Choosing governance in the FCPA reform debate.

• Author: Yockey, Joseph W.
• Position: Foreign Corrupt Practices Act of 1977 - I. Introduction through III. Questioning the Current Reform Narrative, p. 325-353

The recent rise in enforcement under the U.S. Foreign Corrupt Practices Act (FCPA) has led to a vigorous debate about the need for reform. Critics say the statute is overenforced and harms shareholders. Regulators disagree and argue in favor of the status quo. This Article examines both sides of the FCPA reform debate and finds them wanting on several levels. First, a variety of factors suggest that critics' fears of overenforcement are often exaggerated. That said, proponents of existing enforcement efforts who believe that nothing needs to change are also mistaken. Instead of overenforcement, there is a risk that the FCPA is being underenforced. Instead of encouraging firms to develop anticipatory and sustainable compliance programs, current enforcement policy incentivizes a focus on static programs that are incapable of addressing the dynamic risk of corruption. Finally, the present regulatory model fails to adequately address how gaps in international anti-corruption enforcement pose unique compliance challenges on the domestic front.

This Article seeks win-win solutions to these problems by recommending a shift of focus toward regulatory strategies designed around principles of collaboration and experimentation that fall within the category of "new governance." Through a governance-based approach to regulation, firms are expected to better institutionalize context-specific compliance tools developed in consultation with the state and other actors. This approach--when ongoing and initiated outside the context of a specific enforcement action--ought to produce more effective and efficient self-regulation and fewer instances of bribery. The public-private learning process envisioned by new governance should also enhance the United States' efforts to promote international anticorruption norms and help level the playing field for American firms.

1. Introduction II. The Reform Debate A. Rise in FCPA Enforcement Activity B. Criticisms and Calls for Reform 1. Enforcement Practices 2. Overenforcement? III. Questioning the Current Reform Narrative A. The Need for Ambiguity and Flexibility 1. Focus on Values 2. Principle-Based Design B. Settlement Dynamic 1. Quantitative Issues 2. Structural Issues IV. NEXT STEPS IN THE REFORM DEBATE A. Risk of Underdeterrence B. Compliance Challenges C. Gaps in Multilateral Enforcement V. Advancing the Debate Through Governance A. Collaboration and Information Gathering B. Internalization C. Implementation D. Enforcement, Reputation, and Market Effects E. Remaining Domestic Challenges F. The International Element VI. Conclusion I. Introduction

   Corruption is a disease that cannot be cured, only managed. While most agree on this basic point, there is considerable debate about the proper course of treatment. The United States' weapon of choice for combating transnational commercial bribery--the type of corruption under consideration here--is the Foreign Corrupt Practices Act (FCPA). (1) Mostly dormant for its first 25 years, the FCPA is now in the midst of an unprecedented surge in enforcement. More firms are coming under FCPA scrutiny, including several of the largest and most well-known companies in the world, and large criminal and civil sanctions are common.

   The rise in enforcement places FCPA compliance at the forefront of any board's agenda. It has also led to an increasingly impassioned debate about the wisdom and viability of FCPA reform. On one side of the debate are critics who claim that ambiguity in the statute creates perpetual uncertainty about what constitutes an FCPA violation. (2) They suggest this problem is compounded by fears of indictment that make it practically impossible for firms to challenge aggressive theories of FCPA liability in court. As a result, advocates for reform maintain that firms are forced to settle FCPA cases prematurely--often for sums that go beyond what is necessary for deterrence--and to overspend on internal compliance programs. (3)

   On the other side of the debate are the many human rights groups and other organizations in favor of the status quo. (4) To these actors, the FCPA is doing exactly what it is supposed to: promoting economic growth by ensuring a fair and competitive business climate. The Justice Department agrees with this viewpoint. Assistant Attorney General Lanny Breuer recently invoked the image of Mohammed Bouazizi, the Tunisian fruit vendor whose self-immolation in protest of public corruption many see as the impetus for the Arab Spring, to push back against claims that FCPA enforcement should be "softened." (5) Breuer stated that "at this crucial moment in history ... [we] have no greater mission than to work toward eradicating corruption across the globe." (6)

   This Article examines the foregoing debate and describes what both sides get right, and, more importantly, what they get wrong about existing FCPA enforcement policy. From there, it recommends a shift in the direction of the reform conversation--one that incorporates over a decade of learning and progress in the application of "new governance" approaches to regulation. (7) New governance theory offers an alternative to traditional, top-down forms of regulation in favor of a more collaborative relationship between the state and private firms. Governance-based regulation holds particular promise in the anti-corruption context because it shows how the ambiguity associated with statutes like the FCPA can evolve from a compliance challenge to a key part of the compliance solution. (8) The way this transformation happens is through an ongoing dialogue among the state, firms, and other stakeholders that focuses on developing norms and standards necessary to give content to the law. (9) A crucial byproduct of this process is that it provides firms with the information necessary to shape the ethical sensibilities of employees and better equip them to exercise judgment in the face of challenging new situations. (10) This, in turn, should lead to compliance that is anticipatory, adaptable, and sustainable. Enhanced self-regulation will also free up regulatory resources so that regulators can focus on bringing larger and more strategic enforcement actions designed to incentivize industry cooperation and bolster accountability.

   This Article's analysis of the FCPA reform debate proceeds as follows. Part II sets forth the contours of the debate by documenting the rise in FCPA enforcement activity and its attendant criticisms. Part III discusses several quantitative and qualitative factors that cast doubt on the overenforcement narrative favored by the statute's critics--one of most significant being that limited regulatory resources and low detection rates force regulators to rely heavily on self-disclosure and negotiated settlements. Once settlement negotiations begin, firms often have more bargaining power than critics would like everyone to believe, suggesting that sanctions likely stay within manageable boundaries despite frequent protests to the contrary.

   Part IV describes the reasons why, despite skepticism about overenforcement, proponents of existing FCPA enforcement policy are mistaken if they believe that nothing needs to change. Arguably the most useful aspect of the current debate is that it highlights the limitations of a regulatory model that relies primarily on the threat of sanctions to deter wrongdoing. For one, the same resource limitations and low detection rates that lead regulators to rely on negotiated settlements suggest that, instead of overdeterrence, the current model creates a risk of underdeterrence. This might explain why so many observers in the international community believe that transnational bribery remains a significant problem despite the greater emphasis on enforcement in recent years. (11)

   A second problem is more nuanced. An increasing number of firms committed to ethical behavior are less interested in arguing about potential statutory changes and are more focused on making FCPA compliance part of their long-term strategies for risk management. (12) Yet, the current enforcement environment--where negotiated settlements are the norm--encourages these firms to lean primarily on compliance strategies that they can defend later should they happen to come under federal scrutiny. This is worrisome because regulators often lack the resources and expertise necessary to gain context-specific knowledge about how risk manifests itself in different firms. As a result, rather than working to craft innovative compliance solutions capable of responding to the dynamic nature of corruption, compliance efforts will likely devolve into static, one-size-fits-all programs designed to check the boxes that regulators look for. (13)

   A final problem with the current FCPA reform debate is that it fails to adequately consider the effects of international enforcement activities on domestic compliance efforts. The United States has been quite successful in convincing other countries to adopt FCPA-like legislation, but enforcement has not always followed adoption. Thus, a lingering concern is that gaps in multilateral enforcement will divert business opportunities to firms from countries that are unreachable by the FCPA or its international counterparts. This raises the possibility that at least some American firms will feel compelled to resort to bribery if they fear that doing otherwise will allow foreign competitors to take their place. (14)

   To address these problems, Part V argues that the time has come to take a step back in order to reorient the reform debate towards greater reliance on regulatory strategies that fall within the category of new governance. Among other things, the public-private collaboration that new governance envisions will facilitate the pooling of information necessary to provide firms with a more substantive understanding of anti-corruption norms and industry "best practices" for compliance. This is necessary to internalize...