Offering Incentives for Compliance - Combating Corruption in International Business Transactions

The OECD and other multinational bodies have been trying to integrate the judicial processes involved in trans-national corruption cases in recent years. But major roadblocks remain in enforcing penalties against foreign firms registered in more than one jurisdiction. INSEAD PhD candidate José-Luis Peydró-Alcade and co-authors Marco Celentani and Juan-José Ganuza offer a model for easing compliance for authorities in firms' host countries. They also offer incentives for countries to sign up to and respect the OECD's Convention on Combating Bribery of Foreign Officials in International Business Transactions.

by Juan-Jose Ganuza,Marco Celentani,José-Luis Peydro-Alcade
Last Updated: 23 Jul 2013

Many corrupt transactions between foreign firms and agents within a particular country involve firms that are incorporated in a variety of different states. This allows them to exploit both the disparities among various national legal systems, and the very limited ability to enforce national judicial rulings on foreign nationals and companies. Some leading firms even tacitly consider bribes a necessary business expense, disguising them as tax write-offs.

INSEAD PhD candidate José-Luis Peydró-Alcalde and co-authors Marco Celentani and Juan-José Ganuza detail the efforts of leading international bodies like the OECD, the WTO, the UN and the Council of Europe to initiate a supranational framework capable of being employed effectively against such forms of corruption.

The most high profile and corruption-specific treaty to date is the OECD's Convention on Combating Bribery of Foreign Officials in International Business Transactions, which came into effect in 1999. Unfortunately, the Convention has so far produced little in the way of prosecutions.

The authors attempt to provide an initial analysis of corruption in international transactions by analysing the extent to which different international agreements, particularly the OECD Convention, are likely to ensure effective supranational enforceability. First, they consider a multi-state model of procurement, highlighting the current great difficulties in enforcing penalties against corrupt foreign firms, unless their host governments are willing to cooperate extensively with authorities n the nation where the alleged offence took place.

Second, the authors discuss whether international cooperation is more likely to occur when a convention similar to the OECD's is proposed. Moreover, individual nations must decide whether to adhere to the OECD Convention before being able to set penalties and monitor probabilities. The authors use a simple model, in which states signing the Convention are able to make enforcement commitments.

Finally, they consider an alternative convention that stipulates that signatory nations must make firm commitments regarding penalty enforcement against domestic firms that have been found guilty of bribing public officials of these signatory nations only. This would accomplish two objectives: it would provide additional incentives to sign such a convention, since only members would benefit. And it would reduce the often-prohibitive enforcement costs that would likely derive from any such convention if only a few states adopted it.

The authors conclude with a contemplation of the two different directions in which they believe future research may lead to advances. In the first, they acknowledge some of the important limitations to be found in their own model, particularly as it applies to governments' abilities to argue that signing up to the type of convention will be high-cost and of limited benefit.

In the second, they detail the two important assumptions made in their model, and explain how a more realistic model might recognise, first, the asymmetries in the real-world environment that are not completely considered in their proposal. Second, they admit they have dealt with a "complete information environment," in which all nations understand their payoff functions, in particular their "idiosyncratic inclinations" to sign conventions. A More realistic environment would allow for far more incomplete information, and for the possibility that individual countries' inclinations to combat corruption are correlated.

Economica, August 2004

Juan-Jose Ganuza,Marco Celentani,José-Luis Peydro-Alcade recommends

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