Debunking some bribery myths: Bribery may pay, but not where public disclosure is high

By Prof. Aris Stouraitis

No matter where you are, few things provoke the ire of the public like a bribery scandal involving corporations and government officials. As recently as the past five years, we have continued to see bribery rear its head in Asia; in South Korea, the prominent bribery scandal involving Samsung heir Lee Jae-yong and South Korea’s former President Park Guen-hye led to Park’s resignation and conviction. Even just last month, Goldman Sachs’s Asian subsidiary was fined for its role in Malaysia’s 1MDB corruption scandal which saw billions of dollars for public development projects line the pockets of private individuals and government officials including former Malaysian Prime Minister Najib Razak. These incidents are nevertheless merely a glimpse into how pervasive corporate bribery may be behind the scenes.

Although we all have a conception of bribery and corruption on the corporate and political levels, much of it feels like hearsay or the sensationalized fluff of urban legends or Hollywood films. We frequently discuss bribery with the tacit understanding that much of it remains beyond our grasp due to its illegal and undisclosed nature.

While most studies have analyzed bribery using questionnaires & surveys that discuss macro perceptions of corruption, my colleagues and I decided to delve into the hard data available. With data from 195 documented bribery incidents spanning 60 countries over a 40-year period, we examined the benefits of bribery at the micro level and challenged the veracity of common hypotheses surrounding bribery in the real world.

Our results are very relevant for East Asia, which comprises a significant proportion of our sample. One quarter of the bribes that we analysed were paid by East Asian firms, mostly from Japan (17%) and South Korea (4%). In addition, 40% of the government officials who received the bribes were from East Asian countries, mostly Japan (13%), South Korea (7%) but also India, China, Indonesia, the Philippines, Singapore and Thailand.

First, we had to address the most pressing question people have: Does bribery really pay? Is it worth it?

Temporarily putting aside legality and morality (and assuming you do not get caught), it absolutely does pay to bribe. The data shows that each additional $1 in bribes achieves an astonishing $6 to $9 increase in the value of the firm (relative to the overall stock market and controlling for industry, country and firm characteristics).

For example, in 1995, companies belonging to the Mitsubishi Group paid US$8 million in bribes in China and as a result of these contracts their market value increased by US$227 million or 28 times the amount of the bribe they paid. Similarly, on three occasions between 1998 and 2005, companies belonging to the Hyundai Group paid a total of US$42 million in bribes to South Korean officials and received a whopping US$727 million in benefits, 17 times larger than the bribes they paid (all amounts are expressed in US dollars at current rates).

From a purely numbers perspective, this is an undeniably attractive return on investment (ROI) – it is easy to understand the powerful pull of bribery and how its massive returns can tempt corporations and individuals. What’s more, there does appear to be a positive correlation when increasing the bribe – the greater your bribe, the larger the benefits your firm can expect to receive.

Severe Consequences

But with any bribe, you risk getting found out and incurring severe consequences. Many believe democratic countries are better equipped to detect and deter bribery by having systems that hold companies and publicly elected officials accountable. Press freedom and the risk of negative publicity have long been championed as factors that thwart firms from bribery. This belief holds some water, as many bribery incidents we analysed were in fact uncovered by the media.

Having said that, we find that it is the disclosure of politicians’ sources of income specifically – rather than general notions of press freedom – that has a negative impact on the bribery benefits firms receive. Companies derive smaller benefits from bribing government officials in countries which mandate public disclosure of politicians ' sources of income through tax filings or other statements. So while press freedom and investigative journalism do bring instances of corruption to light, what really limits the actual monetary benefits of bribery is public disclosure and politicians being unable to hide the bribes they receive.

Interestingly, this moderating effect of public disclosure is not uniform – it works only in democratic countries. There is no evidence that disclosure matters in autocratic countries. This is not altogether surprising, as democratic officials depend on elections and operate in regimes where law-enforcement is generally more efficient. In countries that mandate politicians publicly disclose their income, efforts to hide income from murky sources or avoid taxes is normally not tolerated – we can see this played out with the recent uproar surrounding US President Donald Trump's now infamous tax disclosure.

In contrast, politicians in autocratic countries are not concerned with securing votes and frequently have no obligation to disclose finances. There is no reason to fear illicit wealth being subject to public scrutiny. Whether warranted or not, some consider autocratic countries to be more corrupt (and therefore more susceptible to bribery or unsavory business practices), but we find that this perception may be overstated when it comes to the benefits from bribery. Aside from the discernible effect of public disclosure of politician income, there were no other notable differences in bribery when comparing democracies to autocracies.

There will be those who insist on pigeonholing corruption and bribery as an autocratic problem, but the data does not support this. Others may question if the stature of who you bribe makes a difference. Common logic would have us believe that the higher up the ladder a corrupt official is, the more beneficial they are to bribe. Interestingly enough, our findings reject this. It does not matter much whether or not the bribe goes to a politician who wields greater power to block (or enact) transactions. Bribing a bigger fish does not hook a greater reward.

Bribery is shadowy in nature and so our understanding of it has been driven by conjectures that have been difficult to test. Now that we have combed the data, we see that common perceptions of bribery may be misleading – which shows how little we really know about how it works. Beyond the effect of public disclosure of politicians’ income, there is still much work to be done in uncovering bribery’s inner mechanisms – perhaps then we can reduce its hold on corporations and governments around the world.

Reference:

Cheung, Y., Rau, P., & Stouraitis, A. (2020). What Determines the Return to Bribery? Evidence from Corruption Cases Worldwide. Management Science.

Original article was published on The Business Times: https://www.businesstimes.com.sg/opinion/debunking-some-bribery-myths