FCPAméricas Blog

Poor Regulatory Quality — A Corruption Red Flag?

Author: Matteson Ellis

Indicators show that, compared to other regions of the world, Latin American countries generally have poor regulatory regimes. The World Bank Doing Business 2012 report ranks Latin American countries, on average, in the bottom half worldwide for regulatory quality. That reports compares 183 economies by measuring the clarity, predictability, and efficiency of regulations that apply to areas like construction permits, getting electricity, registering property, getting credit, protecting investors, and paying taxes.

In my own experiences in the region, I have often encountered regulatory regimes that are vague, that overlap, or that are enforced by multiple government agencies.

What does poor regulatory quality have to do with corruption risk? The link is clear. The more uncertainty there is in the law, the more opportunity there is for corruption. Vagueness and complexity create the potential for discretion by authorities. Discretion, in turn, creates opportunity for manipulation which can form the basis of corruption.

In addition, the more government actors that are involved in a regulatory issue, the more potential places where bribe requests can occur.

Based on this, one might argue that poor regulatory quality, itself, creates a corruption red flag. Consider these examples.

In one case, while conducting acquisition due diligence on a local company that had been making payments to the government based on complicated regulatory fee requirements, our team had to spend considerable time untangling each transaction. After we did so, we found that some of the disbursements did not match up to actual fees. Government officials were being paid under the guise of dense regulatory rules.

In another case, I investigated a company that paid bribes to procurement officials to win a high priced public contract to sell medical equipment. In return, the officials used the lack of clarity in the technical regulations to interpret the rules in a way that favored the bribe payer.

Not only can unclear regulations create opportunities for officials to demand bribes, they can also create an incentive for company officials to offer them. When a permit is caught up in a regulatory black hole and the government is not responding, an employee might feel more compelled to offer a benefit to get officials to act. Depending on the circumstances, this might or might not fall into the facilitating payment exception to the FCPA (discussed yesterday by FCPA Professor Mike Koehler).

In addition, muddy regulations have the potential to trip up an internal investigation. When rules seem unclear, a company’s interactions with the government might create the appearance of impropriety when no improper payments in fact occurred.

How do companies handle the red flag of poor regulatory quality? Since opaque regulations can present risk in so many different ways, it is best to handle issues case by case. You might need to consult local counsel to gain a clearer understanding of the applicable rule. Your internal investigation might need to give heightened attention to the company’s regulatory interactions. You might need to ensure in compliance trainings that your employees who handle regulatory interactions are aware of the added risks associated with their work.

The most important thing is that you are alert to the fact that poor regulations can create unique opportunities for bribe requests and a special motive for your employees to pay them.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

© 2012 Matteson Ellis Law, PLLC

Matt Ellis

Post authored by Matt Ellis, FCPAméricas Founder & Editor

Categories: Anti-Corruption Compliance, Due Diligence, Facilitating Payments, FCPA, Internal Investigations, M&A, Procurement, Risk Assessments, The FCPA Professor, Trainings

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