Why the Law Against Business Bribes Is Good for Business

In February, the Trump administration announced that it was suspending enforcement of the Foreign Corrupt Practices Act (FCPA), pending a six-month review. It is fair to speculate that President Trump hopes to kill the FCPA altogether. This would be bad for both business and the rule of law. To understand what it means for businesses, it helps to understand why this law exists and the effect it has had since being enacted.

Until the late 1970s, U.S. companies routinely paid bribes to foreign officials around the world. The practice was seen as a cost of doing business. A 1976 investigation by the U.S. Securities and Exchange Commission (SEC) concluded that “the problem of questionable and illegal corporate payments is, by any measure, serious and sufficiently widespread to be a cause for deep concern.” A year later, the U.S. became the first country to ban corporate bribery of this sort, enacting the FCPA.

One goal of this clear prohibition is to help companies insulate themselves against demands by corrupt foreign officials. For almost half a century, the FCPA has served as a global standard and one of the most powerful tools in the fight against corruption.

Corruption is a massive problem globally. The United Nations and the World Economic Forum have estimated that corruption reduces the world’s gross domestic product by 5%, or about $5 trillion, annually. As the nonprofit anti-corruption organization Transparency International has warned, “At the company level, corruption raises costs, [and] introduces uncertainties, reputational risks, and vulnerability to extortion. It depresses a company’s valuations, makes access to capital more expensive, and undermines fair competition.”

The FCPA: Protecting U.S. Business Interests

The FCPA was enacted after the disclosure of several scandals involving massive bribes paid by U.S. companies to foreign officials in the mid-1970s. One episode that the SEC brought to light became known as “Bananagate.” In 1975, Eli Black, the CEO of U.S.-based United Brands, the parent company of banana grower Chiquita, jumped to his death from his 44th floor office in New York. Following an investigation, the SEC discovered that the president of Honduras had extracted an illicit payment of $2.5 million from the company to resolve a tax dispute.

That same year, Sen. Frank Church convened a series of high-profile hearings to investigate such incidents. The resulting Senate report concluded that “there is a broad consensus that the payment of bribes to influence business decisions corrodes the free-enterprise system.” Testifying at those hearings, Robert Downey, chairman of Gulf Corp., urged the adoption of federal legislation, saying, “You can help us and many other multinational companies who are confronted with this problem by enacting legislation which would outlaw any foreign contributions by an American company. Such a statute on our books would make it easier to resist the very intense pressures which are placed upon us from time to time.” After the hearing, Sen. William Proxmire pointed out “how widespread the desire in the business community is for this type of legislation.”

In the early years after the enactment of the law, the Department of Justice and the SEC initiated only a handful of FCPA investigations. The point of the law was never to investigate every act of bribery across the globe — an impossible task. It was meant to set a clear standard and create a new environment of legal accountability. Over time, the number of cases has expanded modestly; last year, the Justice Department and SEC initiated 26 FCPA cases.

Though there have been claims that the law has handicapped U.S.-based companies against foreign competitors, it also applies to foreign companies with a financial presence in the U.S. In 2008, federal investigators revealed that Germany-based Siemens, the largest electronics company in the world, had made at least 4,200 allegedly corrupt payments to officials in Argentina, Bangladesh, Nigeria, China, Venezuela, Russia, and Vietnam. None of the payments, totaling $1.4 billion, was made in the U.S. or by a U.S. citizen. But Siemens has a financial presence in the U.S. and so was fined $800 million — at the time, the largest monetary penalty ever levied under the FCPA. As intended, the size of this penalty caught the attention of other companies, many of which launched internal FCPA training to ensure that their employees would not violate the law.

In 2020, Goldman Sachs became enmeshed in an even larger FCPA case when it was charged with paying bribes to Malaysian officials to help win a contract to manage the country’s sovereign wealth fund. A Goldman subsidiary pleaded guilty, and the company paid $2.9 billion in fines and other penalties. A former Goldman banker was sentenced to 10 years in prison. In announcing the settlement, the company’s chief executive, David Solomon, acknowledged that it was “abundantly clear that certain former employees broke the law, lied to our colleagues, and circumvented firm controls.”

Alcoa paid a fine of $209 million in 2014 to settle charges that its Australian bauxite mining subsidiary had paid bribes to win long-term contracts in Bahrain. The same year, Hewlett-Packard paid $58 million to settle a case involving bribes to Russian officials to win computer equipment contracts throughout Russia. Bristol-Myers Squibb was sanctioned in 2015 for making unlawful payments to Chinese health care providers in state-controlled hospitals to boost prescription sales. And the list goes on.

Why Criticisms of the FCPA Don’t Pass Muster

President Trump’s Feb. 10 executive order ignores this history to argue that “American national security depends in substantial part on the United States and its companies gaining strategic business advantages.” It calls the FCPA “overexpansive and unpredictable” and minimizes the negative effects of bribes, stating cynically that these are “routine business practices in other nations.”

The executive order raises three issues that are commonly cited by critics of the FCPA. The first is that the U.S. is an outlier in trying to stop business bribes, to the detriment of U.S.-based companies. While this may have been true a half-century ago, the FCPA is now being emulated by other countries. In 1997, the Organization for Economic Cooperation and Development adopted its Anti-Bribery Convention. In 2010, the United Kingdom enacted the U.K. Bribery Act, which integrates the convention into its national law. Germany has adopted a similar prohibition, an anti-bribery and anti-corruption law that is part of its criminal code.

The second argument critics make is that compliance with the FCPA costs money. Indeed it does: for training, the exercise of due diligence, and the building of internal oversight and compliance systems. But these costs pale in comparison to the cost of operating in a world where bribery is ubiquitous.

The third argument is that in today’s globalized economy, the U.S. is competing with countries like China, India, and Russia that will never join this effort and are contributing to the problem.

But where do we draw the line on lowering U.S. standards? Will we now also accept forced labor, which is common in certain parts of the world? Three years ago, Congress passed the Uyghur Forced Labor Prevention Act almost unanimously. It prevents the import of products into the U.S. from Xinjiang province in China, where the Uyghurs, an ethnic and religious minority, are systematically subjected to forced labor. This is indeed a “routine business practice” in China, but a bipartisan majority in the U.S. Congress wisely drew the line and voted to pass the law.

What U.S. Businesses Need to Do Now

When challenging corruption, U.S. businesses need to exercise the same wisdom. Rather than retreating from their values and interests, they need to double down in support of government efforts to combat bribery. As a starting point, they need to convey to their own employees that while enforcement of the FCPA has been paused, the law remains in effect. This means that companies that relax their zero-tolerance stance to bribery may still risk future prosecution.

Second, because similar anti-corruption laws are now on the books in other countries, U.S.-based companies need to assume that if their employees engage in corrupt practices, there is a distinct possibility that they will be prosecuted in one of them, just as Siemens was prosecuted in the U.S. in 2008.

While business leaders should feel free to lobby for reforms to the FCPA (such as limiting a company’s liability for the prior corrupt activities of a business it has acquired), they should recognize that a world with less corruption is ultimately in their best interests — which was acknowledged by business leaders and lawmakers alike when the FCPA was passed. They should band together and use their collective voice to support renewed enforcement of this law as a tool for ensuring a level playing field for business, and as an effective means of combatting corruption.