The Economist Gets It Badly Wrong on Anti-Bribery Law

Last week, The Economist published an op-ed entitled “Daft on Graft,” which argued that the enforcement of transnational anti-bribery laws like the U.S. FCPA and U.K. Bribery Act is “becoming ridiculous,” with costs that are “spiraling beyond what is reasonable,” and that we are now witnessing “a descent into investigative madness.”

If I spent all my time responding to poorly-reasoned claptrap that looks like it was written either by a shill for business lobbyists or by someone who didn’t know much about the topic, I wouldn’t have time to do anything else. But when such claptrap appears in a widely-read, well-respected publication like The Economist, I can’t just let it pass. I know, I know—it may be unfair to beat up on a short op-ed, a format that doesn’t lend itself to in-depth analysis or nuance. But still, even by the standards of op-eds in popular periodicals, this is pretty bad. The diagnosis of the problem is shrill, one-sided, and hyperbolic, and the proposed reforms are either already in place, or misguided.

Maybe the best way to approach this is to consider each of the op-ed’s four proposed “reforms” to anti-bribery law enforcement one at a time:

  • First, the op-ed calls for the government to “rein in the excesses of the compliance industry” and to tell firms that are under investigation “what level of investigation [the government] want[s] so that companies are not overzealous[.]” The premise here is that spending on anti-bribery compliance (before and after an investigation starts) is out of control. But there’s not particularly strong evidence this premise is true. I’m sympathetic to the idea that law firms and compliance consultants may have a tendency to advocate the most extensive, “gold-plated” investigations possible. But there’s much less evidence that the companies themselves are actually overzealous. (Indeed, it’s odd that the op-ed opens using Walmart as an example of out-of-control FCPA investigation costs. True, as the op-ed notes, Walmart will soon have spent about $800 million on fees in connection with the investigation. But Walmart got itself into this pickle precisely because it rejected not only an outside law firm’s advice to do an extensive investigation when evidence of bribery originally came to light internally, but also its own investigation department’s advice to do a more focused, limited inquiry into Walmart’s Mexican subsidiary.) Yes, we can find examples of firms that have gone overboard. But there are also plenty of examples of firms that haven’t done nearly enough, before or after an investigation starts. And even if these investigations cost a lot of money, who’s to say that’s excessive? Yes, investigation and compliance efforts are costly to firms. And yes, that cost may seem very high relative to the underlying size of the criminal transaction (though in the cases of Siemens and Walmart, the op-ed’s two lead examples, that’s probably not true). But we need to discount the cost to firms by the probability of detection, and in the case of foreign bribery, the probability of detection is quite low. While statistical and normative challenges make it impossible to establish definitively whether the current expected penalties for foreign bribery are optimal, the best (admittedly imperfect) evidence out there suggests they are probably much, much too low to deter these unlawful transactions.
  • Second, the op-ed calls for governments to “lower costs by harmonizing anti-bribery laws and improving coordination between national probes.” The op-ed suggests that the OECD might be the natural body to lead this effort. Of course, the OECD already is leading this effort, primarily through its closed-door meetings of law enforcement officials, and also through the country peer review reports on compliance with the OECD Anti-Bribery Convention. And in fact there’s already a good deal of international cooperation among OECD countries on these issues. The bigger problems concern cooperation with countries that are outside the OECD convention framework, like China. This lack of coordination is indeed a problem, as I’ve discussed elsewhere. But it’s not clear what the op-ed has in mind when it calls on the OECD to “lead [the] effort” to harmonize anti-bribery laws and improve coordination. It seems like the op-ed is either calling on the OECD to do something it’s already doing, or something that it doesn’t have the capacity to do.
  • Third, the op-ed states bluntly that “more cases should go to court.” For an op-ed that seems so concerned about fees and costs, this may seem like an odd recommendation. After all, many firms settle these cases in part because litigation would be extremely expensive. How does it make sense to say, on the one hand, that companies are spending too much on lawyers (doing internal investigation), but, on the other hand, that we should fix this by encouraging/forcing companies to take more of these cases to court (which would require substantially more spending on lawyers)? The op-ed supplies an answer, and it’s a telling one: More court cases, the op-ed says, “would have the advantage of establishing clear precedents”—precedents that would prevent prosecutors from “strong-arm[ing] firms into agreeing to settlements based on controversial legal theories.” In other words, we want more court cases because they will lead to a narrowing of the underlying statutes, making it harder to establish liability in future cases. This is indeed a genuine possible outcome of more FCPA litigation (one I’ve written about before here and here). But this would only be a good outcome if we think that the substantive scope of the FCPA (or related statutes), as interpreted by the government enforcers, is in fact too broad. But it’s not. (Or at least I don’t happen to think that it is). Furthermore, the op-ed doesn’t have the guts to explicitly advocate narrowing the FCPA and other laws. Rather, the op-ed adopts the familiar mealy-mouthed gambit of calling for “clear precedents.” But the clarity or lack of clarity of the law is rarely what prompts firms to spend a lot on internal investigations (ostensibly the op-ed’s main concern)—it’s lack of certainty about the facts. Clearer legal precedents would reduce the burden on firms only if they narrowed the substantive scope of the relevant statutes. So all this stuff about the benefits of having more cases go to trial is really just a roundabout way of advocating for a narrowing of foreign anti-bribery law.
  • Oh, and an important aside here: the op-ed’s one example of a “controversial legal theory” that poor hapless firms might be “strong-arm[ed]” into accepting in settlements is the “one being peddled by American law enforcers that hiring relatives of well-connected officials counts as bribery.” This is a reference to the current investigations into JP Morgan’s hiring practices in China (its so-called “sons and daughters” program). The op-ed’s reference to this case is inaccurate and misleading for a couple of reasons. First, although an investigation is indeed underway, there have not yet been any charges, let alone a settlement. Second, and much more important, the U.S. government has not taken the position that hiring the relatives of well-connected officials in and of itself counts as bribery. Rather, the position is that agreeing to hiring a foreign official’s relative as a quid pro quo—in exchange for the official granting business to the firm—can count as bribery. Of course it can and should—as I’ve argued before (see here and here). To suggest that the US has taken the position that hiring a foreign official’s relative is bribery per se is incorrect and irresponsible.
  • Fourth, the op-ed trots out the old canard that “anti-bribery laws should be amended to offer companies a ‘compliance defense.’” But the op-ed doesn’t actually go on to say anything on behalf of a compliance defense as such. Rather, it argues that “[i]f firms can show that they had sound anti-bribery policies, that they were making reasonable efforts to uphold them, that the wrongdoing did not involve senior managers and that they came forward to the authorities promptly, the penalties should be greatly reduced.” OK, fine—but when firms do these things (put in place sound policies, enforce them, promptly disclose, etc.)—the penalties are already greatly reduced under US law. Sure, firms complain that the reductions aren’t big enough, that the government isn’t clear enough of how much of a benefit they get, and so forth—but a penalty reduction for good faith compliance efforts already exists, and doesn’t require a new compliance defense. Moreover, the addition of a compliance defense under US law would likely not do very much, as I have argued at length elsewhere (see here and here). Also, there’s a serious tension here between the op-ed’s claim that we need to rein in the “ravenous ‘compliance industry’” and its advocacy of a compliance defense. To my mind, the biggest proponents and beneficiaries of a “compliance defense” are not the firms themselves, but rather the consultants and lawyers who sell compliance services, who can use the existence of a compliance defense as a marketing tool, even though in practice the existence of the defense wouldn’t alter the likely outcome of an FCPA investigation. (Oh, and perhaps—especially given that The Economist is a UK publication–the op-ed might have at least mentioned that the UK Bribery Act does have a compliance defense, in conjunction with strict liability for employees and agents. Do the op-ed writers prefer this approach to the US approach? They never say.)

The op-ed does make a point in closing with which I generally agree: given that so many FCPA cases (approximately half) originate from voluntary disclosure, we must be careful not to raise expected costs of an investigation so high that firms are dissuaded from self-reporting. So, we do need to pay attention to concerns about coordination, uncertainty about future liability, confidence that cooperation and good faith will be appropriately credited by enforcers, and so forth. (See here, here, here, and here.) But it’s not at all productive to suggest, without evidence, that the current approach to enforcing transnational anti-bribery law is ”daft,” “ridiculous,” “madness,” etc., and to propose “solutions” that either reflect the status quo or that amount to veiled attempts to curtail the scope of foreign anti-bribery law.

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