Do U.S. Multinationals Use Income Shifting to Launder Corrupt Activity?

Abstract

We investigate a) whether U.S. multinational companies use income shifting to engage in corruption and b) the effects of this income shifting on the welfare of non-U.S. countries' citizens. We use enforcement actions under the Foreign Corrupt Practices Act (FCPA) as shocks to the costs of corruption to establish initial minimum estimates of the effects of corruption on governmental efficacy and quality of life in affected countries. Consistent with theory, developed countries benefit from FCPA actions while developing countries are harmed. After examining the main effects of FCPA actions, we consider whether income shifting serves as a replacement indirect avenue when more direct corruption means are stifled by FCPA enforcement. We find that U.S. outbound income shifting increases following anti-corruption enforcement, and that this increased outbound income shifting mitigates the positive, and magnifies the negative, effects of anti-corruption enforcement actions. Overall, the results are consistent with income shifting acting as an alternate corruption vehicle.