Richard Messick summarizes the output of last April’s Global Capitalism, Trust, and Accountability Conference, co-sponsored by the Stanford Graduate School of Business and the Center on Democracy, Development and the Rule of Law. Participants explored the mechanisms of international corruption and how citizens, states, and the international community can address them.
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Corruption emerged as a central theme at the Global Capitalism, Trust, and Accountability Conference co-sponsored by the Stanford Graduate School of Business and the Center on Democracy, Development and the Rule of Law. Participants discussed what the growing power of global capital and the diminishing trust in government institutions means for the future of capitalism and democracy and suggested various solutions to arrest the growth of global capital’s power that merit further consideration and more research.
Role of institutions
The focus throughout was on the institutions that determine how a nation is governed and economic transactions conducted. The multinational, transdisciplinary group of scholars, journalists, and activists distinguished between nations where corruption is relatively uncommon and governments are committed to fighting it and those where corruption is widespread and the commitment to fighting it weak. Though the details differ, nations in the former group share an institutional architecture—a democratic political system, the rule of law, and informal norms—that, however imperfectly, advances fairness and equal opportunity for all. By contrast, in the latter, institutions are weak and distorted, furthering government’s grip on power through special treatment and “economic rents,” to selected groups. Citizens’ trust in government and norms of honesty and integrity prevail in the former but are lacking in the latter.
The institution at the center of contemporary capitalism is the corporation, a creature of national law able to hold property, enter contracts, and open bank accounts. Incorporation statutes, regulatory agencies, rules on political activities, anti-bribery laws, internal compliance programs, and norms of corporate conduct are written to hold corporate power in check. When effectively enforced, they ensure corporate profit-making activities advance the general welfare.
In nations with weak institutions, corporations can capture the agencies meant to control them, seeing that rules are not enforced or that they are written in ways that enhance corporate power. Even in countries with strong institutions, restraints on corporate conduct are not failsafe. Bribery and the concealment of material information are two of the many ways corporations can escape control. The temptation to do so is ever present. Successful evasion produces supranormal profits for the company and lucrative rewards for its managers.
At the Corporate Misconduct and the Law panel, Wayne State Professor Jennifer Taub presented two cases where American companies had evaded checks on their power, both resulting in enormous harm. Drug manufacturer Purdue Pharma did not tell doctors and the public how dangerous its opioid painkiller OxyContin was. The result: hundreds of thousands of deaths from overdoses and the creation of millions of addicts. In the second, aircraft manufacturer Boeing hid information about its flight control system from the Federal Aviation Administration. Taub ascribed this behavior to a change in the corporation’s culture, from one where safety and transparency was paramount to one that put market share and profitability above all else. The consequence: the death of 346 passengers and crew from the crash of two of its 737 Max jets.
Panelist Gerhard Shick, a former German parliamentarian, presented a case involving a complex tax fraud scheme. Masterminded by a retired German public servant expert in tax law, banks and traders were able to corruptly claim millions of euros in tax refunds by trading a company’s shares near its dividend payout day. The breakdown in institutional controls ranged from violations of the public service ethics code to political pressures to hobble a criminal investigation to ties between powerful regional banks and local politicians that kept the scandal out of the public eye for years. German citizens lost several billion euros in tax revenues as a consequence.
Institutions in international commerce
Global trade and investment, even with the recent stall, has proceeded apace since the end of World War II, vastly complicating the task of controlling corporate power. Corporate operations in multiple countries mean a company is subject to many different laws and enforcement agencies, creating opportunities for exploiting inconsistencies, gaps, and differences in national laws and their enforcement to evade control. The only solution to this international version of regulatory arbitrage, participants agreed, is collective action, an agreement among states to close off the ways corporations can play one nation’s laws against another’s.
Participants acknowledged that eliminating international regulatory arbitrage requires two things. Laws governing corporate conduct must first be harmonized across all jurisdictions where a firm does business. If tax rates are lower in one country where it operates, it can manipulate accounting rules to show its profits were earned there. If one country’s law does not mandate disclosure of who controls a firm, those who want to hide their activities will incorporate their business there. Harmonization of law by itself is of course not sufficient. The harmonized laws must be evenhandedly enforced. Otherwise, businesses can organize their operations to take advantage of states where enforcement is weak or can be thwarted through bribery and other corrupt acts.
Discussion centered on the two most important efforts to curb corporate power by global companies: the United Nations Convention Against Corruption and the OECD Antibribery Convention. All but a handful of small United Nations member states have ratified UNCAC; the 46 nations party to the OECD Convention between them account for more than 80 percent of world trade. Both require that state parties make it a crime under their domestic penal code for corporations to bribe an official of another government, and both mandate they prosecute all offenders. UNCAC contains additional measures to curb corporate corruption. Both conventions provide that the states which have ratified the convention will monitor each other’s compliance.
Keynote speaker Tom Wright presented an international corruption case he had covered as a Wall Street Journal reporter. It involved 1MDB, a Malaysian government fund, and illustrated the tremendous harm that results when restraints on global capital fail.
In violation of both American and Malaysian law, employees of U.S. banking giant Goldman Sachs, together with a Malaysian accomplice, paid over $1.6 billion in bribes to Malaysian officials for the right to underwrite bond offerings for 1MDB. Bankers, lawyers, and other professionals in Singapore and Hong Kong helped the bribe takers hide the money they were paid, creating companies in the British Virgin Islands, Panama, and the Seychelles where opaque ownership laws make it virtually impossible to determine a company’s true owner. Other professionals—estate agents, art dealers, and investment advisers—advised the owners of these “shell” or “anonymous” companies on ways to invest in securities, real estate, and fine art that disguised their ownership. The bribe proceeds passed through banks in Singapore, New York, and Switzerland, where anti-money laundering laws require them to alert authorities to the suspicious transactions. No bank did. The corruption cost the citizens of Malaysia some $4.5 billion.
Italian prosecutor Fabio de Pasquale described a second case where evidence showed the failure of curbs on corporate power allowed the Netherlands Royal Dutch Shell and Italy’s Eni S.p.A to pay senior Nigerian officials $1.1 billion in bribes for the rights to an offshore oil field. Internal corporate documents and testimony from accomplices revealed how the money was secretly channeled through banks and intermediaries in a variety of countries. Not only did the anti-bribery laws of Italy, Nigeria, and the Netherlands fail to deter the bribery, but despite overwhelming evidence of guilt, criminal prosecutions of the bribe payors in both Nigeria and Italy ended in trials acquitting all defendants.
Moreover, shortly after the Italian decision was handed down, a criminal case was filed against the prosecutors for their conduct at trial. That disqualified them from handling the appeal of the acquittal. Responsibility was then handed off to another prosecutor with a long, public record of questioning the wisdom of prosecuting Italian companies for actions in foreign nations. She withdrew the appeal leaving the trial court’s acquittal as the final judgement in the case.
The 1MDB and Italian cases offered two examples of what speakers at the Opacity and Illicit Flows panel stressed was a principal reason why curbing global power is such a challenge: the lack in many countries of laws and ethical standards barring lawyers, accountants, and other professionals from helping criminals of all kinds hide their assets from the authorities. The standard methods are opening a bank account, buying an asset, or forming a corporation either in the name of another or anonymously.
University of Texas Professor Dan Nielson summarized research he and colleagues had conducted showing how easy it is to find a professional willing to provide such services. In some cases, Nielson reported, providers not only made it plain they were prepared to offer patently illegal schemes to conceal the client’s activities but that the more the client was prepared to pay, the greater the level of secrecy. Dartmouth College Professor Brooke Harrington explained that catering to corrupt officials and other criminals was now deeply embedded in global capitalism. The demand for assistance in moving money across national borders has brought into existence a profession specializing in the blandly termed art of “wealth management.” In interviews for her book on the profession, these “wealth managers” said they were careful not to ask clients how they obtained the assets they want to conceal, or why keeping their ownership secret is the paramount goal. Indeed, some bragged to her about their readiness to service anyone willing to pay no matter how and where the assets were acquired.
The failure to convict Eni of foreign bribery is one of three recent cases where an Italian court presented with strong evidence an Italian firm had bribed a foreign public official found a way to let the defendant off. As a party to the OECD Antibribery Convention, Italy pledged not to favor national companies when investigating and prosecuting foreign bribery allegations. The Convention provides that state parties must set aside all “considerations of national economic interest” and ignore any consideration based on the “the identity of the natural or legal person involved.” Compliance with the treaty’s provisions is policed by the Antibribery Working Group, a committee of representatives of all treaty parties. Although the apparent favoritism shown Italy companies accused of foreign bribery has been challenged in reports by other parties to the Convention and civil society organizations, the Working Group has yet to take any action.
Suggested remedies
Participants identified any number of measures either national governments could take individually or collectively. A principal one was greater transparency of ownership. Transparency International USA’s Executive Director Gary Kalman was one of several speakers who stressed the importance of nations requiring the disclosure of the actual, beneficial owner of the corporations incorporated under their law: Both to keep corrupt officials from hiding monies stolen from their citizens and to aid law enforcement to recover funds and assets already stolen.
Several participants recommended expanding liability for executives who fail to prevent corporate misconduct and reducing the threshold for proving the failure to do so. Others urged more countries to encourage, if not require, companies subject to their law to develop robust systems for ensuring their employees, consultants, and other agents obey the anticorruption laws of the countries where they operate. Stricter curbs on the use of corporate monies to influence elections, and systems that protect those who report corruption were also endorsed. When a corporation is charged with a corruption crime and agrees to settle, the agreed fine should comply with the standard found in the OECD Antibribery Convention. It should be “effective, proportionate and dissuasive” to deter future wrongdoing.
Beyond legal changes, participants urged strengthening norms of honesty and fair dealing in commercial transactions and fostering a culture of openness and integrity in business. They recognized that these changes require an effort across the whole of society. Importantly, professional schools need to redouble efforts to instill strong ethical norms in future corporate lawyers, accountants, and managers.
How these reforms are realized will depend on a country’s institutional architecture. In theory, in robust democratic systems citizen pressure should suffice, either through demands to the legislature to change the law or to the executive to better enforce existing law. In fact, mobilizing citizens to fight corruption is often quite challenging. The harm from corruption is diffused across all citizens while the benefits from a corrupt scheme are concentrated in a handful of entities and individuals, meaning citizens’ incentives for reform are weak and the incentives of those who gain from blocking it strong. In the tax fraud scheme Gerhard Shick described, the perpetrators reaped hundreds of millions in euros while each German taxpayer lost a few hundred at best.
Several participants said the key was assembling a reform coalition. That starts with an individual, possibly an opposition politician, or a civil society organization like Transparency International. A reform advocate or “entrepreneur” must have the drive and stamina to commit time and effort to publicize the harm corruption does and to organize those with an interest in fighting it. In weak democracies, where citizen influence is muted, the coalition may need to include international groups.
Participants agreed that by far the greatest challenge to curbing the power of global capital was ensuring nations worked together to enact and enforce the laws to curb it. Absent collective action, corporations will continue to exploit differences in the law or enforcement to enhance their power and thus their profits at the expense of the general welfare. But as the discussion revealed, states’ collective and individual interests in curbing corporate power can diverge. States may collectively agree that cooperation to decrease foreign corruption is an improvement over no cooperation, but each state has an incentive to defect if other states are enforcing bans on foreign corruption. Italy, for example, will benefit if Eni is able to secure ever greater oil reserves through bribery while enforcement of foreign bribery laws in other states prevents their companies from matching Eni’s offers.
Holding countries to their promise to prosecute foreign bribery is an example of the classic prisoner’s dilemma problem. A cooperative outcome, compliance with the treaty, is an improvement over a non-cooperative outcome, countries fail to meet their treaty obligations, but each state is better off if it ignores its obligations while the rest observe them. Suggestions for ensuring nations comply with UNCAC, the OECD Antibribery Convention and other treaties aimed at curbing the power of global capital ranged from naming and shaming in international fora to empowering national and transnational citizen groups to file actions before national courts and international tribunals to imposing trade and investment sanctions on violators. While opinions on the feasibility and efficacy of the different options varied, all agreed that effective international collective action was the only effective way to reign in global corporate power.
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