Weekend Economists Examine Escape Artists and Con Men April 27-29, 2012

[Demeter]

34. The Corruption Law That Scares the Bejesus Out of Corporate America

http://www.theatlantic.com/business/archive/2012/04/the-corruption-law-that-scares-the-bejesus-out-of-corporate-america/256314/

Walmart's Mexican bribery scandal is shining the spotlight on the Foreign Corrupt Practices Act, an obscure law that's become a bane for some of the world's largest corporations...The statute, generally referred to as the FCPA, was passed in 1977 and bans individuals and companies from bribing foreign government officials to win business or influence their decision making. Those who run afoul of the law can face large fines or prison time. For decades after it was enacted, it was barely used. But in the last five years, it has evolved from an obscure vestige of the post-Watergate era into into one of the most talked about and feared laws in America's board rooms.

Just ask Walmart.

CHILD OF THE WATERGATE SCANDAL

There was a time when American businesses didn't fret much about foreign bribery, much less what federal prosecutors might do about it. Rather, it was considered an ugly but necessary aspect of doing business in the graft-plagued developing world. That changed in the wake of Watergate.

The path from Nixon's dirty tricks to the problem of foreign corruption was a bit roundabout, to say the least. At the tail end of the Watergate congressional hearings, a group of business executives testified to making illicit payments to the president's re-election campaign. Their admission perked the interest of Stanley Sporkin, the head of the Securities and Exchange Commission's enforcement division, who wondered how those contributions would have been accounted for on the companies' books. He began an investigation, which eventually revealed that the same slush funds used to funnel money to political campaigns at home were also used to pay bribes abroad. The federal inquiry expanded, and more than 400 corporations eventually confessed to collectively making more than $300 million worth of corrupt payments overseas. This wasn't the first time U.S. companies had been caught doling out cash to foreign governments. After giving the Lockheed Corporation a $250 million federal loan guarantee to avoid bankruptcy in 1971, federal regulators discovered that the airplane maker had bribed public officials in Japan, Italy and the Netherlands to win government contracts. The revelations became national embarrassments in the countries where the deals had occurred. The Lockheed affair and the shocking outcome of Sporkin's detective work both contributed to a sense that reform was necessary. As Andrew Spalding, a professor at the Illinois Institute of Technology's Chicago-Kent College of Law, has written, U.S. policy makers worried that such rank corruption would become a Cold War liability both by harming our relationship with allies and by discrediting capitalism. ...The FCPA eventually passed under the Carter administration, making the United States the first country to officially outlaw foreign bribery. The law then promptly faded from memory. Cases were rare and little talked about. However, by the 1990s, old concerns about the law began to re-emerge.

Before the FCPA's passage, its opponents argued that criminalizing foreign bribery would put American companies at a disadvantage against international competitors from countries with looser laws -- some governments actually allowed corporations to deduct their bribe payments from their taxes -- and would discourage them from doing business in corruption-prone parts of the world. In 1995, John Hines, Jr. of Harvard's Kennedy School released a paper arguing U.S. companies were in fact investing less in countries where bribery was prevalent than they might have otherwise. When the members of the Organization for Economic Cooperation and Development agreed on an international convention against bribery, the Clinton administration pushed Congress to adopt it by arguing it would level the playing field for U.S. businesses, which were allegedly losing $30 billion a year in business to less scrupulous competition. Even after the convention was adopted, the FCPA still remained largely beneath the radar. That changed dramatically in 2007. The graph below, based on annual report by the law firm Shearman & Sterling, shows how the yearly number of Department of Justice cases brought against corporations more than doubled in middle of the last decade.



The penalties paid out by companies also surged, peaking at more than $1.7 billion in 2010.



What brought on the sudden shift isn't entirely clear. The Sarbanes Oxley Act's accounting reforms might have made it more difficult for companies to hide bribes on their books. Meanwhile, the United Nations adopted its own convention on corruption in 2003, and there may have been a sense that the United States needed to show good faith by enforcing its own laws more stringently. If you're to believe comments from Justice Department officials at the time, the Bush Administration simply thought that combating graft was important to the growth of global business. Others have been skeptical of the DOJ's motives. A 2010 Forbes article argued that the only beneficiaries of the government's crusade seemed to be white collar defense lawyers, who reaped hundreds of millions of dollars worth of fees from companies conducting lengthy internal investigations... Increasingly, the FCPA has become a tool for American prosecutors to police the world's large multinationals. Corporations whose shares trade on American exchanges are considered fair targets. So are corrupt transactions that pass through American banks. Using that theory, the Justice Department brought a case against against Japan's JPC, a company that, as the Shearman & Sterling report put it, had "no apparent commercial connection with the United States whatsoever." Rather than test the government's arguments in court, and risk criminal convictions for their executives, most companies have chosen to settle using deferred prosecution agreements.

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