Economics of Bribery by @EricPesik

Secrets and corruption by Adán Sánchez de Pedro
http://www.flickr.com/photos/aesedepece/8176804808/
Economics of Bribery
Eric Roring Pesik

Foreign Corrupt
Practices Act
Dollar by Images of Money
http://www.flickr.com/photos/59937401@N07/6022835400/

Student Sleeping by D. Sharon Pruitt
http://www.flickr.com/photos/pinksherbet/6961676525/
FCPA Training

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

American Cash - public domain image.
Source: http://commons.wikimedia.org/wiki/File:American_Cash.JPG
Why do we bribe?

Neoclassical
Microeconomics
Model
Abandoned Art School 24 by Tiffany Bailey
http://www.flickr.com/photos/xshamethestrongx/6342359807/

Money on a Hook by Tax Credits
Economics is the
Study of Incentives

Economics by Mark Wainwright
http://www.flickr.com/photos/m-a-r-k/3528237255/
People are Rational
Utility-Maximizers

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

Money Scales by Images Money
Risk Versus Reward

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)

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

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

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

Image: Don by D Planet
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%

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.

Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047
Is it worth the risk of
bribing and getting
caught?

Image: Adjust Tie by D Planet
Is it worth the
benefit of bribing
and getting away with it

Greed by Liz West
Does Crime Pay?

How much do they pay?
Who bribes?
What value do they get?
2
1
3

http://office.microsoft.com/en-us/images/results.aspx?qu=handcuffs&ex=2#ai:MP900402864|
Most bribery
statistics come from
firms that bribe and
got caught

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.jpg
This image is of a poster, and the copyright for it is owned by either the publisher or the creator of the work depicted.

You do not talk about fight club

Image: St Munchins Contract Signing 60 by St Munchin's College
http://www.flickr.com/photos/stmunchins/6864640994/
You do not talk
about bribery

Money and Magnifying Glass by Images of Money
Follow the Money

Case Study
Forensic
Accounting
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334

1,388 fraud cases
100 countries
6 continents
2 year period
ACFE Report to the Nations on Occupational Fraud and Abuse (2012)

http://office.microsoft.com/en-sg/images/results.aspx?qu=mP900442346
Companies don’t
pay bribes.
People pay bribes.

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

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

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

Gender of Perpetrators
Male
65%
Female
35%

Female 52%
45%
29%
25%
18%
18%
16%
48%
55%
71%
75%
82%
82%
Male 84%
Canada
United States
Oceanina
Central & S.America
Africa
Asia
Europe
Gender of Perpetrators

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

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

Image: Portrait of a businesswoman by Victor1558
*Except in Canada

96.7%
What is the percentage of
men prosecuted by US Dept of
Justice since January 2008?

58
What is the average age
of persons currently in prison
for FCPA violations?

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)

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

$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
Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012) Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900448685

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%

4.42%1.22%
Bribe %
Low Rank
Official
Bribe %
High Rank
Official
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900401019

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 Corleone
Prequel to Mario Puzo's
The Godfather
“

Case Study:
Markets Analysis

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).

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

-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).

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

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

Removing the ability to bribe
reduces shareholder value by
US $2.19M for median firm

But what about individual firms
and individual bribes...

Case Study
Historical Analysis

Use the records of
firms that bribe
and got caught

Don’t look at the
date of revelation
of the bribery

Look back to when
the contract was
awarded

Look at when
bribing and getting
away with it

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)

166 actual bribery incidents
107 publically listed firms
20 stock markets
52 countries
36 year time period

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

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.

The more you pay,
the less value you get

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=reports&ex=1#ai:MP900422411|mt:2|
Research
3 years before
and 3 years after

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

-1.20%
-1.50%
-0.90%
-0.70% -0.70%
-0.60%
-0.30%
ROA
Companies that bribe have poorer return on assets
(ROA = EBIT divided by total assets)

-12.10% -11.80%
-9.70%
-14.20%
-10.60%
-6.60%
-2.40%
Asset Turnover
Companies that bribe have poorer asset turnover
(sales revenue divided by total assets)

-0.90% -0.90%
-0.50%
-0.40%
-0.80%
0.00%
-0.30%
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%
Net Profit Margin
Companies that bribe have poorer net profit margin
(net income divided by sales revenue)

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%
Cumulative Abnormal Returns

Crime does not pay

Bribe-paying firms
underperform the market

Culture of Corruption
Noncompliance Spillover
Compromised Internal Controls
Short Term Focus
Agency Problem
Prisoner’s Dilemma

It’s not the companies
paying bribes
Parlament by Convergència Democràtica de Catalunya
http://www.flickr.com/photos/convergenciademocratica/6197445493/

American Cash
This image is in the public domain.
Source: http://commons.wikimedia.org/wiki/File:American_Cash.JPG
Why do we bribe?

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

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”

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

Corruption is
Unsustainable
Road Sign by fdecomite
http://www.flickr.com/photos/fdecomite/388303700/

Used with permission from Microsoft
Ethics is
Sustainable

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.

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/

Secrets and corruption by Adán Sánchez de Pedro
http://www.flickr.com/photos/aesedepece/8176804808/
Economics of Bribery

Economics of Bribery by @EricPesik

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