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New York City Bar Association Recommends Reassessment Of The FCPA

“While the task is daunting and the discomfort of admitting that the current approach has significant flaws is unavoidable, that does not mean that action should not be taken”

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This article originally appeared on Professor Koehler’s FCPA Professor website (www.fcpaprofessor.com) and is reprinted with his permission.

Last Friday, the International Business Transactions Committee of the Association of the Bar of the City of New York released a report titled “The FCPA and its Impact on International Business Transactions – Should Anything Be Done to Minimize the Consequences of the U.S.’s Unique Position on Combating Offshore Corruption?” Here are the highlights of the report.

The report explores the FCPA and FCPA enforcement, in part, from an economic perspective and states:

“Companies that are subject to the FCPA—including all U.S. companies and non-U.S. companies that have equity securities listed on a U.S. exchange—have become increasingly wary of purchasing businesses that have not operated under the Act for fear of acquiring very costly liabilities. Similarly, companies that are not subject to the FCPA express substantial reservations about engaging in transactions that would bring them under the Act’s jurisdiction, including listing their equity securities on a U.S. exchange through an IPO or capital raising transaction or by acquiring a U.S. company in a stock-for-stock merger or exchange offer. The effects of the FCPA on transactions are manifested principally in (1) transaction costs (e.g., increased due diligence efforts), (2) post-transaction integration costs (e.g., adding appropriate FCPA compliance procedures to an acquired company or across a company that was not previously subject to the FCPA), (3) the increased risk of exposure to an enforcement action and related costs (e.g., internal investigations and fines) and (4) as a result of the foregoing and other effects of the FCPA, the nonpursuit or abandonment of transactions that otherwise would have been completed. These FCPA-driven costs and considerations put companies covered by the FCPA (mostly U.S. companies and large, mature European companies) in a distinctively different regulatory position as compared to their non-covered competitors. In our experience, and in particular, recently, this asymmetry in regulation has had significant direct and indirect effects on companies subject to the FCPA as well as knock-on effects on the U.S. markets more generally.”

Noting the rise in FCPA enforcement, including fine and penalty amounts, the report goes on:

“These developments raise various questions: Why has the FCPA become an increasingly important factor in international transactions? What effect is the FCPA having on the various participants in the international transactions arena, including governments, companies subject to the FCPA and companies not subject to the FCPA? What changes, if any, should be made to the U.S. approach to combating foreign corruption? This paper explores these questions and concludes with the findings that (1) the United States has pursued, and is currently pursuing, a virtually stand-alone approach to deterring foreign corruption (at least in terms of enforcement activity and the significance of fines and other sanctions), (2) this approach places significant costs on companies that are subject to the FCPA as compared to their competitors that are not—i.e., there is a significant asymmetry in regulation and enforcement—and (3) if these circumstances are unlikely to change (e.g., through a substantial portion of other relevant countries adopting similar enforcement postures), the United States should reevaluate its approach to the problem of foreign corruption.”

The report explores “three elements to the current approach to FCPA enforcement that are helpful in understanding the costs, risks and other constraints that the FCPA places on U.S. regulated companies vis-a-vis their non-U.S. regulated competitors: (1) the U.S. enforcement agencies’ expansive reading of the scope of the FCPA (both in terms of conduct and jurisdiction), (2) the limited checks on FCPA enforcement (whether judicial or otherwise) and (3) the massive size of the potential direct costs (e.g., fines, sanctions and defense and compliance costs) and indirect costs (e.g., reputational effects and “debarment” from current or future government business) of avoiding or defending an actual or threatened enforcement action.”

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A section of the report delves into the “asymmetric approach to enforcement” (between the U.S. and other countries) on both private and public actors by using game theory and the “prisoner’s dilemma.” For example, the report states that “if multiple countries ‘agree’ to craft and enforce anti-corruption statutes and some countries make it clear that they will enforce the laws zealously (‘the enforcers’), there are significant incentives for other countries (the ‘non-enforcers’) not to implement or not to enforce their anti-corruption laws.”  Such an analysis, according to the report, invites a fundamental question – “why does the United States, almost alone, impose the costs of being an ‘enforcer’ on U.S. firms and the non-U.S. firms that choose to register their securities in the U.S.?”

As to changes to the FCPA, the report details the U.S. Chamber’s FCPA reform proposals as articulated by former Attorney General Michael Mukasey in Congressional testimony and states that Mukasey’s suggestions “would be very beneficial, but they may not go far enough” because “the limited amount of judicial oversight or other checks on enforcement or any mechanism for ensuring a convergence of international enforcement efforts would continue to be problematic.”

The report ends with a section titled “a call for analysis and action.” The section “is not offered in praise of a ‘lighter touch’ on bribery” nor does the section “advocate any specific policy proposal.” Rather the section states:

“(1) the competitive landscape of the 21st century global economy warrants the reevaluation of the United States’ strategy in fighting foreign corruption, (2) the current anti-bribery regime—which tends to place disproportionate burdens on U.S. regulated companies in international transactions and incentivizes other countries to take a “lighter touch” —is causing lasting harm to the competitiveness of U.S. regulated companies and the U.S. capital markets and (3) even putting aside the disproportionate costs borne by U.S. regulated companies, the continued unilateral and zealous enforcement of the FCPA by the United States may not be the most effective means to combat corruption globally—in fact, in some circumstances it may exacerbate the problem of overseas corruption.”

fcpa reform and fcpa enforcementSwitching from the “analytical to the proactive,” the report discusses ways in which the U.S. could address the enforcement asymmetry.  Specifically, the report states that “the United States could intensify the regulatory scrutiny of firms not currently subject to the FCPA through various means, including (1) convincing a substantial number of key countries to enact and enforce regimes that are as rigorous and punitive as the FCPA, or (2) unilaterally expanding U.S. jurisdiction to cover as many companies as practicable.”  However, the report states that these options are either difficult, not practicable or not possible.

“Alternatively,” the report  states that “the United States could take steps to reduce the regulatory costs for firms currently subject to the FCPA without undermining any of the Act’s fundamental objectives. For example, the U.S. could decide to (1) dial back the scope of FCPA enforcement with respect to companies and focus more on individuals engaged in foreign corruption, (2) encourage other countries to do the same and (3) agree with other countries to cooperate on international matters such as information sharing, investigations, and extradition.”  Yet, the report acknowledges the “political difficulties” with these alternatives.

The report then states:

“While the task is daunting and the discomfort of admitting that the current approach has significant flaws is unavoidable, that does not mean that action should not be taken. Any such action should begin with an assessment of the current circumstances and a recognition that, in today’s global economy, meaningful international alignment of the world’s leading economic powers is a necessary condition for combating foreign bribery.”

The report concludes:

“While accepting and fully embracing the ultimate policy goal of the FCPA—the prevention of corruption worldwide—the purpose of this article is to call for an assessment of (1) the ability of the United States to achieve that goal unilaterally and (2) the direct and indirect costs of continuing such an effort. This paper has identified several factors, including the incentives of the various participants and the decrease in the relative importance of the U.S.-regulated companies in the international marketplace, that strongly and clearly suggest that the United States cannot continue to do it alone. The costs of pursuing such an approach are substantial and, in certain cases, irreversible and, consequently, a realignment of the U.S. position in the global anti-bribery enforcement regime is necessary.”

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About the Author

Mike Koehler is an assistant professor of business law at Butler University and is an expert FCPA columnist for Corporate Compliance Insights. He is a leading expert on FCPA and other anti-corruption laws and initiatives. Professor Koehler has testified before Congress on FCPA, and he is also frequently speaks about such topics before business and academic audiences.

About the Author

Mike Koehler

fcpa-professor-Mike-KoehlerAbout the Author Mike Koehler is an Assistant Professor at Southern Illinois University School of Law and is an expert FCPA columnist for Corporate Compliance Insights. Professor Koehler is a leading expert on the FCPA and other anti-corruption laws and initiatives and he founded and maintains the site FCPA Professor, an industry leading forum that has earned national and international recognition.