Thursday, April 26, 2012


The Corruption Law That Scares the Bejesus Out of Corporate America
Jordan Weissmann
APR 25 2012
Walmart's Mexican bribery scandal is shining the spotlight on the Foreign Corrupt Practices Act, an obscure law that's become a bane for some of the world's largest corporations.

Up until this past weekend, there was a very good chance that the average New York Times business page reader had never heard of the Foreign Corrupt Practices Act. It's the sort of law that the public ordinarily doesn't have much reason to think about, even as it keeps corporate lawyers and c-suite executives tossing in their sleep. But thanks to the the paper's damning investigation into Walmart's cover-up of bribery at its Mexican subsidiary, this low-key statute is suddenly getting its turn in the spotlight.

The statute, generally referred to as the FCPA, was passed in 1977 and bans individuals and companies from bribing foreign government officials to win business or influence their decision making. Those who run afoul of the law can face large fines or prison time. For decades after it was enacted, it was barely used. But in the last five years, it has evolved from an obscure vestige of the post-Watergate era into into one of the most talked about and feared laws in America's board rooms.

Just ask Walmart.
There was a time when American businesses didn't fret much about foreign bribery, much less what federal prosecutors might do about it. Rather, it was considered an ugly but necessary aspect of doing business in the graft-plagued developing world. That changed in the wake of Watergate.

The path from Nixon's dirty tricks to the problem of foreign corruption was a bit roundabout, to say the least. At the tail end of the Watergate congressional hearings, a group of business executives testified to making illicit payments to the president's re-election campaign. Their admission perked the interest of Stanley Sporkin, the head of the Securities and Exchange Commission's enforcement division, who wondered how those contributions would have been accounted for on the companies' books. He began an investigation, which eventually revealed that the same slush funds used to funnel money to political campaigns at home were also used to pay bribes abroad. The federal inquiry expanded, and more than 400 corporations eventually confessed to collectively making more than $300 million worth of corrupt payments overseas.

This wasn't the first time U.S. companies had been caught doling out cash to foreign governments. After giving the Lockheed Corporation a $250 million federal loan guarantee to avoid bankruptcy in 1971, federal regulators discovered that the airplane maker had bribed public officials in Japan, Italy and the Netherlands to win government contracts. The revelations became national embarrassments in the countries where the deals had occurred.

The Lockheed affair and the shocking outcome of Sporkin's detective work both contributed to a sense that reform was necessary. As Andrew Spalding, a professor at the Illinois Institute of Technology's Chicago-Kent College of Law, has written, U.S. policy makers worried that such rank corruption would become a Cold War liability both by harming our relationship with allies and by discrediting capitalism. It was a sentiment summed up perhaps most eloquently by George Ball, a former undersecretary of state under the Kennedy and Johnson administrations, in Senate testimony from 1976:

The vast volume of speeches, pamphlets, and advertising copy and propaganda leaflets extolling the virtues of free enterprise are cancelled every night when managements demonstrate by their conduct that a sector of multinational business activity is not free; it is bought and paid for. This is a problem that, like so many others, has relevance in the struggle of antagonistic ideologies; for, when our enterprises stoop to bribery and kickbacks, they give substance to the communist myth already widely believed in Third World countries that capitalism is fundamentally corrupt.

The FCPA eventually passed under the Carter administration, making the United States the first country to officially outlaw foreign bribery. The law then promptly faded from memory. Cases were rare and little talked about. However, by the 1990s, old concerns about the law began to re-emerge.

Before the FCPA's passage, its opponents argued that criminalizing foreign bribery would put American companies at a disadvantage against international competitors from countries with looser laws -- some governments actually allowed corporations to deduct their bribe payments from their taxes -- and would discourage them from doing business in corruption-prone parts of the world. In 1995, John Hines, Jr. of Harvard's Kennedy School released a paper arguing U.S. companies were in fact investing less in countries where bribery was prevalent than they might have otherwise. When the members of the Organization for Economic Cooperation and Development agreed on an international convention against bribery, the Clinton administration pushed Congress to adopt it by arguing it would level the playing field for U.S. businesses, which were allegedly losing $30 billion a year in business to less scrupulous competition.

Even after the convention was adopted, the FCPA still remained largely beneath the radar. That changed dramatically in 2007. The graph below, based on annual report by the law firm Shearman & Sterling, shows how the yearly number of Department of Justice cas
es brought against corporations more than doubled in middle of the last decade.

Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle

MEXICO CITY — In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.