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What about bribery?

Summary:
This is a follow-up post to my recent proposal for banning corporations from paying ransom. Let’s think about another possible law, enacted to deal with the following scenario. Suppose that a US corporation has the best proposal to build a project in another country. Unfortunately, the government of that country won’t grant the contract unless a bribe is paid to a top official. The victimized company reluctantly pays the bribe, because paying the bribe reduces the market value of the company by less than losing the contract to another firm. That’s a pretty simple and straightforward example, isn’t it? Governments have been demanding bribes since the beginning of civilization.  Should we pass a law banning such bribes? If you read the comment section to my previous

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This is a follow-up post to my recent proposal for banning corporations from paying ransom.

Let’s think about another possible law, enacted to deal with the following scenario. Suppose that a US corporation has the best proposal to build a project in another country. Unfortunately, the government of that country won’t grant the contract unless a bribe is paid to a top official. The victimized company reluctantly pays the bribe, because paying the bribe reduces the market value of the company by less than losing the contract to another firm.

That’s a pretty simple and straightforward example, isn’t it? Governments have been demanding bribes since the beginning of civilization.  Should we pass a law banning such bribes?

If you read the comment section to my previous post, you’d assume that either nothing could be done about this problem, nothing should be done, or both. Why blame the victim, the poor company that is being squeezed by the powerful foreign company? After all, it’s only natural that it would want to pay the bribe, to avoid losing millions in potential profits. You certainly should not ban the paying of bribes, and in any case, corporations would simply ignore a law that did so.  At least that’s the implication of the arguments they used against my proposed law banning corporations from paying ransom.

In fact, back in 1977 the US passed a law banning companies from bribing foreign governments, and many other countries have followed suit.  So this sort of law is certainly not inconceivable.

Interestingly, the argument for banning the payment of ransom is far, far stronger than the argument for banning bribery. It’s all about “externalities”, which work in opposite directions in these two cases.

One criticism of the Foreign Corrupt Practices Act is that it needlessly hampers US companies, and contracts are then diverted to companies with less ethical home governments.  Corrupt governments would naturally prefer to do business with countries that have weak controls on bribery.

The “diversion” argument also applies to extortion, but in this case it works in favor of the ethical country.  If one country threatens to imprison corporate officials for 20 years if they pay ransom, extortionists will naturally seek out victims in less ethical countries that have not passed such a ban.

Corporations are already banned from paying bribes because these payments fuel criminal corruption, which hurts the entire world, not just the parties directly involved.  Paying a ransom also fuels criminal corruption, hurting the entire world, not just the parties directly involved.  If you don’t believe me, ask a motorist in Florida that is unable to buy gasoline.  We ‘d be better off if corporations were not subject to such demands.  Making it illegal for US corporations to pay ransom would discourage extortionists from picking on US companies.

Even today, institutions often refuse to pay ransom, and instead accept losses that are much larger than they would incur if they did pay ransom.  It can be done.  In the long run, US corporations might thank us for such a law.

I understand that my proposal to ban corporations from paying ransom seems utterly crazy to many people, but don’t assume that it won’t happen some day.  Indeed we may already be inching in that direction:

The U.S. Treasury Department is now stepping in with official guidance. In an advisory published October 1, it warns that a victimized organization that makes ransomware payments to certain identified notoriously high-profile cybercrime organizations, or entities in certain countries, could be subject to fines from the Office of Foreign Assets Control (OFAC). Any companies or contractors that a hacked organization works with—including those providing insurance, incident response, and digital forensics, as well as all financial services that help facilitate or process ransom payments—could likewise be subject to fines.

In the comment section, Luc Mennet suggested an alternative to prison, a 1000% tax on ransom payments.  That tax would serve two purposes.  It would make extortion 90% less profitable, and it would divert the gains from extortion from the criminals to the government.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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