Foreign Corruption

1. Foreign Corruption Stu Carroll Hatice Cellik Erika Chiang April 25, 2012

2. http://www.youtube.com/watch?v=LuBstLZINco

3. History • In the wake of Watergate scandal, SEC found: • 400+ American companies had spent hundreds of millions of dollars bribing official overseas. • It turns out that bribing foreign government officials was not illegal anywhere! • In fact, some European countries even allowed foreign bribes to be deducted from corporate taxes as an expense.

4. Foreign Corrupt Practices Act of 1977 (FCPA) • Passed despite protests from American companies that it would make them uncompetitive • Codified “15 U.S.C. §§ 78dd-1, et seq.”

5. 2 Main Provisions of FCPA • Articles relating to bribery of foreign officials. • Articles relating to accounting transparency

6. Provision I - Bribery • “Enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.” • Revised in 1989 it to apply to foreign firms and persons who cause corrupt payments to take place within the territory of the United States. Text from http://www.justice.gov/criminal/fraud/fcpa/

7. Provision II – Accounting Transparency • “Requires companies whose securities are listed in the United States to meet its accounting provisions.” • Require corporations to • make and keep books and records that accurately and fairly reflect the transactions of the corporation • devise and maintain an adequate system of internal accounting controls Text from http://www.justice.gov/criminal/fraud/fcpa/

8. Who does FCPA Apply to? • Issuers • Domestic Concerns • Foreign companies or persons * U.S. parent corporations may be held liable for the acts of foreign subsidiaries where they authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

9. Exceptions for FCPA • Payments made to facilitate or expedite performance of a "routine governmental action” • A person charged with a violation of the FCPA's anti-bribery provisions may assert as a defense that the payment was lawful under the written laws of the foreign country or that the money was spent as part of demonstrating a product or performing a contractual obligation.

10. Definition of a Bribe • Corrupt intent to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person • Paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value. • Recipient is a foreign official, a foreign political party or party official, or any candidate for foreign political office, of any rank or position. • Payments through intermediaries count!

11. Number of FCPA Cases by Year

12. Countries with the Most Penalties Since 1977 Prior to 2000, only 8 cases. Countries with most cases: Nigeria – 24 China – 19 Iraq – 18 Mexico – 15 Argentina – 8 Sector with most penalty: Energy - $2.03 billion Manufacturing – $225.80 million Total penalty: $4.04 billion As of October 31, 2011 Sources: James Mintz Group, http://www.fcpamap.com/

13. Top 10 FCPA Settlements

14. International Agreements • Organization for Economic Cooperation and Development’s (OECD) Anti-Bribery Convention • (Today 38 countries have adopted the Convention.) • Organization of American State’s (OAS) Inter-American Convention Against Corruption • United Nations Convention Against Corruption • Council of Europe’s (COE) Criminal Law Convention on Corruption

15. What Do Other Countries Do? • Mostly nothing! • UK recently passed their Bribery Act 2010 • Germany, Japan and Saudi Arabia are the last G-20 countries that have not ratified the United Nations Convention Against Corruption.

16. Problems with FCPA • Cultural differences in definition and use • How do you measure bribery? • Definition of bribery is different in every country – does the exception apply? • Challenges state sovereignty • States such as China has state-owned or controlled enterprises. Who counts as foreign officials? • Reduces competitiveness of U.S. businesses overseas • What Americans define as bribery may be requirements to develop business “relationships” overseas • U.S. standards much higher than the rest of the world even compared to other Western countries

17. ONE ISSUE: COMPETITIVENESS OF US BUSINESSES • Enhanced FCPA enforcement will cause US companies to reduce investment in places where corruption is common .

18. Policy Proposal • Expanding the agreements to include more countries • OECD Anti-Bribery Convention: 34 member countries plus 5 non-members (Russia just joined this month!) • UN Convention Against Corruption: 140 signatories out of 193 members • Council of Europe’s (COE) Criminal Law Convention on Corruption: 43 signatories out of 47 members • Involve the World Trade Organization • Make this an issue at the next round of discussions • Encourage individuals, NGOs and media to serve as “watchdogs” to ensure transparency; freedom of the press (i.e. Transparency International)

19. Pros • Less operating costs for companies • No need to pay bribes • No fines due to non-compliance with FCPA • Eliminates legal fees to defend against FCPA • Lower risk of non-compliance with FCPA for U.S. companies • Levels the playing field for all companies

20. Cons • You can’t force countries to join; thus the field will never be entirely even • Prisoner’s Dilemma • Countries receiving bribes will lose profits at least in the short run

21. Counter-Arguments • Even if a minority of countries continue to accept bribes • Companies may choose not to do business there to avoid fines and uphold their image • It can become internationally unacceptable; subject to public shaming • Over time countries learn to adapt to prisoner’s dilemma • Find it beneficial to cooperate rather than undercut others • In the long run, making bribes illegal will help the stability and sustainability of the economy.

22. Impacts on U.S. Trade and Foreign Policies • U.S. is the leader in prosecuting foreign bribery • Can spearhead the effort internationally • One step closer to true global trade liberalization • The reduction of bribery will contribute to sustained economic growth and more competitive trade in other countries • Less aid from U.S. • Economic stability • Political stability

23. Impacts on U.S. Companies • Private U.S. companies will be on the same playing field as companies from other countries • Leads to fair competition • Less costs as mentioned before

24. QUESTIONS?

25. References Council of Europe, Criminal Law Convention on Corruption, http://conventions.coe.int/Treaty/Commun/ChercheSig.asp?NT=173&CM=&DF=&CL=ENG. Giorleny D. Altamirano, The Impact of the Inter-American Convention against Corruption, The University of Miami Inter-American Law Review , Vol. 38, No. 3 (Spring, 2007), pp. 487-547,  http://www.jstor.org/stable/40176742. OECD, Directorate for Financial and Enterprise Affairs, OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, http://www.oecd.org/document/21/0,3746,en_2649_34859_2017813_1_1_1_1,00.html.