Foreign Affairs and Enforcement of the Foreign Corrupt Practices Act

• Date: 01 September 2014
• Author: Stephen J. Choi,Kevin E. Davis
• Published date: 01 September 2014
• DOI: http://doi.org/10.1111/jels.12045

Foreign Affairs and Enforcement of the

Foreign Corrupt Practices Act

Stephen J. Choi and Kevin E. Davis*

We examine factors that might explain how sanctions imposed in Foreign Corrupt Practices

Act (FCPA) enforcement actions vary across the firms and countries implicated using a data

set of FCPA actions resolved from 2004 to 2011. We find evidence that the sanctions in an

individual FCPA action are positively correlated with the egregiousness and extensiveness of

the bribe. The sanctions also increase if the ultimate parent company of entities involved in

the FCPA violation is foreign and if foreign regulators are involved in the action. At the

country level, we report evidence that the SEC and DOJ impose greater aggregate sanctions

for violations in countries with a lower GNI per capita and weaker local anti-bribery institu-

tions. The SEC and DOJ also impose disproportionately greater aggregate sanctions for

violations where the home country of the ultimate parent company of FCPA defendants has

a greater GNI per capita, stronger anti-bribery institutions, and a cooperation agreement

with U.S. regulators. Overall, these findings suggest that factors besides those deemed

relevant by U.S. and international law influence enforcement of the FCPA.

I. Introduction

The United States has a history of policing the world. U.S. law allows people to be pros-

ecuted for foreign misconduct in areas as varied as money laundering, sex tourism, terror-

ism, and torture. There are several alternative explanations of this kind of extraterritorial

regulation. One account views extraterritorial regulation as the product of regulators’

predominantly parochial concerns, such as the desire to prevent activity that causes harm

within U.S. territory or is offensive to fundamental U.S. values. Other accounts claim that

extraterritorial regulation is motivated by concerns about foreign affairs, such as the desire

to promote the development of less developed countries or to enhance the competitiveness

of domestic firms. Yet another account claims that, regardless of regulators’ motivations,

practical constraints and global interdependence will ensure that extraterritorial regulation

is influenced by the extent to which it can be coordinated with the activities of foreign

regulators.

*Address correspondence to Stephen J. Choi, Murray and Kathleen Bring Professor of Law, New York University

School of Law; email: stephen.choi@nyu.edu. Davis is Beller Family Professor of Business Law, New York University

School of Law.

Thanks to Ryan Bubb, Un Kyung Park, and participants in presentations at Berkeley, Harvard, NYU, Emory,

Temple, the Wharton School, and the American Law and Economics Association Annual Meeting for helpful

comments. We are also grateful to Chiamaka Nwokolo and Kimberly Won for research assistance.

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Journal of Empirical Legal Studies

Volume 11, Issue 3, 409–445, September 2014

409

This article provides a quantitative analysis of recent patterns of enforcement of the

Foreign Corrupt Practices Act of 1977 (FCPA), a U.S. statute that sanctions payment of

bribes to foreign public officials. Understanding what explains enforcement of the FCPA is

of great practical importance for businesses trying to decide how to conduct their affairs.

The number of enterprises prosecuted for violating the FCPA’s anti-bribery provisions has

increased from an average of 2.4 cases per year from 1998 to 2006, to 12.6 per year since

then. Understanding FCPA enforcement is also important for scholars interested in how

law enforcement officials enforce extraterritorial regulation and the impact of that regu-

lation on transnational misconduct. Finally, analysis of how U.S. officials enforce the FCPA

should inform thinking about whether it is necessary or appropriate to create some sort of

international organization to prosecute transnational bribery.

Our aim in this study is to examine the extent to which four broad theories explain

the recent pattern of enforcement of the FCPA. Each of these theories yields different

predictions about the factors that will account for patterns of enforcement activity. The first

theory, Legality, predicts that enforcement will reflect factors identified in legislation,

guidelines, and international conventions. The Legality theory suggests that differences in

treatment of defendants and variations across countries in levels of enforcement will

depend entirely on differences in the egregiousness, extensiveness, and prevalence of

transnational bribery subject to U.S. jurisdiction. In contrast with our other theories, this

theory is inherently parochial because it suggests that patterns of enforcement will not

be affected by foreign policy considerations or the presence (or absence) of foreign

regulators.

Our second theory, Altruism, suggests that FCPA enforcement is influenced by

foreign policy considerations. In particular, Altruism suggests that the FCPA will be enforced

with a view to the interests of foreign actors, with U.S. enforcement making up for the

shortcomings of foreign states that are not capable of regulating transnational activity on

their own. On this account, patterns of enforcement activity might be explained by the

needs or institutional capacity of the countries whose officials have been bribed.

The third theory, Self-Interest, suggests that U.S. enforcement will tend to promote the

interests of the United States. This implies that factors such as the nationality of the

defendant and the extent to which the misconduct prejudiced U.S. firms ought to be taken

into account.

Our fourth theory, Coordination, suggests that U.S. officials’ enforcement decisions

will be influenced by the actions of foreign regulators. Those regulators might complement

U.S. enforcement actions by helping gather evidence. Alternatively, foreign regulators

might impose sanctions that serve as substitutes for U.S. enforcement.

Our quantitative analysis explores the extent to which these four theories explain

variations in the treatment of firms and countries implicated in FCPA enforcement actions

using a data set of FCPA cases resolved from 2004 to 2011. The analysis of how sanctions

vary across countries examines how sanctions vary across home-violation country pairings.

For example, French companies bribing Chinese officials would be a France-China home-

violation country pair. We adopt this approach because the Altruism,Self-Interest, and Coor-

dination theories suggest that the level of sanctions imposed for violations of the FCPA

might depend on the country in which the defendant is based (the home country), the

410 Choi and Davis

country in which the public official was located (the violation country), and the relationship

between the home country and the violation country.

We find evidence in support of Legality and Coordination. Consistent with Legality,

sanctions in an individual FCPA action are positively correlated with the egregiousness of

the bribe and the extensiveness of the violation. Across countries, aggregate FCPA sanctions

are proportional to a measure of overall bribe activity in each violation country. With

respect to Coordination, greater sanctions are imposed on defendants investigated or sanc-

tioned by a foreign regulator. The SEC and DOJ also impose greater aggregate sanctions for

home-violation country pairs where the home country has a bilateral cooperation agree-

ment with the SEC, a Mutual Legal Assistance Treaty (MLAT) with the United States, and

stronger local anti-bribery institutions.

We also find that Altruism and Self-Interest explain variations in sanctions across either

firms or countries, but not both. With respect to Altruism, firms that pay bribes in poorer

countries do not receive higher sanctions. However, using an estimate of the overall level of

transnational bribery in a particular country as our baseline, we report evidence that the

U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC)

impose greater aggregate sanctions for violations in countries with a lower GNI per capita

as well as weaker local anti-bribery institutions. Meanwhile, although sanctions are lower in

any individual FCPA action involving a U.S. firm (consistent with Self-Interest), we find that

the SEC and DOJ impose disproportionately greater aggregate sanctions where the United

States is the home country (inconsistent with Self-Interest but arguably due to the relative

ease of access to evidence for the DOJ and SEC when U.S. companies are involved in a

FCPA violation).

Section II sets forth our hypotheses. Section III describes the data set. Section IV

reports tests of the hypotheses based on FCPA-action-level data. Section V reports tests

based on home-violation country pairs. Section VI concludes.

II. Hypotheses and Related Literature

A. The FCPA and Related Laws

The FCPA was enacted in 1977 in the aftermath of the Watergate scandal. It was a direct

response to revelations that U.S. corporations maintained secret slush funds from which

they made illegal contributions to domestic political campaigns and questionable payments

to foreign public officials (Davis 2012). The core of the FCPA is a prohibition on bribery of

foreign officials, foreign political parties, officials of foreign political parties, or candidates

for foreign political office. The current version of the statute prohibits bribery of those

officials in order to assist the bribepayer in “obtaining or retaining business for or with, or

directing business to, any person.” These prohibitions apply to U.S. firms regardless of

where their misconduct takes place. The anti-bribery prohibitions also apply to foreign

firms with certain types of connections to the United States, such as having securities listed

on a U.S. exchange, engaging in prohibited conduct in U.S. territory, or, more controver-

sially, conspiring with U.S. firms. Listing securities in a U.S. securities exchange is important

Foreign Affairs and the Foreign Corrupt Practices Act 411