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Wednesday
Aug052015

Notes from IACA, Part Three (concl.): A facilitation payments question we could not answer

Put 30 anti-corruption professionals from diverse countries in an academic classroom for three days, and the human mind goes to new places. Here’s a question that arose during my recent stint at the International Anti-Corruption Academy which we asked but could not answer. Can anyone?

We were discussing the OECD facilitating payments provision, such as it is. We noted that the convention does not actually require states to prohibit these payments. As this previous set of posts discussed, the comments to the convention discourage the payments, but that’s it.

Left with the choice, some countries that are parties to the convention have opted to allow payments and others have not. The breakdown is about 30/70: 30% of state parties to the convention allow facilitating payments, 70% prohibit them.

I have long looked at the lists of countries in each category and tried to divine a pattern. I could not.

Here are the countries that allow facilitating payments: Australia, Austria, Canada, Greece, South Korea, New Zealand, Slovak Republic, South Africa, Spain, Switzerland, and the U.S.

Here are the countries that prohibit facilitating payments: Argentina, Belgium, Brazil, Bulgaria, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, Netherlands, Norway, Poland, Portugal, Russia, Slovenia, Sweden, Turkey, and the U.K.

During my recent stint teaching at the International Anti-Corruption Academy, we decided to calculate the average ranking in the Corruption Perceptions Index for each category. You may be surprised by how it came out.

For the countries that prohibit the payments, the average CPI ranking is 34. For those that allow them, it’s 23. 

Yes, the countries that have chosen to allow facilitating payments are ranked higher than those that prohibit them. Among those that allow facilitating payments, if you remove the one conspicuous outlier -- Greece -- the average becomes 16. Either way, it a curious pattern.

Why would this be? We discussed it for some time and produced all manner of possible explanations, none of which seemed persuasive. But often that’s the mark of a good educational experience: it marks not the end of an existing inquiry, but the start of a new one.

So I now put the question to the FCPA Blog readership: Why would countries that allow facilitating payments be ranked higher on the CPI than those that do not? Ideas?

Comments are especially welcome.

________

Andy Spalding is a Senior Editor of the FCPA Blog and Assistant Professor at the University of Richmond School of Law.

Reader Comments (18)

I think the assumption is not correct. e.g. Switzerland: Although the notion of facilitation payments does not exist in Swiss anti-bribery laws, authorities have clarified that they are considered illegal under most circumstances. So, how does the calculation change with this information?
I think this is more number crunching than anything else. You can falsify any statistic :-)
August 5, 2015 | Unregistered CommenterJohnathan Hart
It would be interesting to ask these administrations if they believe allowing facilitation payments has an impact on integrity and corruption levels. And if they have different standards for "domestic" and "foreign" facilitation payments?

Maybe questions the FCPA blog could pose to these administrations?
August 5, 2015 | Unregistered CommenterKB
Good question. Regarding Canada, while it is right to say that facilitating payments are currently allowed, amendments to the Corruption of Foreign Public Offficials Act prohibiting those payments were passed in July 2013. They did not enter into force yet though - the date will be determined by an order of Cabinet. To my knowledge, this has not happened yet. The amendments nevertheless indicate an intention to repeal the facilitating payments exception from Canadian law.
August 5, 2015 | Unregistered CommenterFrederic St-Martin
Maybe because it is not criminalized, the payments are recorded openly, whereas in the countries where it is not allowed, payments are still made and not recorded as facilitation payments, thus, if the rating process includes proper recording of transactions, it will have a negative effect.
August 5, 2015 | Unregistered CommenterHetty
Thank you Andy for this post! On 2 July 2015, I attended the Facilitation Payments Conference in Frankfurt, Germany. The event was organised by the Anti-Corruption Forum, and hosted by Deutsche Bank. The panels were composed of senior compliance experts from around the globe, and the discussions were lively. The countries which allow facilitation payments and the ones which prohibit them were identified, and the OECD facilitation payments provision was discussed as well. Germany for example does not prohibit facilitation payments abroad, meaning that grease payments to a foreign government official are not prohibited.

I suggested that a country legislator outlawing facilitation payments was by itself of little practical relevance. In my view, having a prohibition in the penal code was comparable to having a compliance program on paper unless the national legislator enforces the law. For example, requiring deposits of customs fees into central bank accounts or disallowing cash payments could be a way to make facilitation payments stop. Another action governments could take would be to provide full transparency over what customs fees and duties are legitimate, and which ones are not. Several Compliance practitioners seemed to share this sentiment, and expressed their frustration that the national governements do little to support the multi-national companies in tackling facilitation payments. Rather, they felt like the implementation was being assigned to them, and they were left to fight for themselves.

National governments need to enforce their laws and take proactive steps if they are serious about the prohibition of facilitation payments. They also should address facilitation payments and corruption at their meetings more frequently, and set the right tone as David Cameron recently did at the G 7 summit, to provide support for their companies confronted with difficult situations.
August 5, 2015 | Unregistered CommenterStefan Hagner, LL.M.
I started my working life as a deck cadet on an Indian flag cargo ship engaged in the tramping trade, way back in the early '70s, when there was a huge shortage of Indians in the Merchant Navy. As such, even as a teenager, I was thrown into the full frontal experience of "facilitating" the rapid arrival, turnaround and departure of my ship all over the world - for cargo, bunkers, stores, inward immigration, outward emigration, customs, port health, coast guard, lighthouse dues, agents, charterers, safety, medical, sanitation, quarantine, free pratique, pest control, cargo inspections, hold inspections, and everything else that the book could throw at us. In addition there would be canal dues, compulsory pilotages, oil inspections, water suppliers, and since there was a ship's cat, we would often have people from the animal rights organisations marching in with the crew union representatives demanding their pound of flesh.

There was and still is not a single country in the world that seafarers do not have to "facilitate" matters in. Regardless of system of governance - democracy, dictatorship, monarchy, regime, civil war, real war, the works. Everybody needed to be facilitated.

That, also, is truth.
August 5, 2015 | Unregistered CommenterVeeresh Malik
Canada is another outlier. In its recent amendment to the Corruption of Foreign Public Officials Act, Canada stated it plans to eliminate the exclusion for allowing facilitation payments by an order of federal cabinet. Pretty sure it hasn't happened yet, but we're going in that direction.

Personally, I find facilitation payments to be a slippery slope that should not be permitted. The one exception is where someone's personal safety is at stake, in which case, I doubt many of us would condemn the payment.
August 5, 2015 | Unregistered CommenterAli Ikram
As an FCPA compliance attorney, here is my humble view: When a country passes laws that either prohibit or permit the payment of facilitation payments, it does not necessarily have an impact on whether such payments are actually made or requested in that country. The CPI measures just that -- it seeks to quantify how people actually observe corruption in their community.

At our firm, we often hypothesize scenarios when a client could encounter a request for a facilitation payment overseas. Two common examples we come across: 1) transporting products across borders, and 2) securing construction permits from a state inspection agency.

Let's take the countries that have laws prohibiting facilitation payments. The CPI rankings are across the board here, but let's compare country risks for a few. For instance, this group includes a number of Western European countries well-known for their anti-corruption efforts. I think most experts would agree that you are fairly unlikely to encounter a request for a facilitation payment in Denmark if you tried to get a construction permit.

On the other hand, while Brazil, Mexico and Russia also have laws prohibiting facilitation payments, if one needed to secure a similar construction permit in one of those countries, while they may not necessarily encounter a request for a facilitation payment, they are more likely to come across such a request compared with Denmark.

As you point out, several of the countries that permit facilitation payments (Canada, Australia, New Zealand, etc.) are ranked as "very clean" on the CPI. In other words, those countries do not necessarily have an overwhelming problem with corruption in general or with demands for grease payments specifically.

In my view, it seems that many of the countries that permit facilitation payments -- particularly the U.S., Canada, Australia, Switzerland and South Korea -- have economies that are heavily reliant on trade and/or investment in international markets. Hence, while its unlikely you will encounter a request for a grease payment in one of these countries, perhaps the frequency with which these countries do business overseas suggests that their citizens, governments and companies are more likely to encounter a request for a facilitation payment abroad -- thus creating the need to consider whether such payments should be permitted or prohibited.

Put simply, the countries ranked "very clean" don't necessarily perceive corruption or facilitation payments as a problem on their home turf, but perhaps they have conceded that corruption exists elsewhere and sometimes, in limited circumstances, making a grease payment is the only way to secure what one is otherwise legally entitled to when overseas. It is certainly an interesting debate, especially when considering the differences in how the U.S./FCPA and the UK/Bribery Act deal with facilitation payments.
August 5, 2015 | Unregistered CommenterTarek Shuman
OK, a very cynical suggestion. It is easier to prohibit everything when you intend to enforce nothing. Cheers, Joe
August 5, 2015 | Unregistered CommenterJoe Murphy
Despite the geographic and professional  diversity of the participants in the US & International Anticorruption Law Certificate Program at American University, they are in broad agreement that facilitation payments are bribes and should be neither demanded nor paid. The TI CPI reflects perceptions of the extent of government demand, not private sector payment of bribes, large or facilitating. Hence, the seeming anomaly in country rankings. For a ranking of countries by the likelihood their companies pay bribes, one would have to see the TI Bribe Payers Index or it's Progress Report2014:Exporting Corruption or other measures. 
August 5, 2015 | Unregistered CommenterNancy Boswell
I wonder if the timing of enactment of the relevant law is a factor? I am only aware of a few examples, but the U.S. FCPA has been around for decades and allows facilitating payments, while the U.K. Bribery Act and recent similar Brazilian law are much newer and prohibit them. If it's true that the earlier enacted laws allow facilitating payments and later laws prohibit them, this would be consistent with countries having older laws being rated higher on the CPI. Such a finding would also suggest it may be time to update the older laws.
August 5, 2015 | Unregistered CommenterAdam
Thanks for the interesting post, but I kept thinking: Why do you expect to find a pattern between these two variables? Why would you expect a correlation?

The CPI measures the amount of perceived public sector corruption INSIDE a country; a country’s facilitation payment policy is just one indicia of its attitude towards its companies committing potential or arguably corrupt activities OUTSIDE that country. I see no reason why the two should necessarily be related. Inside & Outside -- it's apples and oranges.

Sometimes it’s tempting to look really hard at data and to try to divine a pattern where none may exist.
August 5, 2015 | Unregistered CommenterKC
One point on this topic that is always important to remember is that countries such as the US and Australia don't explicitly 'allow' facilitation payments. No country can legislatively 'allow' its citizens to break the law of another country - small bribe payments are still a crime in the country where they occur.

Under the US FCPA, facilitation payments are an 'exception' to the offence and under the Australian equivalent it is a 'defence' to a foreign bribery in an international business transaction allegation. (see s.70.2 Commonwealth Criminal Code 1995 for the head offence and s. 70.4 the defence). Unfortunately, as they are spelt out as 'exceptions' and 'defences' it is often interpreted that this means they are 'allowed'. This needs close scrutiny and challenge however.

These 'exceptions' and 'defences' probably don't actually need to be spelt out because the relevant element of the crime of foreign bribery as defined in the OCEC's 1997 BRIBERY OF FOREIGN PUBLIC OFFICIALS IN INTERNATIONAL BUSINESS TRANSACTIONS convention (and consequently that definition captured in Australia's s. 70.2) requires that the subject payment be made to obtain or retain business - so in short, there must be a nexus between the payment of the money and the awarding of business to the foreign company. A secret payment to the local fire-chief to get your factory's fire extinguishers certified on time before its opening, is very likely a local crime in that country but, the fact is it doesn't fit exactly with the legal scope and definition of a 'bribery in an international business transaction' crime.

The process to get an international convention (such as the 1997 OECD) ratified and placed into national laws is not always and easy process, similarly as a general rule with laws that have extra-territorial effect, national parliaments often need to see the nexus between the conduct and harm done to their country. As such, the point that Adam makes in the above post about the timing of when countries adopted the OECD Convention is important to consider. I would hazard a guess that if Australia were looking at signing and ratifying the OECD Convention today (rather than back in 1999 when it did), then much of the subsequent international dialogue, discourse, norms and general tenor around the importance of doing something about facilitation payments from the supply side would likely be taken into heavier consideration by those drafting our laws - we might have seen a different set of words in Australia's s. 70.2 (and perhaps no defence listed in s. 70.4).

On a final note, Australia doesn't need to repeal the 'defence' (s. 70.4) and 'dis-allow' facilitation payments; it actually needs to update and re-write the head offence definition listed at s.70.2 as to what we define and include in the scope of being a 'bribery in an international business transaction' crime - no exceptions!.
August 6, 2015 | Unregistered CommenterDavid Wildman
Hi everyone,

the idea of comparing such countries is very smart and also of high interest, let me say this in advance! Great idea and I would suppose to analayze this fact in more detail!!!!

From my limited statistical knowledge, I have some doubts about such a comparison. Comparing rare ranks of these countries is statistically just a first step!

Countries in the upper ranks have very similar scores of CPI. A difference in rank of ten might be just a difference in score of only two points e.g. So you should rather compare scores and test whether there is a significant difference between the two groups or whether this difference might be a mere random error.

In addition there are several other factors you need to control for, e.g. law enforcement (it is not enough to enact the law you must also enforce it), secondly cultural differences between the countries or even previous years CPI scores. There is a very strong time dependency in these scores (so previous years score determines this years score).

Finally, while I think about this problem, it might be a circular problem. Having a low CPI has an impact on enacting facilitation payment laws and this again might have an impact on the CPI of a country in the next year. This linkage might introduce large scale biases into rare comparison of means...

So great idea and observation which would be great to understand in more detail.
August 6, 2015 | Unregistered CommenterTimur
Worth noting that there's some important practical differences between an enforcement policy of non-prosecution and the FCPA-style legal exemption of facilitation payments from the offence of bribery (e.g. an exemption makes 'grease payments' tax deductible, complicates anti-money laundering and asset recovery, etc).

In practice neither approach looks sustainable. The UK initially took steps towards the former with a safe harbour guide on adequate steps to prevent facilitation payments, but this was dropped by the new SFO Director following OECD criticism. The US has been criticised for the latter in UNCAC implementation reports.

That said, I'd echo earlier sceptical / cynical comments and note that the USA seems to be the only country to impose fines in relation to facilitation payments - all books & records or internal control failings (see OECD Working Group on Bribery, Phase 3 review of the US).
August 6, 2015 | Unregistered CommenterNick
I think the thought process is backward. They are not more or less corrupt because they allow facilitating payments; rather, they may have decided to allow facilitating payments because they perceive, or believe others perceive, that they are generally less corrupt and therefore more likely to properly record such payments and to limit them appropriately.
August 6, 2015 | Unregistered CommenterLCS
This was an interesting discussion held at IACA. As one of the students involved and an Australian there was a lot of data on hand to determine the average scores but not a lot of information as to why this is so.

Australia's approach is hard to determine, but much of it relies on a pragmatic view of how to operate in the real world and how Australia requires recording of financial payments of any sort. My considered view is that in not making facilitation payments illegal, these countries may find their enforcement capabilities more focused on bribery, rather than trying to determine what is a facilitation payment and what is not. This then leads to the need for proper education on how to make such payments so they are right and proper.

In addition, while cultural differences play a major role in how bribery versus corruption acts are viewed, where countries are in the development process probably plays a much greater role in determining how a country is scored on the CPI.

In the final analysis focusing on only one aspect of the problem isn't the approach needed. While interesting, I think that what should be researched is a multi-faceted approach to the issue, including such things as culture, religion, geographical location and history. These factors will more than likely determine where a country is in the development process and therefore how corrupt it views itself.
August 6, 2015 | Unregistered CommenterMick Callan
"Facilitation payments" Lawful but awful! in my opinion, those countries have only changed the name for Bribery to be known as facilitation payments when they are in reality practicing Bribe. For transparency, the world need to agree either to legalise such payments through the accounting principles or denounce it!
August 7, 2015 | Unregistered CommenterBernard
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