I Fought the Law and the Law Won: Foreign Corrupt Practices Act Is Changing Emerging Markets Behavior

When asked about the salient features US competitiveness, foreign citizens invariably cite the rule of law - along with a robust and relatively fair judicial system to make it work.

Though taken for granted and a frequent source of complaint by American businesses, the absence of this safeguard has tripped up many a corporation as it expands globally.

New research suggests that the law has given companies the incentive (and the excuse) to decline to pay bribes. Initially thought to be a competitive disadvantage, this is now turning out to be the opposite. As non-US companies seek to sell US products in their home markets or expand into the US, they are finding this act has strengthened both the rule of law and the potential markets for goods and services. As former Citibank CEO Walter Wriston said, "Money goes where it is wanted and stays where it is well-treated." JL

John Bussey reports in the Wall Street Journal:

"Avon's agony—its messy overseas bribery probe—may have a silver lining, though not necessarily for Avon. Avon Products is the latest big fish to get caught in the drift net of the Foreign Corrupt Practices Act, which makes it illegal for companies that trade on U.S. exchanges to bribe foreign officials. The Justice Department has ramped up its pursuit of companies and individuals under the act and has extracted big penalties—a record of nearly $2 billion in 2009 and 2010.

The silver lining? The FCPA—passed in 1977 and still controversial with many U.S. companies—may be proving more effective than any other U.S. initiative in extending the rule of law into developing markets. For all its warts, the rules are changing the often lawless marketplace abroad
Avon isn't commenting on the investigation, though it has said that certain expenses in China may have "been improperly incurred." Its internal probe has cascaded into India and Latin America. The Justice Department often relies on companies to self examine and then volunteer the results. Avon is a good example of what that can mean: It has already spent more than $100 million on its investigation and has fired or suspended several employees. And it still hasn't concluded the probe.

The Justice Department's long list of companies sanctioned for FCPA violations in recent years includes Johnson & Johnson, Tyson Foods, Chevron, Kellogg Brown & Root, Siemens and Daimler. Its definition of what constitutes a foreign official is expansive. And its scrutiny includes suppliers and business intermediaries of U.S. companies—you can get nailed if your foreign partner does the bribing.

The U.S. may have been early with its law, but other countries have followed suit, including Britain. Its new Bribery Act takes effect in July.

From this wellhead of anxiety, a gusher of compliance lawyers, trainers and FCPA navigators has flowed. U.S. companies now heavily vet their potential suppliers, partners and acquisitions abroad and have extensive training and compliance programs on the FCPA. U.S. business groups from Egypt to Singapore to China run briefings on the law.

In Cambodia, "turnout at these events has been impressive and has included a surprising number of Cambodian businessmen and government officials," says Michael Stephen of the American Chamber of Commerce in Cambodia.

General Electric runs compliance training throughout its global businesses. "It's having an impact, and vendors and suppliers increasingly adopt our policies and embrace our training," says Jeffrey Eglash, a lawyer with GE.

Stunned by the magnitude and reach of FCPA penalties, U.S. companies, out of self protection, have become the greatest proselytizers of the rules. Local companies listen up, eager to pass muster with U.S. multinationals.

Ruhul Alam Chowdhury, chairman and managing director of Armada Ltd in Dhaka, Bangladesh, says he sought out compliance training and certification—a "complicated process"—to stay on the radar screen of big foreign companies. Armada represents companies that supply the Bangladesh military. Accreditation, he says, "has given us access."

Armada got its certification from Trace International, a U.S. nonprofit that provides compliance training. One rough-count indication of the effect U.S. and other bribery laws have had on developing markets: Trace now has 188 local member companies in China, up from 35 in 2006. In Brazil it's 74, up from seven; in India 102, up from 15.

"Companies are forcing their antibribery standards out through their international supply and marketing chain," says Alexandra Wrage, president of Trace. "If a Wal-Mart or General Electric or Pfizer can convey to tens of thousands of partners, suppliers, distributors and other intermediaries world-wide that antibribery compliance is valued," norms will change, she says.

The question is, at what cost? Many U.S. companies say that, in the form of the FCPA at least, the cost is too high.

Michael Mukasey, the former U.S. attorney general, told the House Judiciary Committee this month that the FCPA is too vague and gives too much interpretive power to the Justice Department and the Securities and Exchange Commission, which also enforces the FCPA. The result: Companies are essentially railroaded into settling, fearful that if they contest charges the results will be even worse.

Speaking for the U.S. Chamber of Commerce's Institute for Legal Reform, he suggested changes, including tightening definitions, limiting "successor liability" when a U.S. company buys a company abroad, and giving companies credit for strong compliance programs—a "compliance defense."

The Justice Department responded that it already provides extensive guidance on the law and takes into account all factors when reaching a settlement, including compliance programs. It reminded Congress that it isn't after the small fry—it's the egregious cases that get the attention.

Attention can change norms, which can make the marketplace a bit less lawless. And that, the FCPA cops argue, is a long-term plus for business.