FCPA Regulation by Prosecution and the World's New Norms

October 25th, 2012

In late 1975 a Securities and Exchange Commission investigation into Lockheed Corporation revealed that the aircraft manufacturer had paid at least $22 million in bribes to foreign government officials and political organizations. At the time, this was not illegal and it resulted in a scandal, investigation, and a revelation that hundreds of other businesses were routinely involved in this practice. In response to the Lockheed scandal, Congress enacted the Foreign Corrupt Practice Act (FCPA) in an effort to “bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system.” The FCPA makes it unlawful for persons and entities to “make payments to foreign government officials to assist in obtaining or retaining business.”

Last year some members of Congress, including Rep. Jim Sensenbrenner, and the Chamber of Commerce brandished a crusade against the FCPA, hoping to weaken it with amendments. Rep. Sensenbrenner spent a great deal of valuable Judiciary Committee time last fall convincing other Congressmen to join him, rather than encouraging a thoughtful debate on the issue.

In a not-unrelated move, early last November, the Assistant Attorney General of the Department of Justice’s Criminal Division, Lanny Breuer, said in remarks at a national FCPA conference that his division expects to “release detailed new guidance on the act’s criminal and civil enforcement provisions,” in what he hoped would be “a useful and transparent aid.” Breuer didn’t promise a timeline, but he did mention the guidance would arrive sometime “in 2012.”

As you may have noticed, it’s now October in 2012 and we still don’t know where our FCPA guidance is. While there have been multiple rumors over the last few months about its impending arrival, analysts have made these predictions without formal announcement from the Department of Justice. Rumors have flown for the reasons for this, with some noting that delay is staving off congressional action to amend the statue.

There are legitimate reasons to provide guidance on the document, though many fewer to amend it. Businesses have argued “compliance with the FCPA can be costly and unfair, because there is no guidance for effective compliance.” Businesses also point out, not unfairly, that FCPA represents a trend toward “regulation by prosecution.” Rachel and Anthony Barkow, of NYU Law School, define this as a process, growing in popularity, that occurs when prosecutors reach “agreements with companies, under the threat of prosecution, which allow companies to avoid indictments so long as they meet the prosecutors’ regulatory terms.” In many of these agreements, prosecutors compel companies to revamp business practices and adopt new models of corporate governance—resembling the outcomes from reform and regulations that administrative agencies construct.

This idea is not without fault. As with any other kind of regulation, officials should analyze regulation by prosecution through the lens of effectiveness and a comprehensive view of whether the benefits outweigh the costs. For example, if regulation by prosecution is particularly expensive—relative to the benefit—compared to alternatives, it is not such a viable method.

But an argument can also be made on the other side of the coin—that with regulation by prosecution, the DOJ is setting up a new norm. If, with prosecution and enforcement, the DOJ can create a culture of compliance with the law, the benefits of enforcement extend far beyond the isolated cases of prosecution and indictments.

Think about it this way. Economic theory tells us that a criminal’s decision on whether or not to break the law is a function of two basic variables: the probability of getting caught and the penalty associated it. The DOJ has an opportunity to modify this equation in multiple ways—first and, most obviously, by ramping up investigations and making the probability of getting caught higher. But second, by shifting norms so that there aren’t very many violations. This occurs through a virtuous cycle: if the DOJ’s prosecution reduces the number of companies that violate the law, it becomes easier it is to catch the ones that are still violating, which means there is a higher probability of those companies getting caught, which reduces the probability that they’ll cheat in the first place.

As a result, enforcement costs go way down because there aren’t that many people and companies cheating in the first place.

Of course, we don’t have any data or analysis showing whether or not this theory holds for FCPA enforcement, in particular. And it doesn’t really change anything with respect to FCPA guidance—it would still likely provide some benefit to companies to see some clarity regarding DOJ’s expectations for FCPA compliance. At the same time, however, from society’s perspective, the benefits of regulation by prosecution may significantly outweigh the costs, particularly if we are witnessing a case of changing norms. Given that other countries are finally jumping on the anti-foreign bribery wagon—and legislation like the FCPA is becoming common worldwide—we should see even more self-reinforcing cycles of compliance, at decreasing costs to U.S. taxpayers. Best of all, there would be less bribery worldwide. And, lest we forget it in all this legal talk, that would be the real victory.


Written by Ann Hollingshead

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