The Economics of Corruption | Report

Running Head: THE ECONOMICS OF CORRUPTION
The Economics of Corruption
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Executive Summary
Corruption has lowered the rate of economic growth in almost every country. Azerbaijan in has
established an Anti-Corruption Law to fight the odds of corruption especially in the legal
sections. The country has wide spread illicit practices by legal officials as they are engaged in
appealing and taking bribes for the services they provide. Corruption increases the total
production cost of firms and lowers investment as investors find it difficult to operate in such
market structure. The paper aims at understanding the law against corruption and the way it
works. The law has been able to increase the level of domestic and foreign investments by
lowering the level of corruption and corrupt practices. Penalty in terms of fines and years of
imprisonment is given as punishments for taking bribes. The government has also incorporated
an instrument to stop the grievances that gave positive stimulus to the economy of Azerbaijan.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................4
Liability of Legal Person.............................................................................................................4
Incentive structure described in legal instruments.......................................................................7
Cost and benefits of legal instruments.........................................................................................8
Economic theory to help the use of legal instrument..................................................................9
Conclusion.....................................................................................................................................10
Reference List................................................................................................................................12

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Introduction
Corruption has been a key problematic area in Azerbaijan, though the government has
taken quite a few measures to stop them. Azerbaijan is ranked at 122nd place in Corruption
Perception Index out of 180 countries by the International Transparency (Chayes 2016). An
initiative regarding the liability of legal persons was taken by the government for accepting the
Amendments Law to the Criminal Code of the Republic of Azerbaijan. The aim of the law is to
detect, protect and prevent the offences relation to corruption (Forgues-Puccio 2013).
The officials are reputed to derive benefits, incentives and advantages by the supremacy
of their official power. The tag of criminal legal measures are enforced to legal dignitaries who
have the legal power to present a legal entity to take decisions in favour of legal entity or to
administer the actions committed by legal persons. The liability of legal persons is applied due to
carrying out crimes by employees because officials never authorize the latter without exempting
the organization from liability.
A number of categories are enlisted relating the public officials to be subjected under the
illegal offences. The person has to be appointed in the position of government official with the
Azerbaijani laws or Azerbaijani Constitution and representing the state framework positioned on
special authority. It considers civil attendants commanding the administrative area, preoccupied
in managerial positions in government offices and operating in commercial legal presence where
state (Brewster 2014). Even the candidates registered for governmental positions fall under the
desired criteria.

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Discussion
Liability of Legal Person
The action against corruption is engaged in the task of turning an activity illegal by
making it a criminal offence and considers both passive and active bribery, extortion of foreign
officials, attempted corruptions and money laundering matters. The policy does not allow public
officials to hold and operate private businesses, to work in supplementary jobs and restrict them
from getting gifts. A Legal entity is established that has undergone official registration in regard
to property ownership, bearing responsibility for obligation of ownership, acquiring property
rights from its name to personal property (Ardigo. and Inaki 2016).
In Azerbaijan, the liability of legal persons is kept under the following criteria
(ABDULLAYEV 2015). Abuse of office by misuse of official powers which is contrary to
interests and has caused essential harm to the legal rights and legitimate interests of people by
using of official powers for personal or other self-interest, would lead to heavy penalty. They are
also removed from the government position and are deprived from the right to hold certain posts
up to three years. In few instances, imprisonment of three years is given with a penalty of 2
thousand Manats under Section 308.1.
In section 309.2, the legal entity committed with the application of corruption,
application of threats, usage of weapons will result in deep consequences such as provision of
imprisonment up to 7 years with confiscation of policy (Sadigov 2018). Causing a harm to legal
right by the government officials or interest of state will be charged with a fine over 2,000
Manats. Actions related to infringements of legitimate interests and rights by natural legal people
by portrayal of official powers are fined with a rate of 5,000 to 1,000 Manats. The person might
do corrective work for 2 years or public works for 200 hours or accept 3 years of imprisonment

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as the punishment, under Section 310. Receiving, acting and requesting the citizens to offer any
material privileges directly or indirectly, by third parties or intermediaries with the intension to
insert improper influence over decision making of the legal person shall sentenced for 3 or 7
years or fined with 3,000 to 5,000 Manats with confiscating property. The measure is similar
when the legal person exerts improper influence by promising, offering and giving material
values (Mungiu 2017).
Section 313, addresses the legal punishments for creating obvious unreal data in the
documents of official accounts or making of amendments to specific data by regulating the
authentic content which is claimed under service forgery. Section 314, involves the criminal
negligence as described by the inefficient performance or failure of official responsibilities
outstanding to negligent behavior or unfair approach of the service that entails adequate harm to
legitimate interest of organizations and local citizens preserved by law. The punishment includes
penalty of 1,000 Manats or corrective works for 2 years or imprisonment about 6 years or doing
public works for 6 months. If the similar act causes death of the victim or other negative
consequences shall be sentenced up to 5 years (Strimbovschi 2016).
Section 314-1, considers decision relating to the illegal transmission of land plots to
people who are alienated by law on having excusive ownership over the land. Officials are
imprisoned for 2 to 5 years. These legal persons are deprived from the legal right to work for
government or imprisoned up to 5 years due to lease and usage of municipalities. In Section 314-
2, violation by officials regarding the authorization of construction, allotment of land and
erection works of statutory order are expelled from the official position and has to engage in
corrective work for 1 year or imprisonment up to 3 years withy/ without deprivation of authority
of certain posts till 3 years. This allotment of unauthorized land or erection works includes area

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of electric supply networks above 1000 volts, locating trunk pipes, defense objects, water supply,
oil wells and auto routes, sewage systems, technical facilities and protection of water reservoirs
shall be punished by 2-4 years of imprisonment or corrective work with/ without deprivation of
legal stature. If the same activity results in grave consequences will lead to imprisonment for 8
years along with discharging from the official position.
In failed cases of prevention of the above stated acts under section314-3, both knowingly
and unknowingly, due to disrespectful attitude, shall be imprisoned for 2 years. Actions causing
deep or light bodily harms to the victims shall be sentenced to 2-4 years of imprisonment which
will extend another four years of death of the accused victim.
The actions of few military servicemen, representatives of municipalities and municipal
affiliates are kept. People having business and firms excluding an established identity are
considered. Officials of agencies from foreign states and selected members from international
organizations and parliamentary agencies are included (De Vaal 2014).
The preliminary investigation is done in a formal manner. During primary investigation, the
commission of crime is judged after lodging a petition against the legal person which needs to be
approved by the constitution. It is estimated on the grounds whether the person committing the
crime was unaware, died or been unconscious after committing the crime, or must be removed
from the suspicion (Ivory 2014).
The prosecutor acts by giving a copy of the decision initiated by the legal entities within 24
hours. That entity must appoint an entity within 24 hours from receiving the entity and notify
about it in the prosecutors’ office. The investigator decides whom to accept as the representative
of the legislation with a specified time bound. The legal person has the authority to change the

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assigned representative at any stage of operation. The legalized person has a special power of
attorney to provide with the legitimate interests. The legal entities’ nature of interest is
characterized by one or more lawyers excluding the status of delegate. The property of the
legalized person is seized and locked to investigate the criminal actions performed.
Incentive structure described in legal instruments
The structure of legal instruments is based on the basic four economic model.
1) The Identification Model says that the legal person’s liability has to be generated by the
commission of offences by one of the entities of the top management representatives.
2) Organizational Model – the liability of legal entity is established by the deficiency of the
corporate culture.
3) The Expanded identification model which says that liability of legal persons must be
provoked by the failure of management to supervise their employees known as the rule of
lack of supervision.
4) The Vicarious liability model- the liability of the assigned legal person has the liability to
trigger the offence of an employee acting in the boundary of his employment and with the
intension to benefit from the organization.
Azerbaijan has extraordinarily introduced that lack of supervision has triggered the liability
of legal entity. Impose of fine system will prevent the legal authorities from engaging in criminal
activities and breaking the legal legislation rights. The corrupt persons take decisions in regard to
their personal interest. One of the reasons for the cause is the income inequality among citizens
and the corrupted acts are due to habitual norms. Poor market structure leads to failed cases and
corrupt practices. The government is entitled to act in a benevolent manner by creation of strong
policies. The structure of providing heavy penalties and sentence of imprisonment refrains

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government officials from offering, taking bribes. Officials are often indulged in using their
positional power and not discharging the responsibility appointed for. The structure interferes
with the illicit practices and limits the supremacy of legal persons.
Transforming the tax reform structure will leads to greater enhancement of schemes to
tackle corruption. Reforms of tax administration would have higher pay-off if tax laws and
taxation structure is made simpler due to vigilance of officials’ scope. Building a selective civil
service by transparent and merit based hiring of public officials so as to reduce the opportunity
for corruption (Aliyev 2019).
Cost and benefits of legal instruments
Crime which is committed within the responsibilities and duties of the legal members
itself, will not lead to the corporation’s liability. The crime has to be committed with interests of
the legal entity having profit maximization as the primary goal. Increasing revenues of firms,
paying expenses or reducing the costs in financial obligations induce firms to get enlisted in
corrupt practises. Companies get advantage from the development of commercial activity of a
legal person, with acquisition of property on favourable terms, access to profitable commercial
premises, full or partial discharge of taxes, certain production costs and other obligatory
payments (Zhang 2016).
Management of interests of a legal entity indicates the crime that was committed to
protect and ensure the various interests of the legal entity. Protection of interests can assure that a
legal entity remains outside the control of the register and its conflict with various organizations
in assistance of a legal body, creating quality conditions for this legal assistance in connection
with business competitors (Parrado 2014).

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A distinguishing feature of the legislation on corporate liability suggests that in the stages
of investigation, pertaining to an individual or official, there would be manifestation of benefit to
the association, the exercise of criminal contractual measures against the organization might start
(Rose-Ackerman and Palifka 2016).
The legal instrument for abandoning the illicit functions such as charging fines leads to
more money in hands of government which lowers fiscal deficit. The level of competition among
firms also goes up. Businesses operate with high risk of corruption while transacting with the
judiciary. The judiciary was itself found to act ineffectively as they were the ones who took
bribes. Thus, to solve the problem, more valuable measures had to be accepted with strong fiscal
institutions to promote the integrity (Santhirasegaram 2014). The judicial process was anticipated
to be unreliable and faced investment disputes from foreign investors as they bumped into
favoured or well-connected local interests.
Economic theory to help the use of legal instrument
In economics, the liability of legal person is estimated by the cost and benefits according
to the economic principles. The measure is taken in terms of the amount of benefits obtained by
the legal dignitaries and the way these crimes extend interest for further entities. The number of
committed crimes and the consequence faced. The negative externality (where externalities are
outside effects caused by a particular action) faced by the other people as a voluntary
compensation for the caused crime. The social cost faced by the society in assisting the
disclosure of crimes, moral harm caused on the affected victims (Suleymanov and Yusifov
2014).
The issue of Azerbaijan can be solved by the economic module by putting the formula,

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E[U] = (1-p). U(R) – p.U(R-c) [where p= probability for punishment, (1-p) = probability
off not being punished, U= individual utility function, R= income obtained with the corrupted
action, c= cost of being punished, e[U] = individual expected utility ].
By this, the effect of confiscation of the legal instrument to remove corrupt activities is
understood. Provision of severe punishment is not the only way to reduce the desire for criminal
behavior. Thus, adding confiscation probability to p and addition of the amount of confiscated
gain to C, the cost of being punished is calculated. After a while, the expected utility E[U] for
committing the crime significantly changes due to change in the quantity of confiscated
probability and gains. According to this estimation, it is concluded that with the rise in
punishment for probability, there occurs a decrease in the confiscation probability posing
negative effects on E[U]. However, the rise of confiscation probability will have a positive
benefit to the confiscated gains (Mungiu-Pippidi et al. 2017).
Thus, when there are corrupt practices, huge amount of money is rolled out of people’s
hand and goes into hands of private dignitaries. People lose confidence and trust from the
government services. Corruption promotes a critical effect on the global economy. World Bank
data estimated that corruption disturbs 5 percent of country’s GDP (Gross Domestic Product).
Level of corruption hampers business investment to and adds about 10 percent in the total cost of
production. Accusations of bribery eradicate a country’s positive reputation leading to fall in
growth rates. Demand of the country’s good goes down and many countries formulate trade
barrier polices as lawsuits and fines severely hamper a country’s social licence for operation
(Van Elsuwege and Burlyuk 2016).

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Conclusion
The Law of Anti-Corruption deals in accounting the corrupt practices by the legal
persons. The liable legal persons are designated under certain criteria who has been by taking
bribes and not providing the service required by the citizens. Azerbaijan has made quite a good
progress in the fighting the illegal disputes by the approval of Anti-corruption Law; it has to
work in the areas more effectively to regulate the conflicts. The anti-corruption legislative
structure is active with a weak implementation in light of the powers granted by law. Public
officials are prohibited to accept gifts accounting to more than 55 United States dollars and
charged penalty when found guilty.
International instruments regarding the liability of legal persons have shaped the structure
in Azerbaijan. The cases considers promising, accepting, directing or authorizing the citizens to
provide huge amounts to discharge their duties. The structure has altered the corporate landscape
and allowed markets to grow at a steady rate. The legal persons are heavily penalised with fines,
imprisonment and public works according to the concentration of their crimes. This has led to
low crime rates by the legal officials. Thus, conclusion can be drawn that the liability of legal
persons has improved the structure of Azerbaijan and removed corruption.

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Reference List
ABDULLAYEV, K., 2015. Assessing European Neighborhood Policy and the Eastern
Partnership as a normative tool within the context of South Caucasus: the case of Azerbaijan
(Doctoral dissertation, Masarykova univerzita, Fakulta sociálních studií).
Aliyev, K., 2019. THE CURSE OF TRANSFERS? MODELLING FISCAL POLICY
EFFECTIVENESS IN AZERBAIJAN. Economic and Social Development: Book of
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Ardigo, Ö.A. and Inaki, P., 2016. Overview of Corruption and Anti-corruption.
Barry, T.A., Lepetit, L. and Strobel, F., 2016. Bank ownership structure, lending corruption and
the regulatory environment. Journal of Comparative Economics, 44(3), pp.732-751.
Brewster, R., 2014. The domestic and international enforcement of the OECD Anti-Bribery
Convention. Chi. J. Int'l L., 15, p.84.
Chayes, S., 2016. The Structure of Corruption in Azerbaijan. Carnegie Endowment for Inter-
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De Vaal, T., 2014. Azerbaijan–What Lies Ahead?. Russia and the moslem world, (9 (267)).
Forgues-Puccio, G., 2013. Existing practices on anti-corruption.
Ivory, R., 2014. Corruption, Asset Recovery, and the Protection of Property in Public
International Law. Cambridge University Press.
Melikli, G.K., 2019. POLITICAL ASPECTS OF THE CIVIL SOCIETY AND RULE OF LAW
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Mungiu-Pippidi, A., 2017. Corruption as Social Order.
Mungiu-Pippidi, A., Dadašov, R., Pachón, S.N.A., Norman, C., Dietrich, S., Drapalova, E.,
Beblavý, M., Sicáková-Beblavá, E., Mendelski, M., Soyaltin, D. and Louis, J., 2017. The
Anticorruption Report 4.
Parrado, S., 2014. Civil Service Professionalisation in Armenia, Azerbaijan, Georgia, Moldova
and Ukraine. SIGMA, November.
Rose-Ackerman, S. and Palifka, B.J., 2016. Corruption and government: Causes, consequences,
and reform. Cambridge university press.
Sadigov, T., 2018. Psychological dimension of corruption: How are citizens likely to support
anti-corruption policies in Azerbaijan?. International Journal of Sociology and Social Policy,
38(5-6), pp.484-508.
Santhirasegaram, S., 2014. Sociopolitical and economic causes for corruption in developing
countries: a cross country empirical study.
Strimbovschi, S., 2016. Azerbaijan’s Balanced Foreign Policy Trapped in a Volatile Geopolitical
Context. Europolity-Continuity and Change in European Governance, 10(1), pp.121-134.
Suleymanov, E. and Yusifov, S., 2014. Problems encountered during the transition to market
economy in Azerbaijan and solution attempts.
Van Elsuwege, P. and Burlyuk, O., 2016. 9 Exporting the rule of law to the EU’s eastern
neighbours. The European Neighbourhood Policy–Values and Principles, p.167.
Zhang, N., 2016. DEMOCRATIC ADVANTAGES IN CORRUPTION CONTROL. QoG
Working Paper Series, 2016(5), p.5.

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