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SEC Chair Clayton Says That “In Many Areas Of The World, Our [FCPA] Work May Not Be Having The Desired Effect”

Jay Clayton

These pages have long posed the question of whether the Foreign Corrupt Practices Act has been successful in achieving its objectives. (See here for a recent law review article titled “Has the FCPA Been Successful in Achieving Its Objectives” – see also here for FCPA Flash podcast episodes on the topic).

These pages have also long posed the question of whether country exits in the aftermath of FCPA scrutiny or enforcement are a good thing (as the government often seems to suggest) or rather a bad thing. (See here for numerous posts).

Yesterday, in this speech, SEC Chairman Jay Clayton discussed the same topics and offered candid observations that seemingly conflict with much of the government’s FCPA enforcement rhetoric over the last several years.

Clayton stated:

“Turning now to the effectiveness of our efforts, together with our colleagues at the Department of Justice, to combat offshore corruption around the globe.  For the past two plus decades we have vigorously enforced the Foreign Corrupt Practices Act or “FCPA.”  The SEC has brought nearly 80 FCPA cases in the past five years alone, involving alleged misconduct in more than 60 countries.

To be clear, I believe this is important work.  Corruption is corrosive.  We see examples where corruption leads to poverty, exploitation and conflict.  Yet, we must face the fact that, in many areas of the world, our work may not be having the desired effect.  Why?  In significant part, because many other countries, including those that have long had similar offshore anti-corruption laws on their books, do not enforce those laws. Couple this unique enforcement posture of the U.S. with: (i) the fact that U.S. jurisdiction generally is limited to areas where U.S. and U.S.-listed companies do business; and (ii) the reality that there are countries where the business opportunities are attractive but corruption is endemic, and the potential for undesirable results becomes clear.

Let’s go to the economists.  John Nash, Jean Tirole—and many of the other greats who developed and applied game theory to economics and regulation—could tell us a lot about the strong incentives for other countries not to enforce vigorously offshore corruption laws against their companies. Assume a hypothetical country with business promise, but endemic corruption.  If all other countries pursue the common, cooperative, morally grounded policy—or “strategy” in game theory terms—of not allowing their companies to engage in offshore corruption, the country with widespread corruption may change its practices and cross-border business would be conducted competitively and on the up and up.  However, when this cooperative, anti-corruption strategy is being pursued by others, the benefits of playing a non-cooperative strategy are great, particularly if your company is the only one who is “cheating”—your company “wins” the lucrative offshore business with no competition.

This is not a new observation. Speaking generally, the response to this observation has long been to acknowledge the need for greater international cooperation and cite a few isolated indicia of improvement.   Speaking for myself, I have not seen meaningful improvement.

To be clear, I do not intend to change the FCPA enforcement posture of the SEC.  We should, however, recognize that we are acting largely alone and other countries are incentivized to play, and I believe some are in fact playing, strategies that take advantage of our laudable efforts.

Taking a step back, this experience, including the FCPA-driven withdrawal of U.S. and U.S.-listed firms from certain jurisdictions, illustrates that globally-oriented laws, with no, limited or asymmetric enforcement, can produce individually unfair and collectively suboptimal results.  I assure you that this reality is at the front of my mind when I engage with my international counterparts on matters where common, cooperative enforcement strategies are essential, including the recent calls for greater securities law-based regulation of environmental and social issues.”

To those knowledgeable about Clayton’s background, his observations are not a huge surprise. As highlighted in this prior post, during his Senate confirmation hearing Clayton said that because of exposure to FCPA and related laws “there are some jurisdictions where in the vast majority of the cases it may make sense just not to participate.”

Moreover, while in private practice Clayton chaired the International Business Transactions Committee of the Association of the Bar of the City of New York which issued 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?” (See here and here).

As demonstrated by the links at the beginning of this post, I agree with many of Clayton’s observations. However, for the reasons discussed in this article, comparing U.S. enforcement of the FCPA to other nations enforcement of their FCPA-like laws is very much an apples to oranges comparison.

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