Updated again based on my presentation on the 18th of March 2014 at the American Chamber of Commerce in Singapore. Previously presented at the Compliance Day Event for the Singapore Compliance Workgroup on 27-November 2013; and at the PrimeTime Personal Power Lunch and the CFO Asia Congress. We return to the same three economic questions: Who bribes? How much do they pay? And what value do they get? How can we use the answers to discourage bribery? And while we will never eliminate the motivation for bribery, we may reach the point where bribery is no longer business as usual.
I am sharing my slides under Creative Commons Attribution license. You are free to distribute, remix, tweak, and build upon my work, even commercially, as long as you credit me for the original creation by linking to this Slideshare URL. Each slide contains source attributions and URL; you should obtain the original images and data from the original sources before reusing. You must comply with any applicable license restrictions imposed by the original source.
4. Student Sleeping by D. Sharon Pruitt
http://www.flickr.com/photos/pinksherbet/6961676525/
FCPA Training
5. When the big people get in trouble,
the little people get
ethics training
Former Compliance Officer
RAND Symposium, Culture, Compliance and the C-Suite
http://www.rand.org/pubs/conf_proceedings/CF316.html
6. American Cash - public domain image.
Source: http://commons.wikimedia.org/wiki/File:American_Cash.JPG
Why do we bribe?
8. Money on a Hook by Tax Credits
http://www.flickr.com/photos/76657755@N04/7214510228/
Economics is the
Study of Incentives
9. Economics by Mark Wainwright
http://www.flickr.com/photos/m-a-r-k/3528237255/
People are Rational
Utility-Maximizers
10. It’s only when the certainty
of getting caught and punished
exceeds the potential rewards
that corruption will be stamped out.
Peter Coleman
Partner, Forensic, PT. Deloitte Konsultan Indonesia
petcoleman@deloitte.com | www.deloitte.com
11. Money Scales by Images Money
http://www.flickr.com/photos/59937401@N07/5857910508/
Risk Versus Reward
14. Top 10 FCPA Fines of All Time
http://www.fcpablog.com/blog/2014/1/10/alcoa-lands-5th-on-our-top-ten-list.html
Image: Arms Folder by D Planet
http://www.flickr.com/photos/dplanet/94441584/
$153 Million
$185 Million
$219 Million
$338 Million
$365 Million
$384 Million
$395 Million
$400 Million
$579 Million
$800 Million
Weatherford Intl (Swiss)
Daimler AG (Germany)
JGC Corporation (Japan)
Technip S.A. (France)
Snamprogetti/ENI (Holland/Italy)
Alcoa (USA)
Total S.A. (France)
BAE (UK)
KBR/Halliburton (USA)
Siemens (Germany)
15. 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/
16. 20%
Corruption costs
the equivalent of a
20% tax
Six Questions on the Cost of Corruption
With World Bank Institute Global Governance Director Daniel Kaufmann
http://go.worldbank.org/KQH743GKF1
Image: We Want You by D Planet
http://www.flickr.com/photos/dplanet/94442625/
17. 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 Dplanet
http://www.flickr.com/photos/dplanet/94441582/
18. Image: Don by D Planet
http://www.flickr.com/photos/dplanet/94442620/
64% see bribery
and corruption as
having a negative
impact on business
Association of Chartered Certified Accountants (ACCA)
Combating bribery in the SME sector
http://www.accaglobal.com/en/research-insights/small-business-resource/combating-bribery.html
64%
20. The World Bank estimates that
the equivalent of $1 trillion is
offered in bribes every year.
The Real Cost of Bribery
Carmen Nobel, Harvard Business School Working Knowledge.
39. 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
40. Living
Beyond Means
Financial
Difficulties
Control Issues,
Unwillingness to
Share Duties
Unusually Close with
Vendor/Customer
Wheeler-Dealer
Attitude
Asset
Misappropriation
Corruption
Financial
Statement
Fraud
ACFE Report to the Nations on Occupational Fraud and Abuse (2012) Top 5 Behavioural Red-Flags
42. 0.6%
0.6%
0.7%
1.1%
1.2%
1.4%
1.9%
2.0%
3.7%
4.2%
5.7%
5.9%
6.9%
11.9%
12.8%
17.4%
22.0%
Legal
Internal Audit
Research and Development
Marketing/Public Relations
Human Resources
Board of Directors
Manufacturing and Production
Information Technology
Finance
Warehousing/Inventory
Purchasing
Other
Customer Service
Executive/Upper Management
Sales
Operations
Accounting
ACFE Report to the Nations on Occupational Fraud and Abuse (2012) Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422882
45. Risk Factor Based on Tenure
ACFE Report to the Nations on Occupational Fraud and Abuse (2012) - Scaled Risk Factor (Frequency * Amount)
1.0
7.4
9.4
10.0
Less than 1 year
1 to 5 years
6 to 10 years
More than 10 years
46. Risk Factor Based on Education Level
ACFE Report to the Nations on Occupational Fraud and Abuse (2012) - Scaled Risk Factor (Frequency * Amount)
1.0
3.3
4.1
10.0
7.2
Other
High School or Less
Some College
College Degree
Postgrad Degree
55. 166 historical bribery
incidents
107 publically listed firms
20 stock markets
52 countries
36 year time period
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
56. 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
us/images/results.aspx?qu=MP90044
Median Bribe
Amount
57. $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
58. $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
59. 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/
Bribe as
percentage of
project awarded
1.9%
60. 4.42%1.22%
Bribe %
Low Rank
Official
Bribe %
High Rank
Official
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900401019
61. How much do they pay?
Who bribes?
What value do they get?
2
1
3
64. 645 UK firms
$3.768B Average Market Cap
$429M Median Market Cap
Event Date: March 25, 2009
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
65. UK Bribery Act 2010
Exogenous shock:
Newspapers did not
discuss vote
Previous legislation
was early 19th & 20th
century
All previous attempts
had failed
Included unexpectedly
severe fines
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422830
66. -0.06%
-0.87%
-0.05%
CAR [-20;-1] CAR[0;1] CAR[2;20]
March 25, 2009
$2.43 Trillion Loss in Market CapZeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
68. -0.06%
-0.87%
-0.05%
CAR [-20;-1] CAR[0;1] CAR[2;20]
March 25, 2009
$2.43 Trillion Loss in Market CapZeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
69. 0.51% more negative CAR [0;1]
$2.19M more negative loss for median-size firm
-0.87%
-0.61%
-1.12%
-0.51%
Baseline
Low Foreign
Corruption Exposure
High Foreign
CorruptionExposure
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
70. 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).
79. Example:
In 1992, Elf Aquitaine paid $46M in bribes to
acquire German oil refinery assets
At the time the deal was originally
announced, Elf earned $327M cumulative
abnormal returns or a 7 x return
(The bribe was later discovered later and
numerous executives received jail terms in
2002-2003)
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)
80. 166 actual bribery incidents
107 publically listed firms
20 stock markets
52 countries
36 year time period
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
81. For the 166 bribes studied,
the average return was 10.5 x
US Dollar Bill Notes: http://upload.wikimedia.org/wikipedia/commons/6/64/USDnotes.png
US Quarter http://en.wikipedia.org/wiki/File:2006_Quarter_Proof.png
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
82. 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)
87. 2.70%
5.10%
3.20%
0.90%
2.30%
1.40%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Sales Growth
Companies that bribe have greater
sales growth compared to control firms
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)
88. -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)
89. -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)
90. -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)
91. 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)
92. Companies that bribe have poorer cumulative abnormal returns
(difference between the sum of the monthly returns
for bribing firms versus control firms)
-2.90%
0.50%
1.50% 1.60%
0.30%
-4.60%
-6.80%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Cumulative Abnormal Returns
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)
98. It’s not the companies
paying bribes
Parlament by Convergència Democràtica de Catalunya
http://www.flickr.com/photos/convergenciademocratica/6197445493/
99. American Cash
This image is in the public domain.
Source: http://commons.wikimedia.org/wiki/File:American_Cash.JPG
Why do we bribe?
101. The big people often need training
more than the little people do.
Symposium Participant
RAND Symposium
Culture, Compliance and the C-Suite
http://www.rand.org/pubs/conf_proceedings/CF316.html
103. Money Scales by Images Money
http://www.flickr.com/photos/59937401@N07/5857910508/
Risk Versus Reward
104. An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith
Source: http://en.wikipedia.org/wiki/File:Wealth_of_Nations_title.jpg
This image is in the public domain because its copyright has expired.
Adam Smith’s
“Invisible Hand”
106. Maximizing individual profit
can benefit society as a whole
without the need for
government intervention
Adam Smith, The Wealth of Nations
see http://en.wikipedia.org/wiki/Invisible_hand
110. Acknowledgements
How Much do Firms Pay as Bribes and What Benefits do They Get?
Evidence from Corruption Cases Worldwide
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, (March 30, 2012).
http://ssrn.com/abstract=1772246
Bribes and Firm Value
Evidence from Anti-Bribery Regulation
Zeume, Stefan, (August 18, 2013).
http://ssrn.com/abstract=2179437
Report to the Nations
on Occupational Fraud and Abuse
Association of Certified Fraud Examiners (2012)
http://www.acfe.com/rttn.aspx
Flickr Creative Commons
Images from Flickr Creative Commons are used under Creative Commons license.
http://www.flickr.com/creativecommons/
Microsoft Office Online
Images from Microsoft Office Online are used with permission from Microsoft;
no rights to further license or distribute the media elements.
http://office.microsoft.com/en-us/images/
Other Sources
Corporate logos are property of their respective companies.
All other sources and images are acknowledged where they appear.
111. About the Author
Eric Pesik
Eric Pesik is a frequent speaker on legal and compliance matters and has taught law school and
business school in the USA and Singapore.
Background
Mr. Pesik is currently the Associate General Counsel and Compliance Officer for Seagate
Singapore International Headquarters Pte Ltd. He has been a lawyer since 1997 and is a
member of the State Bar of California, USA. He is also admitted to the US Court of International
Trade in New York and the US Supreme Court in Washington, DC.
Disclaimer
This work represents the opinions of the author alone, and is not the opinion his employer.
Other Presentations
Many of Mr. Pesik’s presentations are available on SlideShare at:
http://www.slideshare.net/ericpesik
Creative Commons Attribution License
You are free to share, copy, distribute, and transmit this work; to remix or adapt this work; and
to make commercial use of this work, under the condition that you must attribute this work to
me (but not in any way that suggests that I endorse you or your use of this work). Each slide
contains source attributions and URL; before reusing, you must obtain the original images from
the original sources, and you must comply with any applicable license restrictions imposed by
the original source.
http://creativecommons.org/licenses/by/3.0/
112. Secrets and corruption by Adán Sánchez de Pedro
http://www.flickr.com/photos/aesedepece/8176804808/
Economics of Bribery