The document discusses methods for analyzing the economics of corruption, specifically who engages in bribery, how much they pay, and what benefits they receive. It describes two main methods: historical analysis of past corruption cases and efficient markets analysis using events like new anti-bribery laws. Historical analysis found the median bribe amount was $1.06 million for low-level officials and $11.43 million for high-level officials. Firms paid an average of 1.94% of the project value as a bribe. Efficient markets analysis of a new UK anti-bribery law in 2009 estimated it caused over $2 trillion in lost market value for affected companies.
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Economics of Corruption
1. Economics
of Corruption
CFO Asia Congress
Orchard Parade Hotel
8 October 2013
By Eric Roring Pesik
Image Credit: Get Your Roll On by Chris Potter (www.stockmonkeys.com)
http://www.flickr.com/photos/86530412@N02/8449167986/
2. The FCPA Blog http://www.fcpablog.com/blog/tag/top-ten
Image: Arms Folder by D Planet
http://www.flickr.com/photos/dplanet/94441584/
Top 10 FCPA Fines of All Time
$95 Million
$137 Million
$185 Million
$219 Million
$338 Million
$365 Million
$395 Million
$400 Million
$579 Million
$800 Million
Deutsche Telekom (Germany)
Alcatel-Lucent (France)
Daimler AG (Germany)
JGC Corporation (Japan)
Technip S.A. (France)
Snamprogetti/ENI (Holland/Italy)
Total S.A. (France)
BAE (UK)
KBR/Halliburton (USA)
Siemens (Germany)
3. Greed by Liz West
http://www.flickr.com/photos/53133240@N00/2207307656/
10. 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/
11. 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
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20%
12. 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/
43. 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
44. 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
46. 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
49. Tenure of Perpetrators
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
50. Education of Perpetrators
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
56. 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)
57. 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
58. $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
59. $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
60. Bribe as percentage
of project awarded:
1.94%
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/
61. 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
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. 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).
68. -0.06%
-0.87%
-0.05%
CAR [-20;-1] CAR[0;1] CAR[2;20]
$2.43 Trillion Loss in Market Cap
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
69. Foreign Corruption
Exposure
Firms that operate
in more corrupt
environments
experience a larger
drop in firm value
Image: http://www.transparency.org/cpi2012/results
70. 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).
71. Other Anti-Bribery
Regulations
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
72. 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).
73. Spillover to Foreign
Firms
Non-UK firms with
UK links and high
foreign corruption
exposure experience
higher drop in firm
value
Image: http://www.transparency.org/cpi2012/results
74. Foreign firms with high foreign corruption exposure and
UK links had 0.19% more negative returns
-0.87%
-0.19%
-0.31%
-0.12%
-0.19%
UK Firms Foreign Firms
Foreign Firms
with UK Link
Foreign Firms
without UK Link
Zeume, Stefan, Bribes and Firm Value - Evidence from Anti-Bribery Regulation (August 18, 2013).
75. Median size firms with high
corruption exposure
experienced US $2.19M more
negative loss than firms with
low corruption exposure
76. But what about individual firms
and individual bribes...
78. 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 excess returns
(7 X return) with a net benefit of $281M
after cost of bribe or an ROI of 6.1
(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)
79. 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)
80. 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)
81. 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)
85. 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)
86. -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)
87. -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)
88. -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)
89. 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)
90. 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
CAR
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. Who Bribes?
Well educated, senior-level
males in accounting,
operations, sales, and
executive management
Working at companies focused
on sales growth
Living beyond their means
94. How much do they pay?
The median bribe is
$2.5 Million
The typical bribe ranges from
about 1% to 5% of the project
awarded
95. What benefits do they get?
The average bribe returns
10.5 x the bribe amount
But the more you pay, the less
you get
And you generally
underperform the market
98. Why do bribe paying firms
underperform?
Culture of Corruption
Noncompliance Spillover
Compromised Internal Controls
Short Term Focus
Agency Problem
Prisoner’s Dilemma
101. 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
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Flickr Creative Commons
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Other Sources
Corporate logos are property of their respective companies.
All other sources and images are acknowledged where they appear.
102. 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.
Other Presentations
Many of Mr. Pesik’s presentations are available on SlideShare at:
http://www.slideshare.net/ericpesik
Disclaimer
This work represents the opinions of the author alone, and is not the opinion his employer.
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