TABLE OF CONTENTS I. INTRODUCTION II. THE COST OF FCPA ENFORCEMENT III. REFORMING THE FCPA A. Compliance Defense B. Narrow and Clarify the Definitions of "Instrumentality" and "Foreign Official" C. Other Substantive Amendments D. Procedural Reforms IV. A BROADER APPROACH V. CONCLUSION I. INTRODUCTION
President Obama announced in his 2011 State of the Union address that the Administration aims to double the level of exports from the U.S. by 2014. (1) The President explained the importance of his National Export Initiative:
But this isn't just about where jobs are today; this is where American jobs will be tomorrow. Ninety-five percent of the world's customers and fastest growing markets are beyond our borders. So if we want to find new growth streams, if we want to find new markets and new opportunity, we've got to compete for those new customers--because other nations are competing for those new customers. (2) The President explained that every $1 billion increase in exports would support more than 6,000 American jobs. (3) With approximately fifteen million Americans unemployed, (4) the economic and social importance of this effort is not in doubt.
This paper sets out to criticize the failure of the U.S. government to adapt its policy on combating foreign corruption to its goal of increasing the competitiveness of the U.S. export sector and to the harsh economic reality of this decade. The government's broad and discretionary approach to enforcement of the Foreign Corrupt Practices Act (FCPA) is having a significant chilling effect on U.S. business activity. It is an unremarkable proposition that job creation is a more important policy objective than combating foreign bribery. However, these two goals do not have to be mutually defeating. The U.S. government can pursue both by narrowing and clarifying the scope of the FCPA while initiating a more comprehensive anti-corruption effort that goes beyond FCPA enforcement.
Part II of this paper describes the U.S. government's wide-net approach to FCPA enforcement and the economic costs it has imposed. Part III analyzes several proposed reforms to the FCPA, including the ideas that are currently under consideration by Congress, designed to focus the prohibition on culpable conduct and reduce collateral harm to productive business activity. Part IV suggests ways in which the government can broaden its anti-corruption efforts beyond FCPA enforcement in order to achieve the goals of that statute without harming the economy; criminal laws and securities laws are not the only tools in the toolbox.
THE COST OF FCPA ENFORCEMENT
The U.S. government has shackled its export engine with regulations. Approximately 65% of U.S. exporters have fewer than twenty employees. (5) These firms incur regulatory costs 42% higher than businesses with up to 500 employees, and the average regulatory cost for each employee of a small business exceeds $10,000 per year. (6) The Administration is aware of this problem. In his 2011 State of the Union address, the President proclaimed: "To reduce barriers to growth and investment, I've ordered a review of government regulations. When we find rules that put an unnecessary burden on businesses, we will fix them." (7) There is a consensus both inside and outside of government that the U.S. must remove the unproductive weights that restrain its competitiveness.
Of course, some regulations are necessary. The President immediately struck a note of caution by affirming that "I will not hesitate to create or enforce common-sense safeguards to protect the American people. That's what we've done in this country for more than a century. It's why our food is safe to eat, our water is safe to drink, and our air is safe to breathe." (8) The question that the Administration seems to have failed to examine is whether the marginal improvement in foreign business conduct that it appears to be seeking through its harsh, discretionary, and broad-reaching enforcement of the FCPA is such a fundamental regulatory goal, akin to safe drinking water and clean air, that it is worth the severe economic cost it has entailed.
The FCPA is an increasingly important area of regulatory compliance for U.S. businesses. It consists of two parts. In short, the antibribery provisions make it illegal for any entity with a nexus to the U.S. corruptly to provide anything of value to an instrumentality of a foreign state or to a foreign official in order to obtain or retain business. (9) The books and records provisions require companies to record their transactions and asset dispositions, impose internal accounting controls to ensure that management authorizes all transactions along with any employee access to company assets, and monitor their accounts for consistency with their records. (10)
FCPA enforcement has been accelerating at a daunting pace. From the law's enactment in 1977 until 1998, the government brought only twenty-five corporate cases. (11) In January 2009, the U.S. Department of Justice (DOJ) announced that "enforcement of the FCPA was [its] top priority, second only to fighting terrorism." (12) The statistics show that the government has indeed ramped up the pace of enforcement with impressive speed over the past several years. (13) As of,june 2010, DOJ had 150 open FCPA investigations (14) and described the increase as merely "the tip of the iceberg." (15) Further acceleration is indeed likely with the passage of the 2010 Dodd-Frank Act, which provides financial incentives and protection for whistleblowers who report FCPA violations. (16)
FCPA enforcement is crushing for targeted companies and their officers and agents. For instance, although the maximum statutory fine for a juridical person is $2 million, (17) the U.S. Securities and Exchange Commission (SEC) won an $800 million settlement from Siemens in 2008, accompanied by an $854 million penalty paid to the German government. (18) Between 1977 and 1998, DOJ collected a total of only $35.2 million under the FCPA because the government tended not to seek disgorgement of profits. (19) Today, profit disgorgements and settlements in the tens and even the hundreds of millions of dollars are common. (20)
In addition to these headline costs incurred by the targets of enforcement actions, the hidden costs of the FCPA weigh heavily on the balance sheets of all companies with a nexus to the U.S. and significant international activities. First of all, they must retain FCPA compliance counsel at great ongoing expense. Those that uncover problems may have to conduct exhaustive internal investigations and restructurings, which can cost hundreds of millions of dollars, (21) and seriously disrupt commercial activity. In recent FCPA settlements, the U.S. government has required the violating firm to expend tens of millions of dollars to retain an independent monitor for several years. (22) The cost of these monitors is often multiplied by the fact that they may also look for other unrelated violations by the company. (23) Merely an indictment under the FCPA can lead to debarment from contracting with the U.S. government and revocation of export licenses, which could immediately terminate many companies in the aerospace, defense, and healthcare industries. (24)
Additionally, the government is deliberately targeting corporate executives with criminal charges under the FCPA. Approximately 70% of recent actions have been against individuals.(25) In 2010, the Assistant Attorney General for the U.S. DOJ Criminal Division warned that "the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations." (26)
Of course, these huge costs and penalties are not problematic on their own. Effective deterrence may require a full disgorgement of profits, and better corporate governance often results from intensive compliance counseling, exhaustive internal investigations, lengthy monitorships, and painful restructurings. Rather, the central problem with the current FCPA regime is the unclear scope of the prohibition and the nearly unlimited discretion that prosecutors have to determine what constitutes a violation. Key elements of the offense are not defined in the statute, and because defendants rarely go to trial, there is little case law to elucidate their meaning.
It is this noxious combination of extremely harsh penalties and an ambiguous set of rules that makes the FCPA so disruptive to commercial activity. It causes prudent managers to forego potentially lucrative opportunities when they simply cannot determine whether proceeding would put them on the wrong side of the law. A rational decision-maker would abstain even from acts that involve only a slight possibility of drawing an enforcement action, because he would be afraid of incurring debilitating costs for the company or, worse, significant jail time for himself. Thus, the effective scope of the law's chilling effect extends far beyond the breadth of the prohibition because companies are often unwilling to accept even a slight risk of prosecution when the consequences are so dire.
There are several ambiguous aspects of the FCPA. For instance, although the law only applies when a regulated company is dealing with an "instrumentality" of a foreign state or a "foreign official," it is not clear what characteristics define these terms, and the U.S. government has in practice nearly eviscerated any limitation on the counterparties to which the law applies. The enforcement agencies interpret the counterparty element broadly and treat many purely commercial enterprises as "instrumentalities" of foreign governments and their employees as "foreign officials." The DOJ and SEC treat as instrumentalities all state-owned enterprises, even when the government has only a minority ownership stake, along with businesses that may...