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Perhaps The Disclosure Approach Wasn’t Such A Bad Idea After All


This recent Wall Street Journal article titled “If You Solicit Bribes, This Fellow Wants to Punch You In the Face” caught my eye. It details a Thai man, who after years of paying bribes, became fed up with “what passes for business as usual in Bangkok” and launched a “nightly television show where he runs through the various demands for bribes and kickbacks that he says many people here endure.”

Whether this approach is reducing corruption is a debatable point, but it serves as a useful reminder that the FCPA’s current prohibition approach was not the only approach Congress considered in the mid-1970’s when considering the so-called foreign corporate payments problem.

The other approach, consistent with Louis Brandeis famous quote “sunlight is said to be the best of disinfectants,” was a disclosure approach.

Nearly 40 years into the FCPA, it is a debatable point whether the FCPA’s prohibition approach has been successful in achieving the FCPA’s laudable goal of reducing bribery. After all, can one really say that a law is successful in achieving its goal when there is more enforcement of the law in its third decade compared to its second decade and more enforcement in its second decade compared to its first decade?

If a law is being successful in accomplishing its goal, would you not expect less enforcement, not more enforcement, over time?

Perhaps the disclosure approach Congress considered, highlighted in this post, was not such a bad idea after all.

As told in “The Story of the Foreign Corrupt Practices Act” the Ford administration favored a disclosure approach as to a broad category of payments. In 1976 President Ford issued a memorandum to various federal agencies establishing a “Task Force on Questionable Corporate Payments Abroad” (the “Task Force”).

In a 1976 letter to Senator Proxmire, the Secretary of Commerce set forth the views of the Task Force on “proposed legislation concerning questionable corporate payments abroad.” The letter stated:

“There are two principal competing general legislative approaches – a disclosure approach or a criminal approach. While it is possible to design legislation […] which requires disclosure of foreign payments and makes certain payments criminal under U.S. law, the Task Force has unanimously rejected this approach. The disclosure-plus-criminalization scheme would, by its very ambition, be ineffective. The existence of criminal penalties for certain questionable payments would deter their disclosure and thus the positive value of the disclosure provisions would be reduced. In our opinion the two approaches cannot be compatibly joined.  The Task Force has given considerable scrutiny to the option of ‘criminalizing’ under U.S. law improper payments made to foreign officials by U.S. corporations. Such legislation would represent the most forceful possible rhetorical assertion by the President and the Congress of our abhorrence of such conduct. It would place business executives on clear and unequivocal notice that such practices should stop. It would make it easier for some corporations to resist pressures to make questionable payments.  The Task Force has concluded, however, that the criminalization approach would represent little more than a policy assertion, for the enforcement of such a law would be very difficult it not impossible. Successful prosecution of offenses would typically depend upon witnesses and information beyond the reach of U.S. judicial process. Other nations, rather than assisting in such prosecutions, might resist cooperation because of considerations of national preference or sovereignty. Other nations might be especially offended if we sought to apply criminal sanctions to foreign-incorporated and/or foreign-managed subsidiaries of American corporations. The Task Force has concluded that unless reasonably enforceable criminal sanctions were devised, the criminal approach would represent poor public policy. The Task Force has similarly analyzed the desirability of new legislation to require more systematic and informative reporting and disclosure than is provided by current law. The Task Force recognized that additional disclosure requirements could expand the paperwork burden of American businesses … and that they might, in some cases, result in foreign relations problems – to the extent the systematic reporting and disclosure failed to deter questionable payments and their publication provided embarrassing to friendly governments.  At the same time the Task Force perceived several very positive attributes of systematic disclosure. First, it deemed such disclosure necessary to supplement current SEC disclosure, which as noted already covers only issuers of securities making ‘material’ payments, and does not normally include the name of the payee. Such disclosure would provide protection for U.S. businessmen from extortion and other improper pressures, since would-be extorters would have to be willing to risk the pressures which would result from disclosure of their actions to the U.S. public and to their own governments. It would avoid the difficult problems of defining and proving ‘bribery.’ It would offer a means to give public reassurance of the essential accountability of multinational corporations. …. The President has decided to recommend that the Congress enact legislation providing for full and systematic reporting and disclosure of payments made by American businesses with the intent of influencing, directly or indirectly, the conduct of foreign governmental officials. At the same time, the President has decided to oppose, as essentially unenforceable, legislation which would seek broad criminal proscription of improper payments made in foreign jurisdictions.”

Shortly thereafter, President Ford announced “three new initiatives” based on the findings of the Task Force.  In the announcement, President Ford stated:

“As a deterrent to bribery by American-controlled industries, I am directing the task force to prepare legislation that would require corporate disclosure of all payments made with the intention of influencing foreign government officials. Failure to comply with the new disclosure laws would lead to civil and criminal penalties.”

President Ford also urged enactment of the proposed legislation and stated:

“I am transmitting to the Congress my specific proposal for a Foreign Payments Disclosure Act. This proposal will contribute significantly to the deterrence of future improper practices and to the restoration of confidence in American business standards.  This legislation represents a measured but effective approach to the problem of questionable corporate payments abroad:  It will help deter improper payments in international commerce by American corporations and their officers. It will help reverse the trend toward allegations or assumptions of guilt-by-association impugning the integrity of American business generally. It will help deter would-be foreign extorters from seeking improper payments from American businessmen. It will allow the United States to set a forceful example to our trading partners and competitors regarding the imperative need to end improper business practices. It does not attempt to apply directly United States criminal statutes in foreign states and thus does not promise more than can be enforced. Finally, it will help restore the confidence of the American people and our trading partners in the ethical standards of the American business community.”

Bills based on the Task Force’s recommendations were soon introduced and at Congressional hearings that followed a Department of Commerce official stated as follows in advocated the Ford administration position as follows:

“The existence of the criminal prosecution would be of some value to an American businessman in resisting improper requests for payments abroad. I don’t believe, however, that it would have as much value as the disclosure requirements, for the following reasons. A would-be foreign extorter who asks for $50,000 to do something of importance to the American company, on the one hand would be told, ‘I can’t give you that money because if I do I might have to go to jail,’ and the extorter says, ‘That is your problem, bud, but there is no way, your law can reach me.’ If you have a disclosure provision and the American businessman says, ‘If I give you that money, I am going to have to report the payment to the Department of Commerce, possibly to the SEC, and it will therefore be in the public record, and your name will be in the public record.’  If we are right that every other country in the world, virtually every other country, has laws against public bribery and extortion, then it is our guess that the extorter will be substantially deterred.  We believe that a combination of sunlight and encouragement of other nations to enforce their own laws represents a much more effective way to end corrupt payments than does direct, unilateral criminalization by this country of actions taking place in foreign jurisdictions.  We urge the Congress not to substitute tokenism for real action to deal with the questionable payments problem. The danger in such tokenism is that it will create complacency. Congress will wash its hands of an important problem without having taken meaningful, enforceable action.”

The November 1977 House Report as to H.R. 3815 included “minority views” and stated as follows:

“This legislation would prohibit U.S. corporations from making payments or promises of payments to foreign political or governmental officials. Payments falling within the scope of the bill must be made or offered with the purpose of corruptly influencing an act or decision of the foreign official or inducing that official to use his influence to affect a decision of a foreign government. We support, without reservation, the goal of H.R. 3815, which is the elimination of foreign bribery. Certainly, any legislation which will restore public confidence in American business and will prevent a continuation of the practices which recently have been disclosed is desirable and should be enacted. We are concerned, however, that the approach adopted by H.R. 3815 is not the most effective to eliminate questionable foreign payments.

In general terms the bill makes certain payments unlawful and imposes criminal sanctions on the making of payments described in the bill. The criminalization approach is contrasted with the approach recommended by Former Secretary of Commerce Elliot Richardson which would have required disclosure of improper payments. We believe that adoption of the disclosure approach would, in no way, imply that payoffs will be condoned as long as they are disclosed. Rather, we believe that this approach would prove ultimately to be a much more effective deterrent than would the provisions of H.R. 3815.  This is because the legislation will be extremely difficult, if not impossible, to enforce. Payments falling within the scope of the legislation would include payments made on foreign soil to foreign officials and most probably made by persons who are not U.S. citizens. Investigations of such payments certainly require the active cooperation of foreign individuals and governments. Without such cooperation, the difficulties of obtaining witnesses and evidence to successfully investigate and prosecute the case would be insurmountable.

The difficulties of the criminalization approach to dealing with the problems of questionable foreign payments were reiterated by Secretary of the Treasury Blumenthal when he testified before the Consumer Protection and Finance Subcommittee. At that time he stated:

“I have always felt a criminal statute such as this one will not be easy to enforce, particularly because it does involve acts that take place in other countries, the whole question of extra territoriality gets you into questions of the availability of witnesses, gets you into the question of acts taken in other jurisdictions in which the laws are different . . . we must not underestimate the difficulties of enforcement that in any case will result from this kind of legislation.”

Former Secretary of Commerce Richardson expressed similar fears which are highlighted in the report of the President’s Task Force on Questionable Payments Abroad:

“The Task Force has concluded, however, 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 Task Force has concluded that unless reasonably enforceable criminal sanctions were devised, the criminal approach would represent poor public policy.

We believe that legislation that cannot be effectively enforced will do little to deter payoffs. On the other hand, disclosure could be a very effective deterrent especially in combination with the other sanctions against such payments which exist in present securities, antitrust, tax and criminal law. We are concerned that the committee may have constructed a paper tiger which in the long run will do little to discourage conduct which we all believe has no place in the American business community. We note that in this regard that the disclosure concept in the political area was finally utilized in the Federal Election Campaign Act of 1971. Its effect has been dramatic when compared to the nearly 50 years of benign neglect given unlawful political contributions prior to that time. Hopefully, H.R. 3815 will not be a law shielding corruption for 50 years before the effective deterrent to foreign bribery—full disclosure—is required.”

Representative James Broyhill likewise stated as follows on the House floor:

“[U]nfortunately, I cannot agree . . . that this bill will do much to deter improper payoffs to foreign officials. Although I subscribed 100 percent to the policy underlying the bill—that is, that payment of bribes to foreign officials is conduct which cannot be condoned under any circumstances—I am concerned that the legislation, because of enforcement difficulties inherent in the bill will do little to effectively solve the problem. Enforcement difficulties arise because the payments could involve those made in foreign countries by non-U.S. citizens to other non-U.S. citizens. This is why the previous administration chose to recommend legislation which would require disclosure of these kinds of payments. I do believe that disclosure in combination with the other sanctions against such payments which exist in present securities, antitrust, tax, and criminal law would provide more effective deterrence against such payments.”

As suggested above, one of the key concerns regarding the criminalization approach was whether it would be, in many instances, enforceable and whether its prohibitions were fair to potential criminal defendants. Richard Darman, Assistant Secretary for Policy, U.S. Department of Commerce, stated as follows during a House hearing:

“The basic question, it seems to us, which one must address in considering the foreign payments direct criminalization provision is this: What reason is there to enact a provision of law which an overwhelming majority of responsible legal scholars, law enforcement officials, and serious analysts of this issue, view to be essentially unenforceable. It cannot be said to be for reasons of practical moral leadership, for this would be potentially hypocritical. The answer must depend upon either a conception of the value of enforceable law as a force for change, through the power of declaratory policy alone; or it must depend upon a conception of the value of unenforceable law as a stabilizing force, through the periodic purgatorial effects of ritualistic collective expressions of outrage.

With respect to the latter explanation, we take the problem to be too serious to settle for what might be a passing symbolic gesture. As to the former . . . we believe it to be shortsighted. Whatever leadership value may be associated with essentially unenforceable law is surely to be counterbalanced by the ultimate corrosive effects of its exposure as fundamentally false.”

Some of the most pointed criticism of the criminalization approach came from representatives of the New York City Bar who participated in various congressional hearings. Robert Von Mehren, Chairperson of the Ad Hoc Committee on Foreign Payments, New York City Bar, stated as follows during a House hearing:

“We oppose criminalization for a number of reasons:

(a) As a general principle, states have been reluctant to extend the reach of their criminal law to acts done abroad. This reluctance arises from considerations of comity and from the potential foreign relations impact of extending domestic criminal laws to acts which have their center of gravity abroad and which, therefore, in most cases concern the foreign state more than the legislating state.

(b) It is difficult to investigate and prosecute acts done abroad. The writs of our grand juries and courts do not run as to non-United States citizens outside our boundaries. Thus cooperation of foreign individuals or governments would usually be required to investigate and prosecute a crime based on acts done abroad.

(c) Extraterritorial application of criminal laws also raises serious questions of fairness and due process. The prosecution may be able to obtain cooperation from a foreign government through diplomatic channels; no such possibility is open to the defendant. Certainly the accused would not enjoy the right to have compulsory process for obtaining witnesses in his favor. Moreover, the accused is placed in a position where he might be tried and acquitted in the foreign state and then tried and convicted in the United States, perhaps because the witnesses for the defense who had been available to the defendant in the foreign trial were not available to him in the trial here. All of these considerations militate against the choice of a criminalization approach to the foreign payments problem.”

Likewise, William Kennedy, Co-Chairman, Special Committee on Foreign Payments, New York City Bar, stated as follows:

“What is the situation of the accused? In order to show that he has not violated a law, he may have to bring in evidence in the form of both testimony from foreign persons and documents from foreign entities which may simply be beyond the compulsory process of our courts. And I think to enact a law which raises questions as to whether a person can fairly and effectively defend himself when he is accused of violation of that law is something you should consider very carefully in your subcommittee.”

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