Despite the fact that corporations and interest groups spent about $30 billion lobbying policy makers over the last decade (Center for Responsive Politics, 2012), there is a lack of robust empirical evidence on whether firms’ lobbying expenditures create value for their shareholders. Moreover, while the public perception of the lobbying process is that it involves unethical behavior that may bias rather than inform politicians, this is difficult to show since unethical practices are not typically observable. In our recent ECGI working paper, The Corporate Value of (Corrupt) Lobbying, we identify events that exogenously affect the ability of firms to lobby, and find that firms that lobby more experience a significant decrease in market value around these events. Investigating the channels by which lobbying may add value, we find evidence suggesting that the value partly arises from potentially unethical arrangements between firms and politicians.
Posts Tagged ‘Anti-corruption’
Traditional models of crime frame the choice to engage in misbehavior like any other economic decision involving cost and benefit tradeoffs. Though somewhat successful when taken to the data, perhaps the theory’s largest embarrassment is its failure to account for the enormous variation in crime rates observed across both time and space. Indeed, as Glaeser, Sacerdote, and Scheinkman (1996) argue, regional variation in demographics, enforcement, and other observables are simply not large enough to explain why, for example, two seemingly identical neighborhoods in the same city have such drastically different crime rates. The answer they propose is simple: social interactions induce positive correlations in the tendency to break rules.
“This Order contains no findings that an officer, director or employee of Alcoa knowingly engaged in the bribe scheme.”
There are several notable aspects of aluminum producer Alcoa, Inc.’s (“Alcoa”) recent FCPA settlement. The $384 million in penalties, forfeitures and disgorgement qualify as the fifth largest FCPA case to date. Further, it is remarkable that such a large monetary sanction was imposed when the criminal charges brought by the U.K. Serious Fraud Office against the consultant central to the alleged bribery scheme were dismissed on the grounds that there was no “realistic prospect of conviction.” Perhaps most striking, however, is the theory of parent corporate liability that the settlement reflects. Although there is no allegation that an Alcoa official participated in, or knew of, the improper payments made by its subsidiaries, the government held the parent corporation liable for FCPA anti-bribery violations under purported “agency” principles. Alcoa serves as an important marker in what appears to be a steady progression toward a strict liability FCPA regime.
Fighting insider trading is clearly at the top of law enforcement’s agenda. In May 2011, Raj Rajaratnam, the former head of the Galleon Group hedge fund, received an eleven-year prison sentence for insider trading, the longest ever imposed. More recently, in July 2013, SAC Capital Advisors, a $15 billion hedge fund, was slapped with a criminal complaint that threatens the fund’s existence, even after having agreed to pay a $616 million civil penalty, the largest-ever settlement of an insider trading action. Yet, despite the high enforcement priority and the high stakes involved, a satisfying theory of insider trading law has yet to emerge. And this is not for want of trying. As Larry Mitchell remarked as early as 1988, “Many forests have been destroyed in the quest to understand and explain the law of insider trading.”
In my forthcoming article, Insider Trading as Private Corruption, to be published next year in the UCLA Law Review, I make the case that insider trading is best understood as a form of private corruption. I begin by arguing that we need a theory of insider trading law that not only makes sense of the law that has developed but also guides the law forward. In my view, such a theory must do two things.
Significant FCPA developments continued apace during the first six months of 2013. After a relative downtick in 2012, the first half of 2013 saw criminal enforcement of the statute return to the robust levels of recent years. With approximately 60 devoted prosecutors and enforcement attorneys, whose efforts are frequently supplemented by their colleagues in the U.S. Attorneys’ and regional enforcement offices across the country, the Government’s efforts to enforce the statute have never been stronger.
This client update provides an overview of the Foreign Corrupt Practices Act (“FCPA”) as well as domestic and international cross-border anti-corruption enforcement, litigation, and policy developments from the first half of 2013. There is much for us to report—the last six months witnessed a series of judicial decisions that further define the FCPA’s scope, a plethora of enforcement actions, Corporate America’s response to the U.S. government’s Resource Guide to the U.S. Foreign Corrupt Practices Act, and increasingly vigorous anti-corruption enforcement and legislative activities from around the world.
The FCPA’s anti-bribery provisions make it illegal to corruptly offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business. These provisions apply to “issuers,” “domestic concerns,” and “agents” acting on behalf of issuers and domestic concerns, as well as to “any person” that violates the FCPA while in the territory of the United States. The term “issuer” covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d). In this context, foreign issuers whose American Depository Receipts (“ADRs”) are listed on a U.S. exchange are “issuers” for purposes of the FCPA. The term “domestic concern” is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States.
On April 22, the U.S. Securities and Exchange Commission (SEC) announced its first non-prosecution agreement (NPA) with a company in a matter involving alleged violations of the U.S. Foreign Corrupt Practices Act (FCPA).  The SEC entered into the agreement with Ralph Lauren Corporation (Lauren), resolving allegations that Lauren violated the FCPA when its Argentine subsidiary allegedly paid bribes to government and customs officials to improperly secure the importation of Lauren’s products into Argentina. The NPA in this case resulted from Lauren’s prompt self-reporting and extensive cooperation. Prior to the Lauren NPA, the SEC seemed to provide limited credit to public companies for cooperation in FCPA investigations.
Time will tell whether the Lauren NPA is a harbinger of a new approach.
Cross-border mergers and acquisitions can provide tremendous business opportunities for companies looking to expand globally. Reduced labor and operational costs, new technology and vast new markets for existing products are just some of the benefits companies look to take advantage of when considering entering new geographical areas. However, in analyzing cross-border deals M&A professionals must be conversant with the risk factors associated with the vigorous and cooperative anti-corruption efforts being taken by regulators around the world. While these anti-corruption efforts are increasingly legislated through many jurisdictions, the most significant attention remains focused on the efforts undertaken by the United States in this area.
Ethics is in origin the art of recommending to others the sacrifices required for cooperation with oneself.” Bertrand Russell
Since the publication of its Statement and Guidance on Anti-Corruption Practices in 2009, the ICGN has actively advocated the fight against bribery and corruption as a fundamental component of the corporate governance agenda. The Statement and Guidance takes a global perspective, making clear that anticorruption is a priority in all markets.
But is it appropriate to set the same standards for anticorruption in all jurisdictions, particularly in emerging markets, where many underlying conditions are different and where bribery and corruption are particularly acute in both the public and private sectors? This was the question posed as the main discussion point at ICGN’s “Town Hall” meeting on business ethics in its June 2012 conference in Rio de Janeiro. Meeting participants, from a range of developed and emerging markets, expressed a resounding consensus that investors should not compromise their standards on anticorruption in emerging markets, even if corruption may be a more deep-rooted problem. However, while absolute standards on anticorruption should remain undiluted — beginning with a “zero tolerance” position — there may be different anticorruption strategies to apply in emerging markets, reflecting economic, cultural and legal differences.
The last ten years have seen a continuous increase in white collar criminal and regulatory enforcement activity. 2011 was no exception, and we expect the trend to continue in 2012.
While not an entirely new phenomenon, the world of white collar and regulatory enforcement appears more politicized than ever. Corporations facing investigations in 2012 can expect extensive press scrutiny, serial leaks about the investigation, and, on occasion, parallel involvement of Congress and others at any stage of the matter. The credit a company can expect to receive for providing cooperation seems ever more uncertain, especially in cases receiving a high level of public focus, notwithstanding government protestations that cooperation will be rewarded. And, it is likely to get harder going forward to shepherd corporate resolutions of these kinds of cases through this politicized landscape. There is no simple solution to these challenges. But, as we discuss below, it remains critical for companies responding to multipronged investigations to keep clear lines of communication open with government investigators, to address questions candidly and with integrity, to correct identified problems promptly, and to build upon and strengthen investments made before the inquiry began in establishing a culture of compliance.
In the paper, Which firms benefit from bribes, and by how much? Evidence from corruption cases worldwide, which was recently made publicly available on SSRN, we analyze a hand-collected sample of 166 prominent bribery cases, involving 107 publicly listed firms from 20 stock markets that have been reported to have bribed government officials in 52 countries worldwide during 1971-2007. Prior papers have focused on the date of the revelation of the bribe on the firm’s stock price.
Our research questions are different from this literature. We try to answer three questions. First, who bribes? Second, how much do they pay? Third, what benefits do they get? In contrast to prior literature, to answer our research questions, we focus on the initial date of award of the contract for which the bribe was paid. At that time, the market was unaware that the firm obtained a particular contract by paying a bribe. So the change in market capitalization of the firm on the bribe paying date (which is only available ex-post) provides the magnitude of benefits firms get from the bribe. By subtracting the value of the bribe from the benefits, we get a measure of the NPV for the bribe.