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Does the Foreign Corrupt Practices Act Work?

July 18, 2016
The Foreign Corrupt Practices Act (FCPA) seems as American as apple pie. The law is meant to prohibit bribery of foreign officials, promoting the kind of fair-play economy that politicians of all stripes can get behind. Begun in the aftermath of the Watergate scandal, during which numerous corporations admitted to maintaining slush funds to bribe foreign officials, the FCPA was the first legislation in the world to address bribery abroad [1].

By Jennifer Reich, JD’18

Background

It has two primary components: 1) prohibiting bribes from American companies and companies that do business in America, and 2) mandating adequate accounting provisions for corporations to prevent such bribes from taking place [2]. Enforcement of the FCPA relies primarily on self-reporting by companies, who, in return for footing the bill for investigations, get leniency from the prosecuting agency [3]. In fact, the investigations themselves can be so costly that they act as a deterrent; companies are afraid of doing anything that might even trigger one [3].

The FCPA has become a key regulatory compliance tool in the fight against global corruption and for a more even commercial playing field. After the 2008 financial crisis, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), the two government agencies tasked with enforcing the FCPA, dramatically increased their efforts and drove a significant upswing both in the number of cases and in the dollar value of settlements [4]. Settlements under the FCPA range from thousands of dollars into the billions [5]. For example, in 2008 Siemens agreed to pay $1.6 billion to American and German authorities as a result of systematic bribery of officials to win international government contracts [5]. Many other countries have followed the United States’ lead, and individual countries like Germany and France, as well as member countries of the Organization for Economic Cooperation and Development, have instituted similar reforms addressing foreign corruption [6].

FCPA Related Enforcement Actions

 

In May 2016, the DOJ Fraud Section’s FCPA Compliance Unit issued new FCPA guidelines and instituted a pilot program to encourage voluntary reporting [7]. In addition to doubling the number of attorneys in the Fraud FCPA unit, DOJ adjusted prosecution policies to require full cooperation by companies to qualify for leniency [8], [9]. Some law firms read the change as a signal that DOJ plans to increase enforcement actions under the FCPA [8]. The U.S. Chamber of Commerce protested the reform, arguing that the all-or-nothing policy would discourage corporate cooperation because of the excessively high standards it requires [10]. Regardless, FCPA enforcement appears to be an evolving field with increasing implications for American corporations.

Criticism of the FCPA

However, the FCPA is not without its critics. The high penalties are seen as a handicap, disadvantaging American business through dramatic over-deterrence [11], [12]. The Institute for Legal Reform (ILR), an arm of the U.S. Chamber of Commerce, views the FCPA as overly vague, penalizing honest businesses, and generally an enforcement overreach by the SEC and DOJ [13]. The ILR argues that honest businesses will conduct unnecessary investigations, avoid business opportunities, or lose contracts to foreign competitors, based on their unwillingness to engage in practices that are ambiguous under the FCPA, while their less scrupulous counterparts and businesses from other countries will use such tactics to get ahead [13]. The ILR cites statistics claiming over $1 billion could be lost annually in export trade due to the FCPA’s provisions [13].

In a 2010 report, the ILR set out a number of proposals to improve enforcement of the FCPA, including adding an affirmative defense for compliance, limiting companies’ liability for other companies they acquire or for subsidiaries, and offering more concrete definitions of relevant terms [13]. Although DOJ does regularly issue clarifying guidance, the agency’s wide interpretation of the law leaves many questions still unanswered. As such, none of the ILR’s proposals have been implemented in any significant way.

Cato Institute affiliate and Harvard professor Jeffrey Miron has argued for the repeal of the FCPA entirely [14]. He argues that the FCPA is actually counterproductive, because in impoverished countries where corruption is endemic, the impediments to economic growth created by American companies’ inability to do business there retards those countries’ developments, rather than promoting more stable economies [14]. Miron points out that even in other countries where FCPA-equivalents have been enacted, they are not enforced on nearly the same scale, putting American companies at a disadvantage both against countries with no FCPA-equivalent and even against those that have cooperated with similar measures [14].

Despite the protests of strong corporate interests, the FCPA is not going anywhere any time soon. The controversy itself belies one significant point, raised in DOJ testimony to Congress: “If ‘companies aren’t paying bribes, they have nothing to fear with respect to enforcement’” [11].

Does it work?

As with any regulation, the FCPA has had negative consequences, from increased overhead costs for companies seeking to do business internationally to costly investigations of companies later determined to be in compliance [14]. The arguable success of the FCPA depends on the measuring stick used to evaluate the law. From the perspective of curbing corruption facilitated by businesses and generally promoting the rule of law, the FCPA works. From the perspective of encouraging American business growth in foreign markets, it has been a hindrance. Based on its role improving the economic situations of the people living under corrupt governments and curbing the overall numbers of corrupt officials, the picture is less clear.

The FCPA is, in many ways, a law with long term goals. By throwing America’s global economic heft behind more ethical business practices, the United States can push developing nations towards ultimately more stable, less corrupt governance. As more countries adopt similar laws one can be optimistic about the future, but time will tell whether the FCPA can live up to its promises.

References

  [1] L. Berman, “PART 1: Outlawing Foreign Bribery,” in Exploring the broader questions surrounding the Foreign Corrupt Practices Act, PBS Frontline, May 2009. Available: http://www.pbs.org/frontlineworld/stories/bribe/2009/05/lowell-bergman.html. [Accessed June 15, 2016].

 

  [2] Foreign Corrupt Practices Act, An Overview, Fraud Section at the U.S. Department of Justice, Sept. 2015. Available: https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act. [Accessed June 15, 2016].

 

  [3] D. Hilzenrath, “Justice Department, SEC investigations often rely on companies’ internal probes,” Washington Post: Business, May 22, 2011. Available: https://www.washingtonpost.com/business/economy/justice-department-sec-investigations-often-rely-on-companies-internal-probes/2011/04/26/AFO2HP9G_story.html?nav=emailpage. [Accessed June 15, 2016].

 

  [4] P. Urofsky et al., “Cases and Review Releases Relating to Bribes to Foreign Officials under the Foreign Corrupt Practices Act of 1977,” FCPA Digest, Shearman and Sterling LLP, Jan. 2016. Available: http://shearman.symplicity.com/files/614/614f800363c953e3b00a5c61201a2124.pdf. [Accessed June 15, 2016].

 

  [5] E. Lichtblau and C. Dougherty, “Siemens to pay $1.34 billion in fines,” New York Times: World Business, Dec. 15, 2008. Available: http://www.nytimes.com/2008/12/16/business/worldbusiness/16siemens.html. [Accessed June 15, 2016].

 

  [6] P. Henning, “Be Careful What You Wish For: Thoughts on a Compliance Defense Under the Foreign Corrupt

 

Practices Act,” Ohio State Law Journal, 73, 5, pp. 883-928, 2012. Available: http://moritzlaw.osu.edu/students/groups/oslj/files/2013/02/73.5.Henning.pdf. [Accessed June 15, 2016].

  [7] A. Weissman, The Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance, Department of Justice, Apr. 2016.  Available: https://www.justice.gov/opa/file/838386/download. [Accessed June 15, 2016].

 

  [8] J. Zucker et al., FCPA Enforcement: 2015 Highlights and Trends, Dechert LLP. Available: http://www.americanbar.org/content/dam/aba/publications/criminaljustice/wccn_2016_zucker.authcheckdam.pdf. [Accessed June 15, 2016].

 

  [9] S. Yates, Individual Accountability for Corporate Wrongdoing, Office of the Deputy Attorney General at the Department of Justice, Sept. 9, 2015. Available: https://assets.documentcloud.org/documents/2393039/justice-dept-memo-on-corporate-wrongdoing.pdf. [Accessed June 15, 2016].

 

  [10] M. Miner, DOJ’s New Threshold for “Cooperation”: Challenges Posed by the Yates Memo and USAM Reforms, U.S. Chamber of Commerce Institute for Legal Reform, May 2016. Available: http://www.instituteforlegalreform.com/uploads/sites/1/YatesMemoPaper_Web.pdf. [Accessed June 15, 2016].

 

  [11] D. Hilzenrath, “U.S. firms say foreign-bribe law lacks clarity,” Washington Post: Business, July 23, 2011. Available: https://www.washingtonpost.com/business/economy/us-firms-say-costly-foreign-bribe-law-lacks-clarity/2011/07/05/gIQAB50jTI_story.html. [Accessed June 15, 2016].

 

  [12] The FCPA and Its Impact on International Business Transactions- Should Anything Be Done to Minimize the Consequences of the U.S.’s Unique Position on Combating Offshore Corruption?, Committee on International Business Transactions, New York City Bar, Dec. 2011. Available: http://www2.nycbar.org/pdf/report/uploads/FCPAImpactonInternationalBusinessTransactions.pdf. [Accessed June 15, 2016].

 

  [13] A. Weissman and A. Smith, Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act, U.S. Chamber of Commerce Institute for Legal Reform, Oct. 2010. Available: http://www.instituteforlegalreform.com/uploads/sites/1/restoringbalance_fcpa.pdf. [Accessed June 15, 2016].

 

  [14] J. Miron, “Prosecute Wal-Mart, but get rid of anti-bribery law,” CNN, Apr. 26, 2012. Available: http://www.cnn.com/2012/04/26/opinion/miron-wal-mart-bribery-law/. [Accessed June 15, 2016].

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