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Beyond deterrence (Part 2): Rational actors

This is the second post in a series on the theories of criminal punishment on which modern anti-bribery enforcement is based. Part One is here.

Deterrence. It’s been called the holy grail of criminal punishment. And it’s what we all ultimately hope FCPA enforcement will do. In the end, we want to reduce bribery.
How does deterrence work? 

The thinking goes way back to guys like Jeremy Bentham, but in the modern world it is closely associated with the law and economics movement.

In this paradigm, persons are rational actors whose decisions are based on utility calculations. A would-be bribe payor weighs the utility of paying a bribe against the disutility of punishment. 

And how does he assess that disutility? As the theory goes, he considers three variables: the likelihood of being caught, the severity of the punishment, and its swiftness. 

He weighs those three factors against all he stands to gain from the bribe and makes a rational decision. 

People can argue about whether criminals (or any of us, really) are rational in this way. But when we’re talking about corporations making business decisions, it’s probably not that far from the truth, most of the time.

Governments are rational actors too, seeking to maximize utility. They want their enforcement activity to be maximally effective with minimal cost. After all, it’s taxpayer money they’re spending. And taxpayers want to be safe from crime, but to spend as little as is necessary.
I’d say all of this explains FCPA enforcement pretty well. We have corporations deciding whether to pay bribes.  We don’t want to them to, so we punish them to a sufficient degree that they, and everybody else, will decide that the bribe just isn’t worth the risk. 

Sure, there is much more we could do if our agencies had unlimited budgets. But they don’t. So they look to get as much deterrent value as possible for the dollar. They economize, by settling rather than going to trial, or asking companies to conduct their own investigations and offering cooperation credit in exchange. 

And even then, we can’t catch everyone, so we loudly publicize the settlements that we do reach, and trust it sends a message to all who fall within FCPA jurisdiction.

I’d also say that this all works pretty well. But wait. What do we mean by “works?” Works at doing what, exactly? How should we measure the effectiveness of enforcement?  

We’ll go there next. Or if you can’t wait that long, try this.


Andy Spalding is a senior editor of the FCPA Blog. He is an Assistant Professor at the University of Richmond School of Law.

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  1. 'Rational actors', acting rationally… Hmmm.

    The main problem with this model is that (as we know) human beings may be rational some of the time, but are not rational all of the time. And real Governments are simply not 'rational actors' in the simplistic sense posited here for individuals.

    All that can be claimed is that people, and governments, do things for 'a reason' – which is most likely to be that they choose to pursue competing and conflicting goods, the best way they can see how, in the circumstances. This analysis does not get us far…

    But the anaysis is faulty in another respect: it passes over without pause the notion that the FCPA penalties for many businesses are just 'the cost of doing business'. If paying bribes is illegal, on what rational basis does a corporation decide it is going to do it anyway?

    Just for the sake of argument: what if the penalty for paying bribes were not just a large fine, even an extremely large fine, but de-listing of the corporation from the Stock Exchange, or a ban from acting as a Director of a company, for a significant period – say ten years? Would that change a corporation's calculus?

    If yes, why don't we do it? If we don't do something like this, can we claim to be serious, even rational?


  2. While I agree that human behaviour is unpredictable, one of the most prevalent questions which legal advisers are asked (and I speak from a UK perspective) is "what is the likelihood of getting caught?"

    And the answer is "pretty slim" – the SFO has a miniscule budget in comparison with the DoJ, is up to its neck in Rolls Royce/LIBOR/fighting the Tchenguiz litigation.

    However, no-one can afford to be the test case under the UKBA 2010.

    It is, for many companies, simply a game of risk.

    Regarding the penalties which Howard suggests, I agree that mere money isn't sufficient deterrence in many cases. But the sanction must be proportionate, and there must be cognisance of the fact that businesses employ people and that there is therefore a wider social issue at play.

    Are mass redundancies required? I have my doubts!

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