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Business Sense and the FCPA

October 14, 2011

By Ann Hollingshead

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

Weakening the Foreign Corrupt Practices Act Makes Sense from Neither a Moral nor Economic Perspective

American businesses sometimes argue against the Foreign Corrupt Practices Act, the U.S. flagship legislation which makes bribery of foreign officials a crime, using economics. We see this, in particular with the latest inundations of attacks from the U.S. Chamber of Commerce, which has taken it upon itself to single-handedly dismantle the effectiveness of the FCPA. These interests claim that the FCPA makes U.S. businesses less competitive internationally because other businesses from other countries are “allowed to bribe.” Of course, they don’t put it that crudely. But you get the point. They also argue that the FCPA adds undue costs to U.S. businesses—administrative costs for training and compliance for example—that make those businesses less efficient and less competitive worldwide.

Ignore for a moment the fact that thirty-four OECD countries committed to put in place similar legislation, which creates a quasi-international consensus on such issues and therefore dispels much of this “competitive” myth anyway. But the truth is, at their core, these arguments fail to reflect the dynamic nature of international business.

There’s a story—perhaps a joke—that some of my economics professors used to tell. Suppose a technological change allows a company to improve the efficiency of, say, indoor electric heating by 50%. An engineer—they would tell us—is going to assume that expenditures on heating would decline by 50%. An economist would say, not so fast. It doesn’t just matter what the initial change is—but rather consumers’ reactions to that change. Maybe consumers will leave their thermostats at the same temperature and will, indeed, save 50% of their heating costs. Or perhaps they will increase the temperature of their homes until they are paying the same amount they were before, using the same amount of electricity, but enjoying much more heat. They might even surpass that point, depending on their personal preferences.

This story illustrates the point that you can’t just assume a straight line between an underlying change and an effect. The world is dynamic.

The same is true of the FCPA. With a narrow view of the world, we might agree that with an additional regulatory burden, U.S.companies might face a reduced ability to compete worldwide. This doesn’t take into account changing dynamics, particularly as compliance increases.

A recent survey from Kaplan & Walker and The FCPA Blog shows that compliance programs are increasing amongst U.S. businesses. In fact, a third of U.S. businesses now “carry out regular internal anti-corruption risk assessments,” and “three out of every eight companies conduct stand-alone anti-corruption audits.” In fact only 4 percent of companies have not appointed a senior executive to oversee anti-corruption compliance. Talk about compliance.

The FCPA Compliance and Ethics Blog also recently pointed out some useful anecdotes in this regard. Matt Ellis pointed to three examples of the effectiveness of the FCPA in Latin America. In Mexico, Ellis notes:

While conducting an internal investigation in a coastal town in Mexico for a major U.S.-based energy company, I observed an interesting phenomenon. Many oil and oil services companies were conducting their Gulf of Mexico operations from this particular town. Yet it appeared that local officials in the town had largely stopped demanding bribes. Why? The foreign energy companies operating there were some of the first to be hit by a wave of FCPA enforcement. 

In Argentina, Ellis notes:

To a friend in Argentina—a U.S. citizen working as President of a major multinational corporation there—the FCPA serves as a shield. On several occasions, high-level Argentine officials have propositioned him for improper payments. When this happens, he stands behind the FCPA. He explains that making the payment would be illegal, would expose his company to significant liability, and would subject him to possible jail time. Given the history of high-level corruption cases in the country, my friend’s encounters are probably not unique…The Argentina example supports the assertion that this policy goal is being achieved, as the FCPA continues to provide executives with the shield they need to resist corruption.

These anecdotes fit into the bigger picture about the nature of the FCPA. Has an American company never lost a contract in the history of the FCPA because its officers were not allowed to bribe? No. But does the FCPA provide a systematic impediment to American business competitiveness abroad? No. When an American businessman refuses to pay a bribe, it doesn’t mean the official necessarily goes looking elsewhere. As in Mexico, often the FCPA allows for a shift in the business dynamics, changing the playing field for everyone involved. Moreover, as the Argentine case shows, many businesses welcome this assurance and can use it to their benefit.

If you look at the entire program—the non-market benefits it has provided America, the market benefits it has provided for American companies, and the ethical implications of the program—the costs, which are minimal, localized, and even diminishing, pale in comparison. Stripping the FCPA of its effectiveness doesn’t make sense from a moral standpoint. It doesn’t even make sense from an economic one.

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

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