Although economic analysis is not my field, I have long been interested in basic economic theory as it applies to Foreign Corrupt Practices Act fine and penalty amounts, specifically disgorgement.
In my opening remarks at the World Bribery and Corruption Compliance Forum in London in September 2010 (see here), I observed as follows.
“Another issue in need of deeper analysis is the commonly held enforcement view that the contract (and thus net profits of the contract) at issue was secured solely because of the alleged improper payments made by the corporate. This ignores the fact that most of the companies settling enforcement actions are otherwise viewed as industry leaders presumably because they offer the best product or service for the best price. With such companies, can it truly be said that the alleged improper payments were the sole reason the company secured the contract at issue, thus justifying the company being forced to disgorge all of its net profits associated with the contract? Does a but for analysis have a place in bribery laws – in other words should the enforcement agency have to prove that but for the improper payment, the company would not have secured the contract at issue?”
In the context of the recent Pfizer enforcement action, I again highlighted here some basic economic issues when thinking about the disgorgement penalty in that case.
This previous post highlighted the work of Dr. Patrick Conroy (here) and Dr. Graeme Hunter (here) – both of Nera Economic Consulting. In their thoughtful article titled “Economic Analysis of Damages under the Foreign Corrupt Practices Act,” the authors note that “to date there has been little consideration of the true benefit of the bribe,” but “with fines in the hundreds of millions of dollars and increasing enforcement, it is necessary to clearly understand what effect a bribe had on profits and to carefully establish what the but-for profits would have been without the bribe.”
I recently came across a similar article by Mark Gueck (here) and Jeff Armstrong (here) – both of Finance Scholars Group. Their article “Competition Principles Applied to FCPA Damages” (here), rightly notes that “disgorgement is complex and may put the firm [resolving an FCPA enforcement action] in the position of forfeiting some legally earned profits as well.” The authors “propose strengthening FCPA disgorgement with robust economic analysis, in particular, applying principles of market competition in ways that are accepted in other areas of government oversight so that the proper balance between penalty, incentive and opportunity is achieved.” Among other things, the authors point out, as I frequently have as well, that “companies fined under the FCPA are industry leaders” and that “customers can be expected to purchase from the firm in the absence of a bribe.”
Even if a company is found to have violated the Foreign Corrupt Practices Act, the law nevertheless demands that fine and penalty amounts are fair and just. The time has come for basic economic principles, accepted in other areas of law, to be accepted in FCPA enforcement actions. FCPA counsel would be wise to consider such issues, and engage such expertise, when negotiating resolutions to FCPA enforcement actions with the DOJ and SEC.