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A New Strategy For Preventing Bribery And Extortion In International Business Transactions

Today’s post is from Bruce Klaw (here), an Assistant Professor of Law at Keimyung University in South Korea.  Klaw discusses his recent scholarship “A New Strategy for Preventing Bribery and Extortion in International Business Transactions” recently published in the Harvard Journal on Legislation (see here to download the article).

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I’d like to thank Professor Koehler for this opportunity to write about my article and more importantly, for running FCPA Professor, an invaluable resource for scholars and practitioners alike.

With that said, let me introduce my article with a bit of context, using two stories of FCPA violations in Mexico:

The first story involves Tyson de Mexico, a wholly-owned subsidiary of Tyson Foods, Inc., a U.S. issuer subject to the FCPA.  From 1994 to 2006, Tyson de Mexico made approximately $350,000 worth of secret payments to veterinarians employed by the Mexican government to inspect Tyson’s facilities after those veterinarians expressly threatened to disrupt the operations of two of its chicken processing plants. When Tyson voluntarily disclosed the extorted payments to U.S. enforcement authorities, it was forced to pay $5.2 million in penalties as part of a non-prosecution agreement and settlement with the S.E.C. concluded in early 2011.  (See here for the previous FCPA Professor post).

The second story involves Wal-Mart, which became the focus of significant FCPA attention when the New York Times broke a story in April about an alleged pattern of bribery of Mexican officials in order to facilitate the expansion of Wal-Mart’s business south of the border.  (See here for the previous FCPA Professor post).  The real kicker of the Wal-Mart story, however, was not the fact that bribes were paid to local officials in apparent violation of the FCPA, but rather that top level executives at Wal-Mart’s U.S. headquarters learned about the apparent misconduct through an internal investigation but effectively hushed it, choosing not to disclose the matter to U.S. enforcement officials until their hand was forced by The Times several years later.

The Tyson and Wal-Mart cases illustrate a number of the problems inherent within the FCPA that are identified within the article:

1)      its one-sided focus on only the supply-side of bribery transactions (i.e., the payer) and not the corrupt government recipients who may solicit or demand them;

2)      its failure to meaningfully account for the circumstances under which payments are made or legally distinguish between bribery and extortion; and

3)      its paradoxical reliance on voluntary disclosure as the primary means of detection and corresponding penalization of companies that voluntarily disclose such payments.

As a result of these flaws and others identified within the article, the U.S. anti-corruption regime establishes a structure that all but encourages bribery and extortion in international business transactions to remain secret and pervasive.  Many companies, including Wal-Mart, may well be making the choice to try to keep their payments to foreign officials secret rather than risk the almost certain negative consequences of disclosure.

This is what my article seeks to address.

In this piece, I argue that the focus of the U.S. anti-corruption strategy should be shifted from punishment to prevention.   To accomplish this end, the article argues for a number of detailed and significant changes to the FCPA, which implemented together, should better serve the interests of justice and provide the appropriate incentive structure for substantially reducing international bribery and extortion.

Chief among the changes I propose is decriminalizing the act of giving bribes to foreign officials. Decriminalization is not only morally appropriate in some cases (i.e., when a company like Tyson makes a payment to a foreign official in response to an extortionate demand), but also is likely to prevent bribery in the long run. Decriminalization will help bring corruption out of the shadows, have a nominal impact on the number of bribes offered, and ultimately reduce the incidence of bribe solicitation and acceptance by foreign officials.

In place of criminalization, I argue Congress should focus on strengthening payment disclosure requirements. Congress should impose upon all companies subject to U.S. jurisdiction a strict requirement of mandatory disclosure of all bribe solicitations by foreign officials, and all payments to foreign intermediaries or foreign officials above a certain monetary threshold, similar to the requirement currently imposed on financial institutions to report suspicious activity.

Once disclosed and investigated, payments to foreign officials will tend to fall into two categories: willing and unwilling. The distinction rests on the presence or absence of express or implicit coercive extortion by a public official. By following the natural implications of such a distinction—that criminals should be punished and victims should be compensated—the law can incentivize the disclosure of corruption, enable the true victims of such corruption to take action against the wrongdoer, and facilitate restitution where appropriate.

In the case of truthfully disclosed unwilling payments to foreign officials, such payers should be entitled to restitution and granted safe harbor to insulate them not only from U.S. enforcement action, but also from private civil litigation, the threat of which currently impedes disclosure.

Bribes made willingly, on the other hand, should be publicly disclosed so that foreign governments may prosecute and take other action to rescind tainted contracts.  Likewise, upon disclosure and after the creation of a limited private right of action under the FCPA (for which I also argue in the article), competitors harmed by such unfair business practices may take action against those willing payers to recover their damages.  After all, why should the U.S. government devote its resources to prosecuting bribe-givers when business competitors and foreign governments stand ready and willing, in most cases, to police violators at a fraction of the cost to U.S. taxpayers?

Finally, I argue that to address the demand-side of bribery, Congress should expand extraterritorial U.S. jurisdiction under the FCPA to prosecute foreign officials who solicit or demand unwilling payments if foreign governments are unwilling or unable to do so.

By addressing the problems and implementing the prescriptions I have laid out in the article, it is hoped that the occurrence of bribery and extortion in international business transactions may be substantially reduced.

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As highlighted in various previous posts, discussed in my “foreign official” declaration (here), and will be discussed in greater detail in my forthcoming scholarship “The Story of the Foreign Corrupt Practices Act” (Ohio State Law Journal), addressing the foreign corporate payments problem discovered in the mid-1970’s via a disclosure approach (vs. the current criminalization approach) was favored by the Ford administration.  President Ford’s point person on the issue was Elliot Richardson (Secretary of Commerce) who, in a letter to Senator William Proxmire, summarized the work of the Ford Task Force as follows.  “The Task Force has concluded that the criminalization approach would represent little more than a policy assertion, for the enforcement of such a law would be very difficult if not impossible.  […] The criminal approach would represent poor public policy.  […]  At the same time, the Task Force perceived several very positive attributes of systematic disclosure.”

President Ford stated as follows.  “The reporting requirement covers a broad range of payments relative to government transactions as well as political contributions and payments made directly to foreign public officials.  By requiring reporting of all significant payments, whether proper or improper, made in connection with business with foreign government, the legislation will avoid the difficult problems of definition and proof that arise in the context of enforcement of legislation that seeks to deal specifically with bribery and extortion abroad.”

The disclosure regime was rejected by Congressional leaders.  A Senate Report stated as follows.  “The Committee concluded that an outright prohibition would be at least as feasible to enforce as any meaningful disclosure requirement.  […] Clearly, in order to enforce such a disclosure requirement and apply sanctions for failure to file reports, it would be necessary to prove that the undisclosed payment was actually made, and that it was made with an improper purpose.  Thus, the same evidence necessary to prove a violation of a direct prohibition would have to be marshalled in order to enforce a disclosure statute.  Accordingly, the Committee concluded that a disclosure approach has at least the same enforcement problems inherent in the direct prohibition approach and none of its advantages.”

Jimmy Carter (who favored a criminalization approach over a disclosure approach) defeated Ford in the 1976 election and the rest is history.

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