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Corruption and Government

Throughout the past five years, corruption in government has persisted around the world, vexing many efforts to limit its reach. From Burundi and Guatemala to U.S. reconstruction initiatives in Iraq and Afghanistan, theft, bribery, and extortion have plagued various post-conflict rebuilding efforts. Recently, major scandals involving public contracts have surfaced in Brazil, Ukraine, Canada, China, as well as domestically in New York and Illinois, to give just a few examples.

ThinkstockPhotos-77746188All too frequently, corruption crosses borders. The U.S. Foreign Corrupt Practices Act (FCPA)—which has been the inspiration for the OECD Anti-Corruption Convention—makes it an offense for firms based in the United States to pay bribes to obtain business abroad. The OECD Convention requires signatories also to make overseas bribery a domestic offense consistent with their criminal law.

In the United States, criminal cases brought under the FCPA, as well as domestic anti-bribery laws, respond to individual instances of corruption. However, long-term solutions must go beyond the criminal law and incorporate administrative and institutional reforms. As part of that effort, administrative law reform should be part of the response to entrenched corruption. In the second edition of my book co-authored with Bonnie Palifka, Corruption and Government: Causes, Consequences and Reform, we discuss how administrative law can address government corruption.

It is true that some corruption cases are purely criminal matters where “bad actors” take advantage of opportunities for private gain, making the threat of apprehension and punishment the best deterrent. However, if the incentives for corruption are built into the structure of the public program, the criminal law is an insufficient response. Rather, reform must confront the underlying political and economic incentives for making and receiving payoffs.

Such an institutional approach has been the focus of my work since 1975 when I first wrote about corruption in government contracting, and I still believe that it should be fundamental to the anti-corruption effort. Such reforms avoid creating scapegoats and lower the risk of politically motivated law enforcement.

Criminal law crackdowns may lead public officials to be so anxious about being accused of corruption that they are afraid to exercise initiative, and, as a result, bureaucracies may grind to a halt. Some claim that behavior has occurred in China in recent years and in Italy during the “Clean Hands” anti-corruption crackdown. A study of New York City by Frank Anechiarico and James Jacobs made the same argument.

If officials are “running scared,” the fault may lie in the nature of the crackdown. To achieve lasting change, criminal prosecutions must be coupled with reforms in public administration and service delivery that are consistent with the good governance principles of administrative law.

The best reforms involve the redesign of programs to simplify and accelerate the processing of applications, to reduce scarcity, and to limit discretion. For example, government contracting agencies could, as far as possible, buy standard goods at the competitive prices produced by the private market with a burden of proof on purchasing departments to justify a demand for specialized goods. Administrative law principles of transparency, public input, and official feedback to citizens are the foundation of anti-corruption efforts.

Recent developments in the United States are worth highlighting. Some portions of the U.S. business community, initially including the U.S. Chamber of Commerce, have begun to push back against domestic enforcement of the FCPA by arguing that it hurts U.S. business.

In a paper with Sinéad Hunt, I demonstrated that these claims are inflated by making two arguments. First, even if some firms lose contracts, the costs to them are not the entire profits from the corrupt deals. Rather, their losses are the profit differences between the corrupt lost contracts and their next best options. Firms can invest elsewhere, perhaps even in the United States. Even in extractive industries where the resources are at fixed locations, the cost of a lost contract is not a loss in world supply. The resources will enter the global marketplace where they are open for purchase by anyone.

Second, U.S. efforts to shift business norms in the direction of honest dealings would be severely undermined by a rollback of the law. The behavior of U.S. business is a key factor in these efforts.

Some business interests are launching a similar assault by seeking to restrict the application of a transparency clause in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The Dodd-Frank Act requires firms in the extractive industries to report payments made in connection with extractive industry contracts. This clause aims to help deter corruption and insider deals by providing citizens and watchdog groups with more information about contracts and their associated payments—legal or illegal.

The D.C. Circuit struck down the rule promulgated by the U.S. Securities and Exchange Commission (SEC), finding that the agency failed to provide adequate justifications. The court read—actually, in my view, mis-read—the statute underlying the SEC’s rule on the transparency of extractive contracts to require a cost-benefit analysis. The Act’s provision calling for disclosure of payments made by firms in extractive industries only requires the SEC to develop a rule that requires disclosure. That disclosure is but one part of the overall contracting environment for multinational businesses. Moreover, because firms already collect information on payments, disclosure should involve little marginal cost, and the SEC should readily be able to withstand judicial review based on the purposes of the relevant clauses of the Act.

I have argued in prior work that for statutes designed to fix market failures a requirement that agencies conduct cost-benefit analysis makes good sense, but not otherwise. Certain financial regulations fit into the market-failure niche. However, the Dodd-Frank provision in question here is clearly directed toward an anti-corruption purpose that differs from many of the SEC’s other mandates. As a part of larger, global anti-corruption strategies, disclosure regulation is not amenable to ordinary cost-benefit criteria given the secrecy that surrounds corrupt payoffs. Surely one cannot argue that anti-corruption efforts are not permitted unless clear data exist concerning their net benefits. That would tilt the legal environment against enforcement.

My recent book with Bonnie Palifka provides an in-depth discussion of the interface between corruption and administrative law. Agencies and courts should consider incentives for and against corruption in their own analyses of administrative law doctrines. By making corruption less likely, agency adherence to the best administrative law practices should improve the effectiveness and legitimacy of regulatory policies in the United States and elsewhere.

This essay is part of RegBlog’s sixteen-part series, RegBlog@5.


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