Ed. Note-I was recently interviewed by Branislav Hock, a Research Master in Law Tilburg University in The Netherlands in connection with his graduate studies. After the interivew, I asked if he could write a blog post which discuss his research. The following is our first guest post from a University student in The Netherlands.
Bribery, including its various forms such as political contributions or gift giving, is a widespread phenomenon when doing business abroad, including trade and foreign investment. The Anti – Bribery Convention (the Convention) of the Organisation for Economic Cooperation and Development (OECD) seeks to address these concerns by obliging its signatory states to prohibit firms from bribing foreign government officials in order to obtain or retain business.[i] However, in many emerging countries, bribery of foreign public officials is under-regulated and often even not criminalized at all. In this context, it has been argued that firms from such emerging countries therefore enjoy an advantage over firms from OECD Convention signatories, as they are free to bribe without bearing any liability (so-called ‘free-rider’ problem). This argument is also supported by the results of several macro-economic studies. However, this article argues that in the light of new dynamics of a global anti-bribery enforcement regime, economic assumptions pointing to the problem of competitive disadvantage are disputable because its effects are different.
Are OECD Firms “Leaving” Emerging Markets Because of Anti-Bribery Laws?
Despite the relatively long existence of the Convention, its enforcement was sporadic. However, after 2006 the United States has increased the enforcement enormously. The U.S. Department of Justice and the U.S. Securities and Exchange Commission conducted in average 2.4 enforcement actions per year between the years 1998 – 2006. It increased to average 12.6 enforcement actions between the years 2007 – 2012. The U.S. authorities imposed in penalties $87 million in 2007 while in 2010 already $1.8 billion.[ii] In this context, the business community and some academics argue that current enforcement is too aggressive and that it undermines value maximizing investments of OECD firms in highly corrupted markets.[iii] Indeed, this argument might seem really strong because it is also supported by empirical evidence.
Economic studies at the macro-level points towards the relationship between the level of corruption and the inflow of foreign direct investments (FDIs). One notable study found out that inflow of FDIs and the level of corruption are in a negative relation when the investors are OECD firms. Conversely, non-OECD firms invest relatively more in markets with high level of corruption.[iv] In other words, according to these studies the aggressive enforcement of OECD-based anti-bribery laws pushes “good” firms to leave “corrupted” emerging markets. In this context, some legal scholars even argue that the effect of anti-bribery enforcement (in particular enforcement of the U.S. Foreign Corrupt Practices Act – FCPA) might be understood as an imposition of unintended economic sanctions against emerging markets.[v]
If we look at the global business arena from a wider perspective, the problem of under-regulation of transnational bribery is not special. Increasing importance of corporate social responsibility and stress on ethical business practices make it that soft-law responsibilities are continuously being transformed into hard-law obligations. This transformation of “good business practices” into legal institutions is just a natural sign of social dynamics which is common in many legal areas such as human rights or environmental law. These processes by their nature also influence the way the business in a global arena is done. It is as common as the voice of the business community which is repeatedly complaining on unfair rules of the game when the playing field is levelled by imposition of new legal obligations.[vi]
Moreover, understanding law and legal rules in the way that they have definite purpose or that they lead to definite consequence might be naïve. This view does not take into consideration the dynamic nature of the global business and constructive role of businesses themselves. There are at least two contra-arguments which need to be presented in order to put the above mentioned claim, that emerging countries enjoy an advantage over firms from OECD Convention signatories because of OECD-based anti-bribery laws, under question.
Firstly, national enforcement authorities from OECD Convention signatories have interpreted the Convention so as to endow them broad extraterritorial jurisdiction.[vii] Jurisdiction will be asserted over free-rider firms on the basis that such firms, for example, have assets in the OECD Convention signatory country or are even partially owned by nationals from that signatory. For instance, U.S. authorities have used such arguments to claim jurisdiction to investigate and eventually punish foreign firms for their operations outside the United States.[viii] I believe that broad extraterritorial enforcement of OECD-based anti-bribery laws which was started by the U.S. motivated also other countries to be active. Increasingly, across the globe, many of the countries such as Russia or China have now passed their own laws. Moreover, it seems that they have even ability and desire to enforce them actively as was proclaimed – at least I have noticed that – during the Anti-Corruption Conference for G20 Governments and Business (organized by the Russian Presidency).[ix] Therefore, it is becoming much more difficult to escape from the widening reach of the anti-bribery net and “use” legal gaps for the free riding.
Secondly, relation between law and business competition in the global market cannot be seen as a static concept; it is always moving. Firms are constantly trying to beat their competitors, therefore businesses always respond to the upcoming competitive discourse by finding the way how to transform it into a business advantage; law seems to be a great material for such a transformation. In this context, Thomas Fox, in the interview for my research project, had the following observation: “…obviously the FCPA applies to American companies no question, but if the Chinese company wants to do business with the American company they need to comply with the FCPA because American company is responsible at the end of the day and it’s really a business solution to the political or social problem of corruption so it is becoming more and more common that any company outside the U.S. who wants to do business with U.S. company might have some type of compliance program at place to satisfy U.S. authorities.”
In other words, functioning of OECD-based anti-bribery laws goes beyond the limits of traditional legal boundaries. It can be seen that the positive effect of extraterritoriality helps significantly to mitigate the free-rider problem arising from under-regulation of transnational bribery.[x] This is because in the context of economic and business globalisation, OECD-based anti-bribery laws are directly applicable to a widening range of foreign firms.[xi] Moreover, existing regulatory gaps are often filled by private contractual arrangements (indirect application) as any foreign firm which wants to do business with OECD firms is forced by its OECD business partners not to bribe. This new enforcement dynamics of anti-bribery laws has so far not been the subject of consistent empirical research. I believe that development of such kind of conceptual model could serve as an interesting ground for an empirical test of positive extraterritorial effects of OECD-based anti-bribery laws. It would help to better understand what extraterritoriality is and what should be its role in the global anti-bribery enforcement regime. Moreover, it would contribute to better compliance with the Convention as it will decrease the uncertainty currently connected with enforcement and application of anti-bribery laws.
Towards New Difficulties?
It has been said that extraterritoriality of OECD-based anti-bribery laws helps to mitigate the free-rider problem. However, it is not an aim of this article to claim that the new dynamics of the global enforcement regime does not cause any potential problems. It might also generate negative effects related to protectionism due to the lack of enforcement coordination between anti-bribery authorities. In this context, Thomas Fox in our interview expressed one of the problems as follows: “What the companies are struggling with now is if you have a U.S. investigation and enforcement action, then years later you have a German one and years after that you have one in West-Africa. They do not have certainty when it is going to end. Just for your consideration it should mentioned that as the Convention has no enforcement mechanism the enforcement authority of country A could tend to exploit its extraterritorial jurisdiction in order to target mostly foreign bribery arising from firms from other countries (say B, C or D), thereby putting firms from country A at a competitive advantage. In return, the enforcement authorities from B, C or D can then either try to coordinate with those of A or enter into a retaliatory pattern of enforcement against firms from A. It could lead then to serious enforcement defects which could cause ineffectiveness of the whole OECD anti-bribery enforcement mechanism. However, it would be within the scope of this contribution to elaborate on this issue in more depth.
Based on the arguments stated above, I see the problem of the large “anti-bribery gaps” in emerging markets as a classical element of “global transformation of competitive advantage”. The levelled playing field always create an opportunity for businesses to better react on new circumstances than their competitors. It is actually what “smart competitors” are looking for. The voices claiming that the aggressive enforcement of OECD-based anti-bribery laws pushes “good” firms to leave “corrupted” emerging markets are based on economic assumptions which are used to answer a legal question. However, these economic assumptions are doubtful because the effects are and must be (at least in a long term) different. Hence, accepting a general concept that OECD firms can’t effectively compete in emerging markets if they don´t bribe and do business fairly might seem to be overstated.
Branislav Hock obtained his LL.M. in Law and Jurisprudence at Charles University in Prague, Czech Republic. Currently, he is a Research Master student in Law at Tilburg University, in The Netherlands, where he prepared his PhD proposal “Extraterritorial Effects of OECD-based Anti-Bribery Laws in Theory and Practice: from Free-Riders to Protectionism? He is also an editor of the Tilburg Law Review. He can be reached via email, firstname.lastname@example.org. He would welcome any comments or questions about this article.
[i] See Article 1 of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (came into force on 15 February 1999 and as of May 1, 2013, has been adopted by 40 countries). The Convention focuses only on the supply side of bribery.
[ii] See Choi, S. J. and Davis, K. E. (2012). Foreign Affairs and Enforcement of the Foreign Corrupt Practices Act. NYU Law and Economics Research Paper No. 12-15; NYU School of Law, Public Law Research Paper No. 12-35; See also Runnels, M.B., & A.M. Burton. 2012. “The Foreign Corrupt Practices Act and New Governance: Incentivizing Ethical Foreign Direct Investment in China and Other Emerging Economies”. Cardozo Law Review. 34 (1): 295-328.
[iii] See Spalding, A.B. (2010). Unwitting Sanctions: Understanding Anti-Bribery Legislation as Economic Sanctions Against Emerging Markets”. Florida Law Review. 62 (2): 351-428; Dalton, M.M. (2006). Efficiency v. Morality: The Codification of Cultural Norms in the Foreign Corrupt Practices Act. New York University Journal of Law and Business, Vol. 2; Westbrook A. D. (2011). “Enthusiastic Enforcement, Informal Legislation: The Unruly Expansion of the Foreign Corrupt Practices Act”. Georgia Law Review. 45 (2): 489-579.
[iv]Cuervo-Cazurra, A. (2006). Who cares about corruption? Journal of International Business Studies, 37, 6, 807-822.
[v] Spalding (2010) supra note 3.
[vi] See among others McBarnet, D. (2010). Transnational Transactions: Legal Work, Cross-Border Commerce and Global Regulation, 369-386. In Masson, A., & Shariff, M. J. Legal strategies: How corporations use law to improve performance. Berlin: Springer.
[vii] For the purposes of this article, extraterritoriality exists when an enforcement authority applies national laws for conduct occurring beyond the countries’ borders.
For example Rino International, a China-based issuer was investigated in 2008 for its business activities in China
; See also US v. DPC (Tianjin) Co. Ltd. DPC; OECD firms are being investigated as well – Royal Dutch Shell was investigated and penalised by U.S. authorities for its operations in Nigeria. For more information see FCPA Blog, .
[ix] Third Annual High Level Anti-Corruption Conference for G20 Governments and Business, 25-26 April 2013
[x] See Chow D. 2012. “China under the foreign corrupt practices act”. Wisconsin Law Review. 2012 (2): 573-608; Nichols P.M. 2012. “The Business Case for Complying with Bribery Laws”. American Business Law Journal. 49 (2): 325-368; Rose-Ackerman S., and Hunt S. 2012. “Transparency and Business Advantage: The Impact of International Anti-Corruption Policies on the United States National Interest”. NYU Annual Survey of American Law 67: 433-467.
[xi] Foreign firms are directly subjected to given national anti-bribery laws provided that they listed shares on one of OECD exchange markets