us foreign corrupt practices act and the economics of bribery by @ericpesik

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/

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