The Foreign Corrupt Practices Act (FCPA), which prohibits a U.S. business from bribing foreign officials, is likely to be one of the first pieces of legislation to face significant scrutiny under the next Administration. The FCPA has noticeable faults that can be improved on by the next Administration, but ditching the legislation and its enforcement outright could have a profoundly negative impact on America’s business interests overseas.

President-elect Trump has called the FCPA a “horrible” law. He said that it should not be enforced when the U.S. trades with foreign countries, suggesting it hurts U.S. exports and stifles economic growth. Meanwhile, President-elect Trump’s nominee for Attorney General, Sen. Jeff Sessions (R-Ala.), seems inclined to take a “prosecute or don’t prosecute” view, as opposed to the current approach of often deferred prosecution or settlement. President-elect Trump will also have the opportunity to appoint a majority of the Securities and Exchange Commission (SEC) Commissioners, which is likely to affect the SEC’s FCPA anti-bribery enforcement. 

{mosads}Rigorous economics research points to the fact that the FCPA has supported the free market and is positive for US business interests. That research fully supports that bribery and corruption distort market efficiency. Furthermore, there is significant statistical analysis that finds that FCPA enforcement has not, in fact, negatively impacted U.S. trade and investment and that such enforcement has positively reduced corruption, further supporting a free market.

The economics research has, however, taken issue with how the FCPA is now enforced and this is rightfully something that President-elect Trump, Sessions and SEC officials should address. FCPA enforcement attempts to remedy the benefit of any bribe to a business, but this is not currently being achieved.

The FCPA enforcement view is that a business’s full profit was secured solely as a result of any bribe. Thus, its full profit (100%) is “disgorged”, or taken back, as part of the FCPA remedy. However, most research points out that companies settling FCPA enforcement actions are often industry-leading companies, due to their products, service or price, irrespective of any bribe. The bribe may only partially explain how the business was obtained, or in some cases not at all.

The benefit of the bribe is the extent to which the business increased its profitability. Suppose that the bribe increased a company’s probability by 10%. If there was a bribe, 10% – not 100% – of the business profit should then be taken in an FCPA enforcement action. Further, the economics literature notes that the real profit from the bribe is only the incremental profit from a bribed business, as compared to the profit of the same company just doing different business instead. For instance, a company that sells a drilling rig in one country that was bribed may well have sold that same rig elsewhere without such a bribe and still made a profit. Better economic models should be used to assess the true incremental profit from a bribe.

Fines and criminal penalties for FCPA violations can be huge − in the hundreds of millions of dollars. They begin wrongly assuming that all the business profits are due to the bribe, when that may not be even close to the case. Other punitive fines or criminal penalties are tacked on, equal to two to three times or more. If the actual benefit from a bribe is determined, this may lead to more rationally based FCPA fines and criminal penalties overall. Existing fines and penalties can be hugely excessive relative to the benefit of the bribe, with a wider distortive economic impact.

Robust economic analysis, applying principles of market competition in ways already accepted by other government oversight measures, can determine the true benefit of a bribe, and thus rational penalties for it.

The U.S. leads the world on anti-corruption efforts and it has motivated other countries to follow suit. A pull-back from FCPA anti-corruption enforcement, which is possible under the new Administration, may send the wrong message globally and undermine the credibility of the US.  In contrast, a U.S. FCPA policy refined by robust economics analysis may send a positive signal abroad on the importance of fair business practices.

Dr. Peter Koenig, Of Counsel at Squire Patton Boggs, is both a lawyer and PhD economist  and has been an adjunct professor as to finance, economics and law.