all of the programs investigated for the present study were designed and implemented in the 1990s, many of them after 1997.
Another indication of a global trend toward corporate compliance is the growth of supporting initiatives and organizations. For example, the U.S. Ethics Officer Association, created in 1992, now has more than 800 members. The European Business Ethics Network, with a more academ- ically oriented structure, is similar in size. Hong Kong (China) created a very active Ethics Development Center in 1995. A Business Ethics Research Center (BERC) was established in Japan in 1997 with the sup- port of major corporations. In the Republic of Korea 30 leading compa- nies have implemented the 1999 charter of the Federation of Korean Industries.
Until recently, skepticism in non-U.S. companies regarding what was known as the U.S. compliance-based model was rooted in one or more of three widely shared assumptions:
• When operating in different cultures, businesspeople need to tolerate local customs and practices. In many countries lavish gifts and fees for the performance of certain governmental duties are practices that are deeply rooted in the national culture.
• The design of the U.S.-developed compliance model is not adaptable to non-U.S. business organizations; it is too formalized and legalistic.
• In much of the world there is a serious stigma attached to being an
“informer.” For this reason, outside the United States the “whistle- blowing” information systems on which effective compliance systems rely heavily will not work (Berenbeim 2000: 7–8).
Skeptics have also doubted the effectiveness of the measures taken by U.S. firms, noting that in practice these firms did not seem to be acting more ethically than others, despite their company codes of values. (The poor ranking of the United States in Transparency International’s Bribe Payers Index reflects this perception; see table 2.5 in chapter 2.)
Yet company compliance systems are spreading throughout the world.
The reasons include changes in the legal framework and within compa- nies themselves.
Prohibitions and Extraterritoriality
Bribery is illegal everywhere in the world, but surveys of international corporations suggest that the most potent antibribery measures are prob- ably regulations in the home country that prohibit bribery in other coun- tries. U.S. companies’ pioneering compliance programs were prompted by the 1977 Foreign Corrupt Practices Act (FCPA), under which U.S. com- panies can be criminally prosecuted for engaging in corrupt practices out- side the United States.3
The 1997 OECD Anti-Bribery Convention incorporates the FCPA prin- ciple that corrupt practices are illegal no matter whether inside or outside the home country.4 Of the 35 signatories, 34, including four non-OECD countries (Argentina, Brazil, Bulgaria, and Chile), have enacted enabling legislation. Singapore, although not a party to the convention, has also implemented FCPA-type legislation.
Because they must be incorporated into preexisting legal frameworks and traditions, the national laws implementing the OECD Convention cannot be the same across countries. Nevertheless, the text of the conven- tion provides broad principles for application in areas such as jurisdic- tion, prosecution, and sentencing. The fundamental principle is to put domestic and transnational bribery on the same footing.5
Corruption interferes with fair competition. As noted in chapter 2, the motivation behind the OECD Convention was as much to establish a level playing field for firms as it was to uphold ethical values in business.
Reflecting this concern, Japan has enabled the OECD Convention by amendments to its Unfair Competition Prevention Law rather than to the criminal law.6
The OECD Convention has far-reaching implications. In making compa- nies liable for the behavior of their local branches and affiliates and, to a sig- nificant degree, for the conduct of their business partners, the convention provides an incentive for companies to take wide-ranging measures against corruption. Adoption of the convention and, even more, its enabling national laws galvanized the private sector in countries that had reputedly been cool to the compliance model. The French armament industry rushed to implement huge ethics training courses, and Japanese and Korean cor- porations collectively moved to establish credible programs.
A key clause of the OECD Convention provides for a review mecha- nism. The OECD secretariat and two other signatories periodically review progress in each country. The review covers not only legal and regulatory measures but also the steps taken by governmental and nongovernmen- tal bodies to promote good practices. As an instrument for promoting improvements and convergence among the signatory countries, the review system is likely to have a continuing effect on antibribery policies
and practices, both domestically and internationally. Indeed, such bench- marking exercises (in the form of reports on observance of standards and codes), carried out on a voluntary basis with the help of international organizations, have been increasingly popular for monitoring reforms in the financial or corporate sector.
Incentives for Developing Compliance Systems
By itself, the Foreign Corrupt Practices Act does not adequately explain U.S. companies’ establishment of anticorruption programs. After all, between 1977 and 1995 the U.S. Justice Department prosecuted only 16 bribery cases under the act, and only one person has been jailed for vio- lating it. Furthermore, international experience suggests that investiga- tions can be complex and lengthy, especially in the context of transnational violations, and that proof can be difficult to obtain.
Arguably more important than prohibition have been the legal and regulatory incentives provided to firms based in the United States. The 1991 Organizational Sentencing Guidelines allow for a substantial mitiga- tion (up to 95 percent) of criminal fines and penalties where it can be established that a company has an effective compliance system and thus that any unlawful activity can be regarded as the work of a rogue actor within the firm (see box 3.1).
The U.S. model combining statutory sanctions (sticks) with possibili- ties for mitigation (carrots) greatly influenced the provisions of the OECD Anti-Bribery Convention. The convention itself stops short of recom- mending mitigation of sentences for companies breaking the law, but the desirability of consistency across the signatory countries, and the OECD review mechanism, could set up pressure in this direction. In practice, the development of compliance systems in major corporations makes a miti- gation process feasible and desirable even in legal traditions very differ- ent from that of the United States. In several countries legislators are already following the same dual principle of enforcement and partner- ship. Some examples, including that of Hong Kong’s Independent Com- mission Against Corruption, are reviewed in chapter 6.
A key to the promotion of self-regulation by the private sector may be the principle of the criminal liability of the legal person, which means that a firm can be tried and sentenced like an individual (see box 3.2). This principle is mentioned in the OECD Convention, but it is not universal. In particular, in much of Europe prosecution still focuses on individual responsibility. CEOs have been routinely incriminated for problems occurring within their supervision, but also at levels sometimes too remote to allow a CEO to have direct knowledge of the facts. Although this potential criminal exposure is a deterrent, experience shows that
Box 3.2. Criminal Liability of the Legal Person: A Trend toward Convergence?
Historically, only individuals could be prosecuted and sentenced for a crime. The possibility of making organizations—”legal persons”—
criminally liable was pioneered by France in 1690, with the Grande Ordonnance Criminelle—arguably, an early regulatory measure in cor- porate governance. The principle was scrapped during the French Rev- olution, but it was rediscovered in the late 20th century in the United Kingdom and the United States. Australia, Canada, and other former Crown colonies followed their example. Japan adopted the principle in the 1980s and is now considering moving toward a mitigation-of-sen- tencing framework. France and Germany have recently taken up the principle, but with more limited scope. The legal system in China also includes some form of criminal liability of the legal person.
Source: World Bank Legal Department.
Box 3.1. Mitigation of Culpability under the U.S. Organizational Sentencing Guidelines
The Organizational Sentencing Guidelines of 1991 consider a firm’s culpability in the light of the systems the firm has in place for address- ing potential and actual misconduct. Chapter 8 of the guidelines out- lines seven key criteria for an “effective compliance program”:
• Compliance standards and procedures reasonably capable of reduc- ing the prospect of criminal activity
• Oversight by high-level personnel
• Due care in delegating substantial discretionary authority
• Effective communication to employees at all levels
• Reasonable steps to achieve compliance, including systems for mon- itoring and auditing and for reporting suspected wrongdoing
• Consistent enforcement, including disciplinary mechanisms
• Reasonable steps to respond to and prevent further similar offenses on detection of a violation.
These are broad principles, allowing companies to design compliance programs that best fit their specific needs and environments.
Source: U.S. Sentencing Commission.
prosecution is very time consuming, and in recent years it has given rise in some instances to potentially counterproductive relations between business and the judiciary. The principle of criminal liability of the legal person does not automatically exonerate individuals, but it does give benevolent management an incentive to cooperate with the judiciary, and it limits the occurrence of cases of responsible CEOs being incriminated for rogue behavior within the officer’s chain of supervision.
Companies are increasingly under pressure to assume a greater share of responsibility for compliance. Using incentives to encourage compa- nies to monitor their own behavior is potentially more cost-effective and more efficient than public enforcement relying on sanctions. The utility of this approach is especially compelling in the many countries that have limited law enforcement resources and capabilities.