The Corruption Law That Scares the Bejesus Out of Corporate America

Walmart's Mexican bribery scandal is shining the spotlight on the Foreign Corrupt Practices Act, an obscure law that's become a bane for some of the world's largest corporations. 


Up until this past weekend, there was a very good chance that the average New York Times business page reader had never heard of the Foreign Corrupt Practices Act. It's the sort of law that the public ordinarily doesn't have much reason to think about, even as it keeps corporate lawyers and c-suite executives tossing in their sleep. But thanks to the the paper's damning investigation into Walmart's cover-up of bribery at its Mexican subsidiary, this low-key statute is suddenly getting its turn in the spotlight.

The law, generally referred to as the FCPA, was passed in 1977 and bans individuals and companies from bribing foreign government officials to win business or influence their decision making. Those who run afoul of its rules can face large fines or prison time. For decades after it was enacted, the statute was barely used. But in the last five years, it has evolved from an obscure vestige of the post-Watergate era into into one of the most talked about and feared laws in America's board rooms.

Just ask Walmart.


There was a time when American businesses didn't fret much about foreign bribery, much less what federal prosecutors might do about it. Rather, it was considered an ugly but necessary aspect of doing business in the graft-plagued developing world. That changed in the wake of Watergate.

The path from Nixon's dirty tricks to the problem of foreign corruption was a bit roundabout, to say the least. At the tail end of the Watergate congressional hearings, a group of business executives testified to making illicit payments to the president's re-election campaign. Their admission perked the interest of Stanley Sporkin, the head of the Securities and Exchange Commission's enforcement division, who wondered how those contributions would have been accounted for on the companies' books. He began an investigation, which eventually revealed that the same slush funds used to funnel money to political campaigns at home were also used to pay bribes abroad. The federal inquiry expanded, and more than 400 corporations eventually confessed to collectively making more than $300 million worth of corrupt payments overseas.

This wasn't the first time U.S. companies had been caught doling out cash to foreign governments. After giving the Lockheed Corporation a $250 million federal loan guarantee to avoid bankruptcy in 1971, federal regulators discovered that the airplane maker had bribed public officials in Japan, Italy and the Netherlands to win government contracts. The revelations became national embarrassments in the countries where the deals had occurred.

The Lockheed affair and the shocking outcome of Sporkin's detective work both contributed to a sense that reform was necessary. As Andrew Spalding, a professor at the Illinois Institute of Technology's Chicago-Kent College of Law, has written, U.S. policy makers worried that such rank corruption would become a Cold War liability both by harming our relationship with allies and by discrediting capitalism. It was a sentiment summed up perhaps most eloquently by George Ball, a former undersecretary of state under the Kennedy and Johnson administrations, in Senate testimony from 1976:

The vast volume of speeches, pamphlets, and advertising copy and propaganda leaflets extolling the virtues of free enterprise are cancelled every night when managements demonstrate by their conduct that a sector of multinational business activity is not free; it is bought and paid for. This is a problem that, like so many others, has relevance in the struggle of antagonistic ideologies; for, when our enterprises stoop to bribery and kickbacks, they give substance to the communist myth already widely believed in Third World countries that capitalism is fundamentally corrupt.


The FCPA eventually passed under the Carter administration, making the United States the first country to officially outlaw foreign bribery. The law then promptly faded from memory. Cases were rare and little talked about. However, by the 1990s, old concerns about the law began to re-emerge.

Before the FCPA's passage, its opponents argued that criminalizing foreign bribery would put American companies at a disadvantage against international competitors from countries with looser laws -- some governments actually allowed corporations to deduct their bribe payments from their taxes -- and would discourage them from doing business in corruption-prone parts of the world. In 1995, John Hines, Jr. of Harvard's Kennedy School released a paper arguing U.S. companies were in fact investing less in countries where bribery was prevalent than they might have otherwise. When the members of the Organization for Economic Cooperation and Development agreed on an international convention against bribery, the Clinton administration pushed Congress to adopt it by arguing it would level the playing field for U.S. businesses, which were allegedly losing $30 billion a year in business to less scrupulous competition.

Even after the convention was adopted, the FCPA still remained largely beneath the radar. That changed dramatically in 2007. The graph below, based on annual report by the law firm Shearman & Sterling, shows how the yearly number of Department of Justice cases brought against corporations more than doubled in middle of the last decade.


The penalties paid out by companies also surged, peaking at more than $1.7 billion in 2010.


What brought on the sudden shift isn't entirely clear. The Sarbanes Oxley Act's accounting reforms might have made it more difficult for companies to hide bribes on their books. Meanwhile, the United Nations adopted its own convention on corruption in 2003, and there may have been a sense that the United States needed to show good faith by enforcing its own laws more stringently. If you're to believe comments from Justice Department officials at the time, the Bush Administration simply thought that combating graft was important to the growth of global business. Others have been skeptical of the DOJ's motives. A 2010 Forbes article argued that the only beneficiaries of the government's crusade seemed to be white collar defense lawyers, who reaped hundreds of millions of dollars worth of fees from companies conducting lengthy internal investigations.

What are these prosecutors accomplishing? Maybe they are fighting for truth and justice. Maybe, that is, it makes sense for the U.S. to hold its corporations to a higher standard of integrity than the French or Chinese outfits they compete against when trying to win business abroad. The prosecutors, though, are doing something else at the same time. They are creating a lucrative industry -- FCPA defense work -- in which they will someday be prime candidates for the cushy assignments.

Regardless of why, the reality is that the FCPA has transformed into one of the most fearsome elements in the SEC and Justice Department's arsenals. Some of the cases have involved fairly small stakes. Take the American couple who were sentenced to six months in jail for bribing organizers of a Thai film festival. Others, however, have been blockbusters. In 2009, Halliburton agreed to pay $559 million to settle charges that a former unit had bribed Nigerian officials while building a gas plant. German engineering firm Siemens has coughed up the largest settlement so far, paying $800 million in 2008 to put to rest allegations over the company's pervasive use of bribes in its global operations.

Wait, a German company?, you might ask. Indeed. Increasingly, the FCPA has become a tool for American prosecutors to police the world's large multinationals. Corporations whose shares trade on American exchanges are considered fair targets. So are corrupt transactions that pass through American banks. Using that theory, the Justice Department brought a case against against Japan's JPC, a company that, as the Shearman & Sterling report put it, had "no apparent commercial connection with the United States whatsoever." Rather than test the government's arguments in court, and risk criminal convictions for their executives, most companies have chosen to settle using deferred prosecution agreements.

As prosecutors have become more aggressive, corporations' have sought to try and limit the law's reach. The Chamber of Commerce has argued the statute is too vague on such issues as who actually counts as a foreign official, and penalizes companies with strong compliance programs for the actions of rogue employees. The chamber is lobbying for a slate of major changes, which, for instance, would require prosecutors to prove companies "willfully" violated the statute, and would also limit parent company liability for the actions of their foreign subsidiaries.

Not all of corporate America seems to have a problem with the law in its current form. A survey of more than 100 U.S. companies by accounting firm KPMG, for instance, found executives were essentially split on whether the law put domestic companies at a disadvantage against competitors from countries with looser bribery restrictions, such as China. Only 19 percent strongly agreed that FCPA enforcement was currently excessive.

Which brings us back to Walmart. In Mexico, bribery is seen as a matter of course. And some of the bribes Walmart allegedly used to speed the development of its stores may have actually been legal under the FCPA, which makes an exception for grease payments meant to make low-level bureaucrats do their jobs faster (amazingly!). Other payments may have fallen outside the bounds of the law. But as Holman Jenkins Jr. noted in today's Wall Street Journal, the outcome wasn't necessarily bad for Mexico. Walmart helped modernize the country's retail sector. It brought down prices for poor consumers. It's now Mexico's largest private employer. Does this seem like it would be a problem for U.S.-Mexican relations, or like the sort of thing that would damage capitalism? Legally, the answer doesn't matter. But my guess is not.