By Dr. Patrick Conroy and Dr. Graeme Hunter
Fines and disgorgements for FCPA offenses are based on the “benefit received” from a bribe.
With those penalties now reaching hundreds of millions of dollars and with increasing enforcement, it’s important to understand what effect a bribe had on profits, and to carefully establish what the but-for profits would have been without the bribe.
While a bribe may have led to very high gains, the but-for profits could have been high — and the gain from the bribe low — if the bribe would have little effect on the probability of winning the work or if alternative projects were similarly profitable.
Two concepts are important in thinking about the benefit received from a bribe. One is what effect the bribe has in securing the project. The smaller this effect, the less of a project’s profits can be ascribed to the bribe.
The other relevant concept is what are the true economic profits of a project, including opportunity cost (defined as the expected profits for the next-best alternative). The full economic cost of undertaking a project includes the incremental profit that would be earned on another project that would be performed instead. The gain from a project should not include that project’s opportunity cost.
If a company pays a bribe to secure a project, what is the gain to the company from the bribe? While one answer might be the profits earned by the project, there are a number of considerations based on the incremental probability of winning generated by the bribe and the opportunity cost of the project won that will lead to a more realistic, and sometimes lower, calculation of the true economic profits from the bribe.
More information can be found in our paper here.
At NERA — National Economic Research Associates, Inc. — Dr. Conroy directs projects in the areas of securities, finance, and valuation. He has testified in federal court and arbitrations on issues dealing with securities fraud. Prior to NERA he worked as an economist at the SEC and a broker dealer.
Dr. Hunter directs projects in NERA’s Antitrust Practice, where his work focuses on analysis of the competitive effects of mergers and the effects of alleged anticompetitive behavior, assessing liability and damages. He has also analyzed allegations of corruption related to services provided to the U.S. military and UN peacekeeping operations.