What We Should Know About The Foreign Corrupt Practices Act (FCPA)

The Foreign Corrupt Practices Act (FCPA) has been in the news recently. As a 47-year-old law used to “punish overseas misconduct,” it is also known as antibribery legislation. Targeting domestic and foreign corporations, the FCPA is supposed to stop secret payments that help companies get business. Enforced by the SEC and the Justice Department, it has ensnared “misconduct” at firms that ranged from banking behemoth Goldman Sachs to the “mining giant” Glencore. Now though, a presidential executive order mandates new enforcement guidelines.

As we have suggested in the past, we need only look at the British coastline to see why the seemingly simple is really more complex. For the British coastline, a distant view reveals a smooth border. However, moving closer we see an increasing number of smaller and smaller inlets. Ultimately, a coastline that appeared finite becomes infinite:

Similarly with the FCPA, looking closely, we see so much more.

So let’s take a look.

The Foreign Corrupt Practices Act

The Problem

Rewinding to the mid-1970s, we would find the Congress concerned with hidden corporate transactions. Initially not an ethical concern, the worry was financial. Legislators said that hidden payments prevented investors in publicly held corporations from accessing accurate records. In addition, the worry was U.S. foreign policy. Expressed by (then) U.S. Senator Frank Church, hidden payments “…create the conditions which bring to power political forces that are no friends of ours, whether a Quaddafi in Libya, or the Communists in Italy.”

More specifically, Congressional investigators reported that Gulf Oil was contributing to a Korean president’s political campaign while Exxon and Mobil supported Italian political parties. Other evidence suggested secret money from a slew of big businesses was flowing to a Saudi general, a Japanese prime minister, and the president of Honduras. And, it became ever more complicated when Congressional hearings focused on defense contractor Lockheed’s financial maneuvers. As the recipient of a $250 million government loan guarantee to sidestep bankruptcy, the company had the whiff of the U.S. government as well as being private. And yet, it had an undercover payment pipeline to officials in Japan, the Netherlands, and Italy.

The Debate

Responding, lawmakers knew hidden payments were “…bad economics as well as bad morality.” But stating the problem was easier than finding a solution. A multi-year debate involved how to define bribery and whether a new law would place US multinationals at a competitive disadvantage. Deliberations included the SEC, the Justice Department, the State Department, the Department of Defense.

Reading the record from almost 50 years ago, I especially enjoyed this exchange between two legislators:

“I recall the story of an agency in the bureaucracy that was short on bureaucrats. They hired a talking parrot. And they made him a GS-15. They taught him to say only one phrase: “Very complex, very complex.” Sometimes I get the feeling that the parrot, that very complex parrot, is in charge of the Federal Government’s groping, grasping policy on bribery.”

In response, Secretary of Commerce Richardson said, “Even a parrot must occasionally be right. . . .”

The Results

Between 1975 and 1977, lawmakers proposed approximately 20 different bills. They pondered choosing between the Criminal Code and the Internal Revenue code. They also considered a multilateral solution through what then was the GATT (and became the WTO). Ultimately they chose both disclosure and criminalization.

This excerpt from a Princeton University FAQ perfectly summarizes key provisions of the FCPA:

Our Bottom Line: Adam Smith

Taking a pretty big leap but a relevant one, I thought about how corruption prevents a minimally regulated system from functioning optimally or perhaps even at all.

It took me to Adam Smith.

Corruption distorts much of Adam Smith’s market requisites. As a bribe, for example, corruption changes the self-interest we all need to display and affects spontaneous competition. Certainly equilibrium prices change. And indeed, whether government deals with corruption or ignores it, laissez-faire is affected.

We could say that it all adds up to the rule of law. One of the key criteria in the Index of Economic Freedom, the rule of law score is high in the most successful market systems.

My sources and more: Thanks to Slate Money for inspiring today’s post and to Axios and the NY Times for more detail. Then, for a lawyer’s story of the act, this 2012 Ohio State Law Journal article was a gold mine. However, I especially appreciated this brief and clear Princeton University FAQ for perfectly summarizing key provisions of the FCPA (a tough to find simplification).

Please note that parts of today’s “Bottom Line” were in a previous econlife post.