Extortion, Bribery or Both? A Thought Experiment

Let’s start our thought experiment by looking at the following four scenarios:

Scenario One: Your business provides a product that is absolutely perfect for the needs of an emerging economy.  It’s reasonably priced and exactly meets the infrastructure needs of that emerging economy.  It’s better than any product offered by your competitors, and it will make the difference for your foreign (U.S., EU, Australian, Japanese) business surviving or at least cost jobs (maybe your own) if you don’t land the contract.  The big problem is this: to a get a contract with this (hypothetical) emerging country you need to pay a bribe.  Maybe it can done by selling through a government minister’s family members – who will set up a consulting firm and package the bribe as consulting fees – but you know what is going on.  If you don’t agree to this sort of arrangement, your product won’t even be considered.  You simply won’t have an opportunity to do business in that country.  The parent company will suffer and need to lay off staff.  What’s the right thing to do?  What are you allowed to do?

Scenario Two: Your local company has been doing business for decades in this emerging economy.   But the jurisdiction where your parent company is located has enacted and is now seriously enforcing legislation under the OECD Convention, an international convention that requires signatory countries to enact legislation similar to the US’s FCPA.  The FCPA, in brief, imposes serious criminal penalties on US companies and persons for bribing foreign officials.  Your product is like the one in Scenario One: absolutely perfect for the local company.  And if you don’t get that contract, you may have to close your local company and lay-off thousands of local employees.  You’ll also lose your job.   Do you pay the bribe?  In terms of issues that matter legally and morally, does your situation really differ from Scenario One?

Scenario Three: As in scenario two, your company has been doing business in this emerging country for decades.  But now the difference between thriving and survival hinges on a regulatory approval.  Without that approval, you cannot survive.  But you won’t get that approval unless a payment is paid.  Maybe it’s a grease payment, but you’re not quite sure (usually you and your lawyers aren’t).  And if no payment is made, you’re out of business and you’ll need to lay off thousands of local employees.  You will also lose your job.  In terms of doing the right thing, does this scenario really differ materially from Scenario Two?  If so, how?

Scenario Four: Your company has been doing business for decades in this emerging economy, but now an official alleges it failed to obtain a required regulatory approval.  You and your lawyers disagree, but your lawyers acknowledge that under local law the official’s have broad discretion on how to interpret that law.  Their current interpretation is “novel”, but might strike an outsider (who doesn’t know how the law had been interpreted for the past, say, 35 years) as plausible. And the officials have made it clear that they will adopt this novel interpretation unless you pay them.  If you don’t make that payment, you’ll be tied up in court proceedings for years, spend  enormous sums on legal fees,  your ability to leave this country will be restricted and you may well end up in jail.  But it can all go away if you pay the official.  If you do make that payment, will you be violating your own country’s version of the FCPA?  Is it wrong to make such a payment?

If you have done business in Thailand for any period of time, you will have likely encountered or know someone who has encountered scenarios very much like the ones described above.   This is a problem, and not just for US companies.  There is a fuzzy line between extortion and bribery, and foreign companies are starting to highlight that what often looks like bribery is, in fact, more akin to extortion.  We’ll hazard a few guesses about how this is likely to affect the anti-corruption regulatory terrain.

On the “supply” side of corruption (that is, the bribe-payers), there has been a dramatic increase in new laws and enforcement activity.  At least 38 countries have adopted the OECD Convention.  Ten years back, the U.S. Department of Justice had, maybe, a couple of open FCPA cases or investigations.  Now there are about 150 open cases.   With this many open cases, you can be confident that the number of non-public investigations is several times that number.  The UK’s Serious Fraud Office (SFO) says that it is going to get tough on foreign corruption, and it appears they are serious (couldn’t resist the pun).  We have not yet met anyone from a Scandinavian country who is comfortable with corruption.  The U.S. Chamber of Commerce wants reform around the edges, but I don’t see the pressure on the supply side of corruption going away.  The US is not about to repeal the FCPA.  Enforcement will become more aggressive and more wide-spread.

What about the demand side?  Well, look at Thailand and make your own judgment.  And then take a look at scenarios above, starting with scenario four.   These sorts of scenarios justifiably outrage most of the foreign business community.   And as the pressure increases on the supply side and foreign companies face increasing pressure to refrain from making bribes, they will get increasingly agitated when local officials compel them to pay bribes:  “You mean our country manager might go to prison if we didn’t pay a bribe?”

So what are foreign governments going to do when companies put this sort question to their legislators and law enforcement officials?   For example, what is the US  Government going to say when a company goes public and says they’re facing extortion in an emerging country and all the US officials want to talk about is the FCPA?  This part of the FCPA debate is starting to get real attention.  It doesn’t have to be as serious as a country manager facing jail unless his employer pays a bribe; it could be serious economic harm and lost jobs in, say, the US if a bribe is not paid.

Local governments will be pressed to get serious about battling corruption.  This is easy; everyone will agree that corruption is bad.  But the track record of getting some emerging countries to seriously challenge local corrupt practices is mixed, at best.  Foreign countries might pass laws that allow their companies to file suits against corrupt foreign competitors, but that was considered and never enacted in the U.S. (and even if it was, would it make a difference?)  Or they could go directly against the foreign officials themselves.

If you look at FCPA enforcement, we submit, you will see the early days of this.  (The Green case doesn’t even hint of extortion, but that didn’t stop the US from pursuing the former Thai official.) There is, and will be increased, pressure to extradite corrupt foreign officials and efforts to nab them when they leave the safety of their own countries.  The US, for example, has a history of permitting bounty hunting.  We’ll hear complaints about ‘neo-colonialism’ and similar cant, but it will fall on deaf ears when the behavior looks more like extortion than corruption.  Why should a foreign country manager face FCPA charges when he faces extortion that will not only affect his company but his own liberty and safety?

Not only in the US, but in other countries as well, the public will be sympathetic to the plight of the foreign country manager, and palatably furious with any foreign official employing extortion against one of their countrymen.  And if the foreign government won’t discipline its own officials, the public (in, say the US or the UK) probably won’t be much bothered if their own government presses hard, employing novel measures, to go against that corrupt foreign official.

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