Foreign Corrupt Practices Act Research Articles

Audit Committee Remedial Actions and Regulatory Outcomes following FCPA Investigations

SUMMARY This study examines audit committee (AC) remedial actions in firms investigated for a likely bribery-related violation of the Foreign Corrupt Practices Act (FCPA). Specifically, we study the relation between AC remedial actions and regulatory outcomes of an FCPA investigation. We consider three types of AC remedial actions: AC turnover, adding a newly elected director to the AC, and replacing the AC chair. These actions are not associated with the likelihood of a regulatory investigation concluding in an enforcement action. However, in firms that face enforcement actions, adding a newly elected director is associated with lower monetary penalties, a shorter resolution time, and a lower likelihood of an independent FCPA monitor being required. Additional analyses suggest that these results are driven by firms in which the newly elected director is appointed as the AC chair. Overall, this study adds to the literatures on regulatory cooperation and audit committees.

Bribe-Switching

The US Foreign Corrupt Practices Act (FCPA) prohibits the payment of bribes to foreign public officials. We uncover an unintended consequence—the shadow economies of the countries of these officials increase after FCPA enforcement. Our hypothesis is that corrupt officials may be switching to taking bribes from illegal markets. We find that one case of FCPA enforcement alone increases the shadow economy by as much as 0.27 percentage points (pp), tree loss—an indicator of illegal logging—by 0.027 pp, and trade misinvoicing by 0.5 pp. Our results suggest the need to harmonize anti-corruption policies across all sectors—legal and illegal.

Transnational Legal Spillover? A Re-Appraisal of the OECD Anti-Bribery Convention

Abstract Can prosecutions by US authorities help spread enforcement of foreign bribery laws to other countries? In this article, we explore this question by re-examining earlier scholarship that found that US prosecutions of foreign corporations under the Foreign Corrupt Practices Act (FCPA) increase the likelihood that the corporation's home state will enforce its own foreign bribery laws. Using a conditional-frailty Cox model that allows us to model foreign bribery enforcement actions as repeat-events, we do not find evidence that FCPA prosecutions lead to sustained increases of foreign bribery enforcement by target countries. We also find that prior results are not robust to the inclusion of an important confounding variable: a country's level of exposure to corruption in their trading partners. Still, while our findings indicate a more limited role of US law enforcement in this area, we nonetheless see many promising avenues for future research on transnational law enforcement and its consequences.

The Foreign Corrupt Practices Act (FCPA) as a Symbolic Policy in the Broader “Anti-Corruption Movement”: A Case Study of Latin American Prosecutions

The Foreign Corrupt Practices Act (FCPA) is a US law that ostensibly seeks to reduce transnational corruption through penalizing individuals/entities who bribe foreign officials. The purpose of this study is to critically assess the FCPA and examine how it has been applied within Latin America. To do so, we conduct a case study of FCPA bribery prosecutions in Latin America over a 20-year period, 1997–2016. Results show that only twenty-two individuals were prosecuted during this period, with penalties that amount to little more than a “slap on the wrist.” Consequently, the FCPA can be viewed as a symbolic policy in the larger “anti-corruption movement” in that it purports to battle corruption but does not, in fact, do so.

Foreign corrupt practices act violations and enforcement

Purpose This study aims to examine the determinants of Foreign Corrupt Practices Act (FCPA) violations and consequences of FCPA enforcements. Design/methodology/approach This paper uses publicly available data from Compustat, I/B/E/S and Thomson Reuters databases, combined with Securities and Exchange Commission (SEC) and Department of Justice (DOJ) cases, to extract insights on FCPA violations and enforcements using econometric approaches. Findings The main determinants of FCPA violations appear to be firm size, multinational structure, country corruption and Sarbanes-Oxley Act control weaknesses. Traditional misreporting risks (F-score and M-score) do not predict FCPA violations. This study discovers significant differences between FCPA violations by motivation, as in, sale generation, rent extraction or cost evasion. Bribes motivated by sale generation or rent extraction are partially driven by the extent of the firm’s global operations, whereas bribes motivated by cost evasion relate to internal influences. This study also finds that enforcement is more salient for criminal violations (DOJ enforcement), compared to civil violations (SEC enforcement). Research limitations/implications This research provides new insights into the determinants of FCPA violations while underscoring the need for effective measures to combat bribery and promote ethical business practices. This research contributes to the ongoing efforts to curtail bribery, offering valuable insights into the characteristics of firms more likely to engage in bribery and contexts in which these activities occur. It provides critical implications for regulatory bodies, highlighting the differential responses of firms to varying types of enforcement, namely, criminal versus civil, as the authors observe greater decreases in internal control weaknesses following DOJ enforcement compared to SEC enforcement. Practical implications For enforcement agencies, the findings underscore the importance of rigorous criminal enforcement against FCPA violations, highlighting the improved control environments prompted by DOJ actions. Managers will find this research relevant, as it demonstrates that a firm’s entry into international markets substantially elevates the risk of its representatives engaging in bribery with foreign officials. In addition, the results are of interest to regulators, revealing that the underlying motivations driving a firm’s activities can significantly alter the factors to consider that might lead to an FCPA violation. Originality/value This paper is the original work of the authors and explores the determinants and consequences of FCPA violations and enforcement actions since 2002. To the best of the authors’ knowledge, it is the first to explore bribe determinants by their motive and documents industry-wide benefits arising from criminal enforcement.

Double jeopardy: FCPA enforcement and MNC risk-mitigation strategies

Does transnational anti-bribery enforcement affect the risk-mitigation strategies of firms? This paper uses an original dataset on the enforcement actions of the Foreign Corrupt Practices Act (FCPA) to examine the law’s impact on corporate behavior and political risks for multinational corporations (MNCs). I argue that corrupt institutions are not necessarily undesirable for foreign investors. Foreign firms seek above-normal returns in high-risk markets through informal exchanges with the host government. FCPA enforcement provides a “fire alarm” that affects firms differently given their sensitivity to corruption concerns. FCPA enforcement has unequal deterrence against corporate misconduct, encouraging some firms to adopt transparency norms while incentivizing other firms to be more insidious in their corrupt business practices. I use a partial observability bivariate probit model to estimate the unobservable propensity of firms to engage in corrupt exchanges. Then I examine the impact of FCPA enforcement on Chinese FDI, and find that Chinese investments are deterred from markets with robust legal institutions. The FCPA’s deterrence effects against corrupt competitors is a positive outcome for U.S. MNCs. However, American companies experience diminished returns in countries with strong investor protection regimes. External legal interventions under the FCPA generate regulatory burdens on U.S. that limit their business opportunities.

Reversing the Resource Curse: Foreign Corruption Regulation and the Local Economic Benefits of Resource Extraction

We examine how foreign corruption regulation affects the economic benefits communities receive from extraction activities in the resource-rich areas of Africa. After a mid-2000s increase in enforcement of the US Foreign Corrupt Practices Act (FCPA), nighttime luminosity increases by 15 percent (5 percent) in communities within a 10-kilometer (25-kilometer) radius of affected extraction facilities. Cash-wage employment also increases significantly, suggesting that the economic benefits are not limited to electricity access. Consistent with foreign corruption regulation mitigating the political resource curse, we find that perceived corruption decreases following the rise in FCPA enforcement. (JEL D73, F23, K22, L14, O13, O17, Q31)

This deserves a Huh?

Research methodology To complete this case, students will need to access financial statements from the Securities and Exchange Commission’s webpage. The links are provided. Students will also need to review the conceptual framework that is typically covered in Intermediate 1 to respond to question 5. Case overview/synopsis This case is based on the three financial statement restatements that Weatherford International Ltd. made over an approximately 18-month period. The restatements were due to a fraud committed by manipulating the income tax accrual in the financial statements. The manipulation used was to overstate the amount of income used to calculate the dividend exclusion and then use a relatively high tax rate to calculate the resulting tax benefit. The tax rate used for the fraud was substantially more than Weatherford’s effective tax rate (ETR), which was a prominent part of the company’s strategic growth plan. The tax senior with the external auditors who reviewed the entry made for the dividend exclusion captured the inconsistency with the comment that “This [the entry] deserves a huh?” The case is intended for students in Intermediate 2, where financial statement restatements and their effect on the company’s financial statements are typically covered. During the years covered in this case, Weatherford was also under investigation for violations of the Foreign Corrupt Practices Act (FCPA). Weatherford’s FCPA violations included multiple instances of bribery, the inappropriate use of volume discounts, improper payments and kickbacks in the United Nation’s Oil for Food program. Weatherford received the eighth-largest fine in the history of FCPA violations (at that time) of $152m. Weatherford’s FCPA investigation expanded, and the company paid another $100m in fines for violations of sanctions law and export control law. This case focuses only on the fraudulent manipulation of the financial statements through the tax accrual and does not delve into the other investigations. However, the linkage between those investigations and the fraud in this case is Weatherford’s nonexistent internal controls. Complexity academic level This case was designed to be used in Intermediate 2 financial accounting classes to highlight financial statement restatements and review the conceptual framework and materiality. The students who used the case did not have difficulty with the tax aspect of the case. However, most of the students had taken one tax class previously or concurrently. If students have not had any exposure to tax, the instructor might want to walk students through the tax aspects of the case.

In‐Group Favoritism as Legal Strategy: Evidence from FCPA Settlements

Anti‐corruption laws aim to bolster public integrity by punishing attempts to illegitimately curry favor with government decision‐makers. These laws, however, can generate integrity risks of their own. This article examines one such risk: that firms subject to scrutiny under the Foreign Corrupt Practices Act (FCPA) may attempt to influence prosecutors by exploiting shared political leanings or related socio‐cultural ties. Drawing on social psychology, we theorize that FCPA defendants retain defense attorneys who are aligned with government officials. This behavior is consistent with a strategy of marshaling in‐group favoritism—i.e., the psychological tendency for individuals to view more favorably those that they perceive as members of the same group—to defendants' advantage. This strategy may be particularly auspicious in FCPA matters, in which prosecutors engage in subjective, trust‐based assessments of defendants' self‐investigatory efforts, typically with minimal judicial oversight. We test this theory by matching attorneys listed on court filings for all FCPA matters over eighteen years with a database of individuals' political views based on their patterns of political donations. This analysis reveals that defendants tend to hire more liberal attorneys to represent them on these filings when prosecutors lean left and during Democratic administrations, and more conservative attorneys when prosecutors lean right and during Republican presidencies. In light of these findings, we offer policy prescriptions aimed at increasing transparency and judicial oversight of FCPA matters to mitigate integrity risks.

부패방지를 위한 국제적 노력에 대한 국내 부패방지 법제의 대응과 과제

Corruption is not a problem confined to one country, and since its harms transcend national borders, the international community has been working together to solve this problem for decades. The international community's anti-corruption discussion and cooperation began with the enactment of the Foreign Corrupt Practices Act (FCPA) in the United States in 1977, through the enactment of the Organization for Economic Cooperation and Development's (OECD) Anti-Bribery Convention in 1999, and the conclusion of the UN Anti-Corruption Convention in 2003. The G20 Summit, a global economic consultative body that emerged in the wake of the 2008 global economic crisis, recognized corruption as the main cause of the global financial crisis, and the 2010 G20 Seoul Declaration emphasized cooperation on corruption at the international level. The <Anti-Corruption Action Plan> was adopted in the form of an annex. This action plan includes contents to urge member countries to join and ratify major international conventions against corruption, such as the United Nations Anti-Corruption Convention and the OECD Anti-Bribery Convention, as well as a cooperative system to prevent corrupt public officials from using the financial system and to prevent corrupt public officials from entering and providing shelter. Measures that require close cooperation between countries, such as Goryeo and support for the recovery of hidden assets overseas, were included. In addition, each member country agreed to report the situation every year so that the <Anti-Corruption Action Plan> could lead to effective policies. In order to lead and actively participate in these changes in the international situation, it is judged that Korea, a member of the G20, needs basic research for active implementation and policy and institutional reorganization based on this.
 This paper examined the contents of international activities centered on the UN Anti-Corruption Convention to respond to corruption, the foundation of the domestic legal system and the current status of domestic legal implementation of international agreements. In addition, institutional and policy directions to be improved for future anti-corruption activities were presented.

Foreign whistleblowing: the impact of US extraterritorial enforcement on anti-corruption laws in Europe

PurposeForeign whistleblowers are foreign citizens who help national enforcement authorities to sanction both foreign-based corporations and home-based corporations that engage in economic crime. This paper aims to investigate the expansion of US law in the area of transnational economic crime by discussing the case of foreign whistleblowers.Design/methodology/approachThis paper has been developed from a literature review carried out as part of a wider study into policing international bribery.FindingsThis paper shows that extraterritorial application of US whistleblowing laws is part of a broad trend associated with extraterritorial enforcement of US anti-corruption statutes such as the Foreign Corrupt Practices Act (FCPA). The extraterritorial reach of the FCPA and other statutes allowed the USA to become the leader in sanctioning US corporations as well as non-US corporations for economic crime. In effect, some US enforcement practices have become the standard that has influenced law and law enforcement in other countries as well as internal compliance of corporations.Originality/valueIn spite of the profound impact foreign whistleblowing has on the effectiveness of national anti-corruption enforcement, this topic has been largely neglected by academic research. To the best of the authors’ knowledge, this paper is the first to provide an overview of the role of foreign whistleblowers and the significant impact foreign whistleblowing has for legal reform in European countries and internal compliance of corporations in Europe and beyond.

Analyzing Business Research on the Foreign Corrupt Practices Act: Clusters, Gaps, and Future Directions

This study comprehensively analyzed and summarized business-related research on the Foreign Corrupt Practices Act (FCPA). Research on the FCPA is essential because sanctions for violations have grown substantially, increasing risks for multinational enterprises (MNEs). Recent fines exceeded $1 billion, and business executives were personally fined and imprisoned (Stanford Foreign Corrupt Practices Act Clearinghouse, 2021). Unfortunately, theory-based and empirically-validated business research has not kept pace with this increased risk. Performance mapping and science mapping pinpointed the most prolific academic fields, the most cited articles, and clusters of authors, journals, and keywords. Analyses identified gaps in the literature. Prior research focused on public policy questions, like the impact of the FCPA on American companies (Shapiro, 2013), the propriety of attempting to regulate foreign business ethics, and international treaties. Moreover, significant clustering and fractionalization into legal academic silos have side-stepped business-related research topics. New and different research directions are proposed.

The Foreign Corrupt Practices Act: A giant leap or baby steps to reform?

The 1972 break-in to the Watergate Democratic headquarters resulted in the first-ever resignation from the office of American President. It also uncovered the use of corporate funds by many US multinational companies, including some of its most prominent, to make illicit payments to domestic and foreign governments and companies. These payments went unreported by auditors and management. Senators Proxmire and Church and others sought to address this by strengthening the disclosure and accountability requirements of the Securities and Exchange Act by the passing of the Foreign Corrupt Practices Act (FCPA). This article traces the legislative path of the FCPA by analysing the Congressional hearing transcripts using Moe's theory of political institutions and the theory of bureaucracies by Howell and Moe. The analysis demonstrates exertions of interests to maintain the status quo leading reformers to compromise and accept ‘baby steps’ rather than making ‘giant steps’ in order to achieve some regulatory reform.

Severity of US sanctions against foreign firms: evidence from the FCPA enforcements

PurposeThe purpose of this study is to examine whether foreign firms pay disproportionately higher monetary penalties after controlling for factors that affect the sanctioning of the firm.Design/methodology/approachIn this paper, a cross-sectional data analysis has been used to examine the enforcement actions of the Foreign Corrupt Practices Act (FCPA) against all private and public companies from 1978 to 2019.FindingsThe findings indicate that that foreign firms pay disproportionately higher monetary penalties than domestic firms after controlling for factors that affect the sanctioning of firms. On average, foreign firms pay $43.3m more to the US government than US firms pay. This is a considerable difference in monetary penalties and equal to 68.95% of the average monetary penalty.Originality/valueThis paper shows that the US government treats US firms more favorably than foreign firms in monetary sanctions. Because the FCPA is not applied equally, this is contrary to US government guidelines and to the rule of law. The government needs to reconsider the consequences of imposing disproportionately higher penalties on foreign firms. Given the lack of judicial scrutiny of the FCPA settlement amounts against foreign firms, prosecutorial harshness against them can be remedied by amending the FCPA to eliminate the unequal treatment of foreign entities.

Benefits of Compliance and Risk Management

Compliance is a program that aims to protect organizations from the occurrence of financial fraud, corruption, behavior and/or misconduct of employees linked to them, preventing their good reputation and financial soundness from being shaken. It is a tool whose purpose is to establish rules, standards and guidelines for internal processes within organizations. It was developed in the United States in 1970, and its practices were transformed into a legal institute, through the enactment of the Pioneer Law against Corruption FCPA (Foreign Corrupt Practices Act), motivated by the Watergate Case, which involved then-President Richard Nixon and members of his administration, by paying bribes in surveys in favor of his re-election. In this context, this article has as its main question: how do the benefits offered by the Compliance and Risk Management program collaborate to reduce the risks of fraud, illicit and corruption within organizations? The aim of this study was to present the benefits provided by the adoption of the Compliance and Risk Management program in public and private companies, in their internal processes and relationships with their segment of activity, and how they collaborate for fraud mitigation. The methodology was adopted as a bibliographic research, and it was about the benefits caused by fraud prevention programs. It was found that Compliance and risk management programs bring effective risk protection benefits, mitigating fraud and corruption, combined with new Information Technology Governance (IT) solutions, such as Enterprise Governance, Risk Management and Compliance (EGRC).

Policeman for the World: The Impact of Extraterritorial FCPA Enforcement on Foreign Investment and Internal Controls

ABSTRACTWe show that a mid-2000s increase in extraterritorial enforcement of the U.S. Foreign Corrupt Practices Act (FCPA), characterized by greater international regulatory cooperation and more frequent use of the FCPA's accounting provisions, has a significant deterrent effect on foreign direct investment in high-corruption-risk countries. The decrease in investment is at least as large for non-U.S. as for U.S. firms, suggesting that widespread extraterritorial enforcement helps to create a level foreign investment playing field. Firms under U.S. jurisdiction with fundamental characteristics that make it more difficult to maintain effective internal controls invest less in high-corruption-risk countries after the FCPA enforcement increase, suggesting regulatory compliance costs play a role in deterring investment. Consistent with investments in accounting systems being one way, firms limit enforcement risk when investing in high-corruption-risk countries, firms pursuing new investments spend more time evaluating potential targets, and firms with existing investments report fewer restatements related to unintentional errors.JEL Classifications: F50; F60; K2; M4; O1.

Procedural corruption strategies in public service

The Opportunity-Motivation-Justification model explaining the organizational corruption antecedents conceptualizes procedural corruption as the abuse of legal-rational authority based on formal rules. Yet, the link between the procedural offences and public service remains underexplored, despite severe damages to equal access to market, competition and government legitimacy that corrupt transactions between business managers and public officials might cause. This paper uses a multiple case study strategy to investigate critical incidents of bribery of the public officials in return for business as procedural outcomes. Insights into explanations regarding the legal-rational authority abuse by managers that intend to corrupt the public officials is obtained from the cases of the Foreign Corrupt Practices Act (FCPA) violations formalized from 2013 to 2017. The data includes the US Securities and Exchange Commission proceedings, US Department of Justice communications, and corporate press releases regarding five North American and five European firms publicly traded on the US Stock Exchange. The findings suggest that the business managers may engage in different procedural corruption strategies, depending on the extent to which they interact with formal rules as the base of their legal-rational authority. The four proposed procedural corruption strategies include ignoring, minimizing, denigrating, and constructing.

A perfect storm: how high levels of risk and weak internal controls resulted in violations of the foreign corrupt practices act

Theoretical basis This case is based on Weatherford International’s settlement with the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). Both the SEC and the DOJ were critical of Weatherford for its violations of the Foreign Corrupt Practices Act and for its “inadequate internal controls.” This case explores the Foreign Corrupt Practices Act (FCPA) violations and issues related to internal controls. Research methodology Case study. Case overview/synopsis This case is based on Weatherford International’s settlement with the SEC and the Department of Justice. Weatherford provided equipment and services in the oil and gas industry. Because international markets were growing faster than domestic markets, Weatherford made a strategic decision to pursue growth in international markets. The oil and gas industry has high levels of operating risk as did the countries that Weatherford decided to pursue operations in. However, despite the decision to take on additional risk, Weatherford failed to implement adequate systems of internal controls. The title of the case “A Perfect Storm” refers to Weatherford’s trifecta of operating in an industry with high levels of corruption risk, countries with high levels of corruption risk and failing to implement adequate internal controls despite those high operating risks (Department of Justice, 2013). Weatherford was ultimately assessed a $152m penalty for its violations of the FCPA that included bribery, volume discounts, improper payments and kickbacks. Complexity academic level Undergraduate and graduate auditing classes.

The foreign corrupt practices act: How investors respond when violation severity and corresponding penalty (mis)match

The Foreign Corrupt Practices Act (FCPA) has become a major focus for corporations, the Securities and Exchange Commission (SEC), and the Department of Justice (DOJ), as indicated by the dramatic increase in the number of FCPA enforcement actions and the level of civil and criminal penalties. Prior regulatory practice shows that the SEC and the DOJ struggle not only to evaluate the severity of a company's FCPA violation, but also to establish the penalty amount. Given the difficulty in assessing penalties, the severity of a company's FCPA violation at times appears mismatched with the size of the penalty. Leveraging signaling theory, this study predicts and finds that when a company's FCPA violation severity and the size of the penalty imposed are mismatched, investors experience ambiguity in assessing the company's future prospects and, in effect, are more likely to give the company the benefit of the doubt. In this case, investors' company risk assessments are dampened, and they show a higher willingness to maintain their investment in the company. However, when the severity of the company's FCPA violation and the penalty amount match, investors are less likely to experience ambiguity, which leads to higher company risk assessments and a lower willingness to maintain their investment in the company. In addition, the combination of a more severe FCPA violation and high penalty amount results in the highest risk assessment and lowest willingness to maintain the investment. These results provide ethical and practical considerations that regulatory bodies should weigh in evaluating sanctions.

Economic Statecraft by Other Means: The Use and Abuse of Anti-Bribery Prosecution

AbstractThe Foreign Corrupt Practices Act (FCPA) is frequently used by the US law enforcement authorities to prosecute both US and foreign firms for bribery in foreign host countries. Evidence increasingly shows that anti-bribery enforcement is associated with a reduction in foreign investment inflows to host countries associated with enforcement actions. The determinants of enforcement actions remain understudied, however. I argue that enforcement actions are often political in nature, operating as de-facto sanctions against targeted countries. FCPA prosecutions can thus be viewed as a tool of economic statecraft, designed to reduce foreign direct investment (FDI) inflows to targeted states and enforce US foreign policy objectives. Using data on FCPA enforcement actions along with data on UN voting patterns, alliances, and US foreign aid, I find that FCPA enforcement actions are more likely to target firms that bribe in host countries with foreign policy preferences that diverge from the United States. This paper is among the first to empirically study the determinants of anti-bribery enforcement and to explicitly consider the political nature of FCPA prosecutions. These findings have broad implication for political economy research on foreign investment, economic statecraft, and corruption.