HUMBOLDT-VIADRINA School of Governance

Motivating business to counter corruption

Overview of legal sanctions and incentives for encouraging corporate integrity and reporting corruption

Expert Group Meeting on Legal Incentives for Corporate Integrity and Cooperation
Laxenburg / September 27, 2012

About the initiative Anti-Corruption Incentives and Sanctions for Business

This initiative aims to provide interested parties from the Public Sector, Business Sector, and Civil Society, with an overview of existing and potential sanctions and incentives to motivate business to counter corruption, discuss their applicability in selected partner countries, and promote behavioral change.
Duration:
Steering Committee: Supporter:

January 1, 2011 December 31, 2013

Dr. Valerie Federico-Weinzierl, Prof. Dr. Gesine Schwan, Jermyn Brooks, Prof. Dr. Peter Eigen Siemens as part of the Siemens Integrity Initiative

http://www.humboldt-viadrina.org/anti-corruption/
2

Roles of different stakeholders

Businesses act in complex environments with a variety of different stakeholders, such as public procurement agencies, business suppliers, civil society organizations, media, etc.

Stakeholders

Incentives Sanctions

Business

Public Sector
Business Sector Civil Society

Governmental Institutions Intergovernmental Organizations, etc.

Debarment

Examples

Confiscation

Termination of contract Preferred supplier status

Business
Company as a whole Companys Representatives

Business Business Associations, etc.

Increased risk premium Public naming & shaming Reduced sanctions Fines

Civil Society Organizations Media Academia, etc.

Public award Imprisonment Lower tax rates

Anti-corruption sanctions and incentives

Punishments for violating your anti-corruption standards

Commit or attempt corrupt act

Lack of commitment to good practice anti-corruption standard

Anti-Corruption SANCTIONS for Business

Rewards for meeting or exceeding your anti-corruption standards

Refrain from corrupt act

Demonstrate commitment to good practice anti-corruption standard

Anti-Corruption INCENTIVES for Business

While not all businesses need specific motivations to adhere to anti-corruption standards, sanctions and incentives are key measures to counter corruption.
4

A combined approach
Purpose: Provide sanctions to punish violations of your anti-corruption standards

Purpose: Provide incentives to reward meeting or exceeding your anti-corruption standards

But, only incentives
do not punish non-compliance (i.e. companies may consciously and openly operate in violation of the standards) can lead to free-riding and window dressing can create dependencies for a company, etc.

But, only sanctions

will likely lead to limited or no self-disclosure (reporting) of corrupt practices do not provide motivation for companies to cooperate (i.e. dont signal trust to companies) could lead companies to adhere to your standard, but they seldom provide motivation to go further, etc.

Provide sanctions and offer incentives to mitigate the threatened sanctions to encourage reporting, cooperation and rehabilitation of companies
5

2 major contexts to apply mitigation incentives

There are two main contexts in which mitigation incentives can be applied:

Mitigation incentives

Context 1: Before violation of anti-corruption standard is known to stakeholder

e.g.: company self-discloses violation of anticorruption standards (reporting) to stakeholder Detects otherwise undiscovered corrupt behavior Prevents from driving problems under ground (i.e. break pact-of-silence) Offers ways back to legality, etc

Context 2: After violation of anti-corruption standard is known to stakeholder

e.g.: company cooperates and enhances its internal anti-corruption system

Motivate companies to enhance their internal anti-corruption systems Motivate business proactive engagement with stakeholder Recognize existence of rogue employees , etc

*Mitigation incentives are no ordinary incentives as they require a (threatened) sanction which can be reduced by the company through mitigating factors
6

Example for context 1

US Sentencing Guidelines acknowledge self-reporting by companies in the calculation of the culpability score (example: Pride International received 55% reduction of fine due to self reporting and cooperation)

Sources: http://www.ussc.gov/Guidelines/2011_guidelines/Manual_HTML/Chapter_8.htm and http://www.justice.gov/criminal/fraud/fcpa/cases/pride-intl.html

7

Example for context 2

US Sentencing Guidelines conditions for probation for organization allows to require a supervised establishment/enhancement of an internal compliance program (example: Kellogg Brown & Root LLC agreed in 2009 to retain an external compliance monitor in plea agreement for organizational probation)

Sources: http://www.ussc.gov/Guidelines/2010_guidelines/Manual_HTML/8d1_4.htm and http://www.justice.gov/criminal/fraud/fcpa/cases/kelloggb/02-1109kbr-plea-agree.pdf

Categorizing anti-corruption sanctions and incentives

Public prosecution offices, procurement offices and state-owned enterprises can reduce legal, commercial & operational and reputational sanctions in return for reporting, cooperation and rehabilitation

Legal

Commercial & operational

Termination of relationship Exclusion from opportunities

Reputational

Fine

Anti-Corruption SANCTIONS for business

Compensation for damages

Punishment through casespecific publication Punishment through analysis of comparative performance

Confiscation of proceeds of corruption

Imprisonment (only business representatives) Reduced legal sanction*

Assignment of unfavorable conditions

Access to opportunities Assignment of preferential conditions

Reward through casespecific publication Reward through analysis of comparative performance Reduced reputational sanction*

Anti-Corruption INCENTIVES for business

Reduced commercial & operational sanction*

*Mitigation incentive; Categorization based on HUMBOLDT-VIADRINAs initiative Anti-corruption incentives and sanctions for business
9

7 key principles for implementing and/or benchmarking anti-corruption sanctions and incentives
ESTABLISHING

1 2 3

IMPACT: Be relevant and proportionate! COMMUNICATION: If nobody knows, nobody cares! MONITORING: Trust is good, monitoring is necessary!

EVALUATING

ENHANCING

EVALUATION: Are your measures working?

4 5 6

MULTIPLICATION: The more, the merrier! RESPONSIBILITY: Extend whos accountable! MITIGATION: Apply incentives for rehabilitation!

10

Findings from a global expert survey on anti-corruption incentives and sanctions*

Ranking of sanctions and incentives Other related findings

85% considered Governmental Institutions as very important stakeholder in setting incentives and sanctions for businesses

70% of respondents agreed that the increase use of approaches for streamlining prosecution encourages self-reporting

58% of respondents agreed that mitigation factors should be used less frequently as they reduce the initial deterrent effect of a sanction
* HUMBOLDT-VIADRINA School of Governance (2012). Motivating Business to Counter Corruption A Global Survey on Anti-Corruption Incentives and Sanctions. (see www.humbold-viadrina.org/anti-corruption)

11

Key facts on anti-corruption mitigation incentives to encourage reporting, cooperation and rehabilitation

provide sanctions and offer incentives to mitigate the threatened sanctions to encourage reporting, cooperation and rehabilitation of companies

mitigation incentives can be offered before and after violation of anti-corruption standards is known (e.g. disclosure programs, settlements)

consider legal, commercial & operational, and reputational sanctions and related mitigation incentives when evaluating their best course of action

consider 7 key principles for implementing and/or benchmarking anti-corruption sanctions and mitigation incentives to encourage reporting, cooperation and rehabilitation of companies

12

Questions?

13

Thank You for your attention.

The HUMBOLDT-VIADRINA School of Governance in Berlin/Germany was founded in 2009 by the HumboldtUniversitt zu Berlin and the European University Viadrina in Frankfurt (Oder) to bring together the public and private sectors, civil society, academia, and the media. Its aim is to find practical solutions for social challenges and to contribute to sustainable democratic politics by building political consensus through multi-stakeholder cooperation. The School has a special character: it seeks to be an academically respected institution, as well as an active civil society organization that encourages public debates and long-term policy projects. The School is advised by respectable global governance practitioners, including Peter Eigen, Pascal Lamy, Joseph Nye, Mary Robinson, Richard von Weizscker, and Festus Gontebanye Mogae.

http://www.humboldt-viadrina.org/anti-corruption/

sebastian.wegner@humboldt-viadrina.org

14

Appendix

15

Towards a list of incentives and sanctions by the public sector to encourage reporting, cooperation and corporate integrity

Reduce fines for self-reporting Reduce fines for voluntary corrective actions (e.g. payment of damages, proceeds of corruption) Reduce/refrain from fine in case of existence of an anti-corruption system and for its enhancement Offer shares of sanctions to whistleblowers which provided key information Refrain from exclusion from public funds in case of self-reporting and existence of anti-corruption systems Terminate exclusion from public contracts if company established anti-corruption system

Reduce prison sentence or refrain from imprisonment in case of self-reporting Refrain from termination of contracts in case of selfreporting and existence of anti-corruption systems

Reduce sanctions for cooperation with investigation Refrain from making corruption public in case of self-reporting
Make existence of effective anti-corruption systems mandatory to receive public funds

Measures require e.g. law enforcement, resources and elaborated legal procedures such as voluntary disclosure programs, settlements and other agreements between companies and the authorities.
16