Corruption and the criminal law

By Susan Rose-Ackerman1

Abstract

The criminal law can play a back-up role in the fight against corruption.
The present article discusses five aspects of the criminal law on corrup-
tion. First, corruption may be reduced by legalizing some formerly illegal
activities and criminalizing others. Second, penalties need to be set to
achieve effective deterrence. Third, law enforcement authorities need tools
such as plea-bargaining to encourage bribe payers and recipients to
cooperate with authorities to uncover corruption. Fourth, corporations
and other organizations need to be held responsible for the corrupt
actions of their employees. Fifth, because corruption is often a side effect
of organized crime activity, authorities need to design strategies to deal
with this overlap. In general, the goals of law enforcement should be to
determine those corrupt systems that are doing the most damage and to
organize the deterrence effort to make corruption costly and to give
participants an incentive to report corrupt deals.

Introduction

Corruption cannot be fought solely through criminal law. Too often, Govern-
ments announce a crackdown on corruption and a spate of high-profile
prosecutions take place, only for the problem to re-emerge soon after-
wards as a new group of people takes advantage of the opportunities that
remain. A serious anti-corruption effort requires the State to re-examine
the relationship between government, citizens and businesses. Govern-
ments may need to redesign public programmes, overhaul the public ad-
ministration and the operation of the political system and become more
open to outside scrutiny and input from citizens. Nevertheless, the crimi-
nal law can play a role as a backstop lying behind the needed structural
changes. Unfortunately, it does not always play that role, even in coun-
tries where prosecutions for corruption are common. Sometimes, the
1
Henry R. Luce Professor of Law and Political Science, Yale University, and author of
Corruption and Government: Causes, Consequences, and Reform (1999). Portions of this article
are derived from that book. Aleksandra Sznajder provided help with the material on French and
Polish law.
4 Forum on Crime and Society, Vol. 2, No. 1, December 2002

problem is the biased use of the criminal law to target members of the
political opposition; in the extreme, such prosecutions deter opposition to
the regime in power but have little impact on corruption. Sometimes, the
problem is the weakness or venality of the judicial system. Then, even
cases based on strong evidence may fail in court and this possibility
deters prosecutors from bringing cases in the first place.
The present article considers the back-up role of the criminal law as
an aid to deterrence. There are several aspects to this problem: first, the
legalization of certain illegal activities can remove incentives for corruption;
conversely, some formerly legal activities may need to be criminalized to
deter activities that have much the same effect as outright bribes. Sec-
ond, penalties should be set to achieve optimal deterrence. Third, law
enforcement authorities should have the tools to encourage bribe payers
and bribe recipients to cooperate with authorities to uncover corrupt
transactions. Fourth, as bribes are frequently paid by people acting in the
interest of their employers, corporations and other organizations should
be held accountable under the criminal or civil law. This is an issue of
particular salience, given the new Organisation for Economic Cooperation
and Development (OECD) treaty that requires States to punish overseas
bribery by corporations engaged in international business. Finally, corrup-
tion is often a side effect of organized crime activity. Authorities need to
design strategies to deal with the intersection between organized crime
and corruption.

Legalization and criminalization

Countries seeking to deter corruption and fraud may need to decriminalize

some activities and criminalize others. When economic activities such as
the sale of drugs, gambling or prostitution are criminalized, incentives for
corruption are created. Those who engage in the illegal activity may seek
to corrupt law enforcement officials in order to continue operating. Thus,
one way to reduce corruption is to legalize formerly illegal activities. Policy
makers need to ask if the costs of illegality outweigh the benefits. For
example, after a short experiment with Prohibition, the United States of
America repealed the eighteenth amendment to the Constitution outlawing
the manufacture and sale of “intoxicating liquors”. Its time in force, be-
tween 1919 and 1933, was a period of widespread illegal production and
sale of alcohol and endemic corruption of law enforcement officers. The
amendment’s repeal was supported by many in the law enforcement com-
munity. The worldwide debate over legalizing drugs turns on the feasibility
of controlling the industry through the criminal law, when law enforcement
authorities are vulnerable to corruption. Gambling, formerly outlawed in
many American jurisdictions, was also an important source of corrupt
receipts for the police. The response in many jurisdictions has been to
turn gambling into a legal business, albeit under heavy state supervision
and even, at times, state ownership. Thus, countries may need to examine
where the line between legal and illegal activity has been drawn and ask if
Corruption and the criminal law 5

there are some areas where criminalization is providing few social benefits
and encouraging corruption and illegal business.
On the other side of the ledger, new criminal and civil offences may
need to be created. Many new democracies have not come to terms with
the problem of conflicts of interest among executive branch officials and
members of the legislature. Most developed countries use a mixture of
criminal sanctions, administrative penalties and ethical codes to regulate
civil servants’ and politicians’ involvement in decisions in which they have a
financial interest. Emerging democracies can learn from examining this
experience.
In the United States, a mixture of ethical codes and statutory re-
quirements constrains public officials (Gilman 1995, p. 65). Officials are
not permitted to “use public office for private gain” and are not to hold
financial interests that conflict with their duties, use inside information for
personal profit or accept gifts. Both the payment and receipt of bribes
are criminal offences. The receipt of a salary from sources outside the
Government is against the law, as are payments to officials for represent-
ing a private party in a “particular matter” in which the United States
has an interest. The law applies to both public officials and those who pay
them (Chakrabarti, Dausses and Olson 1997, pp. 597-605).2 Officials must
avoid the appearance of violating the law, even if their conduct technically
complies with it.
By way of comparison, French and Canadian conflict-of-interest re-
strictions have similar goals but use different methods. French law fo-
cuses more on administrative than criminal remedies, but shares the
fundamental goal of avoiding “an unwholesome alliance between personal
financial interest and the exercise of the power of the state” (Rohr 1991,
p. 284). Nevertheless, French restrictions seem, in practice, less strin-
gent. Financial disclosure of assets is not required as a routine matter,
and post-employment restrictions are poorly enforced (Rohr, pp. 284-286).
Canadian (and British) rules are also less restrictive. Parliamentary govern-
ment puts the prime minister in charge of the legislative agenda. This
means that, unlike the United States, conflict-of-interest laws are unlikely
to impose more stringent controls on members of the executive branch
than on members of parliament. Civil servants are regulated by administra-
tive rules, not statutes (Stark 1992, p. 429).
In practice, the most difficult enforcement problems concern job-
seeking. Although, in the United States, government outright quid pro
quos seem fairly well controlled by the code of conduct and the legal
sanctions behind it, officials are often hired after they leave government
service by firms that have business with their previous government em-
ployer. The code of conduct states that “employees shall not engage in
outside employment or activities, including seeking or negotiating for em-
ployment, that conflict with official government duties and responsibilities”.
Subject to several conditions, former officials cannot represent others
before their former employer within two years of termination. The ban is

2
18 USC 201, 203, 207, 208.
6 Forum on Crime and Society, Vol. 2, No. 1, December 2002

not absolute, however, as it only applies to issues on which the person

worked within a year of leaving government (Chakrabarti, Dausses and
Olson 1997, pp. 608-612).3
The United States mix of codes of conduct and criminal, administrative
and civil sanctions is complex and not always easy to understand or inter-
pret. Some critics argue that United States conflict-of-interest laws are
intrusive and counterproductive (Anechiarico and Jacobs 1996; Roberts
and Doss 1992). According to these critics, the rules introduce too much
red tape, stifle creativity and discourage qualified people from joining the
public service. Even if the United States model is too complex to be read-
ily exported, however, it can still provide guidelines for countries beginning
to develop norms of professional bureaucratic behaviour. The harshest
critics of the United States system do not argue that procurement offic-
ers ought to be allowed to own shares in their contractors or accept
salaries or large gifts from firms with which they do business. Yet in
many developing countries such practices have only recently been recog-
nized as troublesome. To prevent government service from becoming a
cynical route to easy wealth, all countries need a basic conflict-of-interest
programme that stresses ethical conduct and is backed up by legal sanc-
tions, some of which will involve criminal penalties. But simple and basic
rules of behaviour are the best place to start, especially if one of the
goals is to avoid turning the oversight process itself into a locus of
corruption.

Deterring corruption: penalties

All countries draw the line somewhere between illegal bribery and accept-
able “gifts of good will”. They criminalize certain businesses such as the
drug trade and legalize others. Countries differ in where the dividing line is
set, and in this section that judgement is taken as given and an effective
deterrence strategy is sought. The sanctioning strategies proposed in the
present article are quite different from the conventional penalties, even in
developed countries. They focus both on improving the deterrent effect of
arrest and punishment and on rewarding those who come forward with
documentation on corrupt deeds.
The optimal amount of corruption is not zero, even if no value is given
to the benefits received by bribers. Once the costs of prevention are
taken into account, the level of deterrence expenditures should be set
where the marginal benefits equal the marginal costs (Anechiarico and
Jacobs 1996; Becker and Stigler 1974; Rose-Ackerman 1978, pp. 109-
119). The deterrence of criminal behaviour depends on the probability of
detection and punishment and on the penalties imposed, both those im-
posed by the legal system and more subtle costs such as loss of reputa-
tion or shame (Becker 1968). Law enforcement authorities can vary either

3
18 USC 207 (a)-(d).
Corruption and the criminal law 7

or both of these variables, but strong empirical evidence is lacking on

their relative importance.4
Successful detection of corruption depends upon insiders to report
wrongdoing. Often, this requires officials to promise leniency to one of the
participants. This creates an important paradox for law enforcement ef-
forts. High expected punishments ought to deter corruption, but a high
probability of detection can only be accomplished if some are promised low
penalties. This section begins with a discussion of deterrence based on
expected punishment. In the next section, strategies are considered that
take account of the interaction between punishment and the probability of
detection.
In some countries, bribe payers are treated more leniently than recipi-
ents. Some countries do not even criminalize the payment of bribes.5 In
others, the reverse is true: the criminal law distinguishes between “ac-
tive” and “passive” corruption. The briber is viewed as the “active” party
and the public official as “passive” (Vermeulen 1997). These distinctions do
not capture the rich variety of cases. Often, the public official can be
described as the active party who extorts a pay-off (Mény 1996, p. 311).
In practice, the distinction between active and passive corruption and
between extortion and bribery means little because both parties must
agree before corruption can occur.
Bribery can be more usefully distinguished on the basis of its social
harm (Shleifer and Vishny 1993).6 Considering whether the briber is enti-
tled to the benefit received and whether or not scarcity exists produces
three categories: an illegal benefit, a legal but scarce benefit and a legal
benefit that is not scarce if allocated honestly. If the benefit provided is
illegal, the social harm of corruption is the distortion introduced by cor-
rupt pay-offs. If the benefit is legal but scarce, the corrupt official gives
preference to bribers over other potential beneficiaries. The social harm is
the net cost of allocating by willingness-to-bribe instead of by the stated
criteria of the corrupted programme. Finally, the benefit may be legal and
appear scarce only because of corrupt public officials. The social cost is
then the distortion created by the officials’ efforts to generate pay-offs.
In deciding how to allocate law enforcement resources, the degree of
social harm should be the most important variable. Holding constant the
cost of enforcement, the highest priority should be given to the allocation
of illegal benefits. In the abstract, it is difficult to rank corrupt transac-

4
One study using United States data from the period 1970-1984 showed that both a
greater probability of conviction and longer prison terms deter corruption (Goel and Rich 1989).
5
In an interview in Taiwan Province of China in 1995, the Justice Minister Ma Ying Jeou
complained that Taiwanese law did not make it a crime for a citizen to offer a bribe. He claimed
that the lack of such an offence “seems to encourage businessmen to give out all kinds of gifts”
and has been “a major obstacle to rooting out the hung bao culture [of giving money in red
envelopes to officials]” (Far Eastern Economic Review 1995).
6
Law and economics scholars distinguish between bribery and extortion, depending upon
whether the payer receives “better than fair treatment” or must pay to be treated fairly (Ayres
1997, pp. 1234-1238; Lindgren 1988, p. 824); however, both are often combined in practice
(Ayres 1997, pp. 1236-1237).
8 Forum on Crime and Society, Vol. 2, No. 1, December 2002

tions that affect the allocation of legal benefits. The social costs depend
upon the damage done by using a willingness-to-pay criterion, on the one
hand, versus the inefficiencies and inequities of officials’ efforts to design
in bottlenecks and scarcity, on the other.
Regarding punishment strategies, a ranking of the social harm of
different kinds of corruption can help set enforcement priorities. However,
the penalties actually levied on the convicted should be tied not to these
social harms, but to the benefits received by the corrupt. Assuming that
society does not give positive weight to corrupt gains, the goal is to
reduce corruption as far as possible in spite of limited law enforcement
resources. In order to deter bribery, at least one side of the corrupt
transaction must face penalties that reflect its own gains. Because the
chance of detection and conviction is far less than one, those convicted
should sacrifice a multiple of these gains. From a pure deterrence point of
view, either side of the corrupt deal can be the focus of law enforcement
efforts. From the point of view of public acceptability, however, bribers
who seek legal benefits are likely to arouse public sympathies, not blame.
Whatever the focus, actors should face expected penalties tied to their
own benefits from corruption.
The penalties imposed on officials should be tied to the size of the
pay-offs they receive and the probability of detection. If penalties are not
a function of the size of the bribe, an anti-corruption drive would quickly
confront a paradox. A high fixed penalty will lower the incidence of corrup-
tion, but increase the size of bribes paid. If the penalty is high, officials
must receive a high return in order to be willing to engage in bribery.7
Thus, the expected penalty should increase by more than a dollar for every
dollar increase in the size of the bribe (Rose-Ackerman 1978, pp. 109-
135). This could be done either by tying the penalty levied upon conviction
to the size of the bribe or by increasing the risk of detection as the size
of the bribe increases. However, if the probability of detection is lower for
small pay-offs, the penalty for each detected offence should reflect the
low incidence of detection. This could mean that those convicted of petty
bribery could face harsher penalties than those found to have taken larger
bribes.
On the other side of the corrupt transaction, a fixed penalty levied on
bribers will lower both the demand for corrupt services and the level of
bribes. However, it will have no marginal impact once the briber passes
the corruption threshold. To have a marginal effect, the penalties imposed

7
For example, anecdotal reports by correspondents with Radio Free Europe/Radio Liberty
claim that in Kiev, a drunk-driving ticket can be avoided with a bribe of US$ 50. In Prague, by
comparison, a similar ticket will be forgiven for a $100 “donation”. The claimed reason for the
difference between Prague and Kiev is that the average monthly salary of a traffic policeman in
Prague is five times higher than that of his counterpart in Kiev (Radio Free Europe/Radio Liberty
2001). Perhaps the chance of being caught is higher as well. Other sources find that the overall
incidence of corruption is lower in the Czech Republic than in Ukraine. Thus, when accepting a
bribe has a high expected cost, this will both deter corruption and raise the size of the bribes
that are paid.
Corruption and the criminal law 9

on bribe payers should be tied to their gains (their excess profits, for
example), not to the size of the bribe.8 Bribes represent a cost to those
who pay them; thus penalties should not be tied to these costs unless
they are a good proxy for the briber’s benefits.
United States law does little to recognize this asymmetry between
bribe payers and bribe recipients in its prescribed punishments. The crimi-
nal penalties are equivalent: both payers and recipients of bribes can be
fined “not more than three times the monetary equivalent of the thing of
value [that is, the bribe] or imprisoned for not more than fifteen years, or
both”.9 This is appropriate for officials who receive bribes, except that
multiplying by three may be a poor measure of the risk of detection and
punishment. The actual probability of detection is likely to be well below
one third. The law, however, does recognize the asymmetry of corrupt
transactions by permitting the President to rescind any contract or other
benefit if there has been a conviction under the statute governing bribery,
graft and conflicts of interest. The United States can also recover, in
addition to any penalties, “the amount expended or the thing transferred
or delivered on its behalf, or the reasonable value thereof”.10 This right of
recovery is designed to avoid losses to the Government. It is a weak
deterrent to corrupt pay-offs because the recovery is not multiplied by a
factor that reflects the probability of detection.
If expected penalties do not increase along with the benefits of cor-
ruption for bribers and the recipients of bribes, the Government may be
caught in a trap where high corruption levels beget high corruption levels.
A low-corruption equilibrium may also exist, but be unreachable in small
steps from the status quo. A high-corruption equilibrium occurs when the
net rewards of corruption increase as the incidence of corruption in-
creases. This might occur, for example, if the probability of detection falls
when corruption is widespread and if penalties levied upon conviction are
not adjusted to take account of that fact. If most public officials take
bribes, overwhelmed law enforcement officials may uncover only a small
proportion of the corrupt transactions.
Any multiple-equilibrium case, however, can be converted into a single-
equilibrium, low-corruption case with the appropriate choice of law enforce-
ment strategy or a change in the information conditions. Strategies that
tie expected penalties to marginal gains can remove a society from a high-
corruption trap. Doing so, however, may require a large increase in law
enforcement resources to tip the system to a low-corruption equilibrium.

8
Alternatively, if potentially corrupt firms are repeat players, they can be deterred by
debarment procedures that prohibit corrupt firms from contracting with the Government for a
period of years. To have a marginal effect, the debarment penalty should be tied to the serious-
ness of the corruption uncovered. For examples of debarment see Nikkei Weekly (19 February
1996) and Thacher (1995), who describes the practices used by the New York City School
Construction Authority.
9
18 USC 201 (a).
10
18 USC 218.
10 Forum on Crime and Society, Vol. 2, No. 1, December 2002

The good news is that the sharp increase in enforcement resources need
not be permanent. It must simply be sufficient to tip the system to a
lower corruption level (Lui 1986, pp. 21-22). The idea is to change expec-
tations. A concentrated clean-up campaign can change expectations about
others’ cooperation in the corrupt system. Once a new low-corruption
equilibrium has been established, it can be maintained with reduced en-
forcement resources provided the honest are willing to report corrupt
offers and law enforcement officials follow up on reports of malfeasance
(Cadot 1987; Rose-Ackerman 1978, pp. 137-151).

Deterring corruption: rewards

Effective deterrence is impossible unless the police can obtain relevant

evidence; this is a difficult task because often the participants are the
only people who know of the corrupt deal. The probability of detection is a
function of whether any of the participants has an incentive to report to
the police. In this context, police promises of low penalties or even re-
wards are often essential.
Let us suppose, first, that the benefit is legal and would be freely
available in an honest world to those who now pay bribes. Because the
bribers receive benefits to which they are legally entitled, they are likely to
believe that they are extortion victims who would be better off in an
honest world. Such bribe payers are potential allies in an anti-corruption
effort who may cooperate in efforts to eliminate pay-offs. They should not
be punished heavily, because leniency will give them an incentive to report
corrupt demands and will encourage the beneficiaries of public programmes
to demand services that are free of pay-off demands. Public prosecutors
need to have flexibility under the law to reduce charges and to seek lower
penalties for those who cooperate in an anti-corruption inquiry, even if
they have paid or received bribes themselves.
Let us consider, next, a scarce but legal benefit that is corruptly
allocated to many individuals who would not qualify if pay-offs were elimi-
nated. Neither those who pay nor those who receive bribes will voluntarily
report the corrupt transaction. Those shut out of the process, however,
have a grievance. For example, disappointed bidders for public contracts
can facilitate efforts to limit corruption (Alam 1995). They should be
rewarded for coming forward with evidence, even if the reason they lost
the bid was not moral scruples but their own unwillingness to make a
large enough pay-off.
Bribes paid to obtain illegal services are likely to be the most difficult
to control. Bribers are often also engaged in other illegal activities and
those who fail in their corruption efforts can hardly come forward to claim
that they should have been the ones obtaining the illegal benefit. Never-
theless, the very vulnerability of bribers can be used to uncover corrup-
tion. They may accept lenient treatment with respect to, say, a violation
of the drug laws, in return for providing evidence in a corruption trial.
Deterrence will be aided if the law enforcement authorities can make
Corruption and the criminal law 11

deals, even with admitted criminals, as a means of uncovering corrupt

networks and illegal business organizations.
There is considerable variation across legal systems in the ability of
police and prosecutors to make deals with those accused of crimes. The
prevalence of plea-bargaining in the United States is well known and is
used not just to save prosecutors’ time, but also to facilitate investiga-
tions of white-collar crime such as corruption. Charges are routinely
dropped or reduced in return for a person’s cooperation in an ongoing
investigation that seeks to implicate those at the top of a corrupt pyra-
mid or on the other side of the transaction.
Some claim that plea-bargaining does not occur in the civil-law coun-
tries of continental Europe. However, several scholars have shown that
although it has been formally forbidden in some countries, in practice it is
quite common.11 In recent years, some European countries, most notably
Italy, have revised their penal procedure codes explicitly to permit plea-
bargaining, an innovation that ought to make corruption investigations
easier. In Italy, the new code, adopted in 1988, permits plea-bargaining
that reduces sentences and appears de facto to envisage bargaining over
the charge (Fassler 1991, pp. 263-265).
When organizations are the locus of corruption, one option is a sys-
tem that rewards “whistle-blowers” within firms and public agencies who
come forward with evidence of wrongdoing. Reporting the peculations of
others can be dangerous. If corruption is systemic, a person who reports
wrongdoing risks being disciplined by corrupt superiors and attacked by
co-workers. One study of corruption in China suggests that this is a
serious problem (Manion 1996). The whistle-blower may even end up being
accused of corruption (New York Times 6 March 1998). Thus, Govern-
ments should consider promulgating statutes that protect and reward
those who report malfeasance (Pope 1996, pp. 59-61). The United
States, for example, has two such statutes: the False Claims Act re-
wards those who report irregularities in government contracts and pro-
tects private-sector whistle-blowers from reprisals (Howse and Daniels
1995; Kovacic 1996).12 The Whistle Blower Protection Act protects
whistle-blowers inside government agencies from retaliation.13
The False Claims Act pays whistle-blowers a share of the total penal-
ties and other damages levied against firms for wrongdoing that has
injured the Government. The rewards are available to people both inside
and outside the firm, although not to government officials with direct
responsibility for detecting contract violations. If the whistle-blower brings
suit and is successful, he or she can recover 25-30 per cent of the
penalty. If the Justice Department opts to join the action, the minimum
recovery is reduced to 15 per cent because the Government will bear
most of the legal costs. Unsuccessful private plaintiffs must bear their
own legal costs, but not those of the firm, unless the court determines

11
Fassler (1991, p. 246) cites the relevant articles in English.
12
31 USC Sections 3729-3731.
13
Pub. L. No. 101-12, 5 USC 2302 (b) (8).
12 Forum on Crime and Society, Vol. 2, No. 1, December 2002

that the suit was clearly frivolous or vexatious (Howse and Daniels 1995,
p. 526).14 The law also protects whistle-blowers from retaliation by their
employers.
A number of objections have been raised to this statute but, on
balance, the law appears to serve a valuable purpose and can complement
efforts at internal monitoring. In particular, the idea that corporate
whistle-blowing will undermine internal control efforts seems misplaced. As
Robert Howse and Ronald Daniels (1995, p. 537) argue, “the fear of being
exposed to prosecution as a consequence of external whistle-blowing may
be an important incentive for some corporations to adopt credible internal
disclosure policies and procedures”. The main problem in countries in the
process of establishing the rule of law will be to clarify what practices are
illegal and subject to criminal penalties. It will not make sense to protect
or reward whistle-blowers unless it is made clear what they should be
looking for.
Sometimes public officials claim that large firms virtually force bribes
upon them. This seems a little disingenuous because the pay-offs are a
cost to the firms involved. Nevertheless, to the extent this claim is cred-
ible, public officials could come forward with evidence of corrupt offers and
seek protection under the Whistle Blower Protection Act. Firms would
predictably defend themselves by arguing that the official demanded the
pay-off. The distinctions in United States law may be useful here. Under
the False Claims Act, the court can reduce the award for a whistle-blower
who was involved in wrongdoing, but only if he or she planned or initiated
the wrongful conduct. The award need not be eliminated, however, unless
the whistle-blower is convicted of a crime.15 Prosecutors with the author-
ity to grant criminal immunity can thus set up a kind of a race in which
the first to report the corrupt transactions will be rewarded, while the
others are punished.

Corporate criminal liability16

Corporations have legal personalities, but this does not turn them into
real human beings. For some commentators, this lack of humanity implies
that corporations ought not to be subject to the criminal law because
they cannot have mental states and so cannot be “guilty”. Applying the
criminal law to corporations gives them procedural protections and a
presumption of innocence that are designed to protect the rights of
individuals, not legal constructs (Thompson 1987, pp. 76-77; Khanna
1996).
The potential criminal liability of “legal persons” is an accepted part of
United States law. By contrast, in many civil-law countries, organizations
are excluded from criminal liability, although the trend may be changing

14
31 USC 3730 (d) (4).
15
31 USC 3730 (d) (3).
16
For a fuller discussion of the issues raised here see Rose-Ackerman (2002).
Corruption and the criminal law 13

with the incorporation of corporate criminal liability into the French crimi-
nal code in 1992 and into the Council of Europe’s Criminal Law Convention
on Corruption (Council of Europe 1999, art. 18). After the French revolu-
tion, France was the source of the prohibition of organizational criminal
liability. Its code was adopted widely in Europe and has influenced criminal
law in parts of the world where the civil-law tradition has been exported.
Current French law, however, establishes criminal liability for organizations
for a set of specified offences, including active corruption or peddling of
influence (Orland and Cachera 1995, p. 114 and appendix, arts. 433-1 and
433-25). The law includes some special penalties for “legal persons”,
including the possibility of larger fines, exclusion from government procure-
ment contracts and placement under various types of probation or court
supervision (Code Pénal 2001, arts. 131-38 and 131-39).
The Netherlands has permitted corporate criminal liability since the
mid-1970s, but Italy and Germany have constitutional provisions precluding
corporate guilt, and the Belgian courts have refused to find corporations
guilty of crimes. In Germany, however, administrative bodies can impose
fines on corporations as well as on natural persons (Orland and Cachera
1995, p. 116; Khanna 1996, pp. 1488-1491). In Poland, corporate crimi-
nal liability does not exist, although legal persons can be required to pay
damages for the negligence of their representatives (Council of Europe
2000, p. 21). The key issue for law reform in these and other countries is
to find ways to hold legal persons responsible for organizational acts.
Organizations should not be anthropomorphized when discussing rights
and responsibilities. Nevertheless, corporations can have responsibilities
that cannot be reduced to individual obligations (De George 1993;
Donaldson 1989). These responsibilities stem from “the practices of the
organizations—the internal and external patterns of relationships—that
persist even as the identities of the individuals who participate in them
change” (Thompson 1987, p. 76; French 1979; Cooper 1968). The issue
of corporate responsibility is important in the corruption context because,
in the business world, most bribes are paid by employees and agents, not
by top management. If pay-offs help a firm obtain business, managers and
owners may hope to facilitate their subordinates’ bribery, while remaining
ignorant of the details.17 Thus, one would like the law enforcement system
to give top management an incentive to control the corruption of their
subordinates. The important issue for policy is whether corporate criminal
liability is the best way to do this or whether a system of civil fines and
injunctions can serve the same purpose more effectively.
According to Jennifer Arlen (1994), if corporations are held criminally
liable for the corrupt acts of their employees and agents, top manage-
ment may not support an effective monitoring system. She analyses this

17
Top managers will hope to rely on their subordinates’ ability to rationalize such pay-offs.
In one experimental study, business students and managers expressed a strong commitment to
honesty as a value, but over 70 per cent were willing to pay a bribe to obtain business. The most
frequently expressed justification was that “the first duty of a manager is to reach the com-
pany’s goals. Therefore, it sometimes becomes necessary to forget about ethics” (Rosenberg
1987).
14 Forum on Crime and Society, Vol. 2, No. 1, December 2002

problem for the general case of corporate crimes and concludes that a
number of alternative rules are superior to present United States law
that imposes pure strict liability on firms. One possibility is a negligence
rule, under which firms are only liable if they have neglected their internal
enforcement responsibilities. For such a rule to be workable, however, the
courts must be able to evaluate internal firm behaviour, which is a difficult
task. One solution may be the drafting of quite precise directives that
state what type of internal monitoring is required.
The United States Foreign Corrupt Practices Act does this by supple-
menting its prohibitions against paying bribes with accounting provisions
that apply to firms within the jurisdiction of the Securities and Exchange
Commission. These firms must establish accounting systems that accu-
rately reflect transactions involving the firm’s assets, and they must have
an effective system of internal accounting controls. Firms and their man-
agers can be subject to both civil and criminal penalties for violating these
accounting provisions (Jadwin and Shilling 1994, pp. 679-680; Nobles and
Maistrellis 1995, pp. 9 and 19; Pickholz 1997, p. 237). There is no formal
due diligence defence to the Act but, in practice, firms that establish and
enforce effective internal control systems appear to experience more
lenient treatment. The Federal Sentencing Guidelines also reward internal
firm efforts to detect and punish violations of the law (Nobles and
Maistrellis 1995, pp. 18-24). Thus, United States law attempts to coun-
ter management’s incentive to insulate itself from the profit-maximizing
malfeasance of employees and agents. Nevertheless, some insulation is
currently possible through the use of foreign firms as sales agents
(Nobles and Maistrellis 1995, p. 25). The OECD Convention on Combating
Bribery of Foreign Public Officials in International Business Transactions
holds firms responsible for the corrupt acts of their agents in interna-
tional business transactions. This Convention has the potential to spur an
interest in the promulgation and enforcement of corporate codes of con-
duct among multinational firms throughout the world.

Organized crime and international criminal enterprise

Illegal businesses seek to operate securely by paying off the police, politi-
cians and judges or by permitting them to share in the profits of illegal
businesses. But such businesses are also vulnerable to extortionary de-
mands. Law enforcement authorities, from the police to prosecutors and
judges, can demand payments to overlook criminal law violations or limit
penalties. If the evidence of criminal behaviour is clear, such businesses
will be unable credibly to threaten to report corrupt demands.
Of course, illegal businesses are hardly innocent victims. They often
actively try to corrupt the police. They seek not only immunity from pros-
ecution for themselves, but also assurance of monopoly power in the illegal
market. Both in the United States and in Latin America, gamblers and
drug dealers have paid officials to raid their competitors or to restrict
entry (Rose-Ackerman 1978, p. 163; New York Times 12 May 1996; New
Corruption and the criminal law 15

York Times 30 July 1996; Washington Post 28 January 1996). In Thailand,

some local public authorities shelter criminal enterprises both from compe-
tition and from the law (Phongpaichit and Piriyarangsan 1994, pp. 51-97).
In the Russian Federation, those engaged in illegal businesses sometimes
engage in outright intimidation of potential rivals, often paying off the
police not to intervene in their private attempts to dominate the market
(Handelman 1995).
The danger for economic development arises when organized criminal
groups begin to dominate otherwise legal business; southern Italy, the
Eastern European countries and those of the former Soviet Union are
cases in point. Several Asian and Latin American countries face similar
risks. Organized crime groups can use the profits of illegal enterprise not
only to assure the complicity of public officials, but also to infiltrate legal
businesses. The profits generated by illegal businesses, earned without
paying taxes, can then be reinvested in legitimate business and in obtain-
ing public contracts (Gambetta 1993; Varese 1994).
The stakes are especially high in Eastern Europe and the countries
formed after the collapse of the Soviet Union. Nothing less than the
entire wealth of the State is up for grabs. The value of sharing in the
privatization of a socialist State dwarfs the benefits of sharing in the
privatization of a public utility in Western Europe or a steel mill in a devel-
oping country. Both criminal groups and legitimate business concerns seek
to share in the wealth. If criminals can create an atmosphere of uncer-
tainty and threaten violence they will drive competitors away, especially
Western firms, leaving the criminal groups with a free run (Shelley 1994).
In fact, foreign direct investment from legitimate business has not been
large in the countries that once formed the Soviet Union and it varies
greatly from country to country (United Nations Conference on Trade and
Development 2000). One explanation for these results is the weakness of
state institutions and the corruption and organized crime influence to
which this gives rise. Although a recent study argues that privatization in
Eastern Europe and the former Soviet Union has been, on balance, benefi-
cial in spite of admitted problems, the authors point to serious deficien-
cies in the legal system (Kaufmann and Siegelbaum 1997).
Even in developed countries, some legitimate businesses are especially
vulnerable to criminal infiltration. Organized crime is both wealthy and
unscrupulous. It is willing to use not only bribery, but also threats and
violence to enforce its contracts and get its way. In the most successful
examples, the legitimate businesses that operate under Mafia protection
earn sufficient monopoly rents to make them supporters of the continued
influence of organized crime. Diego Gambetta and Peter Reuter (1995, p.
128) provide a list of the factors favouring the emergence of Mafia-con-
trolled cartels. In the most favourable cases, product differentiation and
barriers to entry are low, technology is unsophisticated and labour un-
skilled, demand is inelastic and the industry consists of a large number of
small firms. Private garbage collection provides a good example. Entry is
inexpensive; all that needs to be purchased is a truck. However, because
garbage trucks operate alone on the public streets, it is relatively easy to
16 Forum on Crime and Society, Vol. 2, No. 1, December 2002

intimidate unwanted rivals by attacking their trucks without attracting

police attention. To minimize the risks for organized crime, but at a cost,
the Mafia can pay the police to look the other way (Reuter 1987).
Similarly, the ability of a business to corrupt officials to gain approval
of a licence to enable it to operate and to deny such approval to its rivals
yields an obvious competitive advantage. Labour unions, with or without
connections to organized crime, can use this tactic. For example, an
official of the United Union of Roofers in Philadelphia was convicted of
bribing an official of the Occupational Safety and Health Administration to
harass non-union roofing contractors.18
Legal businesses that benefit from prime urban locations are espe-
cially at risk in countries with weak or corrupt police forces. This includes
restaurants and shops serving tourists and business travellers. Manufac-
turers can hide in out-of the-way locations (Webster and Charap 1993),
but service businesses cannot “go underground”. If the police are unreli-
able, criminal groups may demand protection money from businesses and
threaten to attack those that do not pay (De Melo, Ofer and Sandler
1995; Webster 1993; Webster and Charap 1993).
Businesses such as road repair and building construction that do
considerable business with the State are also prime candidates for falling
under the influence of organized crime. If organized crime has already
corrupted a Government in order to run its illegal businesses, it may be a
relatively short step from there to making pay-offs to obtain public con-
tracts on favourable terms. In the extreme, organized criminal groups
manage cartels that share contracts and pay off public officials to buy
their complicity, or at least their silence. In southern Italy, for example, a
survey revealed that over half of the small and medium-sized businesses
had reported that they had withdrawn from a public tender after pressure
from criminal groups or their political allies (The Economist 5 February
1994).
The wealth, unscrupulousness and international connections of many
organized criminal groups prevent control by any one country. The danger
is that, rather than being a stage of development that will wither away
over time, criminal activity becomes so intertwined with politics that it is
difficult to tell them apart.
It follows that anti-corruption efforts should be coordinated with
another international campaign: the fight against organized crime. There
are two reasons for this: first, both corrupt rulers and international
criminal enterprise benefit if it is easy to launder money across national
borders. Accepting bribes will be more attractive if it is relatively easy to
deposit the funds outside the country. Thus, strong international action
against money-laundering can help mitigate both problems. Second, the
existence of large-scale illegal businesses is likely to have a corrupting
influence on government, especially law enforcement and border control.
Corrupt rulers and illegal businessmen feed on each other. Illegal busi-
nesses must pay bribes in order to operate. The bribe receipts, being

18
United States v. Traitz, 871 F.2d 368, 375 (1989).
Corruption and the criminal law 17

illegal, are themselves especially likely to provide capital to illegal busi-

nesses worldwide, which reduces the cost of capital to them and fuels
their growth relative to legal business ventures.
If corruption is combined with organized crime, the problem for do-
mestic law enforcement is multiplied. The experience of developed countries
in fighting organized crime may be useful in some contexts. In developing
countries, which tend not to be used to confronting organized crime, a
combination of training and law reform is a useful first step. But such
reforms are unlikely to be sufficient unless the economy is strong and
competitive. The State may need to make more direct efforts to reduce
the excess profits available to criminal entrepreneurs in legitimate busi-
ness.
One solution is promoting the entry of well-capitalized legitimate busi-
nesses that, with some state help on the law enforcement side, can
compete with Mafia-dominated firms. For example, the courts mandated
the entry of large multinational waste management firms into the trash-
hauling industry in New York City. This strategy reduced the influence of
organized crime and lowered garbage removal costs for the commercial
businesses not serviced by the Sanitation Department. State prosecutors
estimated that garbage removal fees of $1.5 billion in 1995 were inflated
by as much as $400 million. In recent years, the cost of garbage removal
has fallen by 30-40 per cent for most businesses (New York Times
28 February 1994; New York Times 30 July 1995; New York Times
23 December 1995; New York Times 11 May 1998).
A country’s links to the broader world can either limit or expand the
scope for organized crime. On the one hand, an open trading and invest-
ment regime will make it easy for both contraband and the profits of
crime to flow across borders. The existence of banking havens where black
money can come to rest makes domestic criminal activity less risky be-
cause money can be easily hidden abroad. On the other hand, open bor-
ders facilitate investment by outsiders in a country. If these outsiders are
not part of the domestic criminal bodies and are not associated with such
groups elsewhere, they may challenge entrenched groups. Of course, if
such investments are costly and dangerous, few may make the effort, but
a country’s openness to foreign investment at least makes them worth
consideration.
One role for international organizations and for law enforcement agen-
cies in developed countries is the compilation of information on question-
able transactions, combined with the prosecution of individuals and organi-
zations based in developed countries that do business in developing
countries.

Conclusions

Under criminal law, finding the right mix of penalties, rewards and under-
cover law enforcement is not easy. Nevertheless, one important lesson of
the economic analysis of crime is clear: anti-corruption policy should never
18 Forum on Crime and Society, Vol. 2, No. 1, December 2002

aim to achieve complete rectitude. Those who take an absolutist position

are likely to impose rigid and cumbersome constraints that increase,
rather than decrease, corrupt incentives. The goals of law enforcement
should be to isolate those corrupt systems which are doing the most
damage to society and then to organize the deterrence effort to make
corruption costly on the margin and to give participants an incentive to
report corrupt deals.
The criminal law can deter corruption in several ways. First, substan-
tive criminal law may need to be re-examined to determine if some private
activities might be decriminalized, thus reducing corruption and the involve-
ment of organized crime. Alternatively, some currently acceptable activi-
ties, such as conflicts of interest, may need to be regulated or outlawed.
Second, penalties for paying and receiving bribes ought to reflect the
marginal gains of bribers and the recipients of bribes. The former should
be penalized in proportion to the gains that bribes make possible; the
latter in terms of the benefits of the pay-offs themselves. Third, given the
background level of penalties, prosecutors and investigators ought to be
able to reward those who provide useful information that helps authorities
uncover hidden corrupt networks. This will often involve making deals with
those who have paid and received bribes in the past. Fourth, issues of
individual responsibility should not deter law reformers from finding ways
to hold organizations such as corporations legally responsible for the
corrupt acts of their agents. This may involve holding the organizations
criminally liable themselves, but similar results may be possible with purely
civil penalties, provided that they can be tied to corrupt acts that are
related to the enterprise’s activities. Finally, special efforts will often be
needed to counter the influence of organized crime, especially when it
operates on an international scale: international cooperation is needed to
unravel corrupt networks and recover the proceeds of illegal businesses.

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