David Montero on Exposing The Global Corporate Bribery Network

In the past ten years, the Department of Justice has brought more than 150 cases against large corporations under the Foreign Corrupt Practices Act (FCPA), collecting billions of dollars in fines.

What impact is that body of work having on deterring foreign bribery?

Not much.

Why not?

In part because the fines against the corporations are not big enough to deter corporate bribery.

In part because the fines are not used to heal the injuries caused in countries where the bribes were paid.

And in part because executives of major multinationals are not going to jail for the bribery committed in the name of their corporations.

In his new book, Kickback: Exposing the Global Corporate Bribery Network (Viking, 2018), David Montero takes a deep dive into foreign bribery and the U.S. government’s anemic response.

Montero cites the work of University of Washington Finance Professor Jonathan Karpoff.

Karpoff estimates that more than 1,567 corporations have paid bribes, but only 100 have been charged.

“The likelihood of getting caught, in other words, is just 6.4 percent,” Montero writes. “Part of how Karpoff calculates the value of a bribe is to take this very low probability into account. Bribery is attractive as an investment because companies know that they will almost never pay a fine for it,”

Karpoff also finds that corporations charged with bribery faces little reputational risk. Karpoff says that to deter bribery, the chance of getting caught times the amount times the amount you pay if you get caught has be at least as large as the benefits.

Right now, the fines for bribery amount to something like one percent of market capitalization. Karpoff says that to deter bribery, that’s going to have to go up to something like 40 percent of market capitalization.

“Companies are paying record fines in the last ten years,” Montero told Corporate Crime Reporter in an interview last week. Before that, they almost never did pay fines. The Department of Justice will point out that they have collected more than $11 billion in FCPA related fines. That is an astronomical number.”

“But Karpoff looks at the fines in relation to deterrence and the value of the corporation.”

“He went through a database of all of the FCPA cases over the last ten years. He figured out what these corporations were paying in fines. And he determined that on average, these corporations are paying fines that are one percent of their market capitalization.”

“If you are caught paying bribes, yes you will pay a fine. It may be $150 million. That certainly sounds like a huge number, but relative to your value as a company, it might be minuscule. One percent. Bribery fines are the one percent fines.”

“How is that possibly going to result in deterrence? If we want these fines to be effective, they have to be much higher, so much more meaningful than what they are now. They are now just another cost of doing business.

Karpoff’s calculation is that these fines would have to be about forty percent of a company’s market capitalization to actually be effective at deterrence.”

Is it politically possible to hit these companies with these fines that are forty percent of market cap?

“Politically, would the Department of Justice be able to get away with those size fines? Corporations already are up in arms that they are paying these huge fines, which I would argue are minuscule relative to how much these firms are worth. I would like to believe that this is a moment in which people politically can accept that corporations need to pay for the crimes that they commit.”

“Also, in an ideal world, more of these executives would be going to jail. That is a difficult struggle the Department of Justice is facing. Executives from large publicly traded companies are not going to jail for this crime.”

“For me, the solution is that these companies have to pay fines, they should be much higher than they are now. And the fines should take into consideration the most important crucial element – the damage these bribes inflict for a lasting amount of time on the foreign citizens where those bribes are paid. That’s part of the problem with the way we are enforcing this law. These settlements say nothing about the actual impact of these bribes — which is that it devastates the economy, the social fabric, the political fabric of these countries for generations. Corporations are paying the fine because they were untruthful on their filings, because they broke the law by paying the bribe.”

“But the settlement should include some acknowledgment that there was an impact abroad and restitution for the citizens in the countries where these bribes were paid. That’s one way to get these fines to be much higher.”

“And there are rare cases that address this. Ten years ago, the Department of Justice took money that had been seized in a bribery case involving Kazakhstan. And they funded a charity. It was a charity that provided social services to the people there. All of it audited by the World Bank and outside auditors. That was one example of how you could take some of this money paid in fines or money that is seized, and do something that is symbolically a kind of restitution for people who have suffered the impact of the bribes.”

What are the social harms that bribery inflicts?

“A vast body of research shows that bribes contribute to economic inequality. They contribute to a skewing of expenditures of the public’s money toward projects that the public doesn’t need or benefit from. People are bribed to invest in arms projects or defense projects rather than schools and hospitals.”

“The social harms may include environmental disasters. In Bangladesh, a Canadian company paid to get control of a natural gas field. It had no experience developing such a gas field. After it paid the bribes, the gas field blew up, causing $100 million in damage. The village around this field had to be evacuated. People’s livelihoods were destroyed.”

“Bribes also help authoritarian regimes stay in power. Sometimes bribes help them fund the conflicts they are involved in to keep people in a state of repression.”

“Sometimes bribes are paid to patrons of terrorist groups. We have no idea where that money goes. It’s likely to the terrorist groups. Economically, politically and socially, these bribes have a terrible impact.”

“Sometimes these companies are paying bribes to sway elections. Kellogg Brown and Root, a subsidiary of Halliburton, did this in Nigeria. They paid $5 million in bribes to a political party that was up for re-election. Whether coincidental or not, the party won in a re-election. The country is still struggling to deal with the impact of that. The same thing is happening in Costa Rica.”

In the book, you talk about Gulf Oil and Korea.

“Gulf Oil admitted that it paid $4 million to a party in Korea right before a democratic election. It wanted this particular party to win because that was the party that was going to help Gulf Oil get more contracts. And the party did win, but it was a close election. When asked – this was such a close election, did you think your bribes made the difference, the chairman of Gulf Oil said – yes, statistically, I would have to agree, I think our bribes did help sway that election.”

“After a company makes those bribes, it pays a fine and moves on. But the country that has to deal with the fallout of a swayed election, especially when the citizens of that country learn that that election has been compromised by the bribes, it takes a long time to heal those wounds, to close those ruptures.”

You spoke with many former federal prosecutors, including Paul Pelletier. But he was one of the few who called for criminal prosecutors of the executives. He didn’t swing through the revolving door. He is quoted on page 206 – “My belief is that in the corporate environment, if you don’t do executive prosecutions you are not going to have an impact.”

Almost all of the others you spoke with — Lanny Breuer, Peter Clark – they swung through the revolving door. And maybe if they didn’t see the gold at the end of the rainbow, they would follow Karpoff’s dictate to heavily fine the corporations. Or Pelletier’s that — put the responsible corporate executives in jail.

“I wish I knew statistically how rare Pelletier is. I heard from sources that the revolving door aspect of this became more prevalent under Lanny Breuer. I don’t have the statistics to back that up. Sources told me that lawyers came in, worked FCPA cases at the Department for a year, and then went on to big prestigious law firms, sometimes after two years. I don’t know how often that occurred.”

“Many federal prosecutors I spoke with had worked for the Department of Justice for most of their career and then went to work in private practice after fifteen years or so. Is that acceptable? Their explanation was – as a prosecutor at the Department, you don’t make any money. I have three kids in college. I’m tired of not being able to pay for them. I live in DC.”

“I definitely see the revolving door as a problem. I didn’t address that in the book, because I felt like there was so much in the book I was handling. And I don’t know how to address that problem. And if you put in rules to restrict their ability to work the other side, would that change the way the cases are prosecuted? I don’t know. I haven’t done the reporting on that.”

In your book, you have a section on China. Do multinational corporations still have to pay bribes to do business in China?

“I think they do. The Chinese government in 2014 and 2015 made bribery in the pharmaceutical industry a priority for enforcement. Reps on the ground in China told me that bribery is still happening. You just have to be much more discrete. They said – we don’t pay at the same volume. I wrote about a pharmaceutical rep that I interviewed who used to bribe 100 doctors. She told me – now I only bribe three so it doesn’t look so bad. I have less of a chance of getting caught. My company knows what I’m doing. They have told me — keep it quiet.”

“Before, it was so blatant. These are cutting edge companies. GlaxoSmithKline, Pfizer. They have invented life saving medicines. They have changed the way we live around the world. But when it comes to succeeding in China, they resort to this mind numbing inefficient way of doing business. The length they went to pay these bribes and cover them up with fake receipts – it was just staggering. Bribery used to be so blatant – they can’t get away with that any more. They have had to tone it down.”

“The Chinese government did crack down, but the crack down has stopped. We have not heard as much about a crack down on bribery in recent years.”

“GlaxoSmithKline was running such a huge bribery scheme. The Chinese government said the company paid $500 million in bribes in just less than five years, bribing doctors all over China. They happened to get caught because of the scale of the bribery. But all of their competitors were doing this too. The Chinese government decided to crack down on GSK and arrested their chief executive in China, a British citizen. They made an example of GSK. It’s not just prices are inflated. But Chinese citizens were outraged. The Chinese government felt threatened. That was a big episode, but we haven’t seen anything like it since. Which leads me to believe that the bribery is still going on. Sources have contacted me from China and told me that even companies that have settled allegations, there is information about further bribery.”

“Pharmaceutical industry bribery is easy to detect because the bribes were being paid to everyday doctors. The real bribery in China is happening at a much higher level – to government officials and Army generals who are also involved in hospitals or defense projects. We just don’t know anything about that because it is so tightly guarded.”

There is a bribery scandal in Canada where SNC-Lavalin paid bribes in Libya. The company starts a lobbying campaign to get a deferred prosecution in Canada. The Attorney General says no, but they keep lobbying. And now there is a scandal threatening the Liberal Party government.

“This scandal is so Canadian. Citizens really care. Citizens are up in arms about this corporation. This scandal results from one case in which the Attorney General was pressured to give a company a deferred prosecution agreement. That ship sailed so long ago in the United States. The scandal in the United States would be if somebody called a prosecutor and said — don’t give this company a deferred prosecution agreement — prosecute them.”

“Every company that is going to settle an FCPA case is going to get a deferred prosecution agreement. It’s fascinating to see it as an American. This is so new in the Canadian landscape.”

[For the complete Interview with David Montero, see 33 Corporate Crime Reporter 11(10), Monday March 18, 2019, print edition only.]

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