Transnational bribery of foreign officials: a new threat to the future of democracy.

• Author: Nesbit, Julie B.

1. INTRODUCTION

   While every nation in the world proscribes the bribery of domestic government officials,(1) very few of these nations have extended the prohibition to similarly condemn the bribery of foreign public officials.(2) In many countries, the practice of "transnational bribery"(3) has become a routine aspect of conducting business in foreign lands. Whether bribes are given in response to official demands or in an attempt to derive a competitive advantage, businesses frequently view the practice as a prerequisite to securing lucrative contracts in foreign states.

   Corruption involving public officials has reached new proportions in recent years. The end of the Cold War, the spread of democracy, and growing deregulation and privatization have fostered a climate conducive to the increasing incidence and magnitude of corrupt business practices.(4) The transition to market economies in Eastern Europe and the former Soviet Union summarily removed all economic restraints, and corruption and bribery that were previously policed now often go unchecked.(5) In addition, since the economies of countries such as China and Russia have opened up to international trade and foreign investment, corruption has taken on new dimensions.(6)

   As bribery has become increasingly pervasive, the resultant economic and political costs have risen dramatically, particularly in developing countries undergoing political and economic reform.(7) Transnational bribery leads to artificially inflated prices and rewards corruption and inefficiency. Government procurement decisions based on the desire for personal enrichment, rather than on considerations of value and quality, divert scarce resources from their optimal uses. As trade barriers are eliminated and global competition becomes increasingly intense, pervasive corruption threatens the economic growth of developing countries and discourages desperately needed foreign investment. Developing countries that have only recently adopted democratic institutions suffer from political instability, and public perceptions of increased corruption and declining standards of living may lead to a backlash against democracy and a return to prior forms of government.(8)

   As the cost of business bribes becomes increasingly expensive, the world community has become less willing to accept bribery as an inherent element of "business as usual." International organizations, such as the World Trade Organization, the United Nations, and the OECD, have begun to institute reforms aimed at curbing the practice of transnational bribery. Regional organizations and multilateral lenders have also begun to address the problem. However, recent initiatives against transnational corruption have two common weaknesses--they lack enforceability and they do not address corruption on a global scale.(9)

   Anti-corruption movements around the world have set the stage for a comprehensive attack on transnational bribery. The Organization of American States adopted the first convention to criminalize transnational bribery in 1996, and efforts by the OECD to address the issue culminated in the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which was signed by the representative Ministers in November 1997, and is expected to enter into force by 1999. While these developments are promising, they offer only a partial solution to a complex problem. Transnational bribery will persist until a comprehensive anti-corruption strategy, based on an understanding of the underlying causes of corruption, is implemented.

   Part II of this Note will examine the prevalence of transnational bribery in the context of international trade. It then will discuss the negative impact of transnational bribery on national economies, political structures, and international trade. Part III will examine the debilitating impact of transnational bribery on developing countries. The threat to future economic growth, and the potential to create a backlash against democracy are highlighted. Part IV will provide an overview of recent efforts to control and proscribe transnational bribery. Specifically, the approaches of international organizations, multilateral development banks, and regional organizations are described and evaluated. In Part V, the causes endemic to corruption are reviewed, and effective approaches to controlling transnational bribery are proposed.

2. THE GROWING COSTS ASSOCIATED WITH TRANSNATIONAL BRIBERY

   1. The Incidence and Magnitude of Transnational Bribery are on the Rise

      In a recent survey of businesspersons who frequently conduct business dealings in numerous countries, the results indicated that in twenty-six of the world's fifty-four largest trading countries, these people feel that they are more likely to encounter a corrupt transaction than an honest one.(10) Former U.S. Commerce Secretary Mickey Kantor found that the use of illicit payments by foreign companies to win business is the preeminent complaint of U.S. business executives conducting business overseas.(11) A survey conducted by the World Bank, which included 3600 firms in sixty-nine countries, indicated that forty percent of businesses pay bribes.(12)

      Although international business executives perceive corruption and bribery to be most troublesome in developing countries such as Nigeria, China, Bangladesh, Kenya, and Pakistan, much of the problem can be attributed to corrupt multinational corporations and lax laws in newly industrialized countries.(13) For example, Fritz Heimann, General Electric's general counsel, estimates that several billion dollars are lost by General Electric each year due to bribery demands all over the world.(14) Peter Eigen, chairman of Transparency International,(15) asserts that an entrenched system of massive bribery and kickbacks, distributed by multinational corporations based in the West and competing for lucrative contracts in transitional economies, is the source of much corruption in the developing world.(16)

      Bribery by transnational corporations has not only become more widespread in recent years, the going rates have also increased. Michael Wiehen of Transparency International explains the phenomenon of inflated bribery and kickback demands: "Mr. 10% has ballooned into Mr. 30% in many countries."(17) Commentators generally agree that bribery demands are increasing, and the occurrence of corruption on a grand scale has become the rule, rather than the exception.(18) In the last three years, the U.S. Commerce Department has learned of allegations of bribery by foreign companies in approximately 180 commercial contracts valued at almost $80 billion.(19)

   2. Transnational Bribery Creates Allocative Inefficiencies that Result in Less Productive National Economies

      Although many countries view bribery as a necessary measure to ensure that domestic companies are competitive contenders for foreign contracts, the practice of using such illicit payments raises prices and rewards corruption and inefficiency.(20) While transnational bribery is undoubtedly most detrimental to the economies of developing and transitional nations, businesspersons in Europe and the United States consider demands for bribes made by foreign public officials to be one of the greatest problems afflicting international trade.(21) Corruption and transnational bribery pose a tremendous threat to the global economy by distorting economic markets and corroding the social structure of societies.(22)

      First, bribe requirements act as a non-tariff surcharge on goods and services. The payment of bribes is an additional cost to the multinational company imposed by the foreign official demanding the bribe.(23) When a company is required to pay a percentage of its expected profits to a government official, this illicit inducement acts like a tax on an investment or transaction.(24) Companies that pay the bribe will often pass the cost on to consumers in the form of increased prices.(25) The inevitable result of increased prices will be reduced sales levels of the product for which the bribe was demanded.(26) Ultimately, the bribe requirement reduces the foreign company's ability to market its products in a country.

      The situation becomes increasingly problematic as the bribe demand rises in relation to the expected earnings of the goods or services to be produced. While a company may be able to absorb the cost of a ten percent commission paid to a foreign official, by raising the product's price and trimming its gross profit margin, the company must become more creative when a twenty percent commission is demanded.(27) To avoid losing the valuable foreign contract, the supplier may have to increase the product's price, accept a lower gross profit margin, and reduce the quality of his product to achieve cost savings.(28)

      Second, bribery enables the creation of de facto monopolies.(29) Often, a domestic company will make a bribe payment to secure a business opportunity and will then make an additional bribe payment to exclude foreign rivals from the market.(30) This practice discourages foreign suppliers from entering international markets. Furthermore, the existence of monopolistic product markets leads to inefficiency and artificially inflated prices.

      Third, the payment of bribes causes economic waste and inefficiency.(31) The payment of bribes distorts the fundamental underpinnings of a free market economy.(32) In a free marketplace, buyers and sellers compete for business on the basis of value optimization.(33) Ideally, buyers will place a greater value on products with superior quality and competitive prices. The payment of bribes causes buyers to instead consider extraneous factors, such as the amount of side payments and the discrete nature of the seller.(34) When bribe payments are demanded by public officials, suppliers who might have won a contract based on value optimization are often rejected in favor of the corrupt...