Chapter 6 Flashcards
How many American reported being afraid of dishonesty or wrongdoing by gov officials
73.6% corruption hurts all of us and biggest threat to our financial systems - Hidden cost
What is Corruption and its classification?
Abuse of entrusted power for private gain
Grand, petty, or political depending amount of $
Define Grand Corruption
Acts committed at high level gov that affects policies or functioning of state, leaders benefit at expense of public good
Define Petty Corruption
Corruption of everyday abuse of power by low and middle level public officials in interactions with ordinary citizens trying to access basic goods or services
- facilitating payments
Define Political Corruption
Manipulation of policies, institutions & rules in the allocation of resources & financing by political decision makers, who abuse position to sustain power, status, and wealth
What are the costs of corruption?
Economic, political, social, and environmental
Economic - depletes national wealth, reduces competition, deters investments
Political - offices and institutions lose legitimacy when misused for private advantage
Social - Undermines trust in political systems, in its institutions, its leadership, and creates apathy
Environmental - Lack of environmental regs means resources carelessly explited
Brooking institutes costs of corruption
- Lowers tax revs - tax avoidance
- Increases public expenditures - inefficient
- Corrupt data increases chance of fiscal crisis
- Expands underground economy
- Affects productivity, competitivenes, and growth - increase cost of business results in lower investment efficiency
Loss Resulting from fraud
On avg, 5% of annual rev
Gross world product of $80 Trillion
Global losses from fraud, $4 Trillion
Types of Corruption
- Conflicts of Interest: employee, manager, or exec has undisclosed economic or personal int in a transaction - company unaware
- Bribery: giving of something of value by another person to a decisio maker in exchange for influence in a decision making process - Quid Pro Quo
- Illegal Gratuities: Gift not necessarily tied to a particular favor but implication is expectation of future favor
- Economic Extortion: Employee demands payment from a vendor for decision made in vendor’s favor, refusal to pay extorter results in harm to vendor
Average median loss of corruption
250k
US Foreign Corrupt Practices Act 1977
**Purpose: **Making it unlawful for entities to make payments to gov officials to assis in obtaining and retaining business
- books and record and internal control accounting reqs promoting transparency in accounting by US public comps
- Civil and Criminal enforcement
- most vigorously enforced anti bribery law in the world
UK Bribery Act of 2010
Toughest and most far reaching anti-bribery law in the world - not enforced strongly
Reach:
* Commercial bribery(priv to priv) - recipient does not have to be a public official
* Extends to recipient of bribe, not just party that paid bribe
* Strict liability of comp for failure to prevent bribe - subject to defencse that comp has adequate proceds in place, intent not required
* No exceptions for facilitating or promotional pmts
* Juris over comps conducting business in UK, even if not from UK and conduct not in UK
Countries with highest numner of FCPA Enforcement Actions
- China 117
- Nigeria - 77
- Mexico - 67
- Brazil - 60
Criminal penalties for FCPA
Anti bribery provisions
- Corps: 2M fine or 2x G/L
- Indivs: 5 yrs jail and 250k or 2x g/l
Accounting Provisions: more serious penalties
- Corps: Up to 25m fine or 2x g/l
- indivs: 20 urs imprisonment and 5m fine or 2x
New Law: Foreign Extortion Prevention Act
Prohibiting foreign officials from solicitating or receiving bribes
- Criminalizing the demand side of foreign bribery
Corruption trends in Asia, Europe, Latin America and Africa
- China: ranks 65 out of 180 in CPI - moderately corrup
- Latin America: more than 2/3 of countries score below a 50 out of 100
- Africa: african countries averaged 32.5 out of 100 on CPI, corruption is a big issue
Trends
1. 3rd parties remain great area for corruption risk - intermediaries - should carefully monitor
2. Increasing importance of self reporting: discounts provided for self reporting - mitigate through proactive disclosure, cooperation, and remediation
3. Enforcement Authorities focus on due diligence: companies must perform due diligence priot to acquiring companies - mitigate through effective due diligence asses data, do risk analysis, background check, management interviews
4. Ephemeral Messaging: mesasges lasting short pds, prevent collection of communication
5. DOJs Financial incentive and claw back program: companies can reduce fines by clawing back compensationpaid to employees engaged in misconduct
6. Increasing Whistlebrower Activity & Protections - implement effective protocol
7. World Bank enforcements and policy:
8. Modernization of UK Enforcement Powers: widening of whose wrong doing can be attributed to the company
9. Institutuional Investor claims relating to Bribery and Corruption - claims for loss suffered in connection with briebry and corruption issue
Provisions of Foreign Corrupt Practices Act
Anti Bribery Provisions- Prohibits corruptly giving, promising or offering somethind of value to foreign fov official, political party with intent to influence capacity or secure an imporper advantage to retain business
Accounting Provisions:
- Maintain accurate books and record
- Reasonabley effective internal controls
Who is covered by the FCPA?
1. Issuers: Whose securities are registed in the US or required to file period reports and agents acting on behalf of issuer
2. Domestic Concerns: Any US citizen or business org that has principal place of business in the US
3. Other Person: Anyone who take any act in futherance of a corrupt payment wile within the territory of the US
Definition of Foreign Official
- Any officer or employee of foreign gov agency
- Personell of an instrumentaility of foreign gov, employees of gov owned business
- Personnel of public international orgs –> UN, world bank, red cross
- Political Parties officials and candidates
- Royal familiies members
Types of Payments prohibited
FCPA prohibits actual payments and also any offer, promise, or authorization of provision of anything of value
- even if rejected and offer of gift is aviolation
- Indirect corrup payments also prohibited: authorizing 3rd party knowing it will make a corrupt payment - local agents, consultants, attorneys’ and subsid
- Even political or charitable contribs
