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What corruption really costs

Monday 30 January 2012 – by Heidi Lawson

Heidi Lawson, partner at Chadbourne & Parke LLP, looks at the impact of compliance and corruption on a company’s value.

When you mention the word “compliance” to almost anyone working in capital markets, be they bankers, lawyers or accountants, you almost immediately lose your audience.

Compliance is just a cost centre, right? Just another legal hurdle in the way of getting deals done efficiently, right?

Wrong! In the new era of compliance-hungry regulators, who are fighting corruption “Superman” style, it pays to put these issues at the forefront of every deal.

The global focus on corruption shows no signs of abating, and in fact, is intensifying. There are increasingly large penalties, jail sentences and demands on the board of directors for even stricter corporate governance and compliance programs.

The most common and effective tools for exacting punishment are the US Foreign Corrupt Practices Act and the new UK Bribery Act. However, some of the penalties and jail sentences are arguably pale in comparison to the impact on company value.

Impact on Price

FCPA and Bribery Act investigations can have an immediate impact on share price. For example, on March 1, 2011, the Las Vegas Sands Corporation announced that the Securities and Exchange Commission and the DOJ were investigating its FCPA compliance.

By the end of the trading day, its share price had dropped 6.3 per cent, which represented a shrink in market capitalisation of $1.67bn in a single day.

Examples of this kind, showing a marked drop in share price and value in response to announcements of alleged corruption, are common.

FCPA fines are steep and on the increase. In 2010, companies paid in penalties an average of $2.14 per U.S. dollar gained from FCPA violations. This is an 1,800 per cent increase from penalties of just $0.11 per dollar in 2007.

In 2010, corporate fines and disgorgements for FCPA violations amounted to over $1.7bn, which exceeded all previous years. And, the six largest actions in 2010 accounted for $1.36bn of this total.

There are also significant “downstream effects” that can far surpass the cost to companies of FCPA fines and drops in share price. These include securities class action lawsuits, disbarment from foreign contracts and restrictions on the ability to import or export goods and services.

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