Ambiguities in the Foreign Corrupt Practices Act: Unnecessary Costs of Fighting Corruption?

• Author: Jennifer Dawn Taylor
• Pages: 861-886

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The author wishes to thank Professor Catherine Rogers for her guidance throughout this endeavor. She has been a continuous source of advice, patience, encouragement, and reassurance, which has been invaluable to the author personally as well as academically.

I Introduction

Congress enacted the Foreign Corrupt Practices Act ("FCPA") in 1977 to address the problem of corruption in international business transactions. The Act criminalizes payments to foreign government officials intended to influence the official or to obtain an improper advantage. However, the legislation ambiguously defines prohibited conduct and its provisions lack an adequate standard by which to determine the nature of contemplated activity. While the FCPA is a noble attempt at tackling a serious transnational problem, its flaws are subjects of continued criticism. One faction of commentators defends the Act unconditionally due to a foreseen importance in eliminating bribery in business transactions at any expense. An opposing camp considers the FCPA to be poorly drafted legislation and question the Act's utility in actually curbing corruption. These commentators argue that the Act puts American businesses at a competitive disadvantage in international business. While both sides present valid arguments, an intermediate position may represent the most viable solution. Amending the FCPA to reduce ambiguities will establish a more effective policy, by reducing unnecessary costs and promoting ethical behavior.

The policy behind the FCPA is one of substantial importance and thus the probability of the statute's repeal in the near future is low. While corruption is detrimental to international business, measures to eliminate such should be as Page 862 efficient as possible, in order to ensure the costs of compliance are not as burdensome as the corruption it seeks to eliminate. Although most recognize the harmful effects of corruption on the global economy, the difficulty lies in defining what constitutes corrupt activity. Ambiguities inherent in the Act make it difficult to determine what activity is prohibited. Further, on an international scale, the definition of bribery varies from one culture to the next. Business practices in one context, such as in the United States, are not necessarily transferable to another. Consequently, to become a more effective tool in reducing corruption, the Act should be clarified by addressing problems in defining prohibited activities and the lack of guidelines to assist compliance.

Unnecessary costs are imposed on American companies conducting business abroad due to uncertainties in complying with the Act's provisions. Additional costs result from uncertainty among businesses as to whether potential conduct may be a violation. Uncertainties deter businesses from engaging in foreign transactions and encourage overly cautious behavior. Clarifying ambiguities in the FCPA could reduce costs to American businesses by minimizing uncertainty in conducting business activity overseas. Greater certainty would strengthen the Act's objectives in eliminating corruption by promoting a policy that more effectively balances the costs and benefits of compliance.

II Provisions of The Act

The enactment of the Foreign Corrupt Practices Act emerged during the turbulent post-Watergate era.¹ After the discovery of illegal domestic political contributions, investigations by the Securities and Exchange Commission ("SEC") uncovered numerous payments made by American corporations to foreign government officials in return for favorable treatment.² While the payments themselves were not illegal, the SEC began prosecuting for failures to report these payments under the disclosure provisions of federal securities law.³ In addition, the Internal Revenue Service prosecuted companies for illegally deducting improper payments to foreign government officials.⁴ Concerned that these activities were undermining the integrity of American businesses at home and abroad,⁵ Congress responded by enacting the FCPA.⁶

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The Act contains provisions governing both corporate accounting regulations and anti-bribery restrictions.⁷ The accounting provisions are a part of an amendment to the Securities Exchange Act of 1934 and are enforced by the Securities and Exchange Commission ("SEC").⁸ Corporations, which have issued a class of securities requiring registration or which are required to file reports under the 1934 Act (hereinafter referred to as "issuers"), are obligated to comply with the accounting provisions of the FCPA.⁹ The accounting provisions are intended to serve as a deterrent to illegal business practices, such as creating off-the-books "slush funds," misrepresenting the nature of commercial transactions, and falsifying the identify of a payment's recipient.¹⁰ The provision requires the issuer to keep books, records, and accounts in reasonable detail reflecting the corporation's transactions, including any dispositions of the corporation's assets.¹¹ Additionally, issuers are required to create and "maintain a system of internal accounting controls sufficient to provide reasonable assurances that" transactions receive proper authorization, "transactions are recorded as necessary," access to corporate assets is limited, and accountability exists for differences between recorded and actual assets.¹²

The accounting provisions impose liability on individuals who "knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account... ."¹³ The terms "reasonable assurances" and "reasonable detail" are defined by the prudent man standard, which entails a "level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs."¹⁴ Penalties for false and misleading statements under the accounting provisions include fines not more than $1,000,000 and/or imprisonment for not more than 10 years for violations by individuals and a fine not exceeding $2,500,000 for business entities.¹⁵ In addition, a failure to file Page 864 information, documents, or reports will result in a fine of $100 a day for as long as the failure to file continues.¹⁶

The Act's anti-bribery provisions criminalize any payments that are "corruptly" made to foreign officials.¹⁷ The anti-bribery provisions apply to issuers,¹⁸ domestic concerns¹⁹ (which include American citizens and companies formed under United States law), and any person acting within the United States.²⁰ The Act prohibits offering, giving, or authorizing the payment of anything of value to a foreign official,²¹ foreign political party, or candidate for foreign political office, for the purpose influencing any act or decision of such foreign official in his official capacity, inducing the official to do or not do any act in violation of his lawful duty, securing an improper advantage, or inducing such official to use his influence to affect any act or decision of the government in order to obtain, retain, or direct business.²² Furthermore, bribery of foreign officials indirectly or through third Page 865 parties is also prohibited.²³ Violations of the anti-bribery provisions may result in a fine up to $2,000,000 for a business entity and a fine of not more than $100,000, or imprisonment for not more than five years, or both for individuals.²⁴ Both individuals and business entities may be subject to a maximum of $10,000 civil penalty for violations.²⁵

III Policy Considerations

A Extraterritoriality

The activity that the FCPA aims to regulate is the giving of a payment or gift to an individual with governmental authority in a foreign country in order to influence that person to use his or her position to grant an advantage to the payee. This activity is commonly known as a "bribe." In the United States, bribery not only constitutes an illegal act, but it also carries a social stigma and is generally considered to be an immoral activity.²⁶ Under the domestic bribery laws of the United States, both the offering of a payment to a government official and the acceptance of the payment by the official are prohibited.²⁷ By contrast, however, the FCPA criminalizes only the improper payment to the official and does not impose liability on the recipient of such Page 866 a payment.²⁸ Bribery in a transnational context encompasses numerous additional factors, not otherwise present in domestic cases, causing the regulation of bribery beyond territorial limits to become a far more difficult task. Countries hold differing perspectives as to what conduct should be prohibited and thus, an individual may be subject to conflicting standards of conduct. For example, an overlap may occur when one state prohibits its citizens from engaging in a particular activity while its citizens are physically located within the territorial boundaries of another country and the host country does not prohibit such activity.

Under international law, traditional theories of prescriptive jurisdiction²⁹ over extraterritorial activities provide a basis for a state to regulate conduct that occurs outside of its territorial limits.³⁰ Accordingly, a state can enact laws governing both conduct that occurs within its territory and the conduct of its nationals anywhere in the world.³¹ When an activity is prohibited extraterritorially, the potential for conflicting...