How strict anti-bribery laws like the FCPA led to the development of illegal black markets
How strict anti-bribery laws like the FCPA led to the development of illegal black markets
Desierto, Desiree and Bologna Pavlik, Jamie, Bribery-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 a panacea for many problems of the society. But like many other laws that are well-intentioned, anti-corruption laws can have unintended consequences. These results are initially unexpected by proponents of these laws.
“briber-switching”
“Bribery-switching” by American researchers Jamie Bologna Pavlik and Desiree Desierto looks at the unintended consequences of strict implementation of the Foreign Corrupt Practices Act (FCPA). It should be noted that the FCPA was enacted to prevent firms and individuals in the United States from bribing public officials abroad. Most famously, the FCPA was used to prosecute Goldman Sachs for its involvement in Malaysia’s 1MDB scandal. So, what are the benefits of the FCPA?
Many believe that strict anti-corruption laws like the FCPA when properly implemented by government officials will lead to a decline in corruption and an improvement in the economy. The FCPA, which imposes heavy fines and other penalties on US firms that engage in corrupt practices, is actually considered a law that is well enforced. However, the researchers found that other interesting results emerged when the US government accused some US firms of bribery after they acted in other countries. These results failed to meet the initial expectations of the legislators who prepared the FCPA.
development of illegal markets
First, the FCPA There was no real reduction in the level of corruption among foreign officials after the enactment of the The researchers propose what they call the “briber-switching hypothesis” to explain the failure of corruption overseas despite the FCPA rules being in force.
They argue that government officials do not depend only on formal markets to earn bribes but may also depend on other illegal markets to earn bribes. Whether government officials obtain bribes through legal markets or through illegal markets depends, among other things, on the relative cost of obtaining bribes through each route. When laws such as the FCPA increase the cost of extracting bribes in the legal market, it can lead government officials to resort to obtaining bribes from the illegal market. If so, government officials could offset the loss of bribery revenue from legal markets with bribery revenue from the black or illegal economy. For example, after the enactment of the FCPA, some formal investment projects that were previously approved by the authorities after payment of bribes may no longer receive official approval. Instead, officials can focus their efforts on approving projects in the illegal market that bring them bribery revenue at low risk of being caught red-handed.
The researchers found in their study that the size of the black economy increased by 0.25 percent in countries where US companies could no longer offer bribes because of the FCPA rules. Other proxy markers of illegal activity such as murder rates, tree loss, and trade mishandling also showed that the FCPA was increasing illegal activity in the black economies of these countries. This, the authors argue, occurs because public officials resort to obtaining their bribery revenue from the illegal rather than the legal market. This would make illegal activities more likely to flourish in order to maximize their bribery revenue. So, for example, a powerful bureaucrat may allow the illegal sale of alcohol on the black market to flourish in exchange for bribes when it cannot easily obtain bribes for investment projects from US wine firms established because of the FCPA. Is.
Illegal economy, an option?
More importantly, the authors note that there was no per capita increase in the country’s GDP after the FCPA took steps against attempts to bribe its public officials, while in fact the size of their black economies. There was a significant increase in The authors argue that the development of the black economy is a significant negative development for these countries. However, others may argue that the black economy in these countries can serve as a useful alternative to the highly restricted legal economy. In this view, bribery is actually lubrication of the wheels of commerce in many economies where the current laws governing the formal economy are not conducive to legitimate business activities.