By Macleans A. Geo-JaJa and Garth L. Mangum

Abstract

A by-product of the Watergate investigations into illegal political contributions and money-laundering was the revelation that American corporations had been making questionable payments to foreign officials to gain business advantages. That discovery was the driving force behind passage of the FCPA in 1977. Many since have complained that the law put American firms at a disadvantage in international trade. This paper assess the credibility of that claim, as well as exploring the socioeconomic implications of corruption in a world of intensifying international competition. Based on the literature review, examination of international trade data and intensive interviews with foreign firms doing business in Nigeria, the paper reaches the following conclusions:

1) Enforcement of FCPA has waxed and waned, but there is no evidence that its enforcement has impeded the growth of U.S. trade. In fact, trade with countries previously considered "bribe prone" has out-paced the growth of trade with non-bribe-prone countries, despite FCPA.

2) Those American corporations which, in the past, were guilty of international bribery did so as a short-cut when adherence to time-honored ethics could have accomplished the same or better results.

3) The "Storehouse of Knowledge" maintained by successful firms has been far more influential in promoting exports than any questionable payments they might be tempted to make.

4) In most of the questionable payments investigated, American corporations had indulged in bribery to gain a competitive edge over other U.S. firms rather than foreign ones.

5) Whatever the result, international bribery is inherently wrong for the same reason that domestic bribery is wrong.

Despite criticism of it, FCPA has benefitted honest U.S. firms by reducing unfair competition among other American firms which comprise about 80 percent of the world’s true multinationals. For multinationals to function in anything other than a transparent manner would be to impede the spread of democratic governments and market economies worldwide.

INTRODUCTION

A by-product of the Watergate investigation into illegal political contributions was discovery in the early seventies that American corporations had also been making massive bribes to foreign officials to obtain favorable treatment in many nations--especially those of the Third World. Subsequent Securities and Exchange Commission (SEC) disclosures soon added to the furore and congressional investigations followed during 1975-76. Some corporations bribed to secure foreign business; others to beat out competitors, either foreign or domestic. There were bribes to secure tax deferrals, to obtain licenses or to get permission to import materials or human resources, or for other favors (Jacoby, Nehemkis and Eells 1977). More than 450 U.S. firms ultimately disclosed to the SEC by early 1980s illegal or questionable payments abroad, totaling more than $1 billion, to foreign government officials (Clinard 1990:121).

A May 12, 1976 report of the SEC to the Senate Banking Committee revealed, for instance, that Exxon’s total bribes had amounted to $78 million between 1963 to 1972. Lockheed corporation had made secret payments totaling millions of dollars to help Lockheed procure and maintain business overseas. A case in point was the fierce battle between General Electric and Westinghouse for a nuclear power plant contract in the Philippines (Beaver 1994). Despite inferior technology, paying $17.3 million to a relative of Imelda Marcos obtained for Westinghouse a $500 million contract for two reactors. This questionable payment had within two years sky rocketed the contract value to more than $1 billion. These and other payments were said to have ‘eroded public support for governments and jeopardized U.S. foreign policy. The record is replete with examples of these practices and their repercussions.

The Senate Banking Committee headed by Senator Frank Church of Idaho produced days of testimony and President Gerald Ford mounted a cabinet-level Task Force on Questionable Corporate Payment Abroad, chaired by the Secretary of Commerce. The result was passage of the Federal Corrupt Practices Act of 1977. The furore of the time has been forgotten, but the concern remains from many involved in international trade that American firms are placed at a competitive disadvantage by the Act’s requirements. It is the purpose of this paper to objectively assess the credibility of that claim and thereby reconsider the socioeconomic implications of corruption in a world of intensifying international competition.

ENFORCEMENT OF THE FCPA

The Federal Corrupt Practices Act covers corrupt corporate practices involving foreign officials and either domestic concerns or entities that issue securities covered by U.S. laws. The FCPA has two main groups of provisions: The accounting provisions, which are contained in section 102 of the Act, and the anti-bribery provisions, which are embodied in section 103 and 104 of the Act (Codified at U.S.C. 78m(b)(2) (supp. 1983)). Enforcement responsibilities under the FCPA are bifurcated; between the SEC and the Department of Justice. The Department of Justice prosecutes criminal violations of the FCPA and has exclusive authority to enforce, in either criminal or civil proceedings. Thus, the Department of Justice can initiate criminal prosecutions against issuers under Section 103 as well as against domestic concerns under Section 104. The SEC, on the other hand, implements and civilly enforces Section 103 as it does other sections of the Security and Exchange Act (FCPA 1980). The SEC therefore must refer all Section 103 criminal prosecutions of issuers to the Justice Department. The realization of the goals set out by the two provisions of the Federal Corrupt Practices Act is dependent on the Act’s interpretation, implementation and enforcement by the departments saddled with enforcement.

The political ideologies of those responsible for enforcement may also have played a substantial role in determining policy choices in this international morality play. At least, it seems significant that internal accounting or disclosure were the only provisions for deterrence during the Ford administration, while President Carter subsequently requested and pressured Congress to criminalize transnational corruption. The Reagan administration decimated enforcement funds of agencies handling corporate misbehavior. Thereafter, the SEC during the Reagan and Bush administrations generally adopted a hands off, free market approach which the Wall Street Journal attributed to the agency’s being horribly overmatched by the "bad guys" in the market place (December 16, 1985). Senator William Proxmire charged that "the Reagan administration has a double standard for law enforcement; one for its friends and fellow corporate board members and one for the less privileged criminals with whom it deals far harshly." (Newsletter 1985). Policy appears to have shifted again since 1993 with President Clinton intensifying enforcement of the Act, while aggressively pursuing agreement on an international code of conduct.

The Clinton Administration, as did the Carter administration, has been educating the international community to recognize that bribery is unacceptable and adversely affects the credibility of the market system. Both administrations also brought pressure on host countries by prodding regional development agencies, the World Bank and the International Monetary Fund (IMF) to promote "good governance" by pressuring countries that seek financial assistance to crack down on bribery. In the United States, as of 1996, Lockheed, Martin Corporation, Boeing Corporation and IBM either pleaded guilty or were under investigation for FCPA bribery charges. In the biggest ever case brought under the law, Lockheed Martin Corporation pleaded guilty to charges of bribe payments to a member of the Egyptian military to help sell aircraft to the Egyptian government. In another case, the SEC acknowledged that Boeing Corporation and IBM are under investigation for alleged violations of the FCPA. The Boeing investigation focuses on bribe payments to win aircraft contracts in the Bahamas, while that of IBM involves payoffs to obtain computer contracts in Argentina (Victor 1996). Despite the U.S. efforts, the FCPA has not been accepted as a model law for other countries, though significant progress has been made. However, it has brought increased awareness and sensitivity locally and internationally, both positive and negative. A summary of those reactions follows.

GLOBALIZATION OF FCPA

Despite original reluctance, the current trend among nations appears to be to follow the U.S. lead in cracking down on corrupt dealings between firms and governments in international trade. A case in point is the imprisonment of a Japanese Prime Minister in 1993 for taking bribes, but less spectacular examples of such actions abound. For instance, Singapore recently banned five transnational corporations (Siemens AG of Germany, BICC of Britain, Marabeni Corporation and Tamens of Japan, and Perelli of Italy) for alleged bribery.

Progress to achieve a consensus for an international business code of conduct has been encouraging. For instance in 1996, The Organization for the Economic Cooperation and Development (OECD) members agreed to rewrite tax laws that have encouraged and facilitated bribery. This was a major departure from earlier multilateral measures which were largely hortatory in nature and did not include reliable enforcement machinery or sanctions for violators. The proposed changes would eliminate the subsidization of corruption by government. On the international agency scene the International Chamber of Commerce has called for transparency in licencing and public procurement. The Clinton White House has been successful in putting corporate bribery on the agenda of the World Trade Organization. Other international organizations such as Transparency International have sought to impose discipline on corrupt multinationals. On March 29, 1996 the Organization of American States passed an inter- American convention against corruption advocating criminalization of bribery in international trade.

On the other hand, some of the nations see no wrong in what appear to be corrupt actions of home companies. Government departments in a few OECD countries still pay commissions to domestic companies generating foreign contracts in ways which encourage corrupt relationships. Some OECD nations do not require that contractors disclose information on fees and commissions paid to local agents or whether they use agents as conduits for political payments In fact, in about half of the world’s leading industrialized nations, bribery is explicitly allowed, and in many , such as Germany, it is a tax deductible business expense (Tsalikis and Nwachukwu 1991). Generally left out of governmental controls have been the activities of multinational corporations and aid agencies which seek out the services of local agents inside the target country. Efforts to harmonize action against international corruption have fallen far short of agreement, both in the OECD and at the United Nations. The policies of many nations seem more symbolic than substantive, while at the agency level nonenforceable informal arrangements are often instituted. Left out of even these actions have been some Asian and African nations that are carrying out their anti-bribery law informally through coups, political turbulence and constant governmental changes. In most of Africa and Asia where wrong doing has become the norm, the notions of public responsibility and trust have become the exception, not the rule. In these situations corruption has become so regularized and institutionalized that it has resulted in military intervention in governance or political turbulence. Crozier (1964) sees "revulsion against civilian incompetence and corruption" as a major cause of coups in several Asian countries including Burma. During recent decades, corrupt practices have been the most frequently cited reason for military takeovers of governments in Africa. One of the first charges leveled by Nigerian coup leaders against previous governments was corruption ( Kilson 1963). Captain Valentine Strasser’s justification for the overthrow of Sierra Leone’s government on April 29, 1992 was his allegation that members of government were engaged in the plundering of the state’s resources to enrich themselves (West Africa 1992). Similarly, in Mali, the coup of March 1991 was attributed to the peoples’s outrage at the high-level corruption and embezzlement which had come to characterize President Moussa Traore’s government (Turrittin 1991). In Ghana, corruption may have played a major role in the Jerry Rawlings coup, not so much because of revulsion at dishonesty as because the corruption had contributed to a falling standard of living (Wallerstein 1966). More recently, on July 22, 1994, the military also overthrew the government of Gambia and justified it’s action on the grounds of widespread corruption, and embezzlement of public funds. The rational of the coup d’ etat was to respond to the malpractice and misappropriation of funds and rampant corruption (West Africa 1995).

To counter these weaknesses, the Economic Development Institute of the World Bank and the US AID have begun to support conferences advocating anti-corruption initiatives in emerging nations (Center for Institutional Reform and the Informal Sector 1996). This is a favorable signal giving legitimacy to the Federal Corrupt Practices Act, even though it falls short of criminalizing corruption. The World Bank’s new initiatives suggest changing strategies in conducting international business. The conclusion is that the world suffers substantial socioeconomic and political losses from multinational corruption. An international consensus seems to be emerging that, for economic values alone, it is in the interest of the world to reduce the size and frequency of questionable payments.

UNITED STATES OPPOSITION AND SUPPORT

Objections to corruption range from the pragmatic argument that it undermines resource use efficiency and competitive exchange to the normative judgement that it violates moral law. Some pragmatists do not see foreign trade corruption as a problem of concern, as long as it provides benefits that exceed economic cost. They assume corruption to be a normal business practice in many cultures, including the United States, as long as it pays (Spiers and Kovaly 1975). Levin (1975), detailed the institutionalized nature of such arrangements in emerging countries of Africa and suggested that corruption is an established social and economic way of payment for services that would not otherwise be rendered. This position, if true, seems to leave no doubt as to the problems to be encountered by multinationals, particularly in countries where corruption is the norm. Some in the United States then react that, if the prevailing scene is corrupt, U.S. firms in that setting have no alternative but to "play the game." Moralists, on the other hand, contend that corruption is not only morally wrong but leads to the moral disintegration of the individuals and eventually the society which condones it. Details of their arguments are spelled out in the work of Mcmullan (1961), and VanRoy (1970). They believe that questionable payments are inherently wrong for the same reasons that domestic bribery is wrong.

In that setting, the FCPA has received support as well as criticism for putting American firms at a competitive disadvantage in world business where the bribe is an accepted facilitator (Lane and Simpson 1984; Shaw 1988). On the negative side, some pragmatists argue that whatever one’s moral viewpoint may be, international payments should be made and encouraged in ways that are competitive with companies from Europe and Asia who are seeking the same markets. They feel that refusal or inability to conform to host country competitive business practices seriously prejudices the multinational ability to compete effectively in certain foreign markets, especially those countries which allow questionable payments as tax deductible business expenditures. The argument has also been made that some foreign countries might resent U S attempts to export morality and impose it upon transactions taking place in their countries. Virtually every country has its own laws against corruption, they argue, although they might not be vigorously enforced. All that can be expected of foreign business is that it conform to local norms. According to some critics many companies have withdrawn from existing markets or failed to enter new markets because of the uncertainties and difficulties caused by the Act, though they have not provided any hard data to support their claims. The Reagan administration justified its commitment to emasculate the FCPA by the argument that U.S. corporations were suffering losses because they could not favorably compete (Clinard 1990:127). On the other side of the argument, Romeneski (1982) is convinced that the FCPA has not been detrimental to US firms as claimed; rather it has benefitted them by eliminating unfair competition among US firms that make up about 80 percent of the world’s "true multinationals." Others agree that there is substantial evidence that refusal to bribe seldom results in a business advantage for foreign competitors. As Secretary of Commerce Elliot Richardson had indicated to Congress, " In a multitude of questionable payment cases--especially those involving sales of military and commercial aircraft -- payments have been made not to out-compete foreign competitors , but rather to gain a competitive edge over other U S manufacturers." Therefore, he maintained, the FCPA was advantageous because it prevented the diversion of business from efficient US firms (U.S. Senate Committee on Banking, Housing and Urban Affairs, Hearing May 18, 1976). It is also important to note that bribes made to gain advantage over other U.S. competitors constitute a violation of U.S. anti-trust laws.

A survey of senior executives of major companies revealed that more than half condemned bribery, while proclaiming that they have no need to engage in such policies. Most questionable payments are made, they indicated, not to undercut foreign competitors, but rather to gain a competitive edge over other US manufacturers. They believe that US firms are doing quite well and feel that a strong international anti-bribery law would enhance the reputation of US multinationals overseas. While the impact of the FCPA on the export business of U.S. firms cannot be ignored, they argue that export business in emerging nations is primarily determined by uniqueness of technology and the quality of the goods and services provided. Competition, they believe, should be in terms of quality, price, and financing-- not in the purchase of local politicians (Parker 1976). The implication is that corruption creates macroeconomic distortions and barriers to development in the following ways:

1) Corruption slows down investment and economic development.

2) Corruption crowds out productive investment, while raising the cost of carrying out business.

3) Corruption leads to the reduction in the quality of products and of public sector projects, while raising the costs of both.

These economic consequences have political corollaries that are less quantifiable but have serious implications for the legitimacy of governments and the stability of nations.

These expressions may have come as a surprise to competitors in other countries who complained in 1976 that "their American counterparts often insist on paying a lot of bribes because they cannot be bothered to do things in the time honored way of business consultations." In this context, Sorensen maintains that there were no gains to the country’s balance of payments or economy when U.S. companies paid bribes to win contracts that would otherwise have gone to another U.S. company. The fact that some U.S. companies have succeeded in these countries without the payment of bribes is an indication to him that U.S. exports will not suffer all that severely from an end to such payments. Those governments desirous of obtaining U.S. technology and quality will learn to buy that country’s goods without any special inducement (Sorensen 1976).

To test corporate response to the FCPA, the US General Accounting Office (GAO) randomly selected and interviewed executives of 250 companies out of Fortune’s top 1000 companies. The study acknowledged that implementation of the FCPA had resulted in major changes in corporate activities and business conducts. Of those sampled 75 percent, indicated that they instituted changes in their internal accounting control and 60 percent had made changes in their code of conduct because of the FCPA (Romeneski 1982: 126-127). None alleged that the act was an obstacle to their international business.

THE CASE OF NIGERIA

Where does the truth lie among these competing views? We have attempted to gather some empirical evidence to undergird opinion by interviewing officials of American companies currently operating in Nigeria, a country reputed to be a hotbed of bribery demands, and by tracing export trends to that and other countries where bribery is reputedly a standard way of doing business.

METHODOLOGY

Thirty US firms were randomly selected from among 200 multinational companies operating in various sectors of the Nigerian economy with a few substitutions made to assure geographic dispersion. Numbers were assigned to respective companies to assure confidentiality due to the sensitive nature of the research. A questionnaire containing fourteen structured and unstructured questions was administered by research assistants to company management. Of the thirty questionnaires administered only twelve were usable; others were either returned uncompleted or partially completed. This signifies a 40 percent response rate, which appears significant, considering the sensitive nature of the work and the difficulty of empirical work in Nigeria. However, those findings were confirmed in confidence by other executives who did not want to be on record but who were willing to be interviewed informally. Given the prevailing reluctance to go on record, our conclusions on many points must remain tentative. Nevertheless, the consistency of our data with the findings of others and the strengths of the confidential statements are adequate to support both substantial conclusions and significant inferences.

RESULTS

Both formally and informally, respondents from US firms operating in Nigeria overwhelmingly agreed that bribery is a substantial component of business conduct in Nigeria. Others have also reached the conclusion that bureaucratic corruption has became the unofficial but operational administrative order in that country. According to Peter Lewis, "It can be seen in the unplanned solicitation and acceptance of bribes--government officials utilize public office for private gain, and misuse power to benefit themselves. For example, the 1975 Nigerian cement scandal involved public officials and middlemen who embezzled huge sums of money, and eventually led to a government purge. Furthermore, during the Babangida regime, petroleum smuggling was largely the province of senior military officers and a few civilian associates. They arranged legal lifting contracts for companies in which they had an interest, but more typically they simply chartered tankers and covertly filled them at terminals of the Nigerian National Petroleum Corporation (NNPC) for shipment overseas [Lewis 1996:90]. Such illegal activities have become a major portion of Nigeria’s shadow economy.

Though our interviews confirmed that view of the Nigerian scene, the respondents were unanimous in denying any participation in bribery. Yet they were nearly, though not totally, united in declaring that their particular firms had not suffered in their ability to "do business" in the country. Of those interviewed, 83.3 percent indicated that they had not lost any contracts as a result of refusing to pay bribes. Most alleged that it is multinationals without a competitive edge of technology which resort to questionable payments. Sixty percent of those interviewed supported the strong ethical code of FCPA. The others were quick to insist that it was not resistance to morality but objection to government regulation as a general principle that led them to object to FCPA. When asked what gives U S firms competitive edge in Nigeria’s corrupt system, respondents were generally united in their response. Bribery, they said, was not the answer to international competitiveness. Instead, competitiveness must be based on quality and the provision of a unique set of commodities and services made possible through competitive edge technology. Most argued that those multinationals that pay bribes do not have the "storehouse of knowledge" advocated by E. G. Woodroofe as the key to competitiveness (Kugel and Gruenberg 1976, PP. 13-20). Lacking the technological edge and product quality to be sought out by potential purchasers, such firms have to depend on sales agents who provide specialized contacts with decision makers and also know the channels through which payoffs can flow. For the services rendered the agents demand a fee, usually a percent of the total contract value. That system is an open invitation to bribery.

THE COMPETITIVE REALITIES

International trade data support the finding that global success does not require bribery. Export data provided in Tables 1 and 2 illustrate the trend of U S exports from 1986 to 1996. During that ten year period, the US share of export trade to industrial countries maintained a continuous steady growth pattern. The Asian share rose from 20 percent to 31 percent, while that of Africa grew 70 percent between 1991 and 1996 (see Table 1). The results for 1997 and 1998 remain to be seen, but any slowing of export growth will be the result of roiled trade waters along the Pacific Rim and will not involve corrupt relations between US and foreign firms Thus, Table 1 shows that the U.S. still remains a giant trading partner to the world despite the FCPA. In spite of Africa’s economic malaise and political instability U.S. sales to the region surged 18 percent in 1991, compared with a 7 percent expansion in overall U.S. exports. Table 2 illustrates that notwithstanding rumblings by critics, exports to nations that are considered notorious in corruption maintained an exponential growth pattern during 1986-96. Of course, it is possible that exports might have expanded even more rapidly in the absence of FCPA. What might have been can never be known without a controlled experiment, and often not even then. The cynical might even argue that export success is evidence of firms’ abilities to circumvent the law, but, had that been the case, certainly enough would have been caught to indicate that adherence was not the norm. Though not proven beyond reasonable doubt, the preponderance of evidence favors the conclusion that US firms have been predominately obedient to the requirements of the FCPA and have not suffered competitively for that adherence.

Therefore, Tables 1 and 2 lead us to conclude that FCPA enforcement had no severe negative effects on U.S. exports, either in terms of total trade with each country or in the sales and provision of individual products. Table 2 indicates that from the 1980s into the 1990s U.S. trade with "bribe-prone" countries actually had out paced trade with "non-bribe - prone’ countries (compare Tables 1 and 2). The export increase was mainly due to larger shipments of aircraft, construction equipments, oil and gas field machinery, telecommunication and medical equipments. The most telling insights are provided by Table 2 which traces U.S. exports to emerging nations, where bribes are assumed to be paid in order to transact business. According to OECD’s economic outlook, U.S. export competitiveness will steadily increase over the next few years . This competitive edge can be achieved with careful planning and a strong commitment to products that are unique and at the competitive edge of technology. Most enjoy some monopolistic characteristics that result from technological uniqueness gained from research and development and buttressed by persistent efforts to correctly identify market opportunities and competitive windows and to effectively export and successfully deliver a quality product. But even were that not true, the obligation to morality would remain unsullied.

TABLE 1

WORLD TRADE, 1986 -1995

Value of U.S. Exports (Billions of US Dollars)

Source: Basic Guide to Export, U.S. Department of Commerce and The U.S. foreign Trade Highlights (Various Years).

TABLE 2

U.S. EXPORTS TO SELECTED COUNTRIES 1986- 1996, (Billions of US Dollars)