Regulating Corruption in International Markets: Why Governments Introduce Laws They Fail to Enforce (2024)

1. Introduction

Corruption allows firms to earn profits unfairly. In exchange for bribes and inducements that occupy a gray zone of uncertain legality, government officials and politicians offer firms better deals, terms, or benefits than they would otherwise obtain. These unfair advantages are sought by companies for a wide variety of reasons—to win contracts; to obtain production licenses, import permits, or permits to acquire a competitor; to secure subsidies, favorable tax rates (or tax holidays), or tolerance for cartel collaboration; or to achieve any number of other corporate goals. Through corruption, firms can effectively buy impunity for an equally wide range of harmful actions, from producing poor-quality or even dangerous products and services to polluting the environment, violating human rights, and conducting illegal trade.1

For the firms involved, bribery and bribery-resembling practices (such as expensive gifts and private sector career opportunities for officials) reduce the importance of being productive. Corrupt firms can secure profits without providing a competitive combination of price and quality on what they sell; therefore, market mechanisms fail to produce a marketplace that rewards efficiency and innovation.2

For societies, corruption leads to waste, lower value for money, and (especially when politicians are involved) government budgets that are skewed toward spending in sectors where corrupt benefits are secured more easily, such as defense, infrastructure, and extractives (OECD 2015). The victims, of course, are the citizens, who receive fewer state-financed benefits, suffer from poorer public services, see the gap between rich and poor grow wider, and bear the brunt of slower development. Some countries suffer severely from corruption, whereas others seem less affected by it, but none is immune to the problem.3

This chapter explains why initiatives against bribery in international markets seem dysfunctional. It begins in Sections 2 and 3 with a brief overview of current regulations and indicators of their impact. Sections 4–6 address reasons for inefficient regulations, classified into three categories: technical reasons, including inherent challenges associated with the crime and barriers for efficient enforcement; institutional reasons, meaning challenges associated with the organization of various enforcement functions; and political reasons, comprising the backdrop for political priorities as well as the relevance of government coordination of anti-corruption strategies internationally. Section 7 describes the policy tracks that appear particularly meaningful for governments and other players who want to see markets better protected against corruption, and debates what international forces may fuel a process toward more compliance.

2. Government Regulations in Place to Prevent and Detect Corruption

All modern societies have regulations and institutions that are intended to promote integrity in markets.4 Countries have competition law, company law, ownership regulation, and company taxation. Market activities are governed by sales law, contract law, tort law, financial regulation, and, to various extents, arbitration rules. When it comes to markets for government contracts and assets, there are rules regulating public procurement, concessions, and privatization. Government spending is subject not only to constitutional checks and balances such as parliamentary controls but also to public scrutiny via information laws and access to government audits.

The many types of regulations—some of them new, others as old as markets themselves—create real barriers to corporate misconduct. They also constitute key components of a society’s integrity system, which is essential for citizens to maintain trust in their governments. While government strategies against corruption must be considered in light of this broader spectrum of initiatives, it is also necessary to consider governments’ ability to regulate and curb the particular problem of corruption.

Explicit regulation of corruption in markets is a relatively new phenomenon. Although bribery has long been illegal, it has persisted thanks to loopholes and gray areas in anti-bribery laws and uneven enforcement of those laws. Moreover, until recently, politicians hesitated to address this problem, and they found it unwise or undiplomatic to confront firms and leaders of government institutions about suspected corruption, especially in international contexts.

It was not until the 1990s that development banks and civil society began to articulate the threat that corruption poses to development. These players started a crusade against corruption that encouraged voters to demand action and forced governments across the globe to start recognizing the problem. A variety of actors—notably the US government, the Organisation for Economic Co-operation and Development (OECD), the World Bank, the European Union, and the United Nations—launched a diplomatic process to push for tighter legislation. Their efforts were successful: corruption was criminalized in an impressive array of conventions, including not only the well-known United Nations Convention against Corruption (UNCAC), which came into force in 2005, but also a range of regional conventions. Together, these conventions helped to harmonize international laws against corruption and provided what at that time appeared to be a solid legal platform for acting against the problem. Less than a decade after the process started in the late 1990s, almost all countries had embraced the conventions and introduced national legislation criminalizing corruption.5 A parallel international process against money laundering complemented the new anti-corruption regime and made it more complicated for recipients of bribes to benefit from their crime.6

In most jurisdictions, the reforms established or reinforced the principle of corporate as well as individual criminal liability. In addition, a sizable majority of the largest export economies criminalized foreign bribery, which meant that prosecutors could pursue firms for bribes paid in a foreign market, regardless of whether the authorities in that foreign country were inclined to prosecute the crime. This groundbreaking step meant foreign firms could no longer defend their corrupt benefits as the result of adapting to a foreign business culture.7

3. The Impact of Anti-corruption Regulations

Since the legal reforms against corruption were introduced, a significant number of criminal cases have been launched against both individuals and firms, including multinational corporations. According to the OECD (2014a), 164 criminal cases were prosecuted against corporations from 1999 through 2014 for foreign bribery, and most of those cases involved settlements with the prosecuting authorities in the United States.8 For instance, the engineering company Siemens AG, headquartered in Germany, was found guilty of paying huge bribes to secure market benefits. Siemens paid a $20 million bribe to construct power plants in Israel, a $40 million bribe to the president of Argentina for a billion-dollar contract to produce safety cards, and a $16 million bribe to build railway lines in Venezuela.9 Other cases of corruption on a grand scale include the weapons producer BAE; telecom suppliers Vimpelcom and Alcatel-Lucent; oil suppliers Halliburton, Panalpina, and Baker Hughes; construction companies Technip and Saipem (Snamprogetti); and banks that condoned and laundered the proceeds of corruption, including HSBC, Barclays, and Deutsche Bank.10 The fines imposed on the corporations amount to several hundred million dollars. As part of the law enforcement processes, the firms also have been subjected to meticulous scrutiny: they have had to introduce much stricter reporting and compliance systems, change their bonus systems, replace leaders and board members, and accept external monitoring of their operations. In addition, the corporations have had to pay back the estimated proceeds of the crime, some firms have faced debarment from public procurement, and most large corporations have been sued by subcontractors that have suffered losses because their projects could not continue as they had anticipated.

One might assume that such consequences would deter other players from committing similar misdeeds. And for at least some business leaders, the substantial media coverage of the investigations and law enforcement processes may serve as a wake-up call. Yet, despite high-profile convictions, there are also facts suggesting that law enforcement’s record of combating corruption is largely a record of failure.

The OECD country evaluation reports on how governments enforce their anti-bribery legislation reveal severe challenges all along the law enforcement value chain, including in the most developed countries. While forty-six countries have signed and implemented the OECD convention on foreign bribery, many of their governments hesitate to let the rules make a difference.11 For example, the legal details of the convention often become more complicated when translated into legislation at the national level, making the law more difficult to enforce. Many countries have stricter demands for evidence in foreign bribery cases than in purely domestic cases and often insist on additional conditions that must be met for evidence to be admissible.12 Words and phrases found in international conventions, such as “improper advantage,” “undue influence,” “third party,” and “civil servant/public official,” acquire different meanings in different jurisdictions, despite OECD and UN efforts to harmonize enforcement. This problem not only hinders predictable enforcement across borders; if terms are imprecisely defined, wealthy offenders find it easier to appeal verdicts against them, and can afford to drag out the appeals process for years in the court system, until the prosecutors have to let them off because the case has lasted beyond the jurisdiction’s statute of limitations.13

3.1. Quantifying the Impact of Regulation and the Extent of the Problem

For several reasons, the impact of regulation on the extent of bribery is difficult to quantify. Facts about enforcement cases provide little information about the regulatory impact on the problem. Enforcement statistics will often include the number of initiated investigations, the percentage of successful enforcement actions, and the amount of collected monetary penalties. These figures tell us little about the targeted problem because they will rarely reflect the problem’s extent, forms, or fluctuations. Without such facts, it is difficult to draw conclusions about an enforcement agency’s ability to detect and prosecute misconduct.14 The extent of corruption is normally unobservable, and therefore we cannot compare the situations before and after the legal reforms.

Fairly reliable empirical information about the extent of corruption in countries comes from a combination of second-best data sources, and these sources generally confirm that bribery continues to distort international markets. For example, a survey of nearly eight thousand European-based firms, conducted for the European Commission in 2013, revealed that 75 percent of company respondents think corruption is widespread in their country. Four out of ten consider corruption a constraint on their business operations, while more than three out of ten companies that have participated in a public tender report that corruption has prevented them from winning. In addition, “eight out of ten companies agree that corruption comes from links between business and politics being too close, 73 percent agree that favoritism and corruption hampers business competition, and 69 percent agree that bribery and the use of connections are often the easiest way to obtain certain public services” (Eurobarometer 2014, 5).

According to the largest business climate survey internationally, the World Bank Enterprise Survey of 130,000 firms in 135 countries, there is substantial variation across regions in how bribery distorts markets. Globally, 35 percent of firms consider corruption a “major business constraint.” In the Middle East and North Africa, this figure is nearly 55 percent, while it is merely 11 percent in high-income OECD countries. The survey, which can be broken down to the country level, describes significant variation in the forms of bribery—including bribery for contracts, taxation, utility provision, construction permits, and more.

The largest international survey of citizens’ experience with corruption, Transparency International’s Corruption Barometer—involving some 114,000 respondents in 107 countries—confirms bribery is a serious problem. More than one in four respondents report having paid a bribe in the last twelve months. The respondents consider the judiciary and the police to be the most exposed government functions, while they see political parties as the most corrupt institutions. A majority of respondents consider their own government ineffective in combating the problem, and in most countries citizens report there is now more corruption than there was before. Several international surveys reveal that citizens’ trust in their governments’ ability to control corruption is low and in many places declining.15

While it is difficult to say whether these figures represent knowledge of the problem or some general disappointment with political leaders and government institutions, the vast share of citizens who claim that corruption is a serious matter underscores the severity of the problem.

3.2. Regulatory Progress and Political Ambition

The indicators of progress on the anti-corruption agenda may be harder to observe, but they do exist. For example, the PriceWaterhouseCoopers Economic Crime Survey 2016 reports a decrease (although small) in their around six thousand respondents’ experiences with corruption and bribery, from 27 percent in 2014 to 23 percent in 2016. Control Risks, an international consultancy that surveys anti-corruption attitudes globally, finds evidence of slow progress in the private sector: more firms invest in robust compliance systems and consider strategies against corruption a business advantage. There is also an increasing tendency among firms to react with legal means when they are the victims of other firms’ bribery (Bray 2016).

Another study—commissioned by Norton Rose Fulbright, a law firm—evaluates anti-corruption strategies at the national level, and finds evidence of progress over the last ten years in nineteen of forty-one countries surveyed. The progress is particularly notable in Georgia, China, the Philippines, Lithuania, Egypt, and Croatia. Also, governments in previously war-torn countries such as Colombia, Mozambique, and the Central African Republic seem to be on the right track (Pyman et al. 2017).

Internationally, we see forms of anti-corruption action that would have been unlikely some fifteen or twenty years ago. Business organizations advise their members on how to establish and operate robust compliance systems to stand against demands for bribes.16 They also help their members coordinate collective action against governments so that they jointly can demand fair and predictable framework conditions for their market activities. Increasingly, financial service providers reject customers if it appears that they intend to pay bribes or launder the proceeds of crime; sometimes banks report such cases to law enforcement agencies. More than ever, civil society organizations challenge governments and corporations on their anti-corruption agendas, including by asking them what they do to tackle this problem in the international arena. And in 2015, the leaders of the G20 endorsed a set of seven principles stating the detrimental consequences of corruption, and agreed to work against the problem.17

In sum, despite general as well as tailor-made integrity mechanisms in place to protect markets against corruption, there are some reasons to suspect severe weaknesses in the system, which means that firms can continue to secure benefits through bribery, with little risk of facing law enforcement consequences. We do see indicators of progress, but that progress varies from slow to extremely slow, and many governments fail completely in their international anti-corruption commitments—regardless of their de jure reforms. There is every reason to ask why governments introduce laws they fail to enforce.

4. Technical Impediments for Efficient Criminal Law Regulation

Weak enforcement do not necessarily imply that governments themselves are corrupt and intentionally allow bribery to proceed, although there are corruption cases, surveys, and documentaries that raise such concerns too.18 In a number of areas where regulation is necessary, political ambitions exceed what is practically achievable. In this section I describe technical impediments for efficient criminal law regulation: enforcement obstacles that are either associated with the nature of the crime or the structure of the enforcement system. Even the most reform-friendly governments have difficulties with these impediments, which means that efficient enforcement strategies need to be adapted to their existence.

4.1. Features of the Crime Complicate Enforcement

Normally, government regulation is designed to reduce the benefits or increase the costs associated with a harmful activity. Imposing efficient control of corruption is not so straightforward. It is not obvious what acts should prompt a regulatory action and what form that action should take. Corruption involves collusion, which means that those who are participating in the corrupt act have a secret agreement about how to deviate from formal rules and how to share the benefits of doing so. The colluders have to keep their deal hidden from regulators who would otherwise react against them. Increasing the risk of detection and punishment for the briber and/or the official being bribed might be expected to reduce the problem. However, the corrupt deal determines the gains from the crime, which means that for those who remain corrupt, intensified control and a higher risk of punishment improve their bargaining position; a stricter enforcement regime will increase the stakes of the deal. Tighter control of government officials will increase the size of the bribes demanded by those officials who remain corrupt, and tighter control of firms will induce corrupt firms to demand more favorable terms in exchange for the bribes they still pay (Rose-Ackerman 1978).

Imposing personal liability on executives, and, when corruption is proved to have occurred, barring them from acting as leaders in registered corporations and public institutions, imposing fines on them as individuals, or jailing them will, of course, influence managers’ incentives to take part in corruption. For the owners, the management group at large, and the boards of corporations, however, the deterrent effect is much less; because they know they can sacrifice a few executives as scapegoats if the crime is detected, their strategies may remain the same. And for many managers, higher bonuses for entering a new market are likely to outweigh the risk of facing severe criminal law consequences for gaining market access through bribes. Even risk-averse executives may authorize the paying of bribes, because although they dislike the risk of criminal law actions, the risk of detection is only one among several serious risks they are facing as they work to achieve their corporate goals. Their worry about business failure may well exceed the concerns about a criminal law enforcement action against them, especially when the risk of facing such consequences is low (Søreide 2009).

4.2. Criminal Law Criteria Are Not Designed for the Regulation of Corporate Liability

While criminalization of bribery underscores the severity of the offenses and equips investigators with tougher enforcement tools than under civil law regulation, such regulation also implies a very high burden of proof placed on public prosecutors.

For the sake of deterring rational decision-makers who know that the risk of detection is low, the consequences for those caught in corruption must be both predictable and far more severe than the gains from crime (Becker 1968; Shavell 2004). However, with criminalization, regulators have to abide by strict requirements regarding evidence, and the accused have a high presumption of innocence. For complex forms of corporate crime, it will often be impossible for prosecutors to prove that certain transactions are made with criminal intent, and when they can, the eventual penalty is normally far below what economic theory suggests is necessary to secure a deterrent effect. In many jurisdictions, regulators have imposed ceilings on the size of punishments. Often it is not even possible to recover the assets obtained through the crime. In cases where large corporations have gained market benefits in part because of bribery, the gains can amount to hundreds of millions or even billions of dollars, yet it is difficult to determine how many of those millions were attributable to bribery and how many to other, legal actions. Hence, while regulators in principle can not only impose stiff penalties but also reclaim large amounts through asset recovery, the offenders’ risk of losing all the benefits of a corrupt act in a criminal law process is low. For managers whose own moral code does not restrain them from committing criminal acts, the gains from bribery will often outweigh the costs despite the threat of large fines and other significant consequences.

A further problem is the difficulty of distinguishing between practices that are legal and those that are not, especially under criminal law. Despite the modern character of much anti-corruption legislation, courts find it difficult to interpret legal terms such as “undue influence” and “gross negligence” in corruption cases, and to draw the line between illegal and “legal” bribes (e.g., contributing to a politician’s campaign war chest, offering public officials a career in the private sector, or transferring funds to charities under the control of a powerful decision-maker). As a result, substantial gray zones exist that can be exploited by firms that want to profit from offering benefits to decision-makers without running the risk of punishment. If they are caught and charged with the crime, the legal gray zones—combined with rigid statutes of limitations, as discussed earlier—offer plenty of room for clever defense lawyers to appeal their client out of the risk of an enforcement action.

4.3. The International Financial Infrastructure Blocks Investigation

An even bigger practical hurdle for efficient law enforcement is financial secrecy. Market players can buy financial services to keep secret their financial transactions, assets, and business operations. With the help of complex corporate structures, the use of shell companies in tax havens, trusts with apparently no owner, and straw men in company boards, market players evade taxes, hide bribe transactions, and make it impossible for investigators to connect the reward from a business operation with the necessary level of guilt that is required for law enforcement (Schjelderup 2016; Shaxson 2011).

The problem is often associated with financial service providers that operate “offshore” in small states (often island states) and less developed countries. The real problem, however, is located in large cities in the developed world. Typically, it is in those places that both the beneficiaries and the main architects of the secrecy schemes are found, while the specific secrecy provider—if its identity is revealed—is a replaceable piece in the puzzle.19 The lawyers, financial advisors, and accountants who have condoned or advised on the schemes—whose services are indispensable to the wealthy offenders—are seldom held liable for being complicit in a criminal act (Harrington 2016).

5. Organization and Pragmatism across Enforcement Agencies

A second category of obstacles to efficient law enforcement is associated with organization and practical solutions. Many features of today’s enforcement practices and systems have evolved for the sake of aims other than corporate liability in corruption cases, and enforcement difficulties occur simply because prosecutors and other law enforcers need to find pragmatic solutions within these systems.

5.1. The Inclination to Let Firms Negotiate Their Own Penalty

The various enforcement hurdles associated with criminal law have led prosecutors to offer benefits to firms that choose to collaborate, for the sake of identifying evidence and completing a law enforcement action (Makinwa and Søreide 2018).20 The arrangement builds on the well-established principle in criminal law that offenders who confess are treated more mildly than those who deny the facts even if they are guilty. In cases where a corporation provides information about its own crime, many jurisdictions allow their prosecutors to settle the case without court proceedings. Upon exchange of information about the bribery, the prosecutors offer the corporation the opportunity to accept a penalty. If it does, the case is completed; if not, the prosecutor brings the case to court.21

The use of negotiated settlements makes it possible for law enforcers to process a much larger number of cases compared to a situation where each enforcement action must be subject to a court proceeding, while expenses for investigation and litigation are much lower. For several reasons, however, the role of such settlements in preventing future bribery is uncertain, especially because the arrangements offer corporations an opportunity to bargain down their own penalty. Upon some awareness that prosecutors will investigate their operations (e.g., if there have been leakages about bribery to the press—or threats that such details will be shared with law enforcers), managers can secure a penalty discount by offering information about the corporation’s misdeeds and what it did to prevent them from happening. By pointing at what it has done to improve its compliance system, change the composition of its management, create reporting channels for whistleblowers, and allow external monitoring, firms can reduce their penalties substantially.

The problem with that, in terms of deterrence, is that even very high benchmark penalties (i.e., the starting point for negotiations) will not necessarily exceed the gains a firm has achieved from committing the crime. By bribing officials, a company can secure market benefits in several countries at a low risk of detection, well aware that if its corrupt acts are detected, it can negotiate down the consequences while investigators are unlikely to trace all criminal gains. The possibility that it will have to shoulder the burden of an investigation and law enforcement process will raise a firm’s awareness of the risks of corruption, but that awareness will not significantly affect the underlying factors that drive a firm to pay bribes in the first place.

Across jurisdictions, there is significant variation in the formal regulation of negotiated settlements between corporations suspected of bribery and the relevant enforcement agency (Makinwa and Søreide 2018). In some jurisdictions, there is clear resistance against the use of settlements, while in others there are rules intended to ensure a certain compliance with principles of fairness and legitimacy. In practice, prosecutors normally enjoy wide discretion when they settle cases with corporate offenders. Often, they can operate with few checks on how they handle cases, even though the threat of a court case can allow them to dictate what firms need to do to become trustworthy, despite the prosecutors’ diktats having little support in terms of official guidelines or academic research (Arlen 2016, 2018). Details of the crime are not necessarily made known to the public, the precise nature of the deal is kept secret, and, in some countries, firms can negotiate even the contents of the prosecutor’s press release on the case (Makinwa 2015). The wide discretion may also influence the law enforcement bureaucracy. The opportunity to close cases by negotiating settlements might tempt a prosecutor to quickly reach a settlement rather than pursue a lengthy case with an uncertain outcome.

When such concerns are relevant, the negotiated settlements jeopardize basic criminal justice principles. Combined with the secrecy that shrouds the settlement processes, the practice dilutes citizens’ trust in the law enforcement system, which in turn may weaken the system’s impact on citizens’ moral development. A judicial system that signals a clear stand on the difference between right and wrong while protecting innocent individuals and firms from unfair treatment can help shape common views on what is acceptable and not, and thus deter citizens from committing bribery, simply because it is wrong (Tyler 2006). However, a system that allows corporations to pay their way out of a law enforcement situation might not seem either just or fair to many people.

5.2. Failure to Coordinate Strategies Across Enforcement Institutions

To protect markets against corruption and other forms of business-related crime, countries have a number of integrity mechanisms, including whistleblower protection, tort law reaction, public procurement regulations, competition or antitrust authorities, financial oversight agencies, and beneficial ownership registries, as well as tax authorities. Even if explicitly regulated by criminal law, corruption will often have ramifications in the oversight area of several of the mentioned authorities. However, governments have established these enforcement institutions with a narrow mandate to detect and act against a problem other than corruption, and in practice, they rarely fulfil their potential when it comes to acting upon the symptoms of corruption because their enforcement actions are inadequately coordinated.22

Competition law, for example, serves to provide the legal competence for acting upon constraints on fair competition. It prohibits acts that harm the function of markets and regulates mergers and acquisitions. The leniency arrangement for a cartel member who first admits cartel collaboration is generally considered a success, and so is the introduction of settlement-based enforcement actions with demands for compliance and external monitoring on operations. However, in cases where cartel collaboration is combined with bribery (or some other form of crime), a competition agency (normally) can offer leniency for the competition law violation only, and not for the criminal law violation.23 If the agency acts against the bribery—for example, by sharing evidence of the crime with criminal law investigators—it may undermine its own leniency policy, because future offenders are less inclined to self-report for competition law leniency if they end up with liability for bribery (or other for-profit forms of crime).

A second example of inadequate coordination can be found in public procurement regulation, which implies principles for selecting the best combination of price and quality in government acquisitions. Bribery for contracts militates against such principles, and governments have introduced debarment rules, which mandate exclusion of corrupt bidders: the debarred firms are not eligible for bidding on government contracts. In principle, the rule could protect government spending and contribute to deter bribery. In practice, however, very few firms are debarred. One reason is that governments tend to make exemptions from the rules when there are few bidders, when the firms’ services are highly demanded, or when the firms offer unique technology; this indicates that the rules are not sufficiently aligned with the aim of securing competition. Another reason is that firms found guilty in bribery increasingly settle their cases with enforcement institutions upon promises of operating with compliance systems and external monitoring of their business practices.24 Such a settlement often implies “self-cleaning”—the efforts made to be found more compliant and be deemed eligible again for bidding—and thus the firm found guilty in bribery is not debarred after all, which creates reason to question the impact of the debarment rules.

The system for tort law enforcement is a third example of how enforcement suffers from weak coordination across institutions. In a number of areas, private enforcement complements government regulation in terms of securing opportunities for the victims of offenses to claim compensation for damages (or government authorities claim compensation on behalf of victims). Such claims not only add to the enforcement consequences that may deter crime but also bring to light the damages caused by illegal business practices and creates incentives for offenders to desist from their illegal acts. However, if prosecutors settle bribery cases with corporations, the basis for claiming compensation is less clear than what would follow from a court case. Besides, under public procurement debarment rules, compensation to victims makes a firm more likely to regain status as an eligible bidder. However, if the firm is already “self-cleaned” because of the terms agreed in the negotiated settlement, there is no reason to pay compensation for the sake of market participation. Unless these conflicting enforcement mechanisms are sorted out, we cannot expect private enforcement to contribute much to corruption control.

Inadequate coordination across enforcement agencies reduces the enforcement predictability for firms that might self-report their offenses; one agency cannot constrain another agency’s actions, either domestically or internationally. Uncertainty regarding what (total) sanctions will follow upon detected misconduct constrains firms’ inclination to collaborate with law enforcement. With more countries enforcing their laws against corruption, more financial institutions reporting suspicious transactions, more whistleblower channels, and more countries that offer whistleblower protection, the risk of sanctions will nevertheless increase, and self-enforcement may prevail. While these dynamics may create momentum for more compliance, governments can do much to impede or promote the process.

6. Political Leaders with Multiple Aims and Ambitions Internationally

The third and last category of enforcement difficulties is associated with the political level—what in the popular as well as academic literature is often described as a “low political will” to enforce corruption cases. This section will point to underlying factors that add nuance to the perception of low political priority, especially regarding enforcement of foreign bribery cases.

6.1. Politicians Seek to Protect Commercial Interests and Domestic Employment

In addition to the mentioned hurdles, governments rarely give their law enforcement systems the independence and resources they need for efficient law enforcement (Van Aaken et al. 2010). Even in the richest OECD member countries, prosecutors complain that they lack the resources to investigate cases even when they have strong reasons to suspect bribery. The OECD country performance reports suggest that in all countries the impressive progress toward better laws against corruption has not been matched by the institutional progress necessary to enforce those laws. In fact, several of the countries that introduced foreign bribery legislation around the year 2000 have not enforced the rules in a single case.

This enforcement failure is difficult to explain unless one considers political priorities. Could narrow commercial concerns be the reason politicians fail to equip enforcement agencies with the resources they need to fulfill their responsibilities? There are obvious reasons to suspect that governments want “their” firms to secure contracts internationally, no matter how the firms win those contracts. Foreign contracts may lead to more jobs at home, a better trade balance, higher GDP growth, export of cultural values, and stronger diplomatic ties to other governments, even if the deals are purely commercial. Besides, in many countries, some of the largest firms receive large state subsidies, are owned in part by the state, or have close ties to the government in other ways. In such contexts, the government might be particularly eager to see the firms succeeding abroad and may have little motivation to investigate exactly how they secure contracts. Furthermore, contracts obtained through bribery may well be more lucrative than other contracts simply because they are not the result of a competition to provide the best balance of price and quality. Once a firm has struck a deal—for example, a contract to drill for oil—the government of the firm’s home country may want to nurture a good relationship with the regime of the oil-producing country for the sake of the business, rather than to question whether the deal involved corrupt transactions. Moreover, it is not uncommon for government representatives—sometimes accompanied by the country’s president or members of its royal family—to exercise their diplomatic influence in foreign countries precisely for the sake of securing contracts for their private sector. And those representatives do not want accusations of corruption to cloud negotiations. Although bribery is unacceptable and regulated by the penal code, public exposure of corruption might well damage the otherwise positive relations between two countries.25 The different commercial interests may help explain why some politicians hesitate to equip prosecutors for their job, even if that implies a total disregard for the values associated with fair markets internationally.

Across the globe, enforcement of anti-bribery laws is hindered not only by a lack of budget; there also are numerous examples of government interference in the investigation of cases, which means that politicians or high-ranking civil servants have stopped an investigation into bribery from proceeding. While it is unclear what aims or concerns drive them to violate constitutional principles in order to protect private firms, personal benefits for themselves or their political allies cannot be ruled out. After all, for elected politicians, the barriers against corruption are generally very weak, including in countries ranking high in terms of indicators of good governance.26 The line between campaign finance and corruption is often blurred and the rules on what funds should be reported in what ways (and on who should control party funds in what ways for whose benefit) are often not respected.27 In addition, parliamentarians, who normally have to register their wealth and revenues, do so with great room for discretion on what they report. Shareholder remunerations and overseas bank accounts are normally left out of such registries, as are spouses’ wealth and incomes.28 With financial secrecy relatively easy to achieve, there are few barriers in the way for a minister who wants to own and profit from a company in the sector that he or she regulates. Moreover, promises of well-paid positions in the private sector obviously can have a significant personal value for elected officials but are rarely, if ever, required to be disclosed and registered.29

Politicians always have to weigh multiple factors and balance competing goals before they support a policy, modify a regulation, or allocate funds from the state budget. That means they will always be able to find a seemingly legitimate excuse for making a particular decision, which can render it almost impossible for outsiders suspecting political corruption to prove that the decision was bought. We cannot ignore the risk that firms already involved in bribery for commercial gains are also inclined to offer benefits in return for protection against law enforcement actions. However, the different forms of enforcement hurdles suggest we cannot jump to conclusions about political corruption without substantial evidence.

6.2. Governments’ Enforcement Strategies Are Inadequately Coordinated Internationally

In the absence of an efficient international enforcement mechanism, a government’s motivation to enforce the law against “their” firms is likely to decrease if it sees a higher level of enforcement failure among other countries, especially countries whose firms are competing for the same business. This brings us to what might be the biggest obstacle in the international enforcement of foreign bribery laws: the failure of countries to coordinate their efforts for their common benefit—which in this context is markets free from corruption.

Each government that ratifies an international anti-corruption treaty and implements legislation to enforce the anti-corruption rules is unable to observe how other countries perform in the same respect. This lack of transparency can decrease a government’s motivation to enforce the law regardless of whether the government believes other governments are or are not enforcing the law. No matter what other governments say they do, the risk exists that they are condoning bribery. A government that does enforce the law robustly may conclude that it is sacrificing too much for the sake of the international common good. However, for each country, the temptation to condone bribery might increase in relation to the strictness with which regulations are imposed on competing firms from other countries; such strictness is clearly a business advantage for firms that operate without strict enforcement in their own country.30 Hence, a government that believes that other countries enforce the law might be tempted to condone bribery for the sake of securing the benefits. However, a government that believes that other countries fail to enforce the law might also condone corruption simply because it does not want to suffer as a consequence of trying to work for the common good. Worse, the more robustly other countries enforce the law, the greater the benefits for free riders (i.e., countries that fail to enforce the law), and thus the number of enforcers will not increase exponentially.

Given these obvious coordination problems, the failure to enforce is predictable, and one may well wonder why so many governments ratified the anti-corruption conventions.31 The answer might be that anti-corruption initiatives are popular among voters, and few governments want to be seen as opposing such a principled stance. Besides, why would a government oppose it if its anti-corruption performance is unobservable? This is an area of law where governments can easily collect the benefits of an initiative while avoiding the associated costs: a government may declare its support for the convention regardless of its intention to enforce the ensuing law.32

Enforcement failure is thus largely attributable to the fact that both information about firms’ inclination to pay bribes abroad and information about governments’ enforcement of anti-bribery legislation are hidden. Each government does not know the other governments’ true intentions, and its own true intention is hidden from other governments. Also, market players declare zero tolerance for corruption, but no one knows for certain how each firm conducts its business. If these conclusions are accurate, they may also explain why governments fail to give their prosecuting authorities the resources and independence they need for enforcing the anti-bribery legislation.

7. Policy Tracks for More Efficient Enforcement

The concerns reviewed thus far make it easier to understand why benevolent governments fail in the enforcement of the anti-corruption legislation they themselves have introduced. That does not mean they legitimize enforcement failure. The slow pace at which governments improve in their enforcement endeavors, the inherent challenges associated with the crime, and the need for coordinated strategies against the problem are all aspects that call for reflection on policy choices. For insights into promising policy tracks, however, one needs to understand not only the function of enforcement tools but also the drivers of reform and the political momentum necessary to carry through the reforms. This section addresses each of these three dimensions in turn. First, how have economists contributed to the development of conceptual tools that can shape more effective regulation? Second, why might an emphasis on market protection generate a stronger governance drive against corruption than what we associate with pure anti-corruption initiatives? Third, how does political momentum require a constant demand from nongovernmental players? The discussion then summarizes promising tracks for policy reform.

7.1. The Introduction of Smart Enforcement Techniques

In order to facilitate enforcement of anti-bribery laws, economists have suggested that those involved in bribery should be given incentives to report their own offenses. That may sound as though economists are expecting governments to embrace irrational strategies. Corporations, however, are hydra-headed creatures, and even if one head commits bribery, another head can be induced to report misconduct in exchange for the corporation as a whole receiving little or no punishment. This is the rationale behind a duty-based sanctions regime (also known as compliance-based defense), which offers a predictably lower penalty the more the offender has done to prevent and report the crime (Arlen and Kraakman 1997; Arlen 2012). This concept is associated with the use of negotiated settlements, described in Section 5, and enforcement procedures applied in the United States, which has processed more bribery cases than any other country and which is now inspiring other jurisdictions to try similar approaches. However, not even in the United States is the tool used as predictably as economists suggest, and when it comes to judgments about what firms have done to prevent the crime, discretionary authority is very broad.

Another smart approach for tackling corruption is to exploit the fact that it is a collusive form of crime. There will always be more than one party involved, and the deal between them is the crime. This fact poses a difficulty for regulators because the players involved can neutralize the effect of law enforcement actions by raising the stakes of the deal (as explained in section 4); that problem can be solved, however, by penalizing each player in proportion to the gains obtained (Rose-Ackerman 1978, 2010). In addition, regulators can seek to distort the trust between the colluders by treating the party that first speaks out about the crime very leniently, while severely punishing the one that stays loyal to the illegal deal. Regardless of what they promise at the time of entering into the corrupt deal, each party will experience the prisoner’s dilemma and have incentives to be the first to report the crime. Each player’s knowledge that a potential counterpart in corruption will have incentives to depart from the deal once it has been struck might be sufficient to deter corruption, and thus the approach can have an important preventive effect.33

The effectiveness of showing leniency to those who report their crime first has revolutionized competition law strategies against cartels; in most jurisdictions with a well-established competition authority, the corporation that reports cartel collaboration first now faces no punishment (or significantly reduced punishment).34 In the criminal law system, however, there is significant hesitancy about offering mild treatment to any party involved in crime. Even if prosecutors normally reduce the charge in cases when the offender has confessed his or her own crime, self-reporting rarely leads to a very sharp and predictable reduction in punishment. A major concern from the criminal law perspective is how short-term gains from self-reporting incentives may enhance the risk of more serious indirect costs—namely, the risk of jeopardizing the criminal justice system’s ability to serve as a catalyst for moral development in society, mentioned in Section 5.1. That ability, however, will in any case be limited if the alternative is no law enforcement action even when bribery is strongly suspected of distorting markets. A promising trend in anti-corruption is policymakers’ increasing inclination to consider and recommend incentive-based criminal law solutions vis-à-vis corporations. It is now time to consider how the incentives for self-reporting can best be secured while combined with structures that secure legitimacy and fairness, especially in the use of negotiated settlements (Rui and Søreide 2017).

Debarment as stipulated in public procurement rules, discussed in Section 5, is a policy tool that may appear efficient, but scrutiny reveals that its effectiveness is not so obvious. Rules introduced to exclude corrupt bidders from market participation can be harmful to competition. Therefore, the function of the rules is decisive not only for their deterrent effect but also for potential harmful consequences in society. Exclusion of bidders who have been involved in corruption can have a disciplinary impact if the corporations place a high enough value on future contracts for the government (i.e., the discount rate is high enough) and the risk of detection and ensuing consequences is substantial (Auriol and Søreide 2017). By contrast, if bribery implies sole-source procurement (with profitable terms) in a situation with many competitors and otherwise low chances of obtaining the contract, the benefits of bribery will easily exceed the consequences of debarment and the tool has no deterrent effect. When there are few firms in a market, the value they place on future contracts is much higher, and when there is a real risk of detection and debarment, a firm will be far more concerned about offering bribes. Hence, debarment as an anti-corruption device works primarily when there are few firms in the market. In practice, however, these are exactly the circ*mstances when governments tend to make exemptions from the debarment rules (Auriol and Søreide 2017).

If political willingness to use a specific tool for anti-corruption is too low (for example, if there are costly side effects), that tool must be replaced by strategies that will be used. These could be stricter penalties for misconduct, intensified external monitoring, or an instruction that managers responsible for the misconduct must be replaced—strategies that will not hinder the producer in supplying desired products or services. Over the last two decades, we have seen a growing ambition among policymakers to apply the enforcement tools that best affect players’ choices, including by taking into account their behavioral irrationalities; this is a promising track for reformers (Madrian 2014). The message from economists, however, is that regulatory tools for anti-corruption must be designed in ways that secure their intended impact while minimizing market distortions.

7.2. Enforcement Emphasis on Protection of Markets and Financial Stability

The “right design” of enforcement tools implies that self-reporting initiatives must be sufficiently predictable, tort law mechanisms must be enforceable, and the obtainable benefits must be substantial enough so that gains exceed the costs of using the initiatives. However, given the challenges described in Section 5.2, this aim cannot be reached unless different enforcement agencies involved in protecting markets from bribery and other forms of misconduct collaborate better.

The regulatory evolution toward more rewards for self-reporting, combined with the increasing use of settlements for corporate liability, calls for a clearer distinction between civil law and criminal law regulatory functions (Rui and Søreide 2017). This evolution implies that enforcement agencies evaluate corporations’ liability (including criminal liability) upon an assessment of what they did to prevent the crime, whether they have systems for whistleblower reporting, and how well they have collaborated with law enforcers. Inherently, these judgments are closer to what we associate with civil law regulations (such as industrial safety regulations; i.e., did the firm have solid fences?) than to the matter of proving individual guilt under criminal law. Similar to established systems for safety regulations in industrial production, it makes sense to introduce minimum requirements on what firms need to have in place for the prevention of bribery. If so, regulators can hold corporations responsible for a failure to have in place necessary elements of a compliance system, regardless of whether an act of bribery can be proven or not, though the penalty for a failure to have a solid compliance system would, of course, be much lower than the penalty for verified bribery.

A two-track enforcement system consisting of prevention measures regulated under civil law and penalties upon proven bribery under criminal law might facilitate the use of incentive-based strategies (described in Section 7.1).35 Efficient anti-corruption regulation of market players also requires coordination between agencies responsible for different forms of regulation (described in Section 5.2), and automatic exchange of information would ease such coordination, as that would alert the different agencies about the need to inspect certain firms’ performance. Such procedures would promote a more holistic and coordinated approach for the protection of markets against corporate misconduct.36

Besides, initiatives for better market performance might be more effectively shielded against the failures and drawbacks with the enforcement of bribery legislation, especially foreign bribery legislation (described in Sections 3 and 6). If this is the case, a strategy that places market protection at the center of reform, and targets bribery indirectly, may have a higher likelihood of succeeding than the strategies developed specifically for controlling corruption.

Whatever institutional redesign governments will make for better protection of markets against corruption, the institutions need robust checks and balances. Business-related corruption involves the wealthiest and most powerful individuals and institutions, and market players suspected of bribery are inclined to bribe enforcement agencies if that makes them ignore the offenses. The World Justice Project (2018) reports significant risk of corruption within law enforcement institutions in all world regions, and, as described in Section 3.1, citizens around the globe have very low trust in the judiciary and police. Even in countries scoring high on indicators of good governance, there is a substantial risk of political interference in law enforcement processes (Charron et al. 2017; Hessami 2014).37 This concern brings us to the next question: what will make governments comply with their anti-corruption commitments?

7.3. Government Compliance with International Commitments and Drivers for Reform

Section 6.2 described why coordination failure between countries might be a major reason governments fail to enforce their laws against corruption in international markets. If the notion is right, only limited progress in the anti-corruption drive can be made by relying on the commonly prescribed remedies, such as introducing corporate reporting requirements, improving corporate compliance systems, raising penalties, and debarring guilty firms from public procurement. These remedies can certainly help in the fight against corruption, but major progress will hinge on substitute enforcement mechanisms at the international level and, most importantly, on access to (reliable) information about what governments do to enforce their laws.

While various types of players outside government—including civil society, private sector standard-setters, and representatives from other governments and court systems—can evaluate a country’s law enforcement performance, the players that command most respect are international governmental organizations. When these organizations coordinate the evaluations, the governments subject to scrutiny normally first approve the evaluation process, then give the evaluators access to information, and finally make sure that the results are circulated at high political and policymaking levels. The information obtained can be used in various ways (e.g., it can be fed into cross-country comparisons of performance), but it is critical that the evaluations are made publicly available, irrespective of what the individual governments feel about the results.

Independent, comprehensive, and honest reporting of how a government performs helps drive anti-corruption progress because the reported facts provide a necessary basis for demanding change. Access to the information, however, is not a sufficient condition for change, and will hardly matter in situations with authoritarian governments. Also, when governments are democratic and transparent, they can be subject to the commercial priorities discussed in Section 6.1, with both politicians and citizens opposing or criticizing the enforcement of foreign bribery laws that hurt “their” firms. Therefore, evaluations that reveal severe enforcement failure need to be followed by some form of action from international players. Unfortunately, however, this is also where the constraints on international organizations come into play. The organizations are steered by leaders who want progress, but the organizations are controlled by governments that want to keep external monitoring functions within certain limits.

While reform-friendly governments should continue to support and strengthen various forms of international collaboration for the protection of markets against corruption and other business-related offenses, more trends and drivers need to work for similar aims. One of them is the private sector. Corporations and their owners—the category of players who might profit from bribery—are rarely considered front-runners for more efficient enforcement strategies. However, with several law enforcement agencies opting to impose fines, demand compensation, or debar offenders, while managers may or may not be imprisoned, the international regulatory landscape appears highly unpredictable. Corporations involved in misconduct may face claims from several countries, and there is no guarantee that a law enforcement action in one jurisdiction prevents another jurisdiction from bringing claims. Leaders in the private sector want more convincing assurances that the total set of penalties will be reduced if they operate with solid compliance systems, conduct risk mitigation efforts, and report to enforcement agencies any offenses that still happen. This demand is not in conflict with economic ideas of more efficient regulation, discussed in Section 7. Better regulatory coordination and higher sanction predictability will facilitate private enforcement under tort law and international arbitration because such reactions depend on the total set of consequences for a bribery offense and hinge on public institutions for enforcement (Betz 2017).

Eventually, the greater the number of corporations that operate in recognition of the law—even if the risk of detection and sanctions is low—the greater the number of market players that will refuse to accept having their business opportunities obstructed by competitors who pay bribes. The more that market players internationally want to see returns from their investments in corporate compliance, the more inclined they will be to demand efficient formal regulations for all market participants at the national level enforcement (Betz 2017).

8. Conclusion

Given the consequences of corruption, it is obviously of mutual benefit for countries that their governments control corruption not only in their own markets but also internationally. Since the 1990s, governments have taken impressive steps forward in terms of the harmonization of laws against corruption. When it comes to actual enforcement, however, there is significant variation across countries; many jurisdictions have yet to see a single foreign bribery case prosecuted. Most governments declare zero tolerance for corruption and support international anti-corruption initiatives, but they fail when it comes to enforcing their criminal laws against foreign bribery.

It is tempting to assume that various anti-corruption initiatives—from more transparency to better whistleblower systems and new reporting requirements—will combine to form an effective set of strategies against business corruption. However, that will not necessarily be the case if none of the initiatives increases the detection rate for this form of crime or raises the consequences for those who are caught. The considerable attention that is today given to anti-corruption in the press, within business organizations, and by civil society might strengthen moral barriers against the crime but might do so primarily among those who are already inclined to be honest. For rational market players who are inclined to exploit institutional weaknesses in their hunt for profit, talking about corruption will do little to deter it. Deterrence depends on there being a real risk of detection followed by a law enforcement reaction, and the imposition of hard, painful sanctions. Unless governments are able to make their enforcement systems function effectively, the many softer anti-corruption initiatives will add up to nothing more than a pleasing façade of progress, behind which corruption will continue to wreak its damage.

This chapter has pointed out some of the difficulties in law enforcement and discussed reasons governments fail to enforce their laws against corruption in international markets: features of the crime complicate enforcement, and so do rigid criminal law criteria for imposing sanctions, while financial secrecy obscures investigators’ search for evidence of bribe transactions. While countries have several different law enforcement agencies mandated to protect markets against forms of business-related misconduct, a lack of coordination between them makes their total value less than the sum of the parts. Political leaders promise to secure efficient anti-corruption regulation, while in practice many of them ignore these commitments for the sake of securing commercial benefits and employment in domestic markets, and they do not want to sacrifice potential contracts abroad for a greater common good.

Even if these concerns challenge the most reform-friendly government, there are reasons for optimism. This chapter’s review of current regulations and economic insights on how to improve them suggests that efficient strategies against market-related bribery already exist. With powerful players among the beneficiaries of such principles, including the private sector, we can expect progress on this area in the years to come. When there are limits to how much pressure for anti-corruption law enforcement governments will accept, the chapter has discussed how the problem can be tackled from other angles. If we cannot attack the corruption that harms markets, we can at least protect markets in other ways. Rules securing fair and open markets are de facto barriers to corruption, and governments have shown themselves far readier to collaborate on competition control and financial stability than on anti-corruption.

Acknowledgments

Thanks for comments on an earlier draft to Raymond Baker, Fredrik Erikson, Odd-Helge Fjeldstad, Monica Kirya, Drago Kos, Sofie Schuette, and Nigel Quinney. Special thanks to the editors, Eric Brousseau, Jean-Michel Glachant, and Jérôme Sgard.

References

Notes