Solicitation, extortion, and the FCPA.

Author:Yockey, Joseph W.
Position:Foreign Corrupt Practices Act of 1977
 
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The U.S. Foreign Corrupt Practices Act (FCPA) prohibits firms from paying bribes to foreign officials to obtain or retain business. It is one of the most significant and feared statutes for companies operating abroad. FCPA enforcement has never been higher and nine-figure monetary penalties are not uncommon. This makes the implementation of robust FCPA compliance programs of paramount importance. Unfortunately, regardless of whether they have compliance measures in place, many firms report that they face bribe requests and extortionate threats from foreign public officials on a daily basis. The implications of these demand-side pressures have gone largely unexplored in the FCPA context. This Article helps fill that gap. First, I describe the nature and frequency of bribe solicitation and extortion to illustrate the scope of the problem and the costs it imposes on firms and other market participants. I then argue that current FCPA enforcement policy in cases of solicitation and extortion raises several unique corporate governance and compliance challenges and ultimately poses a risk of overdeterrence. Though these concerns can be partially addressed through enhanced statutory guidance, I conclude by urging regulators to shift some of their focus from bribe-paying firms in order to directly target bribe-seeking public officials. Confronting the market for bribe demands in this way will help reduce corruption in general while also allowing employees and agents to spend less time worrying about how to respond to bribe requests and more time on legitimate, value-enhancing transactions.

INTRODUCTION I. FCPA ENFORCEMENT A. Background 1. Anti-Bribery Provisions 2. Accounting and Internal Control Provisions B. Recent Enforcement Trends II. DEMAND-SIDE PRESSURES: THE PROBLEM OF BRIBE SOLICITATION AND EXTORTION A. Nature and Frequency of Bribe Demands B. Costs C. Incongruity of the FCPA and Other International Anti-Bribery Instruments D.FCPA Enforcement in Cases of Solicitation and Extortion... III. GOVERNANCE AND COMPLIANCE CHALLENGES A. Practical Issues B. Expansive and Aggressive Statutory Interpretation 1. The Meaning of "Corrupt" and the FCPA's Business Nexus Requirement 2. The Facilitation Payment Exception 3. Who Is a "Foreign Official"? 4. Implications: Increased Monitoring Costs and the Risk of Overdeterrence IV. SUGGESTIONS AND ALTERNATIVES A. Changes to the FCPA 1. Permit All Bribes 2. Clearly Prohibit All "Bribes" a. Clarifying the Purpose of Anti-Bribery Legislation b. Normative Fairness Concerns c. Market Exit B. Enhanced Regulatory Guidance C. Demand-Side Intervention CONCLUSION INTRODUCTION

Maintaining compliance with the Foreign Corrupt Practices Act (FCPA) a represents one of the most significant issues facing American firms today. The U.S. Department of Justice (DOJ) recently said that enforcing the FCPA, which prohibits firms from bribing foreign officials to obtain business, is now its top priority--"second only to fighting terrorism." (2) This has translated into a sharp rise in FCPA case volume during the past decade. (3) Last year alone saw more FCPA actions than ever before in the statute's thirty-three-year history, with resulting fines routinely reaching into the hundreds of millions of dollars. (4) Estimates further suggest that federal regulators currently have over 200 open FCPA investigations, (5) leading to the observation that FCPA enforcement is "at an all time high and likely to remain there." (6)

In many respects the increasing rate of enforcement is a positive development. Bribery blights lives, undermines democracy, and distorts markets. The FCPA's resurgence is a key part of the global anticorruption response and encourages firms to adopt compliance programs designed to counter corrupt practices. The problem is that, no matter how elaborate a firm's compliance efforts might be, they can do little to curb the market for bribe demands. Firms report that they continue to receive demands for bribes from foreign officials on a daily basis. (7) In some cases this means being solicited for bribes from customs officials in exchange for moving goods in or out of the country. In other situations it means falling victim to extortion, where paying a ransom to a foreign official becomes the only way to avoid harm to one's person, property, or existing economic interests.

Bribe solicitation and extortion thus pose constant challenges for transnational firms but have received only minimal attention in the newly developing literature on the FCPA. This Article seeks to fill that gap by exploring the problem of solicitation and extortion from the perspective of corporate governance. Firms know that giving into bribe demands--regardless of the circumstances in which they were made--is generally no excuse to liability. What this Article shows, however, is that a variety of obstacles exist which make designing efficient internal controls to resist solicitation and extortion increasingly difficult.

Part I sets up the analytical framework by discussing the FCPA's key provisions and the recent upsurge in FCPA enforcement. Part II then introduces data on the nature and frequency of bribe solicitation and extortion to illustrate the scope of the problem and the costs these practices impose on firms and other market participants.

Part III turns to the governance challenges that result from solicitation and extortion. This requires looking at two overlapping issues. The first stems from the fact that firms investing in foreign markets typically need to retain local agents to navigate unfamiliar laws and customs. These agents are notoriously difficult to monitor and often go to great lengths to hide bribe and ransom payments from the firms that hired them. Firms are then exposed to vicarious liability (civilly and criminally) for the wrongs committed by their agents, even when the firms made every effort to prevent the wrongdoing.

The risk of vicarious liability feeds directly into the second issue. Instead of helping to protect firms from solicitation or extortion, federal regulators have actually made compliance more difficult due to their aggressive interpretation of several key aspects of the FCPA. Not all bribes under the FCPA are created equal. The statute affirmatively allows payments made to prompt an official to take "routine" action, (8) payments that were not made for the purpose of getting business, (9) and payments that were not made to "foreign" officials. (10) Many payments made in response to bribe demands arguably fall within these protected areas and yet have resulted in FCPA actions based on increasingly expansive enforcement theories. As regulators continue to push the boundaries of statutory interpretation, firms will find it difficult to predict ex ante whether conduct that appears permissible under the FCPA's terms will later expose them to sanction. This in turn hinders efforts to design monitoring programs that will prevent illegal payments without also deterring employees from pursuing legitimate transactions or engaging in socially desirable risk-taking.

As Part IV shows, some of the foregoing issues can be addressed through enhanced statutory guidance intended to provide firms with better understanding of enforcement standards. This should lead to greater predictability and consistency in the administration of the FCPA. Still another way to ease the pressures generated by solicitation and extortion would involve expanding the scope of anti-corruption efforts in order to directly confront the demand-side origins of corruption. This would require regulators to shift some of their focus from bribe-paying firms in order to target bribe-seeking public officials. To be sure, my argument is not that bribery should be tolerated or that bribe-paying firms should avoid sanction. Rather, the goal of confronting bribe-seeking officials would simply be to add balance to existing regulatory efforts by addressing both supply and demand in corrupt transactions.

The DOJ has made some initial strides on the demand side by seeking to disgorge profits from corrupt foreign officials who receive bribes. But much more needs to be done. This includes improving levels of cooperation with other countries to reduce the frequency of bribe demands and working with non-governmental organizations (NGOs) and other groups dedicated to fighting corruption. Through these and other initiatives, demand-side intervention has the potential to reduce corruption in general while also allowing firms and their agents to spend less time worrying about how to respond to bribe requests and more time on value-enhancing transactions.

  1. FCPA ENFORCEMENT

    1. Background

      Enacted in 1977, the FCPA was the first statute in history to prohibit firms in one country from bribing government officials in another for the purpose of getting business. Its origins can be traced to two scandals from the 1970s. The first involved Lockheed Corporation, which disclosed to regulators in 1971 that it paid multi-million dollar bribes to officials in several countries in order to secure government contracts. (11) This might not have made the splash that it did if it were not for the fact that Lockheed paid these bribes shortly after receiving a $250 million federal loan guarantee to keep it out of bankruptcy. (12) The discovery of Lockheed's bribery embarrassed the United States, as well as the countries whose officials received bribes, including Japan, Italy, and the Netherlands. (13)

      The second scandal was Watergate. In the course of investigating then-President Nixon's re-election campaign, the SEC uncovered evidence that over 400 American companies made questionable payments to foreign officials during the 1970s in amounts totaling approximately $300 million. (14) These payments were often made through the use of "slush funds" that originated in offshore bank accounts or shell companies created for the sole purpose of facilitating...

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