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?

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
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