The legacy of anti-corruption laws – The Hindu


How strict anti-corruption laws like the FCPA led to the growth of illegal black markets

How strict anti-corruption laws like the FCPA led to the growth of illegal black markets

Desierto, Desiree and Bologna Pavlik, Jamie, Bribe-Switching (May 10, 2021). Free Market Institute Research Paper No. 3843425, available at SSRN: https://ssrn.com/abstract=3843425 or http://dx.doi.org/10.2139/ssrn.3843425

Strict anti-corruption laws are seen as the panacea to many societal problems. But like many other laws created with good intentions, anti-corruption laws can also have unintended consequences. These consequences are initially unforeseen by the proponents of these laws.

“Bribe Change”

Bribe-switching by American researchers Jamie Bologna Pavlik and Desiree Desierto looks at the unintended consequences of strict enforcement of the Foreign Corrupt Practices Act (FCPA). It should be noted that the FCPA was enacted to prohibit companies and individuals in the United States from bribing public officials in foreign countries. Most famously, the FCPA was used to sue Goldman Sachs for its involvement in the 1MDB scam in Malaysia. So what were the benefits of the FCPA?

Many assume that strict anti-corruption laws like the FCPA, when properly enforced by government officials, would lead to lower corruption and an improved economy. The FCPA, which imposes heavy fines and other penalties on U.S. companies engaging in corrupt practices, is actually considered a well-enforced law. The researchers found, however, that when the US government prosecuted certain US companies that operated in other countries on charges of corruption, other interesting results followed. These results did not meet the initial expectations of the legislators who developed the FCPA.

Growth of illegal markets

First, there was no real decrease in the level of corruption among foreign officials after the enactment of the FCPA. The researchers propose what they call the “bribe exchange hypothesis” to explain the failure of corruption to fall in foreign countries despite the enforcement of FCPA regulations.

They argue that public officials do not solely depend on formal markets to earn bribes, but may also depend on other illegal markets to earn bribes. Whether public officials receive bribes through legal or illegal markets depends among other things on the relative cost of receiving bribes through each channel. When the cost of extracting bribes in the legal market increases due to laws such as the FCPA, it may lead public officials to resort to obtaining bribes in the illegal market instead. . If so, public officials can offset the loss of bribe revenue from legal markets with bribe revenue from the black or illegal economy. For example, after the FCPA is enacted, some formal investment projects that would previously have received official approval after a bribe was paid may no longer receive official approval. Instead, officials can focus their efforts on approving projects in the illegal market that earn them bribe revenue with less risk of being caught red-handed.

In countries where U.S. companies could no longer offer bribes due to FCPA regulations, the size of the underground economy increased by 0.25 percentage points, the researchers found in their study. Other indirect markers of illegal activity such as homicide rates, tree loss, and commercial misinvoicing have also shown that the FCPA leads to increased illegal activity in the underground economies of these countries. According to the authors, this occurs because public officials resort to obtaining their bribe earnings from the illegal market rather than the legal market. This will make them more likely to allow illegal activities to thrive in order to maximize their bribe earnings. So, for example, a powerful bureaucrat might allow the illegal sale of alcohol on the black market to thrive in exchange for bribes when he can no longer easily obtain bribes for development projects. investment by US liquor companies established because of the FCPA.

Illegal economies, an alternative?

More importantly, the authors note that there was no increase in a country’s GDP per capita after the FCPA opposed attempts to bribe its public officials when in fact there was had a significant increase in the size of their shadow economies. The authors argue that the growth of the shadow economy is a significant negative development for these countries. Others, however, may argue that the shadow economy in these countries could serve as a useful alternative to the very restricted legal economy. From this perspective, bribes can actually grease the wheels of commerce in many economies where the existing laws that govern the formal economy are not conducive to legitimate business activity.

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