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A Positive Correlation Between Bureaucracy and Corruption

Overlap

Previous posts (see here, here and here) have posed the question several times.

Why do Foreign Corrupt Practices Act violations occur?

Do companies subject to the FCPA do business in foreign markets: (i) intent on engaging in bribery as a business strategy and without a committment to FCPA compliance; or (ii) with a committment to FCPA compliance, yet subject to difficult business conditions?

To be sure, there have been some instances where bribery was used as a business strategy and approved of and condoned by high-level corporate executives.  However, the more common reason for FCPA scrutiny and enforcement is that company with a commitment to FCPA compliance is doing business in a foreign country subject to difficult business conditions.

Indeed, as Joseph Covington (a former DOJ FCPA Unit Chief) commented in this prior guest post, he has “rarely seen American companies affirmatively offering bribes in the first instance.”  Rather, Covington observed that companies doing business in international markets are “reacting to a world not of their making” and that “as the world shrinks companies who seek to do the right thing can’t help but confront corrupt officials – as customers, regulator and adjudicators – and confront them often.”

This point is evident in reviewing the World Bank’s Ease of Doing Business Rankings and then comparing the results to Transparency International’s Corruption Perceptions Index. The “ease of doing business index” ranks countries based on factors such as the ease of starting a business, obtaining permits and otherwise dealing with regulatory officials.  The “corruption perceptions index” ranks countries based on the perceived levels of public sector corruption.

You don’t have to be trained in sophisticated statistical methods (which I am not) to see a positive correlation between the two rankings.  That is, the lower the regulatory burdens imposed on business, the less corrupt the country is perceived to be.  The greater the regulatory burdens imposed on business, the more corrupt the country is perceived to be.

Regulatory burdens (ranging from customs procedures, licensing and certification requirements, foreign government procurement policies, etc.) create bureaucracy, bureaucracy creates interactions with foreign officials, and the more interactions with foreign officials, the greater the FCPA risk will be. It is really not that complex of a formula.

Whether its 240 certifications and inspections to build a manufacturing facility in Russia (see here) or 142 signatures needed to clear cargo in the port of Lagos, Nigeria (see here), foreign government bureaucracy is often the root cause of bribery and a reduction in bribery will not be achieved without a reduction in foreign government bureaucracy.

In short, companies doing business in the global marketplace are often funneled into an arbitrary world of low-paying civil servants who administer entrenched bureaucracies which create the conditions for harassment bribes to flourish.

The U.S. Congress recognized this fact when it passed the FCPA.

Congress exempted so-called “grease” or “facilitation” payments from the reach of the FCPA (first through the definition of “foreign official” and then in 1988 through a stand-alone facilitation payment exception) and otherwise included an obtain or retain business element in the FCPA’s anti-bribery provisions. (See my article “The Story of the Foreign Corrupt Practices Act” for a detailed overview of the legislative history).

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The below chart has two segments.  The left segment lists the countries at the top of the “ease of doing business index” and a country’s associated “corruption perceptions index” score.  The right segment lists the countries at the bottom of the “ease of doing business index” and a country’s associated “corruption perceptions index” score.

Country

World Bank Doing Business Index

Transparency International CPI Index

Country

World Bank Doing Business Index

(out of 189)

Transparency International CPI Index

(out of 167)

Singapore

1

8

Yemen

170

154

New Zealand

2

2

Djibouti

171

99

Denmark

3

1

Cameroon

172

130

Korea

4

37

Timor-Leste

173

123

Hong Kong

5

18

Bangladesh

174

139

United Kingdom

6

10

Syria

175

154

United States

7

16

Congo Republic

176

146

Sweden

8

3

Afghanistan

177

166

Norway

9

5

Guinea-Bissau

178

158

Finland

10

2

Liberia

179

83

Taiwan

11

30

Equatorial Guinea

180

Macedonia

12

66

Angola

181

163

Australia

13

13

Haiti

182

158

Canada

14

9

Chad

183

147

Germany

15

10

Congo Dem. Rep.

184

147

Estonia

16

23

Central African Republic

185

145

Ireland

17

18

Venezuela

186

158

Malaysia

18

54

South Sudan

187

163

Iceland

19

13

Libya

188

161

Lithuania

20

32

Eritrea

189

154

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