Choosing governance in the FCPA reform debate.

Author:Yockey, Joseph W.
Position:Foreign Corrupt Practices Act of 1977 - IV. Next Steps in the Reform Debate through VI. Conclusion, with footnotes, p. 353-380
  1. Next Steps in the Reform Debate

    The foregoing discussion does not mean that prosecutors do not hold substantial leverage in pushing FCPA resolutions toward settlement--they clearly do--only that such leverage must be assessed in light of the circumstances of each case. Prosecutors have limited budgets and political concerns of their own. Most firms facing FCPA scrutiny possess the resources to hire expert, well-connected defense counsel and do not operate in industries where an indictment would automatically be fatal. Their managers will want to settle investigations as quickly as possible and get back to business, and a combination of factors suggests that they should be able to drive a harder bargain during settlement negotiations than often portrayed by reformers.

    Perhaps greater empirical analysis--already underway--will better inform our understanding of these issues, assuming that analysts can overcome uncertainties about detection and other inputs. (170) But for now, even assuming that claims of overenforcement deserve at least modest skepticism, proponents of the status quo should not take it for granted that FCPA enforcement quality is high. The most useful aspect of the current debate is that it provides an opportunity to reexamine the framework of FCPA enforcement and the policy goals it hopes to achieve. This examination reveals that the current model suffers from several problems.

    1. Risk of Underdeterrence

      The first issue that the current enforcement model raises is the risk that, if corruption is not being overly deterred, it is being underdeterred. As we have seen, the current sanction-based approach to FCPA enforcement requires the state to make significant investments in monitoring and detection in order to enforce compliance. (171) The strain that this places on regulatory capacity helps explain the reliance on firm self-disclosure and cooperation. But this dynamic also signals a potential paradox in present FCPA enforcement. As anti-corruption enforcement becomes a higher priority, there is a risk that regulators will focus on bringing smaller, easier actions that they can be sure of settling in order to demonstrate a high enforcement volume--or that they will settle cases against larger firms capable of mounting a defense for only minimal amounts. (172)

      To take the DOJ as an example, a staff of 20 prosecutors likely cannot afford the time and risk associated with prosecuting every large firm suspected of wrongdoing. Thus, for every case like Siemens, prosecutors may devote the bulk of their energy and resources to pursuing firms that self-report or are less able to mount a vigorous defense. This strategy would be rational for an enforcer that needs to point to a vigorous enforcement record to back up a strong public commitment to fighting corruption. (173) However, if the expense of pursuing firms is too great for regulators with limited resources, they could end up imposing sanctions through settlement that are too low to sufficiently deter wrongdoing. These circumstances likely explain why so many NGOs and other actors in the international community believe that transnational bribery remains a significant problem despite greater attention to enforcement compared to years past. (174) They also undercut the values at the heart of the FCPA and raise questions about the United States' reputation in the international community as a pioneer in spreading anticorruption norms.

      One way to bypass these issues might be to legislate for more severe sanctions in FCPA cases. However, as to enforcement, we are concerned with not only finding the correct level of deterrence, but also the costs to society of enforcing the rule designed to do the deterring. With many criminal statutes, the costs of enforcement consist mainly of the costs of paying for prosecutors, prisons, police, and courts. With respect to the FCPA, though, there is another set of significant costs: the costs incurred by companies to establish internal compliance systems. If sanctions are set too high, there could become a point where the total costs of enforcing the statute--including compliance costs--become socially inefficient as they are passed on to consumers and other end-users of a firm's products or services. (175)

      Still another option would be for regulators to devote more energy to prosecuting individual wrongdoers within a firm. At bottom, employees who commit FCPA violations typify the agency cost issue that affects all firms. But many FCPA settlements simply require firms to pay a fine and make various internal governance reforms. As long as bribery is profitable and sanctions are borne primarily at the entity level, managers have little incentive to try to stop it. (176) This is especially true if the results of bribery provide them with career advancement or other personal benefits. (177) Prosecuting the individuals responsible for committing bribery--or those who failed to make a good faith effort to monitor the bribe payers--is one way to counteract the principal-agent problem. (178) As Miriam Baer observes:

      Most corporate chieftains would prefer to avoid fines. But all are horrified by the thought of jail and the prospect of being publicly labeled a criminal ... [P]unishment [also] improves compliance ... [because it] reassures the employees and officers who are inclined not to break rules that we will hold accountable those who do. Punishment signals to law-abiding employees that the trust they have placed in others is reasonable and likely to be reciprocated. (179) The trouble here is in proportioning blame appropriately. It is extraordinarily difficult to structure sanctions in a way that accurately captures the culpability of responsible parties. This difficulty follows from the organizational complexities inherent in modern corporations that make it challenging to assess internal behavior. (180) Even if these obstacles could be overcome and the "right" people are held accountable, the question remains whether subsequent managers or agents will be sufficiently deterred. (181) This concern highlights the importance of corporate culture. While it is true that FCPA violations can be viewed as part of a corporate principal-agent problem, they are not always the product of rogue individual agents. Prosecuting individual wrongdoers can only go so far in producing sweeping reform in companies where violations stem from issues of organizational culture and practices. (182) Cristie Ford and David Hess cite empirical studies showing that a majority of employees believe that "organizational factors"--such as pressure to meet performance targets or the disregard of internal corporate codes--are more to blame for firm misconduct than employee self-interest. (183) For this reason, many scholars believe that "corporate criminal enforcement ought to focus above all on genuine institutional production of wrongdoing," where placing "blame at the institutional rather than individual level is most justified and most likely to send useful messages about how institutions ought to arrange themselves so as not to produce lawbreaking." (184)

    2. Compliance Challenges

      Something else that often gets overshadowed by the current reform debate is the fact that an increasing number of firms are less interested in debating potential structural reforms to the FCPA and more focused on making anti-corruption compliance part of long-term strategic planning and risk management. (185) Whether framed in terms of corporate social responsibility or not, these firms have come to realize that there is a business case to be made for avoiding bribery that goes beyond the risk of regulatory sanction. Bribery raises their marginal tax rate, increases the chance of continuous solicitation, (186) raises the cost of capital due to the time lost during haggling, (187) makes it harder to recruit and keep talent, and, for some companies, can have adverse branding and reputational effects. (188) Contracts obtained through bribery may also be legally unenforceable, and can undermine employee trust and confidence in management. (189)

      For firms that strive to be law-abiding, the issue then becomes how to structure their compliance efforts to minimize the chance of wrongdoing. This is often easier said than done. Corruption comes in many forms and rarely remains static. Corrupt negotiations may occur between low-level government workers and low-level firm employees, or between high-ranking government officials and members of a firm's executive suite. Different markets and industries also present different risks. While commercial participants in some countries see bribes as simply a cost of doing business, in others the request for payment often rises to the level of extortion. (190) Unique cultural norms and business practices can further blur the lines between innocuous gift giving and illegal kickbacks. (191)

      Firms also are not immune to the monitoring difficulties that frequently bamboozle law enforcement. Transnational bribery often occurs in secret and remote locations. A company's ability to monitor is extremely limited in these circumstances. This concern is compounded by firms' frequent reliance on foreign agents and intermediaries (a legal requirement in some countries) because these actors operate at the periphery of regular corporate activities and have a variety of tools available for hiding illegal payments. (192) Some foreign officials have even gone so far as to help agents hide their tracks by channeling bribes disguised as fees or commissions through specially created shell entities. (193) Similarly, direct quid pro quo transactions often give way to indirect payments to foundations or educational institutions that mask the specific personal benefit enjoyed by a foreign public official or her relatives. (194) These issues affect firms of all sizes, but can be particularly difficult for small- and medium-sized entities to handle given...

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