214510228/

Economics is the Study of Incentives

Economics by Mark Wainwright http://www.flickr.com/photos/m-a-r-k/3528237255/

People are Rational Utility-Maximizers

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, PT. Deloitte Konsultan Indonesia

[email protected] | www.deloitte.com

Money Scales by Images Money http://www.flickr.com/photos/59937401@N07/5857910508/

Risk Versus Reward

Risk Versus Reward

What are the risks?

Top 10 FCPA Fines of All Time http://www.fcpablog.com/blog/2014/1/10/alcoa-lands-5th-on-our-top-ten-list.html

Image: Arms Folder by D Planet http://www.flickr.com/photos/dplanet/94441584/

$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)

11%

11% of companies say “firms like theirs” bribe

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: Don by D Planet http://www.flickr.com/photos/dplanet/94442620/

20% Corruption costs the equivalent of a 20% tax

Six Questions on the Cost of Corruption With World Bank Institute Global Governance Director Daniel Kaufmann

http://go.worldbank.org/KQH743GKF1 Image: We Want You by D Planet http://www.flickr.com/photos/dplanet/94442625/

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/

Image: Don by D Planet http://www.flickr.com/photos/dplanet/94442620/

64% see bribery and corruption as having a negative impact on business

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

64%

Who is making money?

The World Bank estimates that the equivalent of $1 trillion is offered in bribes every year.

The Real Cost of Bribery Carmen Nobel, Harvard Business School Working Knowledge.

What are the rewards?

Is bribery worth it?

Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047

Is it worth the risk of bribing and getting caught?

Image: Adjust Tie by D Planet http://www.flickr.com/photos/dplanet/94441582/

Is it worth the benefit of bribing

and getting away with it

Greed by Liz West http://www.flickr.com/photos/53133240@N00/2207307656/

Does Crime Pay?

What is the ROI of bribery?

How much do they pay?

Who bribes?

What value do they get?

2

1

3

http://office.microsoft.com/en-us/images/results.aspx?qu=handcuffs&ex=2#ai:MP900402864|

Most bribery statistics come from firms that bribe and

got caught

Who 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. All Rights Reserved. http://en.wikipedia.org/wiki/File:Fight_Club_poster.jpg This image is of a poster, and the copyright for it is owned by either the publisher or the creator of the work depicted.

You do not talk about fight club

Image: St Munchins Contract Signing 60 by St Munchin's College http://www.flickr.com/photos/stmunchins/6864640994/

You do not talk about bribery

Money and Magnifying Glass by Images of Money http://www.flickr.com/photos/59937401@N07/5858011914/

Follow the Money


Who bribes?


2

1

3

Case Study Forensic Accounting

http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334

1,388 fraud cases 100 countries 6 continents 2 year period

ACFE Report to the Nations on Occupational Fraud and Abuse (2012)

http://office.microsoft.com/en-sg/images/results.aspx?qu=mP900442346

Companies don’t pay bribes. People pay bribes.

Pressure

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

ACFE Report to the Nations on Occupational Fraud and Abuse (2012) Image: http://office.microsoft.com/en-us/images/reults.aspx?qu=MP900431223

Living Beyond Means

Financial Difficulties

Control Issues, Unwillingness to

Share Duties

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

ACFE Report to the Nations on Occupational Fraud and Abuse (2012) Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422882

Gender of Perpetrators

Male 65%

Female 35%

ACFE Report to the Nations on Occupational Fraud and Abuse (2012)

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

Gender of Perpetrators ACFE Report to the Nations on Occupational Fraud and Abuse (2012)

Risk Factor Based on Tenure ACFE Report to the Nations on Occupational Fraud and Abuse (2012) - Scaled Risk Factor (Frequency * Amount)

1.0

7.4

9.4

10.0

Less than 1 year

1 to 5 years

6 to 10 years

More than 10 years

Risk Factor Based on Education Level ACFE Report to the Nations on Occupational Fraud and Abuse (2012) - Scaled Risk Factor (Frequency * Amount)

1.0

3.3

4.1

10.0

7.2

Other

High School or Less

Some College

College Degree

Postgrad Degree

http://office microsoft com/en-us/images/results aspx?qu=MP900408932

Who bribes?

Image: Portrait of a businesswoman by Victor1558 http://www.flickr.com/photos/76029035@N02/6829334723/

*Except in Canada

Reality Check

96.7% What is the percentage of men prosecuted by US Dept of Justice since January 2008?

58 What is the average age of persons currently in prison for FCPA violations?

http://office microsoft com/en-us/images/results aspx?qu=MP900408932

Who bribes?


Who bribes?


2

1

3

Case Study Forensic Accounting


166 historical bribery incidents 107 publically listed firms 20 stock markets 52 countries 36 year time period



Image: http://office.microsoft.comus/images/results.aspx?qu=MP90044

Median Bribe Amount

$1.06 M

$11.43 M

Low Rank Officials High Rank Officials

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: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422532

$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

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: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900448685


Image: http://www.flickr.com/photos/34728058@N08/4818131438/

Bribe as percentage of

project awarded

1.9%

4.42% 1.22%

Bribe % Low Rank

Official

Bribe % High Rank

Official 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: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900401019


Who bribes?


2

1

3

Image: http://www.fanpop.com/clubs/marlon-brando/images/9109847/title/godfather-fanart

Don’t write if you can talk, don’t talk of you can nod your head, don’t nod your head if you don’t have to.

The Family Corleone Prequel to Mario Puzo's The Godfather

“

Case Study: Markets Analysis


645 UK firms $3.768B Average Market Cap $429M Median Market Cap Event Date: March 25, 2009

Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).

UK Bribery Act 2010 Exogenous shock: Newspapers did not discuss vote Previous legislation was early 19th & 20th century All previous attempts had failed Included unexpectedly severe fines

Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013). Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422830

-0.06%

-0.87%

-0.05%

CAR [-20;-1] CAR[0;1] CAR[2;20]

March 25, 2009 $2.43 Trillion Loss in Market Cap


Cumulative Abnormal Returns

-0.06%

-0.87%

-0.05%

CAR [-20;-1] CAR[0;1] CAR[2;20]

March 25, 2009 $2.43 Trillion Loss in Market Cap


0.51% more negative CAR [0;1] $2.19M more negative loss for median-size firm

-0.87% -0.61%

-1.12%

-0.51%

Baseline Low Foreign

Corruption Exposure High Foreign

CorruptionExposure


0.37% more negative CAR [0;1] $1.58M more negative loss for median-size firm

-0.87% -0.92%

-0.55%

-0.37%

Baseline No Cross-Listing US Cross-Listing


Efficient Markets Theory

Removing the ability to bribe reduces shareholder value by US $2.19M for median firm

But what about individual firms and individual bribes...

Case Study Historical Analysis



Use the records of firms that bribe and got caught


Don’t look at the date of revelation

of the bribery


Look back to when the contract was awarded


Look at when bribing and getting

away with it

Example: In 1992, Elf Aquitaine paid $46M in bribes to acquire German oil refinery assets At the time the deal was originally announced, Elf earned $327M cumulative abnormal returns or a 7 x return (The bribe was later discovered later and numerous executives received jail terms in 2002-2003)


166 actual bribery incidents 107 publically listed firms 20 stock markets 52 countries 36 year time period


For the 166 bribes studied, the average return was 10.5 x

US Dollar Bill Notes: http://upload.wikimedia.org/wikipedia/commons/6/64/USDnotes.png 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)

10.5 X

5.5 X

All Bribes

High-Rank Politicians

CAR [-1,+1] relative to initial contract announcements, divided by amount of the bribe.


The more you pay, the less value you get

But that’s not the end of the story...

http://office.microsoft.com/en-us/images/results.aspx?qu=MP900443251&ex=1

Do firms that bribe perform better?

http://office.microsoft.com/en-us/images/results.aspx?qu=reports&ex=1#ai:MP900422411|mt:2|

Research 3 years before

and 3 years after

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

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)


-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)


-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). 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)


Companies that bribe have poorer cumulative abnormal returns (difference between the sum of the monthly returns

for bribing firms versus control firms)

-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



Crime does not pay

Bribe-paying firms underperform the market

Culture of Corruption Noncompliance Spillover Compromised Internal Controls Short Term Focus Agency Problem Prisoner’s Dilemma

Who is making money?

It’s not the companies paying bribes

Parlament by Convergència Democràtica de Catalunya http://www.flickr.com/photos/convergenciademocratica/6197445493/

American Cash This image is in the public domain.

Source: http://commons.wikimedia.org/wiki/File:American_Cash.JPG

Why do we bribe?

Risk Versus Reward

The big people often need training more than the little people do. Symposium Participant RAND Symposium Culture, Compliance and the C-Suite

http://www.rand.org/pubs/conf_proceedings/CF316.html

Neoclassical Microeconomics

Model

Abandoned Art School 24 by Tiffany Bailey http://www.flickr.com/photos/xshamethestrongx/6342359807/

Money Scales by Images Money http://www.flickr.com/photos/59937401@N07/5857910508/

Risk Versus Reward

An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith Source: http://en.wikipedia.org/wiki/File:Wealth_of_Nations_title.jpg This image is in the public domain because its copyright has expired.

Adam Smith’s “Invisible Hand”

Takeaway point

Maximizing individual profit can benefit society as a whole without the need for government intervention

Adam Smith, The Wealth of Nations see http://en.wikipedia.org/wiki/Invisible_hand

Corruption is Unsustainable

Road Sign by fdecomite http://www.flickr.com/photos/fdecomite/388303700/

Used with permission from Microsoft http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442989&ex=1

Ethics is Sustainable

Acknowledgements

Acknowledgements 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 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 Office Online are used with permission from Microsoft; no rights to further license or distribute the media elements. http://office.microsoft.com/en-us/images/ Other Sources Corporate logos are property of their respective companies. All other sources and images are acknowledged where they appear.

About the Author Eric Pesik Eric Pesik is a frequent speaker on legal and compliance matters and has taught law school and business school in the USA and Singapore. Background Mr. Pesik is currently the Associate General Counsel and Compliance Officer for Seagate Singapore International Headquarters Pte Ltd. He has been a lawyer since 1997 and is a member of the State Bar of California, USA. He is also admitted to the US Court of International Trade in New York and the US Supreme Court in Washington, DC. Disclaimer This work represents the opinions of the author alone, and is not the opinion his employer. Other Presentations Many of Mr. Pesik’s presentations are available on SlideShare at: http://www.slideshare.net/ericpesik 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 me (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/3.0/

Secrets and corruption by Adán Sánchez de Pedro http://www.flickr.com/photos/aesedepece/8176804808/

Economics of Bribery

economics of bribery by @ericpesik

Business

scaled risk

risk factor

corruption

tiffany bailey

images money

public domain

sales revenue

occupational