The Foreign Corrupt Practices Act Revisited: Attempting to Regulate “Ethical Bribes” in Global Business

INTRODUCTION In the early 1970s, during the Watergate hearings, Congress and the American public learned of a number of questionable payments made by U.S. multinational corporations, including illegal contributions to the 1972 Nixon presidential campaign, laundering of bribery money through foreign banks to avoid U.S. financial reporting requirements, and direct payments to foreign government officials to gain unfair advantage in bidding for government contracts. In one instance, Lockheed Corporation, an American multinational company, paid an estimated $25 million in concealed payments to Japanese officials in connection with the sale of its Tristar L-1011 aircraft to Japan.(1) These bribes led to the resignation and subsequent criminal conviction of the Japanese Prime Minister Kankuie Tanaka. As a result of these hearings and the reaction of the American public, the Justice Department, the Securities Exchange Commission (SEC), and the Internal Revenue Service (IRS) began investigating international bribery by American business firms. As part of the investigation by the SEC, the commission told publicly listed companies that investors have a right under federal securities law to be fully informed of the character and integrity of the management officials of the firm. It was stressed that this was particularly important when a listed company had significant assets in foreign countries, since investors might not enjoy the same protection that exists in the United States. To force disclosure, the SEC held out the threat to multinational firms that it would withhold clearance of securities for trading on the national exchanges unless they made full disclosure of foreign financial transactions. As a result, 450 companies, including more than 100 of the Fortune 500, admitted to making questionable foreign payments, totaling over $300 million.(2) As a result of these investigations, in an attempt to curtail U.S. corporate involvement in the bribing of foreign officials and to upgrade the image of the United States throughout the world, Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977 as an amendment to the Securities Exchange Act of 1934. Since its enactment, the FCPA has been somewhat controversial for two reasons. First, the FCPA was thought to be controversial because it sought to make a distinction between "bribes" to governmental officials, which were deemed to be illegal payments, and "gratuities," which were considered to be legal payments to low level officials to facilitate various routine business arrangements such as expediting the movement or processing of goods and services. As an example, in some countries it may be necessary to pay a "gratuity" to an official to expedite telephone installation or to have goods processed through customs in a reasonable length of time. These types of lower level officials frequently rely on such gratuities to supplement a relatively low base salary. Second, the FCPA was controversial because it was thought by some that American companies would be unable to compete effectively in a global economy if their market activities were hindered by the act. After the law was passed, some American firms complained that they were losing orders to Japanese and European competitors where bribery was sometimes not merely legal but tax free, since it could be claimed as a legitimate business expense. For instance, one American firm reported that it had been locked out of the South American market at times because it refused to pay the bribes necessary to obtain the business. Additionally, a former U.S. government official claimed that in Japan bids for government construction jobs are routinely rigged.(3) The purpose of this article is to revisit the provisions of the FCPA, to discuss the challenges faced by international business managers in light of laws that attempt to legislate ethical behavior, and to suggest some practical methods to deal with these issues. …