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Secrets and corruption by Adán Sánchez de Pedro
http://www.flickr.com/photos/aesedepece/8176804808/
Economics of Bribery
Eric Roring Pesik
http://www.amcham.org.sg/
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
http://www.flickr.com/photos/76657755@N04/7214510228/
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
http://www.flickr.com/photos/59937401@N07/5857910508/
Risk Versus Reward
Risk Versus Reward
What are the risks?
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
http://www.flickr.com/photos/dplanet/94442620/
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/
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/
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%
Who is making money?
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.
What are the rewards?
Is bribery worth it?
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
http://www.flickr.com/photos/dplanet/94441582/
Is it worth the
benefit of bribing
and getting away with it
Greed by Liz West
http://www.flickr.com/photos/53133240@N00/2207307656/
Does Crime Pay?
What is the ROI of bribery?
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
http://www.flickr.com/photos/59937401@N07/5858011914/
Follow the Money
How much do they pay?
Who bribes?
What value do they get?
2
1
3
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.
Pressure
4.1%
4.7%
4.8%
5.3%
6.5%
6.5%
7.9%
8.1%
8.4%
12.6%
14.8%
14.8%
18.2%
19.2%
31.5%
35.6%
Instability in Life Circumstances
Excessive Pressure from Family or Peers
Complained About Lack of Authority
Past Legal Problems
Refusal to Take Vacations
Excessive Pressure from Organization
Complained About Inadequate Pay
Past Employment Related Problems
Addiction Problems
Irritable, Suspicious, Defensive Attitude
Divorce or Family Problems
Wheeler-Dealer Attitude
Control Issues, Unwilling to Share Duties
Unusually Close with Vendor or Customer
Financial Difficulties
Living Beyond Means
ACFE Report to the Nations on Occupational Fraud and Abuse (2012) Image: http://office.microsoft.com/en-us/images/reults.aspx?qu=MP900431223
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
Never a 1:1 relationship
0.6%
0.6%
0.7%
1.1%
1.2%
1.4%
1.9%
2.0%
3.7%
4.2%
5.7%
5.9%
6.9%
11.9%
12.8%
17.4%
22.0%
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%
ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
Female 52%
45%
29%
25%
18%
18%
16%
48%
55%
71%
75%
82%
82%
Male 84%
Canada
United States
Oceanina
Central & S.America
Africa
Asia
Europe
Gender of Perpetrators
ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
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
Who bribes?
Image: Portrait of a businesswoman by Victor1558
http://www.flickr.com/photos/76029035@N02/6829334723/
*Except in Canada
Reality Check
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?
Who bribes?
How much do they pay?
Who bribes?
What value do they get?
2
1
3
Case Study
Forensic
Accounting
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
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
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
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%
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
How much do they pay?
Who bribes?
What value do they get?
2
1
3
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
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
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).
Cumulative Abnormal Returns
-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
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
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).
Efficient Markets Theory
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
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900385334
Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047
Use the records of
firms that bribe
and got caught
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900414039
Don’t look at the
date of revelation
of the bribery
Image: http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442939
Look back to when
the contract was
awarded
Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900430507
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)
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
166 actual bribery 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)
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)
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)
The more you pay,
the less value you get
But that’s not the end of the
story...
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900443251&ex=1
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
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
-1.20%
-1.50%
-0.90%
-0.70% -0.70%
-0.60%
-0.30%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
ROA
Companies that bribe have poorer return on assets
(ROA = EBIT divided by total assets)
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
-12.10% -11.80%
-9.70%
-14.20%
-10.60%
-6.60%
-2.40%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Asset Turnover
Companies that bribe have poorer asset turnover
(sales revenue divided by total assets)
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
-0.90% -0.90%
-0.50%
-0.40%
-0.80%
0.00%
-0.30%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Operating Profit Margin
Companies that bribe have poorer
operating profit margin compared to control firms
(operating profit divided by sales revenue).Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
0.00%
-0.50%
-0.10%
-0.20%
-0.40%
-1.20%
-0.60%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
Net Profit Margin
Companies that bribe have poorer net profit margin
(net income divided by sales revenue)
Cheung, Stephen Yan-Leung, Rau, Raghavendra and Stouraitis, Aris, How Much do Firms Pay as Bribes and What Benefits do They Get? Evidence from Corruption Cases Worldwide (March 30, 2012)
Companies that bribe have poorer cumulative abnormal returns
(difference between the sum of the monthly returns
for bribing firms versus control firms)
-2.90%
0.50%
1.50% 1.60%
0.30%
-4.60%
-6.80%
Year -3 Year -2 Year -1 Year 0 Year +1 Year +2 Year +3
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)
Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047
Crime does not pay
Bribe-paying firms
underperform the market
Why?
Culture of Corruption
Noncompliance Spillover
Compromised Internal Controls
Short Term Focus
Agency Problem
Prisoner’s Dilemma
Who is making money?
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?
Risk Versus Reward
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
Neoclassical
Microeconomics
Model
Abandoned Art School 24 by Tiffany Bailey
http://www.flickr.com/photos/xshamethestrongx/6342359807/
Money Scales by Images Money
http://www.flickr.com/photos/59937401@N07/5857910508/
Risk Versus Reward
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”
Takeaway point
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
http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442989&ex=1
Ethics is
Sustainable
Acknowledgements
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

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Economics of Bribery by @EricPesik

  • 1. Secrets and corruption by Adán Sánchez de Pedro http://www.flickr.com/photos/aesedepece/8176804808/ Economics of Bribery Eric Roring Pesik
  • 3. Foreign Corrupt Practices Act Dollar by Images of Money http://www.flickr.com/photos/59937401@N07/6022835400/
  • 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?
  • 7. Neoclassical Microeconomics Model Abandoned Art School 24 by Tiffany Bailey http://www.flickr.com/photos/xshamethestrongx/6342359807/
  • 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
  • 13. What are the risks?
  • 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%
  • 19. Who is making money?
  • 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.
  • 21. What are the rewards?
  • 23. Image: http://office.microsoft.com/en-sg/results.aspx?qu=MP900185047 Is it worth the risk of bribing and getting caught?
  • 24. Image: Adjust Tie by D Planet http://www.flickr.com/photos/dplanet/94441582/ Is it worth the benefit of bribing and getting away with it
  • 25. Greed by Liz West http://www.flickr.com/photos/53133240@N00/2207307656/ Does Crime Pay?
  • 26. What is the ROI of bribery?
  • 27. How much do they pay? Who bribes? What value do they get? 2 1 3
  • 29. Who bribed and got away with it? http://office.microsoft.com/en-us/images/results.aspx?qu=MP900443285&ex=1
  • 30. 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.
  • 31. You do not talk about fight club
  • 32. Image: St Munchins Contract Signing 60 by St Munchin's College http://www.flickr.com/photos/stmunchins/6864640994/ You do not talk about bribery
  • 33. Money and Magnifying Glass by Images of Money http://www.flickr.com/photos/59937401@N07/5858011914/ Follow the Money
  • 34. How much do they pay? Who bribes? What value do they get? 2 1 3
  • 36. 1,388 fraud cases 100 countries 6 continents 2 year period ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
  • 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
  • 41. Never a 1:1 relationship
  • 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
  • 43. Gender of Perpetrators Male 65% Female 35% ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
  • 44. 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 ACFE Report to the Nations on Occupational Fraud and Abuse (2012)
  • 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
  • 48. Image: Portrait of a businesswoman by Victor1558 http://www.flickr.com/photos/76029035@N02/6829334723/ *Except in Canada
  • 50. 96.7% What is the percentage of men prosecuted by US Dept of Justice since January 2008?
  • 51. 58 What is the average age of persons currently in prison for FCPA violations?
  • 53. How much do they pay? Who bribes? What value do they get? 2 1 3
  • 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
  • 62. 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 “
  • 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).
  • 72. Removing the ability to bribe reduces shareholder value by US $2.19M for median firm
  • 73. But what about individual firms and individual bribes...
  • 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)
  • 83. The more you pay, the less value you get
  • 84. But that’s not the end of the story...
  • 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)
  • 95. Why?
  • 96. Culture of Corruption Noncompliance Spillover Compromised Internal Controls Short Term Focus Agency Problem Prisoner’s Dilemma
  • 97. Who is making money?
  • 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
  • 102. Neoclassical Microeconomics Model Abandoned Art School 24 by Tiffany Bailey http://www.flickr.com/photos/xshamethestrongx/6342359807/
  • 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
  • 107. Corruption is Unsustainable Road Sign by fdecomite http://www.flickr.com/photos/fdecomite/388303700/
  • 108. Used with permission from Microsoft http://office.microsoft.com/en-us/images/results.aspx?qu=MP900442989&ex=1 Ethics is Sustainable
  • 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