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Correcting Corruption and the FCPA

August 08, 2017
In November 2014, a worldwide bribery investigation involving tens of millions of dollars, four continents, and the law enforcement agents of ten nations came to an end at a courthouse in New Haven, Connecticut [1]. There, the United States Department of Justice assessed the largest sanction in the history of its enforcement of the Foreign Corrupt Practices Act (FCPA) and fined French rail transport company Alstom S.A. $772 million [2].

From 1999 to 2011, Alstom paid out nearly $75 million worldwide to officials of foreign governments, including the Bahamas, Egypt, Indonesia, Saudi Arabia, and Taiwan, and it is estimated that Alstom made a profit of $296 million from the business that the bribes had secured [3]. Using individuals close to the foreign officials—individuals with codenames like “Mr. Geneva” and “Quiet Man”—Alstom paid what it called “consulting fees” to avoid detection and win business [4]. In many ways, the case was routine, save for the sheer size of the sanction: To avoid prosecution, Alstom immediately plead guilty, admitted all wrongdoing, agreed to pay the fines and to change its internal policies and controls [5].

FCPA History

The FCPA is one of the most high-profile anti-corruption laws that the United States enforces. While some herald it as a force for good, using America’s economic and legal influence to root out corruption around the world, it is also derided by those who conclude it makes America less competitive around the world. One undeniable truth, however, lays in the midst of the debate: The FCPA generates significant revenue for the United States. Since its inception, and mostly in only the last twenty years, the FCPA has brought nearly $10 billion worth of fines into the U.S. Treasury [6].

First enacted in 1977 in a wave of post-Watergate anti-corruption sentiment, the FCPA had laid dormant and relatively forgotten until the early 2000s, when its enforcement became a top priority for the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), partly due to its potential to help fight corruption in countries associated with the War on Terror.

While the FCPA’s passage was largely driven by normative judgments about what should be considered unethical and illegal, there are also important economic considerations for why bribery harms societies. Specifically, some economists argue that bribery is economically inefficient in several ways. First, a project that would generate less economic activity than other alternatives may win approval simply because a small bribe is attached to it [7]. Second, once an economy has developed a reputation for being amenable to bribes, fewer firms will invest in the area known to be corrupt [8]. Finally, capital that could otherwise be invested in research and development is diverted to the pockets of officials [9]. Therefore, beyond moral judgments that the United States may wish to export to developing economies, anti-corruption measures can promote efficient use of resources.

Image: Perceptions of public corruption around the world. Source: Transparency International.Image: Perceptions of public corruption around the world. Source: Transparency International.

What FCPA Enforcement Looks Like

Paradoxically, even though FCPA enforcement has become such a top priority in recent years, few judges have ever weighed in to interpret it. Typically, defendant corporations become so alarmed at the possible fines they would face if they went to court and lost that they admit wrongdoing and settle before even considering a court battle. And while the settlements are gargantuan, they pale in comparison to the alternative fines if found guilty. For instance, when Siemens was assessed combined fines of $1.34 billion in 2008 for its acts of bribery abroad, it was avoiding the near $2.7 billion it could have paid under DOJ guidelines [10]. The DOJ and SEC often make agreements to not prosecute in exchange for the companies changing their governance and ethics procedures, with the caveat that if the company commits any other corrupt offense or does not adequately change its ways, the DOJ or SEC will resume prosecution after all.

While this pattern has the practical effect of rooting out corruption and forcing changes to the ways firms do business abroad, no judge has given clarity to the exact limits of the FCPA’s vast language. If it is illegal to “corruptly” offer “anything of value” to a “foreign official” to win business, what are the precise definitions of “corruptly,” “foreign official,” and “anything of value?” [11]. No one truly knows. But in the meantime, the DOJ and SEC operate according to their own intimidatingly wide interpretations of the law.

Criticism

The FCPA is the subject of fierce criticism in some circles. The U.S. Chamber of Commerce has long been one of the most outspoken critics, and the Chamber’s own Institute of Legal Reform has proposed significant changes to the law [12]. After decades of waiting, the Chamber and its allies may finally have their chance in President Donald Trump and a Republican controlled legislature. In a 2012 CNBC SquawkBox interview, President Trump commented on the FCPA, stating, “This country is absolutely crazy” to prosecute alleged violations in places like Mexico and China, and that the FCPA is a “horrible law and it should be changed” because it puts American business at a “huge disadvantage.”

Such is the most common criticism of the FCPA: It makes America less competitive compared to other countries. Of course, experts debate whether that ever was true, or even if so, if it still is today. While the FCPA was one of the first international anti-bribery laws on the books in the west, now every OECD member country has signed the OECD’s anti-bribery convention and instituted its own version of the law [13]. Thus, whatever disadvantage the United States had relative to other similar wealthy economies, it is now no longer such an outlier. That said, however, none of the laws that the FCPA inspired is as draconian as the FCPA itself. The FCPA levies the largest fines and, unlike in countries like the U.K., it offers no real affirmative defenses, i.e., circumstances that, if proven, can excuse guilt.

Amending the FCPA

Two significant changes to the FCPA could help the United States promote honest dealing around the world while at the same time easing the nerves of firms that wish to do right but accidentally commit an offense.

First, the FCPA should be amended to provide greater clarity to the language of the statute. As mentioned above, the law is so vaguely written—and lacks any substantial judicial guidance—that there are some baffling circumstances that fall within the law’s reach. For example, Citgo is an American corporation incorporated in Delaware and headquartered in Houston. And yet, because it is a wholly owned subsidiary of Venezuela’s state-owned oil company, Petroleos de Venezuela S.A., everyone who is an employee of Citgo—even American citizens working for Citgo in America—are considered “foreign officials” under the FCPA [14]. A fresh rewrite, with the benefit of knowing today’s economic interconnectedness, would make compliance easier.

Second, the FCPA should be amended to model the U.K.’s international anti-bribery law, the Bribery Act. Under the Bribery Act, corporate defendants have a full defense if they can prove they had adequate procedures, programs, and practices in place to monitor and prevent bribery by associated persons, even if an isolated incident of bribery did occur [15]. Thus, companies still have the incentive to institute robust ethics and compliance programs, while wrongdoers without such programs would be appropriately punished. The idea has gained traction in Congress, with hearings in 2011 exploring the idea of adding the affirmative defense. To date, however, no such changes have been made.

Conclusion

The FCPA has successfully promoted corporate integrity in a globalized economy that routinely sees all stages of production and management operate across dozens of borders. With the helpful changes outlined above—changes that would (1) provide clarity to the law and (2) maintain the law’s effectiveness while making it less needlessly draconian—the United States can still retain its status as the premier business environment and at the same time use its economic clout to promote fair dealing around the world.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

 

References

  [1] http://fcpa.stanford.edu/enforcement-action.html?id=546

  [2] https://www.nytimes.com/2014/12/23/business/alstom-plead-guilty-bribery-us-justice-department.html?_r=0

  [3] Ibid.

  [4] Ibid.

  [5] Ibid.

  [6] http://fcpa.stanford.edu/statistics-keys.html

  [7] Cortney C. Thomas, The Foreign Corrupt Practices Act: A Decade of Rapid Expansion Explained, Defended, and Justified, 29 Rev. Litig. 439, 441 (2010)

  [8] Ibid.

  [9] Ibid.

  [10] http://www.nytimes.com/2008/12/16/business/worldbusiness/16siemens.html

  [11] 15 U.S.C. § 78dd-1

  [12] http://www.instituteforlegalreform.com/uploads/sites/1/restoringbalance_fcpa.pdf

  [13] http://www.oecd.org/corruption/oecdantibriberyconvention.htm

  [14] http://fcpaprofessor.com/lack-of-pride-and-that-citgo-sign-too/

  [15] Michael Peterson, Amending the Foreign Corrupt Practices Act: Should the Bribery Act 2010 Be A Guideline?, 12 Rich. J. Global L. & Bus. 417, 426 (2013)

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