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«by Lindsey Diane Carson A thesis submitted in conformity with the requirements for the degree of Doctor of Juridical Science Faculty of Law ...»

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Laws of Unintended Consequences:

The Impacts of Anti-Foreign Bribery Laws on Developing



Lindsey Diane Carson

A thesis submitted in conformity with the requirements

for the degree of Doctor of Juridical Science

Faculty of Law

University of Toronto

© Copyright by Lindsey Carson (2015)

Laws of Unintended Consequences: The Impacts of Anti-Foreign

Bribery Laws on Developing Countries

Lindsey Carson

Doctor of Juridical Science

Faculty of Law University of Toronto 2015 Abstract Over the past quarter-century, the international community has grown increasingly aware of the deleterious impacts of corruption on economic growth, governance institutions, political stability, social freedoms and opportunities, and overall equality and efficiency within and across countries, with the effects most pronounced in the developing world. Corruption’s ascent as a priority on the international development agenda has led to the emergence of a global anti- corruption regime engaging governments, civil society, corporations, and international organizations. Among the most prominent of these multilateral anti-corruption efforts has been the agreement among most of the world’s leading economic powers to create legally binding standards that criminalize the bribery of foreign public officials. However, the existing literature examining the impacts of these anti-foreign bribery (AFB) laws has focused nearly exclusively on the statutes’ effects on the competitiveness, costs, and investment decisions of regulated firms and individuals, with little investigation of the consequences of the multilateral AFB regime for the countries ostensibly harmed most by corruption – those in the developing world. This dissertation fills that gap in current law and development scholarship, using theoretical, anecdotal, and empirical evidence to identify how AFB laws change the incentives of foreign ii investors as well as government officials and to analyze how those shifts may ultimately affect the levels, sources, sectors, and types of foreign investment flowing into developing countries. It further considers the consequences of AFB laws for governance institutions and the magnitude and forms of corruption within less-developed countries. Examining critically the range of potential effects, it concludes that, under certain conditions in certain environments, laws prohibiting foreign bribery may undermine the developmental conditions in and prospects for poorer countries.

–  –  –

While I am indebted to countless individuals who supported me in various ways over the years it took me to write this dissertation, I would like to acknowledge several here briefly.

First and foremost, I am forever grateful to my supervisor and mentor, Professor Michael Trebilcock. His kindness, wisdom, and humor have been boundless throughout this process (despite my periodic taxing of his patience). He has challenged me to stretch my writing and analytic skills to levels they could not have reached on my own and has supported me at every turn. His passion for teaching and scholarship has been an unwavering inspiration for me, and his is a model I can only hope to emulate in my own career. On a professional and personal level, he has been a kindred spirit without peer.

I would also like to thank the other members of my dissertation committee, Professor (and now Dean) Edward Iacobucci and Professor Mariana Mota Prado, for their invaluable counsel and advice over the past few years. Frequently challenging me to recognize and interrogate the assumptions underlying my arguments, Professor Iacobucci has helped me to learn to identify both the strengths and weaknesses in my assertions and to use that knowledge to improve and refine my analyses. Professor Prado has provided great inspiration, indispensable advice, and unparalleled opportunities for me as I have begun to embark on my academic career, and I cannot thank her enough for her promotion of and confidence in my scholarship.

I am grateful to Professor Kerry Rittich and Professor Susan Rose-Ackerman for their thoughtful and constructive contributions to this dissertation. I would also like to thank the faculty and staff at the Faculty of Law at the University of Toronto, especially Professor Jutta Brunée, Professor Albert Yoon, Professor Anthony Niblett, Archana Shridar, Nadia Gulezko, and Whittney Ambeault.

I am also deeply indebted to President Ronald Daniels, who first introduced me to Professor Trebilcock and helped to launch me on this fantastic adventure.

Many dear friends have provided priceless support and welcomed laughter during this process, but I am especially grateful for Roxana Banu, Michael Lwin, Benjamin Danner, Alex Ejsmont,

–  –  –

Finally, to my family, words will not ever be able to express how much your love, support, and encouragement mean and have meant to me over these sometimes-trying three years. You are my heart, my rock, my inspiration, and my motivation, MB, PB, A&A, TJ, and CC.


–  –  –

Chapter 1: The Fight against Foreign Bribery and Its Unexpected Effects on the Developing World

1 Introduction

2 Corruption, FDI, & AFB Statutes: The Consequences for Developing Countries

3 Conclusion

Chapter 2: The Political Economy of Corruption

1 Defining Corruption

2 Measuring Corruption

2.1 Objective Data

2.2 Perception-Based Surveys

2.3 Experience-Based Surveys

2.4 Using Measurements of Corruption

3 Consequences of Corruption

3.1 Economic Impacts

3.2 Impacts on Political and Governance Institutions

4 Causes of Corruption

4.1 Discretionary Authority

4.2 Capturable Rents

4.3 Incentives Structures

vi 4.3.1 Economic Issues

4.3.2 Political Issues

4.3.3 Socio-Cultural Issues

5 Conclusion

Chapter 3: The Emergence, Evolution, and Limitations of the AntiForeign Bribery Regime

1 Evolution of the Transnational AFB Regime

1.1 “A Beacon for the Light of Integrity for the Rest of the World”: The U.S. Foreign Corrupt Practices Act (FCPA)

1.1.1 Rationales for the FCPA Post-Watergate Morality Foreign Policy Economic Policy

1.1.2 Provisions of the FCPA Anti-Bribery Provisions Accounting Provisions Enforcement & Penalties

1.1.3 “The Lonely Boy Scout”: The United States’ Solitary Stance (1977-1999)

1.2 Movement towards Multilateralism

1.2.1 Early Attempts

1.2.2 Corruption as Development Priority

–  –  – Globalization Influence of Media and Civil Society

1.2.3 Emergence of the Transnational Anti-Foreign Bribery Regime:

The OECD Convention Tactical Maneuverings towards the Convention................. 82 Basic Provisions of the OECD Convention Significance of the OECD Convention and Anti-Foreign Bribery Laws in the Global Anti-Corruption Regime

2 Limitations of Existing Laws in Deterring Foreign Bribery

2.1 Rational Choice Model of Deterrence

2.2 Scope of Prohibition

2.2.1 Facilitation/Expediting Payments

2.2.2 Jurisdictional Restrictions

2.2.3 Status and Treatment of Legal Persons

2.3 Enforcement

2.4 Severity of Penalties

2.5 Empirical Evidence

3 Conclusion

Chapter 4: Foreign Direct Investment and Development.................. 110 1 Foreign Direct Investment in Developing Economies: Current Status 113

–  –  –

2.1 FDI in Early Development Economics

2.2 Counter-Revolution: The Return of Neoclassical Economics & Redemption of FDI

2.3 Retreat from Orthodoxy: Institutions and the New Development Economics

2.4 Regulating and Protecting FDI

3 FDI & Development: The Evidence

3.1 FDI & Economic Indicators of Development

3.1.1 Economic Growth

3.1.2 Spillovers & Domestic Productivity

3.1.3 Wages

3.2 FDI & Governance-Related Indicators

3.2.1 Corruption

3.2.2 Political and Social Indicators

4 Disaggregating FDI

4.1 Sector

4.1.1 Extractive Industries

4.1.2 Manufacturing

4.1.3 Services and Infrastructure

4.2 Form: Ownership Structure

4.3 Host Country Characteristics & Conditions

5 Conclusion

Chapter 5: Foreign Direct Investment, Corruption, and Anti-Foreign Bribery Laws

–  –  –

1.1 Type of Corruption

1.1.1 Predictable versus Opportunistic Corruption

1.1.2 Grand versus Petty Corruption

1.1.3 Host Country Institutions

1.2 Type of Investment

1.2.1 Objectives and Sectors of Investment Market-Seeking FDI Resource-Seeking FDI Strategic-Asset-Seeking FDI Efficiency-Seeking FDI

1.2.2 Form of Investment

1.3 Type of Investor

1.3.1 Firm Characteristics

1.3.2 Home-Host Country Institutional Proximity

2 Effects of AFB Laws on FDI in Developing Countries

2.1 Levels of FDI from Covered Parties

2.2 Overall Levels of FDI – Potential for Alternative Sources............. 222

2.3 Forms of Foreign Direct Investment

2.4 Alternative Corrupt Activities

3 Conclusion

Chapter 6: Unexpected Outcomes and Unintended Consequences:

The Impacts of Anti-Foreign Bribery Laws on Governance and Economic Growth in Developing Countries

x 1 The Grand Ambitions of the AFB Regime

1.1 Exploring the AFB Model

1.2 Interrogating the AFB Model

2 Deviating from the Model

2.1 Incomplete Deterrence

2.2 Exit or Avoidance of Corrupt Host Countries

3 Substitution Effects

3.1 Sources of FDI

3.2 Sectors and Forms of FDI

3.3 Types of Corruption

4 Conclusion

4.1 Overview of the Unintended Consequences of AFB Laws............. 270

4.2 Reforming and Refining the AFB Regime

4.2.1 Facilitation Payments

4.2.2 Statutory Compliance Defenses

4.2.3 Restitution to Developing Host Countries

4.3 Final Thoughts


Chapter 1

The Fight against Foreign Bribery and Its Unexpected Effects on the Developing World 1 Introduction Decried as an “insidious plague” that “undermines democracy and the rule of law, leads to violations of human rights, distorts markets, erodes the quality of life and allows organized crime, terrorism, and other threats to human security to flourish,”1 corruption has emerged as one of the most-cited obstacles to the promotion of economic growth and political and social stability in developing countries.2 While quantification of the total direct and indirect costs corruption imposes on the global community is an understandably imperfect endeavor, estimates suggest that corruption leads to losses totaling more than 5% of global gross domestic product (GDP) (US$2.6 trillion) per year,3 with bribery alone costing the global economy US$1 trillion annually.4 Recognizing its deleterious effects within and across societies, over the past quarter-century governments, civil society organizations and activists, international institutions, and members of the global business community have launched a plethora of initiatives at the organizational, national, and international level to address the causes or limit the effects of corruption. Among the most prominent of these multilateral anti-corruption efforts has been the agreement among most of the world’s leading economic powers to create legally binding standards that criminalize 1 Secretary-General Kofi Annan, Foreword to the United Nations Convention against Corruption, GA. Res. 58/4, U.N. Doc. A/54/422 (Oct. 31, 2003).

2 Following the practice of the World Bank, throughout this dissertation the term “developing” refers collectively to those countries classified by the Bank as low- or middle-income. For a list of these countries and a discussion of the Bank’s methodology, see http://data.worldbank.org/about/country-and-lending-groups (last visited July 31, 2014).

In addition, “developing,” “underdeveloped,” and “less-developed” are used interchangeably to refer to these countries; the final term should not be confused with the United Nations’ “least-developed country” designation, applicable to forty-eight countries in 2014. For the United Nations’ most recent list of least-developed countries, see http://www.un.org/en/development/desa/policy/cdp/ldc/ldc_list.pdf (last visited July 31, 2014).

3 International Chamber of Commerce, Transparency International, the United Nations Global Compact, & the World Economic Forum Partnering against Corruption Initiative (PACI), The Business Case against Corruption 2 (2009), available at http://www.weforum.org/pdf/paci/BusinessCaseAgainstCorruption.pdf.

4 World Bank, Six Questions on the Cost of Corruption with World Bank Institute Global Governance Director Daniel Kaufmann http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20190295~menuPK:34457~pagePK:3437 0~piPK:34424~theSitePK:4607,00.html (last visited Sept. 30, 2014) (characterizing its estimation approach as “conservative”).

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