Season 2 Episode 29
The Foreign Corrupt Practices Act and Recent International Business Changes Associated with it
Chris Yenkey is an associate professor in the Sonoco International Business Department at the Univ. of South Carolina Darla Moore School of Business and a core faculty member of the Rule of Law Collaborative at the Univ. of South Carolina School of Law. Prior to joining the Moore School in 2016, Prof. Yenkey was an assistant professor of organizations and markets at the University of Chicago Booth School of Business from 2011-2016, where he was the John E. Jueck Faculty Fellow from 2015-2016 and held courtesy appointments in the departments of Sociology and African Studies.
Chris appeared on Moore Impact Season 2 Episode 6 when we talked about government interference in markets and corruption in African nations. In this episode, Dr. Yenkey revisits some of the corruption symptoms but we start with neoliberalism and how the policies of Reagan and Thatcher shaped the globalism that blossomed in the 1990s and early 2000s.
Some topics include:
Learn more about Dr. Chris Yenkey here
Learn more about the Darla Moore School here
Photo Credit: Corporate Compliance Insights
Kasie Whitener (00:04):
Good Tuesday morning to you. Welcome into Moore Impact. My name is Kasie Whitener. I'm the host of our show that brings our Darla Moore School of Business Scholars into the studio, off campus and into the studio to share their research and their professionalism and their expertise with our local Columbia audience, but also with our audience on MakethePointRadio.com. And of course, with our Moore Impact podcast. With me today, Dr. Chris Yenkey, associate Professor of International Business. And we're gonna talk today about corruption. You've been here before, and we talked about corruption the last time you were here. I have these notes from our last conversation that say things like, is corruption dragging down our own government? The numbers are close to Kenya and other unstable, corrupt governments. Like my notes from our last conversation, and that those of you who are listening live right now, you can actually go out and find these show notes for that on um, sc.edu. Just put in more impact and you'll find it, the conversation we had before. So, welcome Chris. Let's talk corruption.
Chris Yenkey (00:59):
Hey, good morning everyone. Kasie, thanks very much for having me back. It's good to be here.
Kasie Whitener (01:03):
Yeah, I'm glad you're here. So let's, let's dive in right away. We were talking about, uh, fair trade all summer long. We've been talking about terrorists. We've been talking about trade policy through our economics department. We've been talking about what the economic impact is, but you and I kind of got into it on the phone yesterday about like, is there a moral high ground? Does such a thing even exist? So what's been happening? What's been going on this summer that's got us concerned about the direction we're headed from a corruption perspective?
Chris Yenkey (01:27):
Yeah. So, uh, I think this is a timely point to talk about this subject because certainly the new administration's, uh, shifting policy initiatives in the international space are, are, are grabbing headlines every day. And, and, and rightly so, uh, tariffs of course are at the top of everyone's minds. Uh, the Trump administration's trying to get the best deal possible, uh, you know, which, which on a lot of ways is, uh, you know, is really understandable. Uh, how do we get that best deal? What does that best deal look like in the long term? What are the repercussions, uh, of any particular deal, I think is where things start to get, get kind of gray. Uh, and so I understand you've had, uh, some of our trade and tariff experts in, and so, uh, so my role I think this morning is to talk about shifts in U.S. Policy, especially as it, uh, involves, uh, regulating corruption worldwide.
Kasie Whitener (02:24):
Yes. I think a hundred percent. Yeah. So when, uh, Bill Hauk was here, we talked about South Carolina being a recipient of foreign direct investment. And how the tariffs affect South Carolina. On a podcast I was listening to this morning, they were talking about this new deal with Nvidia being able to sell its chips to China and having to pay 15%, they've agreed to give 15% of their profits on these particular chips sales to the government. That is an unusual role. For government to play in any kind of business transactions. Yeah. So talk to us about like, kind of what was the business landscape? How did government exchange, or what was the relationship between government and business in that global marketplace before all this came down? I mean, if, if you were to say like, how, where is the government spectrum? It's either highly involved or it's like not involved at all.
Chris Yenkey (03:09):
Oh, well, so when you say before the current time, I mean, before is a really big period of time. So it's not like there was one simple way of handling things. And then the second administration was inaugurated in January and everything changed.
Kasie Whitener (03:24):
Right.
Chris Yenkey (03:24):
There's a, you know, you've got, so the question was around, uh, government involvement in the global system. And I think that, uh, especially since Reagan, since Reagan is often pointed to as the benchmark administration. Uh, especially among conservatives and Trump supporters, there's a, there's a very fond, uh, recollection of the Reagan years. So let's,
Kasie Whitener (03:48):
For the, for the modern economy.
Chris Yenkey (03:49):
For the modern economy, exactly. And so Reagan was part of, and we're getting, we're we're getting into economic history here to kind of set the table, I think.
Kasie Whitener (03:58):
Sure.
Chris Yenkey (03:58):
So, so Reagan and his counterpart in the uk, Margaret Thatcher, uh, we were the catalyst, uh, of the, um, the, uh, neo, uh, oh my goodness,
Kasie Whitener (04:10):
Neoliberalism.
Chris Yenkey (04:11):
The, the neoliberalism movement. And I don't know if you've already discussed this with, with listeners.
Kasie Whitener (04:16):
No, we've not.
Chris Yenkey (04:16):
Okay. So neoliberalism is kind of the economic, oh boy. Somebody, uh, if, if really specialist colleagues are listening, they're gonna, they're gonna razz me for this one. But neoliberalism is kind of the conservative policy manifestation, uh, in the, in the global space. And so neoliberalism prioritizes free markets with less government involvement and intervention. So we want less regulation. We want, uh, increased ability for private companies to compete against each other, uh, initially in a domestic space, but now in a global space under the belief that that competition is gonna keep everybody healthy and strong, and the best are gonna rise to the top.
Chris Yenkey (05:01):
Uh, which does two things for us. One is it stimulates a meritocracy, right? Where people who are smarter and work harder, make more money. Uh, but it's also healthy for the global economy and global society because it gives us higher quality goods and services. That's the philosophy.
Kasie Whitener (05:16):
Ideally.
Chris Yenkey (05:16):
Ideally, that's the philosophy, uh, behind it. And now, you know, you've got, it's a confusing landscape. So I'm gonna be really, really careful here to, to, to avoid commentary and just put issues on the table. You've got an increasingly complicated landscape since Reagan. So, uh, listeners at home, you know, if you're sitting there with your phone or your laptop, or your computer, whatever it is, you can just google, you know, history of, of global trade. Uh, and what's probably gonna pop up is a graph on your screen, uh, that is kind of jaw dropping in terms of the total dollar value, uh, of global trade.
Chris Yenkey (05:58):
Because this, the new era of globalization and global trade really kicked off, uh, just before Reagan, and then really accelerated during those years. Doesn't mean Reagan caused it, right? Uh, but he and Margaret Thatcher were sitting at the desk, right?
Kasie Whitener (06:13):
Right.
Chris Yenkey (06:13):
He was sitting at the resolute desk as this, as global trade was really, really exploding. So, you know, so in the early days of anything, the issues are relatively straightforward. But as we know, as time goes on and more people get involved, and now we've got several billion more people in the world, right? And, and, and global trade is, uh, is, you know, orders of magnitude larger than it was in the early eighties. Uh, the situation has become a lot more complicated. And so now you've got an administration that espouses a conservative neoliberal kind of agenda, but is cutting deals. You mentioned Nvidia. You know, I mean, it's like, okay, well, you can sell the most sophisticated technology in the world to our biggest competitor, and arguably our largest national security threat. As long as you give us 15%, it's, uh, it's an odd position to take. And I'm not saying it's wrong, I'm just using that as an example, uh, of how complicated.
Kasie Whitener (07:10):
Well, It's, it's the most recent one. I mean, I think that's the idea is to, like, every, every new deal that comes out seems like even more of a creative take.
Chris Yenkey (07:19):
Yeah, yeah.
Kasie Whitener (07:20):
On, on and there, and the, the lack of visible strategy sort of has everybody kind of wondering. And, and the podcast I was listening to this morning, he said, it's straight outta The Art of the Deal, is to say, like, I don't want anybody to know what I'm really trying to do. Right?
Chris Yenkey (07:33):
That's right.
Kasie Whitener (07:34):
And so, everything seems to be a little obfuscation and some, you know, red herrings kind of all, uh, you know, put out there in, in the water.
Chris Yenkey (07:41):
I think a good question for all voters in, in all democracies at all times, to ask themselves repeatedly would be, this is a good deal for whom?
Kasie Whitener (07:51):
Yeah.
Chris Yenkey (07:52):
Right? Because it's very easy for any given leader, whether it's Republican or Democrat, or, you know, Kenyan or Nigerian or, or French or whatever it is, uh, to say, look, oh, this is a good deal. Well, okay, you know, a good deal for whom, right? Where's that 15% go? Right? Does that fund education? Does that fund infrastructure? Does that lower my,
Kasie Whitener (08:10):
Does it pay off the national debt?
Chris Yenkey (08:11):
Does it pay off the debt? For God forbid, we should actually do that. Right? Uh, you know, that kind of thing.
Kasie Whitener (08:17):
Yeah.
Chris Yenkey (08:17):
And so there's a lot less accountability, uh, on that sort of on, once you get into those details.
Kasie Whitener (08:23):
We're gonna run to our first break. And on the other side, when we come back, I wanna unpack things like the IMF and the World Bank and these loans, and some of these other things we've kind of been talking about in terms of like how the US works with international countries, and how the business lines transcend those national lines. It's Kasie and Chris Yenkey in here on Moore Impact. We're doing more about global business. We'll be right back.
Kasie Whitener (08:57):
Welcome back into Moore Impact. Kasie Whitener here with Chris Yenkey. We're talking international business, and as we were going to break, I kind of threw a bunch of like World Bank IMF kind of stuff out there. But before we get to that, I wanna talk about the corrupt,
Chris Yenkey (09:10):
Foreign Corrupt Practices Act.
Kasie Whitener (09:11):
Foreign Corrupt Practices Act. Let's talk about legislation that creates boundaries for government or, or boundaries for, for companies. What is the Foreign Corrupt Practices Act?
Chris Yenkey (09:20):
Yeah. The Foreign Corrupt Practices Act is, is, uh, uh, a fascinating, uh, US law. And, and we kind of set it up a little bit before a break, talking about the rise of neoliberalism in the Reagan era, uh, as it coincided with increases in international trade. So, let me, uh, and you're gonna have to forgive me for a second. I'm gonna put my professor hat on for a minute. I'm going to, uh, give everybody a little bit of a, a mini history, uh, lesson here. I'll try to make it not sound like such a lecture
Kasie Whitener (10:35):
Right.
Chris Yenkey (10:36):
Okay. All right. Well, so that's not good. All right.
Kasie Whitener (10:37):
As, as they would say, they used to just bribe the committee members. Now they're bribing the White House.
Chris Yenkey (10:41):
Now they go straight to the top.
Kasie Whitener (10:42):
Right.
Chris Yenkey (10:42):
So, uh, okay, this isn't good. But interestingly enough, at the time, there wasn't a law against it, right? Bribery domestically was against the law, bribing a foreign official. We didn't have a law for it.
Kasie Whitener (10:54):
Right.
Chris Yenkey (10:54):
And so, in response to that, in 1977, Congress passed the US Foreign Corrupt Practices Act, and it barred US companies from bribing foreign officials, uh, in the service of, of winning business, right?
Kasie Whitener (11:07):
Right.
Chris Yenkey (11:07):
More, more or less now, over the year. Well, it, it also had a second provision. One is that comp. The second is that the companies had to keep what they called fair and accurate accounting. Okay. Now, in the, in the, the sense of what we teed up, uh, before the break, this is all in service of fair competition and fairness to investors,
Kasie Whitener (11:28):
Right.
Chris Yenkey (11:28):
because if your company is spending lots of money off the books on illicit activities, that's information that shareholders should have so they can be informed about where to invest their money.
Chris Yenkey (11:37):
All right. So that's, the law initially passed in 77. It was amended a couple of times over the years to expand its powers to regulate. Uh, a big one was that it was expanded to also cover foreign companies that are listed on US capital markets.
Kasie Whitener (11:55):
Okay.
Chris Yenkey (11:55):
So if you're a German or a Japanese or a Chinese company, you're traded on the New York Stock Exchange. You're, you fall under US Department of Justice jurisdiction. And so, even if you're a German company, bribing an official in India to win an infrastructure com, uh, infrastructure contract, you can still be prosecuted under the Foreign Corrupt Practices Act.
Kasie Whitener (12:15):
So let's talk about the enforcement of the Foreign Corrupt Practices Act. Which agency is responsible for keeping a watchdog eye on this stuff and bringing those things to light.
Chris Yenkey (12:24):
Department of Justice.
Kasie Whitener (12:25):
Okay.
Chris Yenkey (12:25):
Yeah. With, uh, with some, uh, also kind of side role for the Securities and Exchange Commission, which is the, the regulatory agency that, that, uh, that monitors.
Kasie Whitener (12:33):
For the markets.
Chris Yenkey (12:34):
That monitors financial markets. That's right. And so, if, uh, again, listeners at home, don't take my word for it, right? Google Foreign Corrupt Practices Act Enforcement. Right. And what you're gonna get is you're gonna get a bunch of results that show you sort of the top FCPA cases. And what you're gonna see is that in the top 10 of these cases, at least half of them are foreign corporations. Right? Siemens, for example, is the number two. Goldman Sachs is our number one winner. Uh, they paid one point, I think it's double, check me with your own Google search. I think it was 1.4 billion in fines.
Kasie Whitener (13:07):
Wow.
Chris Yenkey (13:07):
Uh, for bribing officials overseas to win contracts in various countries. But German, uh, engineering giant Siemens is number two, uh, Erickson, which I believe is Swedish. Is probably number three, or number four, if my memory serves me right. So this, this act really has a global reach. Now, again, setting up, uh, from our, our earlier conversation around Reagan and fairness and free trade. Okay. Because the US had the Foreign Corrupt Practices Act starting in the late seventies. What it meant was that we now have an incentive to create a fair enforcement system or a fair regulatory anti-corruption system worldwide. So the US starts pushing anti-corruption and anti bribery conventions through international organizations like the United Nations, the OECD, uh, uh, as well. And so we got lots of anti bribery conventions that now most countries in the world have signed onto. Right. The US was a huge advocate for this because of the belief that corruption distorts markets.
Kasie Whitener (14:12):
Right.
Chris Yenkey (14:13):
And that America is the home of the highest quality companies in the world. Right. And that in a fair fight worldwide, US companies are, are gonna do well. That, that, because bribery is such a distortion, you could have a foreign company that has a lower quality product that bribes their way into a contract. This hurts US economic interest because our companies lose the contract, but it also distorts the quality of products and services available globally.
Kasie Whitener (14:42):
Okay.
Chris Yenkey (14:43):
Okay. So the whole Foreign Corrupt Practices Act framework combined with international conventions that are based on it, are based on having a global system of a fair fight where bribery won't be tolerated.
Kasie Whitener (14:56):
Gotcha.
Chris Yenkey (14:57):
All right. All right. All makes sense.
Kasie Whitener (14:58):
And this is all like mid eighties, early eighties, like, you know.
Chris Yenkey (15:00):
Yeah. The initial, the, uh, the initial act was passed in 77. It was amended, uh, several times, uh, once in the late eighties, again in the late nineties. Right. It's, it's gotten tweaked here and there over time.
Kasie Whitener (15:13):
And as we get into digital businesses and we create this like endless infinity real estate of digital commerce and the digital world, right? The Foreign Corrupt Practices Act is still in effect, it's still being enforced by the Department of Justice.
Chris Yenkey (15:28):
Well, there's where things get really interesting, because as of June 9th, uh, we have of this year, of this year, we have a new enforcement memo from the Department of Justice, right. That radically alters enforcement of the Foreign Corrupt Practices Act.
Kasie Whitener (15:45):
Okay.
Chris Yenkey (15:45):
Now, again, if you're listening at home, don't take my word for it. Get on Google. Google Blanche Memo, B-L-A-N-C-H-E, the Blanche memo. Todd Blanche is the assistant, uh, or sorry, is the, uh, the deputy, uh, attorney General Todd, right? Yeah. Todd, Todd, Todd Blanche, I believe
Chris Yenkey (16:34):
Hold tight. We'll get back to you.
Kasie Whitener (16:36):
Okay.
Chris Yenkey (16:36):
Alright. So they got back to us on June 9th when, uh, the Department of Justice issued what's now known as the Blanche Memo. It is a four page document that outlines the new administration's approach to enforcement. It does not change the law, and we're gonna,
Kasie Whitener (16:53):
It can't, yeah.
Chris Yenkey (16:53):
It can't. Right. That takes an act of Congress. Right? We'll come back to that in a second, but it, but the Department of Justice can choose how it's gonna enforce any given law, and they like to have a transparent relationship with US businesses. So that there's less uncertainty around how laws are gonna be enforced.
Kasie Whitener (17:12):
Right.
Chris Yenkey (17:12):
So, the Blanche memo outlines the new enforcement approach, uh, for the Foreign Corrupt Practices Act, and it is a radical reorientation.
Kasie Whitener (17:23):
Okay.
Chris Yenkey (17:23):
It essentially, and again, you don't have to take my word for it, you can read it. Right. What it says is, we are not gonna prosecute US companies for engaging in business that is normal in corrupt context.
Kasie Whitener (17:36):
So if the country has a culture of bribery, uh, then we're not going to penalize our US companies for participating in that culture and doing conducting business the way the other businesses in that nation are conducting business.
Chris Yenkey (17:54):
Yeah. Uh, as a, as a general statement, that's perfectly fine. If any of my students are listening, they know that I'm bristling at the word culture
Kasie Whitener (18:09):
Right.
Chris Yenkey (18:10):
The Department of Justice is no longer going to penalize US firms for engaging in corruption that is normal in that location. Now, that's just the first part of, of the statement. The second part of the statement though, actually turns around and goes the opposite direction and says that it will go after US competitors. It is fundamentally a double standard that is now put the Foreign Corrupt Practices Act in the middle of this, of this double standard. On the one hand, US companies are not going to be targeted if they're doing what they consider to be normal. But foreign companies that are competing with US interests in any particular space can be targeted
Kasie Whitener (18:57):
If they commit the same,
Chris Yenkey (18:59):
In their competition with a US firm for a given contract. Right. Let's say the US firm tries to bribe the official, and, and the, the language doesn't explicitly say Chinese firms, but this is how it's written. Uh, and you're gonna find lots of expert commentary that says this is, this is how, that's it's written, it's it's written to help us be able to target Chinese competitors. Right. If we're competing for the same contract. Right. The enforcement guideline is now to that the US will go after the foreign competitor and not the US company especially. And this is explicitly stated in the, uh, in the memo, uh, around issues, uh, of comp competition, uh, for critical minerals and port access worldwide.
Kasie Whitener (19:44):
Okay. Um, so I wanna understand that the Foreign Corrupt Practices Act is enforceable by the Department of Justice. Up until recently, the Department of Justice was enforcing it equally across all companies, whether those were US companies or foreign companies, as long as they were committing these unsavory practices. Right. Things that we felt were, uh, not competitive, they were anti-competitive practices. Yeah. And yet, now under new direction, US companies are allowed to justify their behavior, but foreign companies that are participating in the exact same behavior will be targeted by the Department of Justice.
Chris Yenkey (20:22):
Exactly. Right. Okay. So let me just, let me just sort of rephrase what you, what you said. Right. You're exactly right. Okay. Another way to rephrase it is that historically, for the previous 50 years, since almost 50 years since the passage of the Foreign Corrupt Practices Act, the, the approach, the strategy, the philosophy has been to take a rule of law approach to ensuring fair competition based on quality
Kasie Whitener (20:49):
By all competitors.
Chris Yenkey (20:50):
worldwide, by all competitors, no matter where you're from because of the belief that US companies were the best position to compete.
Kasie Whitener (20:57):
Right.
Chris Yenkey (20:58):
Right. And now we are, as we are literally formalizing a double standard where global competition now, uh, is, uh, is being influenced by the government. So again, circling back to Reagan, right? We've got a government intervention into the international business space via this lopsided enforcement of anti-bribery conventions.
Kasie Whitener (21:25):
Alright. On the other side, we're gonna talk about what's the impact of this, what's the fallout gonna look like? And, uh, what, if anything we can do about it, we'll be right back.
Kasie Whitener (21:48):
Welcome back to Moore Impact. Kasie Whitener here. This is our show where we have the Darla Moore School of Business Scholars and practitioners come in and talk to us a little bit about the work that they do on the research side, but also the practical application of that research in what we're seeing in our government and political landscape. And so today I've been talking with, uh, Dr. Chris Yenkey, who's a professor of the international business, about the Foreign Corrupt Practices Act, and the recent administration's first pause on enforcement, and then the Blanche memo, which is, this is their new address to enforcement. This is their new philosophy toward enforcement, which creates a double standard between US businesses and foreign businesses, uh, operating overseas. And, uh, I wanna be clear, like as people are just joining the program, what we're talking about here is just what we're seeing out loud. These are like not opinion conversations you and I are having. This is like out loud, what's being done. Uh, and, and, and people can Google it and find you keep saying that. Like, go look it up. You can find it. It's all out there. I'm not making this up. Uh, let's talk about this double standard. Let's talk about what the fallout for something like this really is, especially for US businesses.
Chris Yenkey (22:57):
Yeah. Yeah. So, so just as a quick summary just before the break, we're talking about changing an enforcement in the Foreign Corrupt Practices Act. What had been, uh, illegal since 1977, the bribing of foreign officials, uh, the DOJ is now saying they will pause that enforcement. They will not go after US companies for engaging in what they call routine business practices overseas, but they will go after the, the strategic competitors of US businesses. Alright. So let's talk about the, the pluses and then the minuses, which is where we want to go to. So, look on the, on the plus side, uh, the argument is that this is good for us business because it allows them a fair fight, uh, in, in corrupt, in places where corruption is normal and they're, and that a resource heavy, this gives, uh, you know, this no longer hamstrings US businesses that's good for us interests, especially as it, uh, revolves around port access and access to rare earth minerals like copper and lithium, and all of these, uh, critical minerals that are necessary for the new digital economy. That's on the positive side.
Kasie Whitener (24:02):
Let me ask you this really quickly, because I'm wondering as when we see a shift like this, when an administration comes in and they make a shift like this, it's because something has been happening that made them go, that doesn't work anymore. So, were there nations, were there instances, were there deals out there that we were missing out on, that we lost out on because our competitors were playing by their own rules?
Chris Yenkey (24:25):
Absolutely.
Kasie Whitener (24:25):
Okay.
Chris Yenkey (24:25):
You bet. And, and, and to be fair, for many, many years, the US I mean, I Google the Department of Commerce, the US Department of Commerce over the years has even issued multiple memos, right? Asking for a, a toning down, if you will, of the Foreign Corrupt Practices Act enforcement specifically because of this double standard.
Kasie Whitener (24:44):
Right.
Chris Yenkey (24:44):
It is a double standard. Like, I don't, I can't imagine an objective perspective that doesn't recognize that. The question though is why do we have that double, like, do you want to give up on enforcement? Right? And, and just,
Kasie Whitener (24:57):
Or do they think.
Chris Yenkey (24:58):
Call it the Wild West and let people,
Kasie Whitener (24:59):
Or do they think enforcement wasn't working,
Chris Yenkey (25:01):
Or maybe enforcement wasn't working, but that's not the approach we see here. We're not seeing a new approach to enforcement. We're seeing an elimination of it. And so, so let's talk about the three risks or the three downsides, uh, that were, that we're worried about now in the international business space. First, the first one, which I think is the most obvious, is that the US is, is joining a race to the bottom when it comes to corruption. That for a long, long time, you know, I mean, the US is not a perfect com uh, country, right? But for a long time in this space, we were the leader in anti-corruption initiatives.
Kasie Whitener (25:33):
Right.
Chris Yenkey (25:33):
When it comes to international enforcement of anti-bribery statutes, uh, the US is by far the leading country in, in prosecuting companies for engaging in this practice. Uh, typically Germany is, uh, nu is number two, and the UK comes in at third.
Kasie Whitener (25:48):
Right.
Chris Yenkey (25:49):
Uh, right. And in a year to year basis, sometimes Germany and the UK kind of switch spots, but the US always has the most prosecutions. We take it the most seriously. But we've, we've essentially given up on that.
Kasie Whitener (25:59):
Right.
Chris Yenkey (26:00):
At least for the term of, of this, uh, of the current administration.
Kasie Whitener (26:03):
Right.
Chris Yenkey (26:03):
And so we are now a part of the race to the bottom in this, in this space, right? If you can't beat 'em, join 'em,
Kasie Whitener (26:11):
Right.
Chris Yenkey (26:11):
Is is the new approach. All right. So race to the bottom, not good for all the reasons that Reagan argued, right? We need fair competition. We need to foster quality and not perverse incentives like bribes, et cetera, et cetera. All right? Race to the bottom is the number one race.
Kasie Whitener (26:24):
And you've mentioned before, bribery corrupts fair markets.
Chris Yenkey (26:27):
Absolutely. Right? I mean, anybody can, anybody can have their own example of this, right? You can either have the best product or you can bribe somebody, right? I mean, we even do it as parents sometimes, right?
Kasie Whitener (26:49):
I I don't parent that way, Chris, but it's fine. But I know people.
Chris Yenkey (26:52):
Yeah, I know what you're
Kasie Whitener (27:32):
Right.
Chris Yenkey (27:33):
So it's like, you know, when we're driving down the highway in South Carolina, we know that, we know the state patrol is gonna give us, you know, some number of miles an hour over the speed limit. Right?
Kasie Whitener (27:41):
Nine.
Chris Yenkey (27:41):
We've all gotta, you know, they don't explicitly state it in a memo, right?
Kasie Whitener (27:45):
Right, right.
Chris Yenkey (27:45):
But we understand that there's a difference between the letter of the law and how that law is enforced.
Kasie Whitener (27:49):
Right.
Chris Yenkey (27:51):
All right. But that doesn't mean that the law can't be enforced at a later time.
Kasie Whitener (27:54):
In the next administration.
Chris Yenkey (27:55):
In the next administration or tomorrow. You know, just because you sped on your way to Charleston yesterday doesn't mean you're gonna get away with it tomorrow.
Kasie Whitener (28:01):
Right.
Chris Yenkey (28:02):
And so there's risk there. So for any company that's operating in one of these high corruption contexts where they're going after mineral rights deals or whatever it is, they also know that they can still be prosecuted by any future administration who chooses to reverse their enforcement guidelines.
Kasie Whitener (28:20):
They just,
Chris Yenkey (28:21):
and puts 'em in a real conundrum.
Kasie Whitener (28:22):
They just know they're not gonna be prosecuted right now.
Chris Yenkey (28:24):
Exactly.
Kasie Whitener (28:25):
And so they might decide, hey, the payoff, you know, in the short term, is worth it for us to make these choices in Botswana, in Kenya, wherever we're operating right now. And then, you know, we'll just roll the dice that five years from now, we're not gonna, you know, we may have fines, but we will have made plenty of money.
Chris Yenkey (28:42):
Absolutely. So you've got, uh, legal teams and risk management departments at multinational corporations that are pulling their hair out, right? Right Now.
Kasie Whitener (28:51):
Trying to figure out, is this worth the investment?
Chris Yenkey (28:53):
Is this worth the risk or not? Right?
Kasie Whitener (28:55):
Yeah.
Chris Yenkey (28:55):
Because on the, on the sales side, you can imagine the sales side is like,
Kasie Whitener (28:59):
Oh they don't care.
Chris Yenkey (28:59):
Let's go for it, baby. They'd like,
Kasie Whitener (29:01):
Your sales reps will sell stuff you don't even do man.
Chris Yenkey (29:03):
Exactly. Risk management is, is pulling a tear out.
Kasie Whitener (29:05):
Yeah.
Chris Yenkey (29:05):
So we've got risk of future prosecution is an unintended consequence. Okay. The, the second, uh, unintended consequence, and the, the third downside is that we, uh, we think, and we don't have clear data on this, we're still, we're still working on the issue, but it's reasonable to think that a lot of US companies operating overseas use the Foreign Corrupt Practices Act as cover. So that they don't have to engage in immoral and ethical practices like bribery.
Kasie Whitener (29:34):
Right.
Chris Yenkey (29:35):
Well, now their counterparts, you know, uh, their government officials that they have to deal with overseas, they have read the Blanche memo too. Right?
Kasie Whitener (29:43):
Right.
Chris Yenkey (29:43):
And so we, uh, worry that there is a big risk for us companies operating overseas that don't need to bribe, that don't want to bribe, but now can become targets because their, their government counterpart in the host country understands that that enforcement is not an issue anymore.
Kasie Whitener (30:00):
The things you used to get away with in Morocco, right.
Chris Yenkey (30:04):
Or, or you spent, you spent a long time building up a business in Morocco.
Kasie Whitener (30:08):
Right.
Chris Yenkey (30:08):
And you did it ethically.
Kasie Whitener (30:09):
Right.
Chris Yenkey (30:09):
And you played by the rules.
Kasie Whitener (30:10):
Right.
Chris Yenkey (30:11):
And now that's all, that's all.
Kasie Whitener (30:12):
Because Moroccan officials know that they could be making more money off of you.
Chris Yenkey (30:16):
Exactly.
Kasie Whitener (30:16):
Because your government's not going to enforce the foreign correct practice.
Chris Yenkey (30:19):
Exactly. And so we've got some ideas in the International Business Department about how to collect data on this, but it's really difficult because, I mean, how many multinational corporations are you gonna call up and say, Hey, now that you know, since the Blanche memoir, are you getting shaken down a lot more? You know?
Kasie Whitener (30:33):
Right.
Chris Yenkey (30:33):
Most companies don't really want to talk about that, so. Uh, so this is, uh, this is something we worry about, but it's, it's, uh, it's very difficult to get hard data and hard evidence, uh, on a, on a stigmatized practice like this.
Kasie Whitener (30:46):
All right. When I first, uh, you and I first started talking about doing this episode, I had mentioned to you a book called, uh, Confessions of an Economic Hitman. Which is a practitioner book that's out there in the space. Somebody had, when I, uh, I mentioned I was running for Senate, somebody said to me, you've gotta read this book. She said, once I read this book, I just gave up. There's just no, there's no real, you know, uh, ethical behavior anywhere in the world after I read this book. And the gist of the book is that our, the US government intercedes or intervenes on behalf of our corporations in nations worldwide. To create opportunities for these companies. And so as we started talking about the Foreign Corrupt Practices Act, I was like, well, has our government, how involved has the government been in these markets? How, how much have they been manipulating these markets or creating opportunities for our businesses? Isn't just this just how we've always done things?And just now we're maybe being honest about it.
Chris Yenkey (31:40):
Yeah. So, okay. So we're pivoting. So we're pivoting a little bit. Yeah. We we're pivoting and in a, in a really interesting and important way. Right. But we're still on the topic of what is the role of government in international markets.
Kasie Whitener (31:52):
Yes.
Chris Yenkey (31:52):
In global marketplaces. And, and we have initially talked about the Foreign Corrupt Practices Act and trying to, to keep things ethical and, and have a, a Right. A rule of law basis for international business.
Kasie Whitener (32:03):
With fair markets being our ideal.
Chris Yenkey (32:05):
Absolutely. Right. Absolutely. Right. So now we're into a really interesting, uh, sort of, uh, additional way that governments get involved. And you've mentioned the International Monetary Fund and the World Bank explicitly, again, sorry, I gotta do a little bit of a history.
Kasie Whitener (32:19):
Please do.
Chris Yenkey (32:20):
That's all right. And, and so, uh, again, everyone at home can, can Google, you know, uh, history of the World Bank and the IMF. Here's what you're gonna find when you read up on this post World War II in 1944, uh, I think, or no, sorry, 47, uh, I think it was 44 countries came together, uh, in a charming, quaint little New Hampshire town named Bretton Woods. Uh, and the idea was how to foster economic stability worldwide in the wake of World War II, because, you know, lots of places were, were bombed out. Right, right. And, and, and economically a complete disaster.
Chris Yenkey (32:57):
And that's a breeding ground for more militarization and that kind of
Kasie Whitener (33:01):
More violence.
Chris Yenkey (33:01):
More violence. And so what we needed was a stable global international order to support peace so that there was less of a, less of a, of a push, uh, into, to conflict and violence. What you got outta that was the World Bank and the IMF. Now, technically, uh, the World Bank was originally the International Bank for Reconstruction and Development, and then it changed its name, but whatever.
Kasie Whitener (33:22):
Okay.
Chris Yenkey (33:23):
If you, if you're really interested, you can keep digging on that. But, uh, but essentially you got the World Bank and the IMF, the World Bank, and the IMF have historically two different missions. The World Bank is there to provide financing for infrastructure projects. So when your buildings and your roads and your hydroelectric dams and all that were destroyed by the war, the World Bank comes in and provides financing for infrastructure projects. The International Monetary Fund provides short term loans, so your, you can make ends meet in your budget, so to speak.
Kasie Whitener (33:55):
Alright. When we come back on the other side, we're gonna talk about how the World Bank and the IMF and the US government make things available to US businesses overseas. We'll be right back.
Kasie Whitener (34:26):
That feels like exactly the right intro for what we're about to start talking about. Kasie and Chris here, back on Moore Impact. We got our final segment of the show. As we're going to break, Chris kind of laid out the framework of the IMF and the World Bank. And what I wanna talk about is how the US government enables US businesses to engage in business overseas with both the World Bank, the IMF and, and other trade policies. So let, let's get into it.
Chris Yenkey (34:52):
All right. Great. So we understand that the World Bank basically funds big infrastructure projects. You wanna build a road or a dam. The IMF is there for short-term loans so that you can, a country can, can pay its bills. Now, there's a huge amount of money available through these, right. And, and countries can contribute to a fund. The US is, uh, is the leading contributor to, to both institutions. Uh, as, as, uh, you know, most would argue it should be as the world's leading economy. Uh, but we'll, we'll set that aside. 'cause there's some contention there around whether or not the US contributes too much or more than its fair share. Uh, but this is, this is the way it works. So, uh, so then over time, over the, over the decades, the World Bank and the IMF, uh, as Western Lending Institutions developed a, a, an approach, if you will, to lending that has come, uh, to be known by the term of loan conditionality.
Chris Yenkey (35:45):
So, yes, we will make you this loan from the IMF to pay your bills or this loan from the World Bank to build roads or bridges. Right. But these loans come with conditions, and sometimes those are, a lot of times those conditions are around policy reforms in the country. So loan conditionality again, uh, really rose during the Reagan administration because of their belief in neoliberalism. And that markets were the best coordination device out there. So what you see a lot of are a really common example of loan conditionality is that if a developing country wants this loan, it has to privatize lots of state-owned companies, for example, under the belief that that private markets are more efficient and more innovative. Okay. But you've, you've got lots of different conditions that can be placed on these loans. And then also some conditions are about projects, uh, where the terms of the loan for the project can also favor US companies. Now, this doesn't have to be corrupt because, you know, you can, you can believe, or it can be true, uh, for example, that a US construction company, uh, offers the best product for building your new dam. Or building your new road or something like that. Uh, but over the decades, loan conditionality became, uh, not just a, a an element of, of, of international lending, but a core feature of it.
Kasie Whitener (37:08):
Right.
Chris Yenkey (37:08):
Now,
Kasie Whitener (37:09):
Hang on, hang on really quickly, please. Because I just wanna ask a quick question. So if you are, uh, if I'm in, say, Argentina and we need something, right? Uh, and then a US company comes and they go, Hey, you need this something, be it roads or a dam or schools or whatever it is, and we say, well, we just don't have the money to pay you to be able to do this. And the US company goes, let's go to the IMF and see what they can do for us. Is that how that relationship goes? Or is it that the, that the IMF says, you know what, um, we, we don't really care who you, uh, spend your money with. And then, you know, over there, the US is going, pick me, pick me,
Chris Yenkey (37:45):
And then there's a bidding process.
Kasie Whitener (37:46):
Right.
Chris Yenkey (37:46):
Yeah. I'm not that familiar with the sequencing of it.
Kasie Whitener (37:50):
Okay.
Chris Yenkey (37:50):
My hunch is that it's more of the latter than it is the former.
Kasie Whitener (37:53):
Okay.
Chris Yenkey (37:53):
So I think that, I think the infrastructure needs of a given country are pretty well known in that country.
Kasie Whitener (37:58):
Right.
Chris Yenkey (37:58):
Right? And so they seek a way to, to fix that infrastructure problem. And then once they have, you know, cash in the bank or a, or a line of credit, uh Right. They can open up the bidding process.
Kasie Whitener (38:09):
Gotcha. Yeah. Okay.
Chris Yenkey (38:09):
Yeah. I don't think we're, I don't think there's too many US infrastructure companies out there kind of, you know, beating the bushes on sales calls.
Kasie Whitener (38:15):
Right.
Chris Yenkey (38:15):
I think these projects are, are pretty well known. So, okay. So you've got us, so you've got loan conditionality as a Western, uh, sort of, uh, approach, uh, to this, to this model. It's, uh, it exploded, uh, in the Reagan years. And don't kid yourself, Bill Clinton was just as in into loan conditionality, and so is Barack Obama as, as anybody else. So, right. It's now a core feature. Okay. You can imagine over time though, that, uh, sovereign states don't really like being lectured to and don't like really being told how to run their countries.
Kasie Whitener (38:46):
Right.
Chris Yenkey (38:47):
Right, even as, you know, conditions are poor and they're not, you know, necessarily
Kasie Whitener (38:53):
Yeah.
Chris Yenkey (38:53):
They still don't like to be pushed around.
Kasie Whitener (38:55):
But if you're a dictator and you and your 32 friends are in charge, you don't wanna be told that you gotta share that money. That you just got from the IMF with all the rest of the people in your country.
Chris Yenkey (39:03):
Hundred percent.
Kasie Whitener (39:03):
I got you.
Chris Yenkey (39:04):
For, for lots of different reasons. And, and don't get me wrong, I spend a lot of time in my classes holding developing country governments, uh, accountable for bad decisions and bad governance. Right.
Kasie Whitener (39:15):
Right.
Chris Yenkey (39:15):
So, I, I'm not sweeping this stuff under the rug at all.
Kasie Whitener (39:17):
Right.
Chris Yenkey (39:17):
We're just, we're doing our best, telling a long story in a short period of time here. But loan conditionality is, is a key feature of Western lending. All right. Now you've got the rise of China. Enter, enter China, uh, enter the global stage with increasing cash reserves. Right. And as their economy is growing, as the manufacturing sector is growing, they are resource poor and cash heavy. And so they are, uh, uh, you know, over the last, say, 20 years or so, increasingly in a position, uh, based on cash reserves and resource demands, uh, that they are in a position to then provide an alternative lending arrangement to lots of developing countries. The Chinese explicitly disavow conditionality. The Chinese will never step in and tell you how to run your country, change this policy, we're concerned about your human rights record, you know, this kind of stuff.
Kasie Whitener (40:11):
You must use a Chinese developer.
Chris Yenkey (40:13):
Well, so that's there. So there's, there's a couple of things that come with, with Chinese money. One is the lack of conditions in terms of, uh, policy changes and that sort of thing. But there they do drive a very hard bargain, and they very often like Chinese companies and Chinese labor to do the work. So one critique of the, the non unconditional, the unconditional Chinese lending model is that they come in, uh, and instead of helping develop and stimulate the local economy, it's best for Chinese companies because the Chinese companies get the contract and they import workers. And when the job is done, they all, they all go back home.
Kasie Whitener (40:52):
Right.
Chris Yenkey (40:52):
The second is that the Chinese lenders are a lot less forgiving if you fall behind on your payments. Uh, and so the World Bank and the IMF have a long established track record of accommodating different repayment terms, especially as shocks hit.
Chris Yenkey (41:10):
Right? Because the global, the global markets change all the time. Right. You could have a country, an economy that is based on, say, cocoa beans or coffee or sugar, right. Or even oil. Right. And you invest heavily in that sector because it seems like a good idea at the time. And then there's a shock to that commodity price and the price goes down. Well, the World Bank and the IMF have a pretty good track record of working with a company or a country to, uh, to reformulate their, their repayment goals. The Chinese are a lot less tolerant. Uh, and so you have concerns, and again, people should, should google this, uh, and read more about it. These are two sides of a perspective, not truth versus, versus lies here. But the, the critique of this Chinese model is, uh, is what has come to be known as debt trap diplomacy.
Chris Yenkey (41:57):
So that the Chinese are, make, the argument is that the Chinese are making risky loans for high risk projects, and if the project works that's great, they get their money back. But if not, they can come in and sort of repossess the railroad or repossess the port. Right. Or it gives them a strategic advantage, you know, almost like you might think of a payday. And, and again, this is a perspective, this is not my argument of what is right or wrong. But the comparison, uh, is often with, say, payday lenders.
Kasie Whitener (42:26):
Right.
Chris Yenkey (42:27):
Right? You're, you're loaning to a high risk group at unfavorable terms, and they are not set up for success. But it's okay because the lender is holding collateral.
Kasie Whitener (42:38):
Right.
Chris Yenkey (42:39):
And so the lender's gonna be fine no matter what.
Kasie Whitener (42:41):
Right.
Chris Yenkey (42:41):
And so now we are in a situation in the global markets where developing countries are riding an unbelievable amount of debt. Uh, at this point. And it is the second major debt wave since, uh, since the end of the, the colonial period in the 1960s. Uh, and a and an increasing share of that debt is being held by the Chinese and by private bond markets, neither one of which are at all happy to, to redo your, your repayment schedule.
Kasie Whitener (43:11):
Right.
New Speaker (43:12):
Uh, and so it's, it in the global space, uh, we're in a really tricky spot at the moment, uh, because such a large share of debt is being held by Chinese and private interests. They want their money now. Uh, it is very fair to, uh, think of a house, a, a lower income household with huge credit card debt. Like, what are they gonna do?
Kasie Whitener (43:33):
Right.
Chris Yenkey (43:34):
You get trapped in that debt. Uh, yeah.
Kasie Whitener (43:37):
And then you're just working and working and working and never paying it off.
Chris Yenkey (43:40):
Well you're working and working, you can't get ahead of the payments. Right. But also as anybody who's ever been in credit card debt knows, you know, the, the quickest, most viable way to get outta credit card debt is to open up a new credit card.
Kasie Whitener (43:51):
And pay off the old one with it. Yeah.
Chris Yenkey (43:53):
And pay off the old one with it. But then the new one has a worse interest rate. Right. Because now your credit score is lower. Right. And it's, it's, you're, you're spiraling down and down and down.
Kasie Whitener (44:03):
Right.
Chris Yenkey (44:04):
And at the household level, or at the country level, that's what we would call a debt trap.
Kasie Whitener (44:08):
Now, the IMF and the World Bank do not have within their mission to lend money to countries to help those countries get outta debt with other lenders, right?
Chris Yenkey (44:18):
Oh, I think it's, uh, I wouldn't say that they don't have that as their mission. Uh, I don't, I'm not familiar with, for example, the IMF or the World Bank coming in and helping you pay off your Chinese loan.
Kasie Whitener (44:30):
Right.
Chris Yenkey (44:30):
That I, I don't think we've gotten there yet.
Kasie Whitener (44:33):
Okay.
Chris Yenkey (44:33):
So that may be coming in the future, but I'm, I'm not aware that that's a, the big issue.
Chris Yenkey (44:38):
Interesting.
Chris Yenkey (44:39):
Yeah, maybe, it's, it, if it's not, I I, it's very logical to think that that's where we, we may be heading next. But I don't know.
Kasie Whitener (44:45):
You've just taught me so much and I hope that our listeners have heard a lot and understood a lot too. Chris, this is really important stuff. We're gonna keep an eye on this Foreign Corrupt Practices Act. And the enforcement thereof. What have you been working on this summer?
Chris Yenkey (44:59):
Oh, man. Uh, this summer more corruption work. Uh, we did a, a big field experiment on bribery in Nairobi, Kenya, in the capital city, where we actually engineered an opportunity for 1400 members of the general public to, uh, to, to react to a real corrupt opportunity. And we tracked reasons why they said yes or said no. So, uh, so that is one example we're working on, on corruption from the bottom up. When we talk about corruption, we're usually talking about governments. And we point fingers at those guys, you know, from above. They're all hurting us, but, you know, managers at companies, people who interact with the police, we're all part of this system. And so what we're working on is anti-corruption, uh, efforts that help members of the general public understand better ways to not get stuck into this crappy trade off.
Kasie Whitener (45:46):
That's awesome. Yeah. Thank you so much for being here, Chris. I appreciate you.
Chris Yenkey (45:49):
Alright, my pleasure. Nice to be here.
Kasie Whitener (45:51):
This has been Moore impact. When you learn more, you know more, when you know more, you do more. Thanks for listening.