FCPA Risks When Bubbles Burst in Latin America

There is a lot of talk right now about whether Brazil can maintain the impressive growth it has experienced in recent years. On February 14th, a Financial Times headline read, “Brazil housing bubble fears as economy teeters,” while The Wall Street Journal reported, “Brazilian data released Friday suggest economic growth has weakened over the past two quarters, illustrating how far a country once considered the darling of emerging-market investors has fallen.” Similar reports are appearing each day.

If Brazil’s economy declines, it will be yet another example of a boom-and-bust cycle, which is common in Latin America. Not only do countries experience these cycles, the region on the whole is also known for periods of economic expansion followed by precipitous collapse. In the 1970s, increased commodity prices led to economic growth that ended abruptly in the 1980s, triggering a sharp debt crisis. In the early 1990s, market-oriented reforms created a surge in short-term capital that ended, again abruptly, in the Tequila crisis of 1994.

This regional history and current economic predictions beg the question: how is corruption risk affected when economies contract? Here are some common effects that companies invested in Latin America and subject to the FCPA should keep in mind:

More pressure to cut corners. When economies implode, it can be difficult for multinational companies to exit – especially those that have invested millions in new plants, distribution infrastructures and other fixed assets. They are forced to compete for fewer and choosier private sector customers, as well as a reduced number of publicly funded projects. This puts more pressure on sales personnel to hit targets and show results. The temptation to do whatever is necessary to stay ahead, or stay employed, increases. These pressures increase the risks that staff and agents of multinationals will resort to bribe payments.

More aggressive bribe demands. Some cite an increase in the aggressiveness of bribe demands when markets fall. Glenn Ware, who co-leads PwC’s anti-corruption practice, has called economic decline “the perfect storm” of corruption risk, because it leaves a smaller pot of public resources that corrupt officials can leverage to benefit personally. This can lead some officials inclined toward corruption to be more forceful with their demands.

Increased enforcement risks. When economies contract, public dissatisfaction often brings new parties and personalities to power. These new leaders might be motivated to uncover bribery schemes involving their predecessors. Making previous administrations look bad bolsters their own standing. Foreign companies representing limited local constituencies are obvious targets for increased scrutiny and blame. These many shifts mean that companies engaged in wrongdoing stand a greater risk of getting caught when economies decline. They may even face a greater likelihood of enforcement in the United States if a country’s new leadership is more willing to share evidence with U.S. authorities.

Extortion and renegotiation of existing contracts. When new leaders come into power as a result of economic crisis, they might be more corrupt than prior ones. They could choose to extort money from companies, perhaps by threatening license revocation, increased taxes or audits. If an unscrupulous company already has government contracts in place that are based on bribe payments, new governments might seek new bribes to keep them. For example, Siemens Argentina won a $1 billion national identity card contract from the Carlos Menem administration at a time when the Argentine economy appeared strong. It did so by bribing government officials. The economy then fell into crisis and President Menem lost his bid for a third term. In 1999, the new President Fernando De la Rúa threatened to terminate Siemens’ contract unless the company paid more bribes. This shows that not only is it a bad idea for companies to engage in corruption in the first place, but it can become an even worse idea when local economic conditions change.

More contact with governments. When economies contract, governments sometimes choose to take more active roles in the market. They modify regulations, create export taxes, implement price controls and take other actions to keep the economy from slipping further. In extreme cases, they nationalize companies and industries. When these changes occur, the entire legal underpinnings of a company’s investment in a country can change. As a result, companies find themselves forced to interact with officials in ways they had never done before, increasing opportunities for bribe requests.

Reinforced inequality. What may be the most pernicious result of boom-and-bust cycles is the effect they have on the poor and middle classes. This affects bribery risk because more inequality often results in more opportunity for corruption. A study by the Kyoto Institute of Economic Research established the link between low economic growth, inequality and corruption. It showed that when inequality among citizens is large, political support of the government is less sensitive to corruption, so corruption increases. In addition, inequality further impedes economic growth, creating a vicious cycle.