In two speeches last week Department of Justice (DOJ) Acting Principal Assistant Attorney General Trevor McFadden addressed multiple topics and issues around the Foreign Corrupt Practices Act (FCPA). The first set of remarks were made in Washington DC at the Anti-Corruption, Export Controls & Sanctions (ACES) 10th Compliance Summit (the “DC speech”). The second were made at the American Conference Institute (ACI) 19th Conference on the FCPA in New York City (the “NYC speech”).
While most of the remarks echoed earlier DOJ officials, we have rarely seen such a comprehensive set of statements about the evolution in purpose for the FCPA, how businesses should comply with the FCPA and FCPA enforcement going forward into the Trump administration. I found these remarks to be so significant I will be exploring them over the next few posts. Today, I will take up the reasons for FCPA enforcement today in 2017.
The purposes of the FCPA were written into the Preamble to the original 1977 legislation. In it, Congress set out three clear policy goals for the enactment of the FCPA. First, was the public revelation that over 400 US companies had paid over $300 million to bribe foreign governments, public officials and political parties. Such payments were not only “unethical” but also “counter to the moral expectations and values of the American public”. Second was that the revelation of bribery, tended “to embarrass friendly governments, lower the esteem for the United States among the citizens of foreign nations, and lend credence to the suspicions sown by foreign opponents of the United States that American enterprises exert a corrupting influence on the political processes of their nations”. Third was by enacting such resolute legislation, US companies would be in a better position to resist demands to pay bribes made by corrupt foreign governments, their agents and representatives.
Each of the above provide mechanisms to escape liability, rather than the affirmative actions to prevent bribery and corruption. Yet early in his DC speech, McFadden brought up the concept of Corporate Social Responsibility (CSR) and articulated “at the very least it must mean that a company rejects bribery of government officials as a means to get ahead.” This is a very far cry from the business world of 1977, when the FCPA was enacted when “bribing foreign officials in order to gain business advantages abroad was often considered a routine business expense.” McFadden said that he had personally seen companies “give up potentially lucrative business opportunities or forgo entry into certain markets because they valued their brand reputations over additional profits made under dubious circumstances.” Neither CSR nor brand reputation were reasons for the original passage of the FCPA yet today they are at the forefront of corporate compliance with the law.
The harm caused by bribery and corruption has also seen a shift since 1977. The connection between bribery and corruption and terrorism has been well-documented since 9/11. However, McFadden identified several other reasons for robust enforcement of the FCPA. Corruption “impedes free competition” as it allows companies which provide substandard products and services to be awarded contracts by foreign governments and state-owned enterprises. Of course, the real losers are the citizens of those countries where contracts are awarded based on bribery and corruption. For not only do they receive suboptimal products and services under bribe-induced agreements but “these bribes actually impede economic growth, undermine democratic values and public accountability and weaken the rule of law.”
Economic growth is impeded through the diversion of funds which should be paid to a country, lining of the pockets of its officials. The country does not receive the benefit, in goods or services, that it paid for. Here one only needs to consider the words of King Abdullah of Saudi Arabia, who told then Secretary of Defense Robert Gates, he wanted to purchase arms from America, rather than from Russia or France because he did “he wanted all the Saudi money to go toward military equipment, not into Swiss bank accounts.” You might also consider how much stronger, better run and more efficient both Petrobras and Brazil would be today if the company had not allowed bribery to be the clear market differentiator, rather than quality and pricing, before Operation Car Wash.
Yet corruption damages more than the citizens of the countries where it occurs. In an area rarely discussed by the DOJ, McFadden correctly noted the damage it afflicts on businesses which engage in such behavior. The first area he highlighted was that because of the uncertainty corruption brings to a transaction, it actually increases, not decreases the cost of doing business. Simply put, once you pay a bribe, you are identified as a business which is willing to break the law and you can essentially be blackmailed into an ongoing stream of business corruption.
McFadden also pointed out the effect of companies engaging in illegal conduct on their own employees. There are not many employees, in any company anywhere in the world, who want to be known as legal scofflaws. Beyond this attitude McFadden looked at corruption from more of a Human Resource (HR) perspective when he said, “Bribery has destructive effects within businesses as well, undermining employee confidence in a company’s management.” Allowing a culture of bribery and corruption to thrive within an organization also fosters a “permissive atmosphere for other kinds of corporate misconduct, such as employee self-dealing, embezzlement, financial fraud and anti-competitive behavior.”
While McFadden laid out the above reasons that bribery and corruption is against a business’s long term interest, he added another, which the DOJ does not often discuss. Bribery and corruption is not in “the best interests” of a company’s shareholders and investors. There are two parts to the FCPA: (1) the anti-bribery provisions and (2) the accounting provisions. Companies which engage in bribery and corruption never correctly record bribes paid as bribes, at least not in their publicly available books and records. This means investors are prevented from obtaining a true and accurate picture of a company’s legal value.
I conclude today’s review of McFadden’s remarks by noting that the FCPA has made a positive impact in fighting this global scourge. Moreover, the leaders in this fight are companies and businesses which comply with anti-corruption laws such as the FCPA. McFadden stated, “we are heading in the right direction. And this is in large part thanks to our allies in the private sector – people like you – who are leading the way in CSR and anti-corruption compliance efforts.”
The remarks by McFadden on the invidiousness of bribery and corruption demonstrate the FCPA is not captive to the underlying reasons for its passage in 1977. Application of laws evolve as businesses, society and the global community evolves. Even if the Congress which passed the law some 40 years ago did not understand, appreciate or even consider the reasons that McFadden articulated in the DC speech, they are important in today’s world.
Tomorrow I will consider the corporate response to FCPA enforcement.
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© Thomas R. Fox, 2017