Economics of Bribery

  • 408 views
Uploaded on

I had the honor of speaking at the recent PrimeTime Personal Power Lunch at Garibaldi Italian Restaurant & Bar on October 23, 2013. Building on my previous presentations, we discussed the economic of …

I had the honor of speaking at the recent PrimeTime Personal Power Lunch at Garibaldi Italian Restaurant & Bar on October 23, 2013. Building on my previous presentations, we discussed the economic of bribery: Who bribes? How much do they pay? What value do they get?

More in: Technology , Business
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
408
On Slideshare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
21
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Economics of Bribery Garibaldi Italian Restaurant & Bar Thursday, 24 October 2013 By Eric Roring Pesik 10 Pound Notes by Images Money http://www.flickr.com/photos/59937401@N07/5929623095/
  • 2. Peter Humphrey China central broadcaster CNTV via Mail Online http://www.dailymail.co.uk/news/article-2403297/
  • 3. Secrets and corruption by Adán Sánchez de Pedro http://www.flickr.com/photos/aesedepece/8176804808/
  • 4. American Cash This image is in the public domain. Source: http://commons.wikimedia.org/wiki/File:American_Cash.JPG
  • 5. Talk to the hand by John Lambert Pearson http://www.flickr.com/photos/orphanjones/2123340817/
  • 6. Economics of Bribery
  • 7. Economics by Mark Wainwright http://www.flickr.com/photos/m-a-r-k/3528237255/
  • 8. Rational utility-maximization
  • 9. Money Scales by Images Money http://www.flickr.com/photos/59937401@N07/5857910508/
  • 10. Money on a Hook by Tax Credits http://www.flickr.com/photos/76657755@N04/7214510228/
  • 11. Siemens (Germany) $800 Million KBR/Halliburton (USA) $579 Million BAE (UK) $400 Million Total S.A. (France) $395 Million Snamprogetti/ENI (Holland/Italy) $365 Million Technip S.A. (France) $338 Million JGC Corporation (Japan) Daimler AG (Germany) Alcatel-Lucent (France) Deutsche Telekom (Germany) $219 Million $185 Million $137 Million $95 Million Top 10 FCPA Fines of All Time The FCPA Blog http://www.fcpablog.com/blog/tag/top-ten Image: Arms Folder by D Planet http://www.flickr.com/photos/dplanet/94441584/
  • 12. International Currency by epSos.de http://www.flickr.com/photos/epsos/8453271596/
  • 13. 11% 11% of companies say “firms like theirs” bribe Image: Don by D Planet http://www.flickr.com/photos/dplanet/94442620/ 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)
  • 14. 20% Image: We Want You by D Planet http://www.flickr.com/photos/dplanet/94442625/ 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
  • 15. 40% Image: Adjust Tie by Dplanet http://www.flickr.com/photos/dplanet/94441582/ 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)
  • 16. Who is making money?
  • 17. Is bribery worth it?
  • 18. Is it worth the risk of bribing and getting caught? Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047
  • 19. Is it worth bribing and getting away with it? Image: Adjust Tie by D Planet http://www.flickr.com/photos/dplanet/94441582/
  • 20. Greed by Liz West http://www.flickr.com/photos/53133240@N00/2207307656/
  • 21. What is the ROI of bribery?
  • 22. Who bribes? How much do they pay? What value do they get?
  • 23. Most bribery statistics come from firms that got caught http://office.microsoft.com/en-us/images/results.aspx?qu=handcuffs&ex=2#ai:MP900402864|
  • 24. Who bribed and got away with it http://office.microsoft.com/en-us/images/results.aspx?qu=MP900443285&ex=1
  • 25. 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.
  • 26. Image: St Munchins Contract Signing 60 by St Munchin's College http://www.flickr.com/photos/stmunchins/6864640994/
  • 27. British Money and magnify glass by Images of Money http://www.flickr.com/photos/59937401@N07/5857443389/
  • 28. Who bribes? How much do they pay? What value do they get?
  • 29. Who bribes?
  • 30. Case Study: Forensic Accounting http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
  • 31. 1,388 fraud cases 100 countries 6 continents 2 year period ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
  • 32. Companies don’t pay bribes; people pay bribes http://office.microsoft.com/en-sg/images/results.aspx?qu=mP900442346
  • 33. Pressure
  • 34. Living Beyond Means 35.6% Financial Difficulties 31.5% Unusually Close with Vendor or Customer 19.2% Control Issues, Unwilling to Share Duties 18.2% Wheeler-Dealer Attitude 14.8% Divorce or Family Problems 14.8% Irritable, Suspicious, Defensive Attitude 12.6% Addiction Problems 8.4% Past Employment Related Problems 8.1% Complained About Inadequate Pay 7.9% Excessive Pressure from Organization 6.5% Refusal to Take Vacations 6.5% Past Legal Problems 5.3% Complained About Lack of Authority 4.8% Excessive Pressure from Family or Peers 4.7% Instability in Life Circumstances 4.1% ACFE Report to the Nations on Occupational Fraud and Abuse (2012) Image: http://office.microsoft.com/en-us/images/reults.aspx?qu=MP900431223
  • 35. Corruption Unusually Close with Vendor/Customer Living Beyond Means Wheeler-Dealer Attitude Financial Statement Fraud Control Issues, Unwillingness to Share Duties Financial Difficulties Asset Misappropriation ACFE Report to the Nations on Occupational Fraud and Abuse (2012) Top 5 Behavioural Red-Flags
  • 36. Never a 1:1 relationship
  • 37. Accounting 22.0% Operations 17.4% Sales 12.8% Executive/Upper Management 11.9% Customer Service 6.9% Other 5.9% Purchasing 5.7% Warehousing/Inventory 4.2% Finance 3.7% Information Technology 2.0% Manufacturing and Production 1.9% Board of Directors 1.4% Human Resources 1.2% Marketing/Public Relations 1.1% Research and Development 0.7% Internal Audit 0.6% Legal 0.6% ACFE Report to the Nations on Occupational Fraud and Abuse (2012) Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422882
  • 38. Female 35% Male 65% Gender of Perpetrators ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
  • 39. Europe 16% Male 84% Asia 18% 82% Africa 18% 82% Central & S.America Oceanina United States Canada 25% 75% 29% 45% Female 52% 71% 55% 48% Gender of Perpetrators ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
  • 40. More than 10 years 10.0 6 to 10 years 9.4 1 to 5 years Less than 1 year 7.4 1.0 Tenure of Perpetrators ACFE Report to the Nations on Occupational Fraud and Abuse (2012) - Scaled Risk Factor (Frequency * Amount)
  • 41. Postgrad Degree 7.2 College Degree 10.0 Some College 4.1 High School or Less Other 3.3 1.0 Education of Perpetrators ACFE Report to the Nations on Occupational Fraud and Abuse (2012) - Scaled Risk Factor (Frequency * Amount)
  • 42. Who bribes?
  • 43. *Except in Canada Image: Portrait of a businesswoman by Victor1558 http://www.flickr.com/photos/76029035@N02/6829334723/
  • 44. The average person currently in prison for FCPA violations is 58 years old
  • 45. How much do they pay?
  • 46. Case Study Forensic Accounting http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
  • 47. 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)
  • 48. Median bribe amount Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012) Image: http://office.microsoft.com us/images/results.aspx?qu=MP90044
  • 49. $11.43 M $1.06 M Low Rank Officials Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422532 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)
  • 50. Head of State $16.77 M Member of Parliament $13.77 M Government Minister $7.63 M Military Officer $5.32 M Judge Head of Agency Governor/Mayor $5.00 M $0.50 M $0.19 M 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
  • 51. Bribe as percentage of project awarded: 1.94% Image: http://www.flickr.com/photos/34728058@N08/4818131438/ 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)
  • 52. 1.22% Bribe % Low Rank Official 4.42% Bribe % High Rank Official Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900401019 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)
  • 53. What benefits do they get?
  • 54. “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 Image: http://www.fanpop.com/clubs/marlon-brando/images/9109847/title/godfather-fanart
  • 55. Case Study: Markets Analysis http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
  • 56. How do the police detect cars with radar detectors? Image: http://en.wikipedia.org/wiki/File:Radar_Detector._canada._Escort_Passport_8500_x50_blue_3635.jpg
  • 57. Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442392
  • 58. Suddenly flash radar into a crowd of cars Image: http://en.wikipedia.org/wiki/File:Radar_gun.jpg
  • 59. Image: http://en.wikipedia.org/wiki/File:Radar_Detector._canada._Escort_Passport_8500_x50_blue_3635.jpg
  • 60. Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442392
  • 61. Take away the ability to bribe and see which stocks hit the brakes http://office.microsoft.com/en-us/images/results.aspx?qu=MP900387936&ex=1
  • 62. 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 Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900422830 Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
  • 63. 645 UK firms $3.768B Average Market Cap $429M Median Market Cap Event Date: 25-March 2009 Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
  • 64. Market Capitalization What would it cost to buy every share of stock in the company
  • 65. Median Size Firm 50th percentile (50% of firms are smaller, 50% are larger)
  • 66. Abnormal Returns Difference between stock price change compared to the rest of the market
  • 67. CAR [-20;-1] CAR[0;1] CAR[2;20] -0.05% -0.06% -0.87% $2.43 Trillion Loss in Market Cap Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
  • 68. Foreign Corruption Exposure Do firms that operate in more corrupt countries have greater drop in firm value? Image: http://www.transparency.org/cpi2012/results
  • 69. Baseline Low Foreign High Foreign Corruption Exposure CorruptionExposure -0.61% -0.87% -1.12% -0.51% 0.51% more negative CAR [0;1] $2.19M more negative loss for median-size firm Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
  • 70. Other Anti-Bribery Regulations Do firms that are already subject to US anti-bribery regulations (FCPA) experience a smaller drop in firm value? Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900400667
  • 71. Baseline No Cross-Listing US Cross-Listing -0.55% -0.87% -0.92% -0.37% 0.37% more negative CAR [0;1] $1.58M more negative loss for median-size firm Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
  • 72. Spillover to Foreign Firms Do non-UK firms with UK links and high foreign corruption exposure experience higher drop in firm value? Image: http://www.transparency.org/cpi2012/results
  • 73. UK Firms Foreign Firms -0.19% Foreign Firms Foreign Firms with UK Link without UK Link -0.31% -0.12% -0.19% -0.87% Foreign firms with high foreign corruption exposure and UK links had 0.19% more negative returns Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
  • 74. Median size firms with high corruption exposure experienced US $2.19M more negative loss than firms with low corruption exposure
  • 75. But what about individual firms and individual bribes...
  • 76. Case Study Historical Analysis http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
  • 77. Use the records of firms that bribe and got caught Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047
  • 78. Don’t look at the date of revelation of the bribery Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900414039
  • 79. Look back in time to when the contract was awarded Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442939
  • 80. Look at the company performance when bribing and getting away with it Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900430507
  • 81. Example: Elf Aquitaine paid $46M in bribes to acquire German oil refinery assets in 1992 At the time the deal was originally announced, Elf earned $327M 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)
  • 82. 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)
  • 83. For the 166 bribes studied, the average return was 10.5 x Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
  • 84. All Bribes High-Rank Politicians 10.5 X 5.5 X 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)
  • 85. But that’s not the end of the story...
  • 86. Do firms that bribe perform better? http://office.microsoft.com/en-us/images/results.aspx?qu=MP900443251&ex=1
  • 87. Examine financial performance 3 years before and 3 years after http://office.microsoft.com/en-us/images/results.aspx?qu=reports&ex=1#ai:MP900422411|mt:2|
  • 88. Sales Growth Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 5.10% 2.70% 3.20% 2.30% 0.90% 1.40% 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)
  • 89. ROA Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 -0.30% -0.70% -0.70% -0.60% -0.90% -1.20% -1.50% 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)
  • 90. Asset Turnover Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 -2.40% -6.60% -9.70% -12.10% -10.60% -11.80% -14.20% 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)
  • 91. Operating profit margin Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3 0.00% -0.30% -0.40% -0.50% -0.80% -0.90% -0.90% 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)
  • 92. Net Profit Margin Year -3 Year -2 0.00% Year -1 -0.10% -0.50% Year 0 Year +1 Year +2 Year +3 -0.20% -0.40% -0.60% -1.20% 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)
  • 93. CAR Year -3 Year -2 Year 0 1.50% 0.50% Year -1 Year +1 Year +2 Year +3 1.60% 0.30% -2.90% -4.60% -6.80% Companies that bribe have poorer cumulative abnormal returns (difference between the sum of the monthly returns for bribing firms versus 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)
  • 94. Bribe-paying firms underperform the market for 3 years before and 3 years after winning the contract (except for sales growth)
  • 95. Why?
  • 96. What’s next?
  • 97. The Pay Off by Chris Potter (www.stockmonkeys.com) http://www.flickr.com/photos/86530412@N02/8449175260/
  • 98. 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.
  • 99. http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442989&ex=1
  • 100. Balancing Sunlight by D Sharon Pruitt http://www.flickr.com/photos/pinksherbet/3938631939/
  • 101. Discussion Question
  • 102. Why do bribe paying firms underperform?
  • 103. Economics of Bribery Garibaldi Italian Restaurant & Bar Thursday, 24 October 2013 By Eric Roring Pesik 10 Pound Notes by Images Money http://www.flickr.com/photos/59937401@N07/5929623095/
  • 104. Acknowledgements
  • 105. 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 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/ Flickr Creative Commons Images from Flickr Creative Commons are used under Creative Commons license. http://www.flickr.com/creativecommons/ Other Sources Corporate logos are property of their respective companies. All other sources and images are acknowledged where they appear.
  • 106. 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/