Economics of Corruption
-
Upload
eric-pesik -
Category
Business
-
view
665 -
download
0
description
Transcript of Economics of Corruption
Economicsof CorruptionCFO Asia CongressOrchard Parade Hotel8 October 2013 By Eric Roring PesikImage Credit: Get Your Roll On by Chris Potter (www.stockmonkeys.com)http://www.flickr.com/photos/86530412@N02/8449167986/
The FCPA Blog http://www.fcpablog.com/blog/tag/top-tenImage: Arms Folder by D Planet
http://www.flickr.com/photos/dplanet/94441584/
Top 10 FCPA Fines of All Time
$95 Million
$137 Million
$185 Million
$219 Million
$338 Million
$365 Million
$395 Million
$400 Million
$579 Million
$800 Million
Deutsche Telekom (Germany)
Alcatel-Lucent (France)
Daimler AG (Germany)
JGC Corporation (Japan)
Technip S.A. (France)
Snamprogetti/ENI (Holland/Italy)
Total S.A. (France)
BAE (UK)
KBR/Halliburton (USA)
Siemens (Germany)
Greed by Liz Westhttp://www.flickr.com/photos/53133240@N00/2207307656/
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422830&ex=1#ai:MP900422830|
Image: Cut your Bills by Images of Moneyhttp://www.flickr.com/photos/59937401@N07/5857660216/
Image: Chinese Flag by Philip Jägenstedthttp://www.flickr.com/photos/48982392@N00/2489526032/
The value of a dollar by rahimshttp://www.flickr.com/photos/rahims/2110236034/
Where are we now?
International Currency by epSos.dehttp://www.flickr.com/photos/epsos/8453271596/
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/
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/KQH743GKF1Image: We Want You by D Planethttp://www.flickr.com/photos/dplanet/94442625/
20%
40%
40% of companies claim to have lost business to competitors who won contracts unethically
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: Adjust Tie by Dplanethttp://www.flickr.com/photos/dplanet/94441582/
Who is making money?
Is bribery worth it?
Is it worth the riskof bribing and
getting caught?
Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047
Is it worth bribing andgetting away with it?
Image: Adjust Tie by D Planethttp://www.flickr.com/photos/dplanet/94441582/
Image: Greed by Liz Westhttp://www.flickr.com/photos/53133240@N00/2207307656/
What is the ROI of bribery?
Who bribes?How much do they pay?What value do they get?
Most bribery statistics comefrom firms that
got caught
http://office.microsoft.com/en-us/images/results.aspx?qu=handcuffs&ex=2#ai:MP900402864|
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.jpgThis image is of a poster, and the copyright for it is owned by either the publisher or the creator of the work depicted.
Image: St Munchins Contract Signing 60 by St Munchin's Collegehttp://www.flickr.com/photos/stmunchins/6864640994/
Who bribes?How much do they pay?What value do they get?
Method 1:Historical Analysis
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
Use the records of firms that bribe
and got caught
Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047
Don’t look at the date of revelation of the bribery
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900414039
Look back to the time the contract
was awarded
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442939
Look at companyperformance when bribing and getting away with it
Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900430507
Method 2:Efficient Markets Analysis
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
Image: http://en.wikipedia.org/wiki/File:Radar_Detector._canada._Escort_Passport_8500_x50_blue_3635.jpg
How do the police detect cars with radar detectors?
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442392
Image: http://en.wikipedia.org/wiki/File:Radar_gun.jpg
Suddenly flash radar into a crowd of cars
Image: http://en.wikipedia.org/wiki/File:Radar_Detector._canada._Escort_Passport_8500_x50_blue_3635.jpg
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442392
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900387936&ex=1
Take away the ability to bribe and see which stocks hit the brakes
Who bribes?How much do they pay?What value do they get?
Who bribes?
Method 1:Historical Analysis
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
1,388 fraud cases100 countries6 continents2 year period
ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
Companies don’t pay bribes; people pay bribes
http://office.microsoft.com/en-sg/images/results.aspx?qu=mP900442346
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
LivingBeyond Means
FinancialDifficulties
Control Issues, Unwillingness to
Share Duties
Unusually Close withVendor/Customer
Wheeler-DealerAttitude
AssetMisappropriation
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%
LegalInternal Audit
Research and DevelopmentMarketing/Public Relations
Human ResourcesBoard of Directors
Manufacturing and ProductionInformation Technology
FinanceWarehousing/Inventory
PurchasingOther
Customer ServiceExecutive/Upper Management
SalesOperationsAccounting
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
Male65%
Female35%
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 PerpetratorsACFE Report to the Nations on Occupational Fraud and Abuse (2012)
Tenure of PerpetratorsACFE 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
Education of PerpetratorsACFE 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
Who bribes?
http://office microsoft com/en-us/images/results aspx?qu=MP900408932
*Except in Canada
Image: Portrait of a businesswoman by Victor1558http://www.flickr.com/photos/76029035@N02/6829334723/
The average personcurrently in prison for FCPA violations is58 years old
How much do they pay?
Method 1:Historical Analysis
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
166 historical bribery incidents 107 publically listed firms20 stock markets52 countries36 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
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.comus/images/results.aspx?qu=MP90044
$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
Bribe as percentage of project awarded:
1.94%
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://www.flickr.com/photos/34728058@N08/4818131438/
4.42%1.22%
Bribe %Low Rank
Official
Bribe %High Rank
OfficialCheung, 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
What benefits do they get?
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 CorleonePrequel to Mario Puzo'sThe Godfather
“
Method 2:Efficient Markets Analysis
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
UK Bribery Act 2010Exogenous 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
645 UK firms$3.768B Average Market Cap$429M Median Market CapEvent Date: 25-March 2009
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
KPI = Cumulative Abnormal Returns
-0.06%
-0.87%
-0.05%
CAR [-20;-1] CAR[0;1] CAR[2;20]
$2.43 Trillion Loss in Market CapZeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
Foreign Corruption Exposure
Firms that operate in more corrupt environments experience a larger drop in firm value
Image: http://www.transparency.org/cpi2012/results
0.51% more negative CAR [0;1]$2.19M more negative loss for median-size firm
-0.87%-0.61%
-1.12%
-0.51%
BaselineLow Foreign
Corruption ExposureHigh Foreign
CorruptionExposure
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
Other Anti-Bribery Regulations
Firms that are already subject to US anti-bribery regulations (FCPA) experience a smaller drop in firm value
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900400667
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
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
Spillover to Foreign Firms
Non-UK firms with UK links and high foreign corruption exposure experience higher drop in firm value
Image: http://www.transparency.org/cpi2012/results
Foreign firms with high foreign corruption exposure and UK links had 0.19% more negative returns
-0.87%
-0.19%-0.31%
-0.12%
-0.19%
UK Firms Foreign FirmsForeign Firms with UK Link
Foreign Firms without UK Link
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
Median size firms with high corruption exposure experienced US $2.19M more negative loss than firms with low corruption exposure
But what about individual firms and individual bribes...
Method 1:Historical Analysis
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
Example:
Elf Aquitaine paid $46M in bribes to acquire German oil refinery assets in 1992
At the time the deal was originally announced, Elf earned $327M excess returns (7 X return) with a net benefit of $281M after cost of bribe or an ROI of 6.1
(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)
166 actual bribery incidents107 publically listed firms20 stock markets52 countries36 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)
For the 166 bribes studied,the average return was 10.5 x
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.
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)
But that’s not the end of the story...
Do firms that bribe perform better?
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900443251&ex=1
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
Companies that bribe have greatersales growth compared to control firms
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)
-1.20%
-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)
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)
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).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)
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 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
CAR
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)
Bribe-paying firms underperform the marketfor 3 years before and 3 years after winning the contract
(except for sales growth)
Recap
Who Bribes?
Well educated, senior-level males in accounting,operations, sales, andexecutive management
Working at companies focused on sales growth
Living beyond their means
How much do they pay?
The median bribe is $2.5 Million
The typical bribe ranges fromabout 1% to 5% of the project awarded
What benefits do they get?
The average bribe returns10.5 x the bribe amount
But the more you pay, the less you get
And you generally underperform the market
Discussion Questions
Why?
Why do bribe paying firms underperform?
Culture of CorruptionNoncompliance SpilloverCompromised Internal ControlsShort Term FocusAgency ProblemPrisoner’s Dilemma
Does Crime Pay?
Acknowledgements
AcknowledgementsHow Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases WorldwideCheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, (March 30, 2012). http://ssrn.com/abstract=1772246
Bribes and Firm ValueEvidence from Anti-Bribery Regulation Zeume, Stefan, (August 18, 2013). http://ssrn.com/abstract=2179437
Report to the Nations on Occupational Fraud and AbuseAssociation of Certified Fraud Examiners (2012)http://www.acfe.com/rttn.aspx
Microsoft Office OnlineImages from Microsoft Office Online are used with permission from Microsoft. http://office.microsoft.com/en-us/images/
Flickr Creative CommonsImages from Flickr Creative Commons are used under Creative Commons license.http://www.flickr.com/creativecommons/
Other SourcesCorporate logos are property of their respective companies. All other sources and images are acknowledged where they appear.
About the AuthorEric 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.
BackgroundMr. 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.
Other PresentationsMany of Mr. Pesik’s presentations are available on SlideShare at: http://www.slideshare.net/ericpesik
DisclaimerThis work represents the opinions of the author alone, and is not the opinion his employer.
Creative Commons Attribution LicenseYou 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). http://creativecommons.org/licenses/by/3.0/
Each slide contains source attributions and URL; you should obtain the original images from the original sources before reusing. You must comply with any applicable license restrictions imposed by the original source.