January 22, 2018

How to Root Out Corruption Without Introducing More

Tyler Cowen

Holbert L. Harris Chair of Economics at George Mason University
Summary

The Foreign Corrupt Practices Act is open to political abuse, but that's no reason to scrap it.

Are you worried there may be corruption in the American executive branch today, yet also fearful that the tools for rooting out such malfeasance may be abused? If so, welcome to the dilemmas surrounding the Foreign Corrupt Practices Act.

There has been speculation about whether President Donald Trump and his real estate operations abroad might be guilty of FCPA violations -- a cause for concern -- but at the same time the federal government can use the FCPA to threaten executives with prison terms of up to 20 years. That’s not entirely reassuring in a polity when impartiality and the rule of law are not guaranteed. At a time when so many norms are being broken, including personalized presidential tweets attacking business leaders, attacks on the idea of free speech and a newly heightened sense of political polarization, the threat of politically motivated prosecutions can cause executives to think twice before criticizing the government.

To recap, the FCPA, enacted in 1977, generally prohibits American businesses from offering bribes or other favors to foreign officials to assist in obtaining or retaining business. Ideally, we would like a statute that roots out the worst instances of corruption abroad, but without excessively penalizing American business or enforcing an arbitrary standard, liable to political abuse.

Trump has complained about the law and argued it should be weakened. Jay Clayton, now head of the Securities and Exchange Commission, co-wrote a 2011 piece arguing that enforcement of the act should be rethought, because multinationals from other countries do not face equally strong regulatory burdens.

Whether or not you agree with those views, making the law tougher won’t be easy. What is striking from the evidence is that companies violate FCPA commonly, and usually at an expected profit. That conclusion is from a study by Jonathan M. Karpoff, D. Scott Lee and Gerald S. Martin, based on data from the Department of Justice and Securities and Exchange Commission, in turn derived from 143 enforcement actions from 1978 to mid-2013, as directed against publicly traded companies.

The researchers find a 22.9 percent chance that an eligible company will engage in prosecutable foreign bribery over the studied period. That is more than just a few bad apples crossing a line. They also estimate that the chance of an enforcement action against a violation company is only 6.4 percent. So most get away with it. To make the bribes unprofitable, it would be necessary to increase average penalties by a factor of 8.3, or more than 22 times their average historical level. That’s probably not going to happen, and in any case it would raise the number of mistaken and ambiguous cases, raise the costs of doing business abroad, and, more hypothetically, raise the risk of using the FCPA to punish executives who are out of political favor. To worry about political bias, you don’t have to think that regulators or the executive branch sit around deliberately targeting enemies as Richard Nixon did.  There is so much discretion in enforcement of this law that favorable treatment for the well-connected will, whether intended or not, create pretty much the same result of differentially punishing critics and nonsupporters. 

Like it or not, this law is not going away -- and there are some good reasons to have it. The U.S. has been the world leader in taking on corruption, and we shouldn’t give up that position without a fight. There has been a payoff, as other countries move in the American direction with tougher anti-bribery measures. Getting rid of the FCPA now would send the very worst possible message to the world. Furthermore, some aspects of the FCPA are useful in helping U.S. multinationals limit the demand for bribes, by claiming they are unable to comply for legal reasons.

Rather than junking the FCPA, we should consider reforming it, lowering its costs while simultaneously making it harder to use as an instrument of political retribution. It is pretty common for business leaders to think that being well-connected lowers their chances of legal or regulatory prosecution.   

To improve the law, commentators have recommended adding a “willfulness” requirement for corporate criminal liability, limiting liabilities from the activities of subsidiaries or from previous acquisitions, clarifying exactly who counts as a “foreign official,” and more generally swinging the presumption back closer to innocence, especially for companies with active and responsible compliance programs. All of those changes could build in more safeguards for ambiguous cases and for companies that are basically engaged in honest business. Recently announced Department of Justice guidelines do take some steps in these directions, for instance by encouraging voluntary disclosure and remediation of infractions.

At the same time, might we not increase the fines for the most egregious offenders? That would create both the reality and the impression of keeping some teeth in the law.

We’ll see soon enough if the FCPA starts moving into the headlines. For now, it ought to be possible to discourage corruption without putting productive American executives at undue criminal or political risk.