Cross-national patterns in FCPA enforcement.

AuthorMcLean, Nicholas M.
PositionForeign Corrupt Practices Act of 1977

NOTE CONTENTS INTRODUCTION I. THE FOREIGN CORRUPT PRACTICES ACT II. POSSIBLE DETERMINANTS OF CROSS-NATIONAL FCPA ENFORCEMENT PATTERNS A. Investment B. Corruption C. Foreign Policy D. Enforcement Cooperation III. DATA AND ANALYSIS A. Data Sources B. Results and Analysis IV. TOWARD AN ENFORCEMENT-BASED CROSS-NATIONAL MEASURE OF FCPA RISK? A. The Importance of FCPA Risk Assessment and the Role of Corruption Perceptions Measures B. Examining the "FCPA Enforcement-Action Intensity" of U.S. FDI CONCLUSION APPENDIX * INTRODUCTION

Corruption (1) has been described as "the single greatest obstacle to economic and social development" in the world. (2) Amid an emergent global consensus on the importance of combating international corruption, (3) over the past decade, U.S. authorities have spearheaded a dramatic increase in the number of enforcement actions brought under the Foreign Corrupt Practices Act (FCPA). (4) Recent FCPA enforcement efforts have ensnared large numbers of individuals and firms operating in a variety of foreign countries. (5) These efforts have made headlines, (6) prompted widespread changes to corporate practices, (7) and resulted in the imposition of large criminal and civil penalties. (8) Yet despite this surge in enforcement, FCPA charging decisions remain highly discretionary--indeed, opaque--in a number of respects, (9) and our understanding of the factors that influence FCPA charging decisions in practice remains incomplete. (10)

This Note examines one aspect of this issue: the cross-national patterns associated with U.S. enforcement actions under the FCPA. After years of aggressive enforcement, what conclusions can we draw regarding the cross-national distribution of FCPA cases? How closely does variation in the relative number of FCPA cases associated with different foreign nations track perceived cross-national variation in corruption levels? Do the data suggest the existence of a link between U.S. foreign policy considerations and FCPA charging decisions? Are countries that cooperate more closely with U.S. authorities more likely to be associated with FCPA enforcement actions?

This Note proceeds in five parts. In Part I, I provide an overview of the FCPA and briefly examine the law's enforcement history. In Part II, I present a number of hypotheses regarding possible cross-national influences on FCPA enforcement. In Part III, I introduce a new cross-national dataset of FCPA enforcement actions. I then propose and test a simple model to explain cross-national variation in FCPA enforcement actions, in which the number of FCPA cases associated with a given host country is a function of (1) the level of U.S. foreign direct investment (FDI) stock in the country and (2) the level of corruption in that country. Testing this model via multivariate regression analysis, I find that both of these factors are significantly associated with cross-national variation in FCPA enforcement levels, and that this relationship is robust to the inclusion of a number of controls (including GDP per capita and regional fixed effects). Moreover, I find that the presence of bilateral mechanisms of regulatory and enforcement cooperation between the United States and a given host country is strongly associated with increased FCPA enforcement in that country. In contrast, other variables--including foreign policy alignment between the host nation and the United States--do not appear to be associated with variation in FCPA enforcement levels. In addition, I find that cross-national variation in the number of FCPA cases in a given country is more closely associated with actual recorded experience with corruption (as measured by cross-national survey instruments) than with more widely used measures of corruption perceptions. This finding could provide some support to those who have questioned whether measures of corruption perceptions are truly successful in capturing underlying variation in corruption levels.

Today, ascertaining and quantifying FCPA country risk is an important challenge facing multinational firms and legal practitioners. Although indices of corruption perceptions have been a traditional source of data for judging the level of enforcement risk, the efficacy of using perceptions-based measures has, in recent years, come under increasing criticism in the academic literature. (11) In Part IV, I suggest an alternative approach: I calculate a cross-national measure of the "FCPA enforcement-action intensity" of U.S. FDI. (12) Such a metric might be employed both as a way for private sector actors to quantify FCPA risk and, potentially, as a way to proxy cross-national variation in underlying corruption levels in the academic study of corruption.

  1. THE FOREIGN CORRUPT PRACTICES ACT

    The FCPA was enacted in 1977 following a series of investigations that uncovered widespread illicit payment of bribes to foreign officials by U.S. firms. (13) Adopted as an amendment to the 1934 Securities Exchange Act, the FCPA itself was subsequently amended in 1988 (14) and 1998. (15) The 1998 amendments established, inter alia, extraterritorial jurisdiction over violations of the FCPA by U.S. nationals. (16)

    The provisions of the FCPA fall into two general categories. First, the FCPA's antibribery provisions criminalize the act of "corruptly" making an "offer, payment, promise to pay, or authorization of the payment of any money" to "any foreign official for purposes of ... influencing any act or decision of such foreign official in his official capacity ... or ... inducing such foreign official to use his influence with a foreign government ... in order to assist ... in obtaining or retaining business." (17) These provisions apply to three categories of persons: U.S. issuers, (18) "domestic concerns," (19) and "any person other than an issuer ... or a domestic concern" who acts "while in the territory of the United States." (20)

    Second, the FCPA imposes on U.S. issuers certain accounting requirements, which themselves fall into two categories. Issuers must "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." (21) Issuers must also "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances" of compliance. (22) Both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are responsible for enforcing the antibribery provisions of the Act, while the SEC enforces the internal controls and the books and records provisions. (23)

    Enforcement of the FCPA during the Act's first two decades was limited. (24) However, recent years have seen a dramatic surge in enforcement actions brought under the FCPA. (25) A number of reasons have been suggested for this rise in enforcement, including increased international trade and investment, (26) the 1997 establishment of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, (27) and the impact of the Sarbanes-Oxley Act of 2002. (28) As an assistant U.S. attorney general recently observed, "[W]e are in a new era of FCPA enforcement; and we are here to stay." (29)

  2. POSSIBLE DETERMINANTS OF CROSS-NATIONAL FCPA ENFORCEMENT PATTERNS

    In recent years, the enforcement agencies have sought to increase the transparency of charging decisions by publishing memoranda outlining the factors to be taken into account in deciding whether to bring charges. (30) Nevertheless, as noted above, charging decisions under the FCPA remain highly discretionary, (31) and we lack a comprehensive account of the cross-national determinants of FCPA enforcement. When examining aggregate FCPA enforcement patterns, what factors might we expect to see associated with cross-national variation in enforcement levels? Although a number of different hypotheses might be suggested, four variables appear particularly relevant.

    1. Investment

      First, we might expect to see a greater number of FCPA cases associated with countries in which U.S. firms have more extensive investment. All else being equal, where the U.S. investment presence is greater, the likelihood that U.S. firms will become embroiled in FCPA violations should similarly be higher. Granted, employing U.S. FDI as an independent variable in explaining the distribution of FCPA cases is potentially problematic: several recent U.S. FCPA enforcement actions have involved foreign-headquartered entities--including, for example, the 2010 enforcement actions against Siemens AG of Germany and Alcatel-Lucent S.A. of France. (32) Foreign corporations can be subject to the FCPA either as a consequence of their status as U.S. issuers or if an "act in furtherance of ... [a corrupt] payment" takes place "in the territory of the United States." (33) Nevertheless, despite these recent high-profile enforcement actions against foreign-headquartered firms, over the broader history of FCPA enforcement, actions have predominantly targeted domestic U.S. firms. (34) Consequently, employing U.S. FDI as an independent variable here is appropriate.

      Alternatively, there are also reasons to believe that an inverse relationship between investment and FCPA enforcement might exist: the possibility of becoming subject to an enforcement action under the FCPA may dissuade U.S. firms from investing in countries that exhibit (or are perceived to exhibit) high levels of corruption. (35) Thus, as U.S. FDI rises, we would expect FCPA enforcement to increase, but as FCPA enforcement increases, we might expect U.S. FDI to fall. Although a full examination of this relationship is beyond the scope of this Note (it would likely require a multiperiod model), I nevertheless seek to address this issue of reverse causation by employing data on foreign investment stock (representing the accumulation of FDI in prior periods) as opposed to foreign investment flows. (36)

    2. Corruptio...

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