Transnational Corruption and Corporations

Regulating Bribery through Corporate Liability

Simeon Obidairo

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317006992
• Edition: 1
• Topic: Law
• Subtopic: International Trade Law
• Index: Law

What are the challenges to the prevention of transnational bribery by multinational corporations in international business transactions? This book examines two particular constraints operating on the regulation of transnational corruption in general and bribery in particular. Firstly, it explores the limits of international cooperation in the regulation of transnational corruption and highlights the disparities between the capacities of individual states to pursue adequate regulation. It also considers the role and progress of international bodies such as the OEDC and the response of selected domestic legal systems in tackling the problem. Secondly, the book examines the liability regime for corporations and again, highlights an unexpected shortcoming of multilateral policy in the administration and enforcement of international agreements. The book will be of value both to students and researchers with an interest in the regulation of transnational corruption as well as policy-makers and practitioners working in this area.

Chapter 1
Introduction

Multilateral Regulation of Corruption and Corporations

Building an effective regulatory and liability framework to curb the incidents of transnational corruption by corporations is a complicated endeavour. On the one hand, you have all the problems associated with trying to regulate conduct that is notoriously fuzzy to define. Most of us cannot agree on the definition, but we all assume that we can recognize it when we see it. This is great for slapping judgement on conduct after the fact, but hardly the stuff that we can design appropriately worded legislation to control. Throw in the fact that the word corruption is a culturally laden term. By culturally laden, I do not mean that some cultures condone corruption; rather I am suggesting that there is a spatial and temporal element to what constitutes corruption. This does not suggest that there are no commonly accepted notions of what constitutes corruption. Rather, because of the cultural variations, what morally constitutes corruption is not uniform, and the moral aspect obviously informs the legal. You can only determine whether conduct is corrupt by reference to what is acceptable at the time and place where the conduct occurs. In other words, labelling conduct as corrupt does not travel well. Also complicating the problem is the fact that corruption is difficult to measure (most of the people engaging in conduct labelled as corrupt do not advertise) and its effect are tricky to quantify (one of the enduring debates in the literature centres around whether or not corruption is harmful).

In addition to the specific issues associated with labelling conduct as corrupt, there are many issues associated with regulating transnational corporations and imposing liability on legal persons. The typical context in which a transnational bribery transaction occurs serves to highlight some of the difficult issues that national legal systems have to grapple with to ensure an effective liability regime for legal persons. The typical scenario for a transnational bribe transaction often presents itself in the following manner. A corporation incorporated in a developed country (State A) decides to conduct business in a developing country (State X). The corporation incorporates a wholly owned subsidiary in State A, and the wholly owned subsidiary incorporates a subsidiary in State X. The State X subsidiary designates itself the owning company and incorporates an operating subsidiary in the same state. In the course of doing business in the developing country, the State A corporation concludes that the only way it could obtain certain lucrative contracts would be to bribe officials in State X. An agent of the operating corporation in State X pays a bribe to the State X official. The operating corporation is successfully prosecuted for violating the bribery statute in state X and is fined.

The capacity of the host state to impose a sanction on the operating corporation, however, may be limited. The operating corporation does not own any significant assets and therefore cannot pay the fine. The State X authorities can bankrupt the operating entity, but the effect on the parent corporation, the subsidiary of the State A corporation, is minimal.1 The owning entity will still have all the relevant assets, which the operating entity’s creditors cannot touch. The owning entity can simply find or create a new operating entity and carry on as before. In State A, the public prosecutor brings an action against the corporation for violating the prohibitions against the bribery of foreign public officials.

The preceding situation is the typical context in which transnational bribery by corporations occurs and it raises a number of issues pertinent to state legal systems. For instance, in the context of the transnational bribery transaction described previously, one of the primary questions that would determine the efficacy of prohibitions against transnational bribery is whether the legal system of both jurisdictions imposes criminal liability on corporations. There has already been considerable discussion within the academic literature on the justification for imposing criminal liability and sanctions on corporations.2 Where the legal system does recognize the imposition of criminal liability on corporations, the debate often focuses on the potential benefits of prosecuting corporations as opposed to individuals.3 Other questions debated in academic circles include the means and circumstances required to impute the actions of the agent to the corporation.4

The determination that the actions of the agent are those of the corporation hardly ends the array of issues raised by this typical transnational bribery transaction. Other key issues include whether or not the parent corporation should be held liable for the actions of the subsidiary. For instance, using agency principles as the basis for liability, some courts impute criminal liability on a parent for the actions of a subsidiary. The basis for the liability of the parent corporation rests on the principle that where the parent controls the subsidiary corporation, the subsidiary acts not for itself but for the parent. Thus, the parent is liable for the acts of the subsidiary within the scope of its authority even when the subsidiary is a foreign corporation. There is even precedent to suggest that liability may be based on the parent’s acquiescence in the subsidiary’s criminal activity.

The yardstick of the liability of the parent for the actions of the subsidiary is the involvement of the parent in the affairs of the subsidiary. In holding the parent liable, the courts look beyond the formal separateness to disregard the rule of limited liability. This process is commonly referred to as ‘piercing or lifting the veil’ or ‘disregarding the entity’. The decision to pierce the corporate veil raises a host of other considerations. These include the decision on when corporations are sufficiently affiliated with one another that the veil of limited liability would be lost. For instance, it is presumed that only controlling shareholders should lose the safeguard of limited liability. Determining whether one corporation controls another is easy when a parent owns all of the stock of a subsidiary, but what about cases in which the alleged parent owns, for example, 25 percent of the subsidiary’s stock? Should it make a difference if the shareholders are individuals? Should these individual shareholders lose the protection of limited liability?

Multilateral Initiatives to Control Corruption

Clearly, developing and implementing an effective regulatory and liability regime to curb corruption by transnational corporations is a complex affair. So complicated in fact, that the international community has demonstrated a concerted effort towards the regulation of transnational corruption in general and corruption by transnational corporations in particular. A fundamental assumption underlying the collaborative efforts is the belief that a transnational business community operating on a level playing field would maximize the interaction and competition between industry players and in turn realize greater market efficiencies for society.5 There are also several other reasons for the increased collaboration such as attitudinal changes to the acceptability of the high levels of corruption, technological advances that have created border-less capital markets, the closer integration of economies, international mergers, and the growing international awareness that transnational corruption has economic costs.

On the international level, several multilateral institutions and organisations have made considerable progress in the efforts to regulate transnational bribery, such as through the efforts of the Organisation for Economic Cooperation and Development (OECD) member countries. These efforts culminated in the signing of the OECD Convention on Combating Bribery of Foreign Public Officials (OECD Convention), which is undoubtedly an important milestone in the effort to combat transnational bribery and corruption in international business transactions. Following the OECD Convention has been the adoption of the Inter American Convention on Corruption (the Organization of American States [OAS] Convention) and very recently, the United Nations Convention against Corruption (UNCAC). The speedy ratification of these conventions and subsequent implementation of domestic legislation are a tribute to the success of these initiatives.

Despite the adoption of these multilateral initiatives and the broad attack on transnational bribery by corporations, a significant limitation exists in the form of the sovereign right of every state to regulate criminal activities that occur within their territory. The limitation imposed by such a right poses fundamental challenges to the efforts to control transnational bribery in general and by corporations in particular. Transnational bribery transactions, by their very nature, consist of actions or actors in more than one state. Transnational bribery by corporations further complicates the regulation of corruption because the transnational activity of these corporations implicates the home and host state, each with its own interests. These interests, and the legal control of each state over a corporation, are not always perfectly aligned. For instance, the jurisdictions of each state could either overlap or (worse) contain a jurisdictional lacuna where the corporation is not subject to the law of either state because of the disparity of law in different states. A typical example of this jurisdictional lacuna applies in the states that have yet to criminalize transnational bribery. Corporations of those states operating through a subsidiary are not liable for transnational bribery in states that have a rigid veil piercing law.

The disparity between the regulatory regimes in various states is also a source of additional challenges to the regulation of corporate transnational bribery. The regulation of criminal conduct requires the development of domestic regulatory capacity as a precursor to the effective regulation of transnational bribery. However, there are serious disparities between states in their domestic regulatory capacity and their ability to enforce the regulatory regime prohibiting transnational bribery. In theory, the regulatory regimes prohibiting transnational bribery by corporations in some states may accord prohibitions similar to the regulatory regimes in other states. Nevertheless, the impediments to an effective legal regulatory apparatus are many. First, there are cultural obstacles, where laws may be enforced on a very flexible, negotiable, and non-confrontational basis. Here, informal relationships between parties may override any formal legal arrangements that exist between them. Second, the administrative and institutional capacity to enforce laws is crucial to the effective prohibition of transnational bribery. Very often, the sheer lack of capacity results in the inconsistent or ineffective application of the laws that prohibit transnational bribery. Criticisms of the shortcomings of many developing states in their efforts to regulate transnational bribery remain commonplace in much of the contemporary commentary on the regulation of transnational bribery.

The main condemnation of the current efforts to regulate transnational bribery relates to the prevalence of transnational bribery despite extensive legal devices to control the practice.6 In these criticisms, domestic regimes seem too weak to pursue adequate regulation on their own while being ensconced in notions of sovereignty and jurisdiction, which hamper efforts to respond adequately with the cross-jurisdictional cooperation requisite to the effective regulation of transnational bribery. In addressing the strategies for tackling corruption, Salbu argues that fighting corruption by legal decree is naïve, as these decrees do not address the entrenched political, social, and economic causes of corruption.7 McClenahen similarly suggests that anecdotal evidence and experience support his contention that legislation cannot effectively curb transnational bribery. In support of this assertion, he cites as an example the Foreign Corrupt Practices Act (FCPA) and other domestic forms of legislation that have been ineffectual in curbing transnational bribery.8

The assertion that the curbing of transnational bribery by legal decree is naïve is contested by Nichols, who argues that the majority of transnational bribery transactions do not involve the United States (US) or US businesses because of the impact of the FCPA.9 Salbu counters this point with evidence, which suggests that more than 90 percent of US company directors believe their competitors outside the US occasionally or regularly use intermediaries to circumvent anti-corruption legislation in competing for contracts in developing countries.10 He argues that much of the corruption faced by US corporations bidding for overseas contracts continues to be attributable to US competitors. In effect, even if these corporations are complying with the FCPA, they are still engaging in transnational bribery. Salbu qualifies his argument in response to Nichols by suggesting that his argument is not that the laws are entirely ineffectual in combating transnational bribery. Rather, he opines that the law serves a very limited role, and the limited role of the law must be taken into account and incorporated into public policy. In his view, the most likely benefit of legislation is convincing the world that bribery and corruption are serious problems. Beyond this, the role of the law in effecting social change is questionable.11

Without taking a position on the efficacy of the law in effecting social change, it is indisputable that legislative strategies to combat transnational bribery have both a supply and demand side. The demand side of bribery refers to demands or requests for bribes by public officials. The supply side of bribery refers to offers of bribes to public officials. A corrupt transaction can be initiated in either way. There are, therefore, supply-side solutions and demand-side solutions to curbing transnational bribery by corporations. The supply-side solutions seek to impede prospective bribe-givers from offering or paying bribers. The demand-side solution discourages prospective bribe-takers from accepting or requesting bribes. Initial efforts at curbing bribery focused on the demand side, with most countries enacting legislation prohibiting the receipt of bribes. In recent years, these have been supplemented by supply-side solutions to transnational bribery through the adoption of extra-territorial prohibitions on transnational bribery. In part, at least, this has been a response to the perceived ineffectiveness of mechanisms for the regulation or control of bribery in the place of its commission.

Framing the Arguments on the Multilateral Framework to Control Corruption

This book sets out the argument that the current multilateral and domestic efforts to curb transnational bribery by corporations are unlikely to result in a reduction of the prevalence of bribery in international business transactions. The shortcomings are linked, among other issues, to the challenge presented by transnational corporations. The challenge posed by transnational corporations is that although commercial relationships increasingly transcend political borders, the laws regulating these transactions and the responsibility for enforcement remains determined by national regulatory institutions. These national institutions are, more often than not, too weak to regulate transnational bribery by corporations adequately. Theoretically, these national institutions would benefit from the support provided by an effective international regime for the regulation of transnational bribery. Unfortunately, the international regime has, however, been rendered ineffective by an overwhelming number of substantive and procedural impediments requisite to an effective regime to regulate transnational bribery by corporations.

There are at least two identifiable propositions explaining why the current multilateral regulatory regime to curb transnational bribery by corporations has not been effective. The first position, put forward by the proponents of the current multilateral efforts to regulate transnational bribery by corporations, link the failure of the current multilateral efforts to deficiencies in pursuing the existing regulatory interventions aggressively enough.12 The second position, put forward by the opponents of the current multilateral efforts, locates the ineffectiveness of the current multilateral efforts, not in the failure to pursue the interventions but in the multilateral initiatives themselves. They argue essentially that multilateral initiatives against corruption are unacceptable forms of moral imperialism because the global community has yet to develop into a single viable community that can be effectively subjected to a single set of extrinsically imposed rules.13 Both the proponents and opponents of the current multilateral efforts to regulate transnational bribery by corporations through multilateral cooperation typically begin at the same point and then diverge. The two positions both agree o...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Cases
• List of Abbreviations/Acronyms
• 1 Introduction
• 2 Corruption: The General Debate
• 3 Regulating Bribery
• 4 Multilateral Regulation of Transnational Bribery
• 5 Selected Challenges in the Regulation of Transnational Bribery: A Case Study of the OFFP
• 6 Limits of National Regulation: Liability Regime for Corporations
• 7 Liability for Bribery within the Agency Framework of the Contracts Theory
• 8 Conclusion
• Bibliography
• Index