Originally posted in The National Law Review
Corruption has severe damaging effects on democratic institutions, undermining public accountability and diverting public resources from important priorities such as health, education, and infrastructure. As stated by former Secretary-General of the United Nations, Kofi Annan, on the passage of the United Nations Convention Against Corruption:
Corruption is an insidious plague that has a wide range of corrosive effects on societies. It undermines democracy and the rule of law, leads to violations of human rights, distorts markets, erodes the quality of life and allows organized crime, terrorism and other threats to human security to flourish.
Essentially, if left unchecked, corruption becomes more than just an economic or international development issue, it begins to threaten basic human rights.
One of the primary ways corruption manifests is through bribery and improper uses of official funds. And despite the damage such crimes cause to global development, there are few mechanisms preventing corruption on a cross-boundary or international scale. For example, Transparency International’s new report, Exporting Corruption, found that only 11 major exporting countries – accounting for about a third of world exports – have active or moderate law enforcement against companies bribing abroad in order to gain mining rights, contracts for major construction projects, purchases of planes, and other deals. At the same time, perceptions of corruption have plateaued and even risen in many states in recent years. Additionally, according to the European Commission, global offshore wealth rose to an estimated EUR 7.5 trillion (USD 7.8 trillion) or 10.4% of the global GDP for 2016 alone, which (in an effort to calculate the scale of international tax evasion), for just the EU meant that an estimated EUR 46 billion in revenue was lost to international tax evasion for the same year.
Based on a review of existing national and regional legislation, the only law truly effectively deterring such violations on a larger scale appears to be the United States’ Foreign Corrupt Practices Act (“FCPA”). The FCPA, enacted by the U.S. Congress in 1977, was intended to stop corrupt practices wherever they arise, create a level playing field for honest businesses, and restore public confidence in the integrity of the marketplace. As stated by U.S. Senator Tower in a 1976 Senate Floor Hearing leading up to the passage of the FCPA:
[I]mproper payments to foreign government officials or their intermediaries is indeed a serious problem and one which is not taken lightly by responsible governments. It is also a problem more akin to a disease which deeply troubles proponents of our free enterprise system. We have built an economy in the United States based on vigorous, honest competition where price, quality, and service commingle with demand and supply to regulate economic transactions. Bribery poisons this system by destroying the organisms of mutual trust and voluntary cooperation so essential to the free flow of commerce. This ethical decay must be stopped.
To do so, the FCPA prohibits the payment of anything of value to foreign government officials in order to obtain a business advantage and requires publicly traded corporations to have certain internal controls in place and make and keep books and records that accurately reflect the transactions of the corporation in order to ensure that funds are used properly and not for any illicit purpose. Because the FCPA applies to both U.S. persons (including U.S. corporations, NYSE corporations, or corporations trading specific types of ADRs acting abroad) and foreign nationals as well as violations that use U.S. mechanisms or occur in part in the United States, the FCPA uniquely stretches to reach international conduct and prevents just the sort of cross-border violations that often stunt international development. U.S. persons, including corporations, cannot simply go abroad to engage in corrupt activities and take advantage of gaps in other countries’ enforcement of bribery and related misconduct.
Additionally, the FCPA is extremely effective in preventing corruption because (1) it has strong sanctions deterring wrongdoing, and (2) whistleblowers from around the world can safely report violations of its provisions under the Securities and Exchange Commission (“SEC”) whistleblower program.
First, unlike many other laws that prevent corruption, the FCPA has substantial sanctions for wrongdoers. For each violation of the anti-bribery provisions, the FCPA provides that companies may be subject to a fine of up to $2 million USD and individuals, including officers, directors, stockholders, and agents of companies, may be fined of up to $250,000 and for each violation of its internal controls/recording keeping provisions. In total, the FCPA provides that corporations may be fined up to $25 million USD and individuals may be fined of up to $5 million USD. Violations of either provision may also result in jail time for individuals. Moreover, under 18 U.S.C. § 3571(d), courts can actually impose significantly higher fines, namely, up to twice the benefit that the defendant obtained by making the corrupt payment, and under 15 U.S.C. § 78u-2 the SEC may order the disgorgement of ill-gotten gains from FCPA violators, often resulting in massive overall sanctions. For example, to date in 2020, the average sanction for entities for FCPA violations is $293,824,428 USD. These fines, which are largely nominal in other nations, significantly deter corporate corruption. For example, in France, the company Vitol was fined €300,000 for the same international bribery scheme that it was fined $17 million for in the United States.
Second, the FCPA is under the joint jurisdiction of the SEC and Department of Justice, which means that whistleblowers may report violations of the FCPA to the SEC under the SEC’s comprehensive and extremely successful whistleblower program. Corruption, particularly corruption transcending national boundaries, is extremely difficult to detect or prove, particularly when law enforcement is often limited to U.S.-based evidence. Therefore, in order to detect and prove legal violations such as those covered under the FCPA, it is vital to encourage whistleblowers to come forward. Whistleblowers (who are typically “insiders”) are uniquely positioned to bring corruption taking place primarily outside of the U.S. to the attention of U.S. law enforcement. They are also often best positioned to track how a fraud crosses international borders. Lastly, whistleblowers may be exclusively able to access and send evidence of U.S. persons’ wrongdoing occurring abroad to U.S. officials largely stuck in the United States.
It is important to note that this program is mutually beneficial to whistleblowers. Whistleblowers are able to submit anonymous tips through to the SEC through attorneys using the SEC’s Form TCR program. If their tips then lead to sanctions over $1 million USD, they may be entitled to between 10 and 30 percent of the monies recovered depending on a variety of factors. Because, as discussed above, the FCPA was designed to combat the “ethical decay of corruption,” FCPA whistleblowers are not only protected by the strict confidentiality and anonymity provisions of the SEC whistleblower program, but may be handsomely compensated for their risk in exposing corruption due to the high sanctions violators often face and the extremely high law enforcement interest of U.S. officials in preventing bribery and associated illegal activities, one of the factors for increasing a whistleblower reward. Arguably, law enforcement interest is the sole motivating factor for the FCPA and therefore, all whistleblowers who provide information that leads to a sanction of $1 million dollars or more should receive the maximum award.
In order to prevent erosion of democratic institutions around the world, the FCPA should be replicated in other nations, particularly in the global north, where wrongdoers are more likely to try and “game” the international system. The United States cannot tackle this issue alone. Additionally, whistleblowers must be encouraged and lauded in the United States and elsewhere so that insiders continue to bravely expose corruption only they can see and track. FCPA whistleblowers have been, and continue to be, vital to ensuring that those who commit fraud face prosecution in the United States and have their ill-gotten gains disgorged. Each successful FCPA case makes it more likely that a would-be fraudster in any part of the world thinks twice before committing bribery and other malfeasance, for fear of legal repercussions brought by the might of the United States government.
For an in-depth overview of the FCPA policy, the U.S. Department of Justice and Securities Exchange Commission have published an excellent guide, which is the single best resource on the scope of the FCPA.