International - Written by on Tuesday, February 17, 2015 4:25 - 1 Comment

OPINION: Fines are not enough when “no-one cares”.

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Africa Map Stock Market“The share price fell first thing, then recovered; no one cares, as they didn’t with BAE and Saudi…A fine? A few million, perhaps, who cares? Even the China/Indonesia stories are a long way in the past, and investors are super-focused on the road to 2018: that’s what gets the share price to £20 or back to £5.”

This quote from an analyst appeared in a story in the FT yesterday about the latest development in an ongoing bribery investigation story.  For present purposes it doesn’t really matter which company.  It could be any – but it raises an important question.

What punishments should be meted out to deter bribery.

Are fines the answer? Are they big enough? What could be an effective deterrent to stamp out bribery? What about debarment? Is there another way?

On the face of it the analysts comment yesterday seems to embody what some would say is wrong with the financial markets.

We need to get real.

Markets are amoral.

For the most part investors do not care whether corporations comply, or not.  All that matters to most investors is the perceived value of a corporation’s stock (or other investment class) to those buying and selling it at any given time.  This is a question of collective market perception.

And it turns out, at the end of the day, government bribery investigations don’t really move the needle.

A cursory review of corporates  stock price charts who have suffered penalties for unethical conduct reveals the reality – the long term effects of corporate penalties are negligible.

Let’s take the Daddy of them all.  Siemens.  After a dip in the eye of the public media storm around the time of its bribery story the Siemens stock price is now trading around historic norms.  Life goes on.

Fines are part of the answer of course.  And they deliver a short sharp shock.  But they are not the only answer.

Debarment is an option.  But it is rare, as people worry about throwing out the baby with the bath water making thousands and tens of thousands of innocent employees jobless at a stroke.

Prosecutors point to jail terms for violators and corporations fire those who get caught.  Make no mistake, the effects of being caught involved in bribery for individuals are devastating. The pressures of a criminal investigation often take a heavy personal toll of which a guilty verdict and a prison sentence are just the final (or penultimate) instalment – with confiscation of ill gotten gains to follow.

But these are blunt instruments and bribery persists.

At the weekend I was asked by Richard Bistrong to weigh into a debate which was being had in the comments thread of GlobalAntiCorruptionBlog.

In a nutshell, and I paraphrase (and therefore open myself to the observation that I have oversimplified) one camp was arguing for fines and another was arguing for debarment.  The debarment team (led by Richard Bistrong) argument is basically that if you want to force good behaviour you need to make the sanction relevant for those who might engage in it.  Put another way, says Richard (and he speaks with the authority of someone who used to be in sales and went to prison for bribery so I guess he has an opinion worth listening to), large fines for a corporate are too distant for the people on the ground.  Debarment on the other hand (in fact partial debarment was Richard’s preferred option) would have a greater impact – as – and I paraphrase again, sales teams would not wish to have their ability to meet sales targets and earn bonuses by being locked out of key markets.

Read the post and the thread for the unabridged version.

I threw this observation into the mix:

Debarment should be used in appropriate cases which is what legislators intended. Otherwise there is no point in having the sanction. 

Of course this must be weighed against what is in the public interest – maybe partial debarment is a solution in that it would not necessarily amount to corporate death -instead disabling the corrupt arm.

On the economics at play – there is plenty of evidence that people do not always behave purely in accordance with economics. 

Love would be one example,  […after] Valentines Day. 

So it’s important to focus on using various strategies to nudge people into the behaviour you’re after. Richard’s idea is one strategy. Others can also and should be deployed. 

Essentially the ultimate objective is to stop bribery. One weapon in doing so is to make bribery socially unacceptable to potential bribers and their peers to help drive compliant behaviour. Not 100% effective but when bribery is socially acceptable – and the constant refrain that it equates to local custom and practice and who are we to impose our values on others is a big red flag that it’s considered acceptable – then bribe payers are able to rationalise their behaviour extremely easily against a backdrop where perceived enforcement risk is considered low.

Put another way. Present deterrents are plainly not working.

There is no perfect solution to any of this.

For the record we are strong proponents of not doing something which would result in say a world leading business with a large book of public sector contracts being debarred.

However, criminal justice relies on the deterrent effect.  Perhaps debarment is a tool which should be used from time to time in appropriate cases instead of being, as it is at present, a (very) hollow threat.

One thing is for sure, fines are not enough.

 

 

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Nick van Benschoten
Feb 17, 2015 7:00

Barry,

Thanks for picking up the debate on Richard Bistrong’s proposal for more frequent and targeted use of debarment. I think this is a timely discussion as the UK moves towards implementation of the new EU Procurement Directives.

These EU rules include expanded requirements for debarment (exclusion from public procurement) with the UK regulations published and due to come into force on the 25th of February. We await the practical guidance on key topics such as how parent and sister companies will be affected by debarment of a fellow Group company.

On the substance of Richard’s proposal, I’m aware of a Italian precedent in debarring Siemens for one year from the Italian public procurement market being quickly narrowed to just the national gas turbine market, but there may be others.

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