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Those Are Fighting Words

Whoa. Did that guy just say the Foreign Corrupt Practices Act causes corruption and hurts poor people? What kind of person would talk that way? Doesn’t he know how the FCPA spreads American business ethics to the four corners of the planet? That the law he’s attacking is in the same category as mom and apple pie?

But here’s the thing. The guy doing the attacking (OK, the scholarly analysis) has made a good case for his thesis. He’s Andy Spalding — a well-mannered and generous lawyer on a year-long Fulbright Research Grant in Mumbai, India. We heard from him earlier this week:

Dear FCPA Blog,

I am a lawyer from D.C. currently studying the impact of the FCPA on emerging markets. I am working on a law review article that develops some of my thoughts, and I would love to hear your (and your readers’) reaction.

My paper picks up an idea that economists have been batting around for about fifteen years — that FCPA enforcement doesn’t just deter bribery, but actually deters investment in countries where bribery is perceived to be more common. I argue that we should therefore understand FCPA enforcement as de facto economic sanctions, and that these sanctions have most often targeted emerging markets. This raises a number of ethical, economic, and foreign policy problems, as I discuss.

You might find the chapter on legislative history interesting (as might your readers). There is a lot of material there that, as far as I know, has not been developed in the law review literature and that might be helpful in briefs and such. I invite anyone to use it.

Best regards,
Andy Spalding

The paper itself is all that he says it is, and more. He looked at the 125 enforcement actions since the FCPA’s inception (his count). Only nine, or 7%, involved developed countries, whereas more than “two-thirds of all FCPA violations – 85 instances, or 68% of the total – have occurred in emerging markets, as defined today by Standard & Poor’s.” And he found that as FCPA enforcement goes up, foreign investment from the U.S. and other compliance-minded countries goes down.

His conclusions: The FCPA scares clean money away from the most corrupt nations, opening the door to investments by “capital-rich countries that are not committed to effectively enforcing anti-bribery measures.” Think China in Africa, Latin America, and Central Asia, for example. So the patterns of FCPA enforcement, he says, amount to undeclared economic sanctions against developing countries, which in turn send them deeper into corruption and poverty. “The FCPA is thus revealed to be a large-scale study in the law of unintended consequences,” he says.

That’s right. The paper is a real mind-bender. Download it from SSRN here and let us know what you think. We’ll be coming back to this topic sometime soon.

By the way, in footnote 199, the author levels a rather serious charge against The FCPA Blog. He calls our posts on respondeat superior “balanced and sophisticated.” We forgive you, Andy.

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  1. I'm DEFINITELY reading this paper…

  2. Good theory, but I don't buy it. There are many "capital-rich countries" in the world that ARE committed to fighting graft and have just as much respect for the rule of law as the United States. Many of them are very active in these parts of the world, even more so than American companies.

  3. This is the author, Andy Spalding. Thanks for the comment. What you say is unmistakably true, but how does it weaken my thesis? I am not suggesting that the OECD-enforcing countries have pulled out entirely, or that they ever would. They're still there. I am suggesting (or more accurately, economists before me have demonstrated) that as enforcement goes up, investment in transitional economies goes down. So to make your point, you have to argue either: 1) that OECD enforcement has no negative impact on FDI in transitional economies; or 2) it does have a negative impact, but countries such as China or Russia are not moving in to fill the void, and will not. May I ask, which do you believe? Thanks.

  4. Andy, thanks for your work exploring this issue. Your thesis comes close to arguing 'well if we dont do it, then someone else will'. Corruption and bribery is wrong and keeps hundreds of millions of people in poverty. It does matter whether bribes are paid by US, Chinese, German or Russian companies, all of them are wrong. Arguing that OECD signatory countries allow their companies to invest (and most likely pay bribes) in corruption prone countries because those Chinese or Russian will anyway is morally ambiguous at best.

  5. Thanks for the comment. However, I cannot see how anyone could reasonably infer from my argument that I oppose enforcing anti-bribery legislation. I definitely don't say that, and I definitely don't believe it. This is not a debate about whether to enforce the FCPA, but HOW to enforce the FCPA.
    As your comment reflects, we are both concerned about poverty. I agree that bribery contributes to poverty, but doesn't economic withdrawal also contribute to poverty? Of course it does. I believe we can enforce bribery prohibitions without scaring companies away from markets that badly need their capital . . . if we try.

  6. By all means US (Western) companies should and do invest in developing countries. Just don't pay bribes while you are there. Thats what the FCPA is all about, isn't it?.

  7. Absolutely true, James. And if only it were that simple. It's not, and my point is this: if we're not more careful about how we penalize companies for FCPA violations, some companies (not all, of course) will decide they can't afford the risk of doing business in developing countries. We know this is already occurring. And would you agree that it is a bad thing, particularly for the developing countries?

  8. I'm not sure what you mean by 'how we apply the FCPA'. Do you mean softening the regulations and enforcement penalties? Is so then this is a step backward. If companies take a commercial/ethical decision to avoid the risks (i.e. paying bribes to corrupt officials) then it is a good thing for the company and the country itself. I see corruption as an abuse of power and self enrichment and the expense of good governance. I agree this is not an easing thing for many companies, but weakening the consequences for corrupt behaviour is a step backwards. But lets keep this debate going as it's too important ignore.

  9. Great, James. Now we're getting somewhere. This is the most substantive engagement I have had on these ideas, and I appreciate it.
    Let's get as specific as possible on where we agree and where we disagree, and then talk about the disagreement. We agree that FCPA penalties should establish a meaningful disincentive for companies to bribe. We also agree that under the current enforcement regime, some companies decide that they cannot afford the risk of investing in bribery-prone markets. We're still on the same page, right?
    Okay. Now we're to the part where we disagree, as far as I can tell. You think that if companies decide not to invest, it's good for the company and good for the country. My research concerns that latter point — that it is good for the country. What is the good that comes to the country, specifically? I won't put words in your mouth; can you lay it out for me, as you see it? Let's go from there.
    This is great. Thanks again.

  10. I think the argument here forgets that the FCPA has exactly zero power for the partners in corruption, the officials and executives at state-owned companies who take the bribes or insist on them. It's not as if the big bad American companies came up with the idea on their own. If, in fact, a particular nation's propensity towards a corrupt system causes US companies to hesitate before investing there, then isn't the natural progression that eventually the corrupt system cannot sustain itself?

  11. This is the author, Andy. I am actually fully sympathetic to the premise of your comment. Nobody likes to pay a bribe — it's a chink against the bottom line — but companies feel trapped, and the solicitors of these bribes bear substantial responsibility. Ultimately the question is, what is the best way to change their habits? By investing less, or by investing more? The original vision of the FCPA is that we would be a positive influence in bribery-prone countries by doing business properly. My argument is that certain features of FCPA enforcement have produced an undesired outcome — that companies are pulling out. I can't see that this is good for anybody. And just as companies don't want to pay bribes, I believe they also don't want to pull out of potentially profitable markets — they're doing so largely because they're afraid of the legal penalties. Am I wrong?

  12. It’s a bit like the progressive income tax, anti-trust or fighting child labour. The way to hell is paved with good intentions.

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