A tale of two laws

BRIBING foreign officials is wrong, but not everything governments do to prevent it is wise or proportional. Firms are increasingly fed up with the way America's Foreign Corrupt Practices Act (FCPA) is written (confusingly) and applied (vigorously). The law was passed in 1977, but recent years have seen a spike in enforcement, from five actions in 2004 to 74 in 2010. Five of the ten biggest settlements ever were last year, including a $400m fine against BAE Systems, a British defence contractor, and a $365m fine against ENI, an Italian oil firm.

On August 31st the Wall Street Journal reported that the Department of Justice has been investigating Oracle, a database-software company, for a year. Unusually, Oracle has said nothing about the investigation. Ethisphere, a promoter of corporate responsibility, rated Oracle one of the world's most ethical companies in 2009. Mike Koehler, a law professor at Butler University in Indiana, writes that General Electric, HP, AstraZeneca and others have all been among Ethisphere's “World's Most Ethical” while settling FCPA prosecutions or under investigation.

An FCPA action is an ordeal. Few firms dare risk going to court—only two cases against corporations have ever resulted in completed trials. The vast majority of cases are settled, which can take years. Listed companies must satisfy not only the Department of Justice, but also the Securities and Exchange Commission, which enforces the FCPA provisions requiring accurate records of all business dealings (to deter or detect illicit payments). Before the department and the commission will sign off on a settlement, the company must satisfy them that the rest of its operations are squeaky clean. Narrow investigations can mutate into broad ones that cost tens of millions of dollars.

And bosses can be sent to prison for up to 20 years if their companies fall foul of the FCPA. In theory, they could be jailed because a staff member at a foreign subsidiary bribed an official without their knowledge. In some cases, the law insists that directors ought to know about dodgy goings-on, even if they do not.

This is a hefty deterrent to doing business in poor countries, some studies have found. Andy Spalding, a law professor at the Chicago-Kent College of Law, likens the way the FCPA is enforced to “de facto sanctions” on countries where corruption is rife. A study by KPMG, a consultancy, found that a third of British and a quarter of American companies would simply steer clear of corruption-prone countries to avoid the risk of being prosecuted. Firms from less fussy places, such as China, will happily fill the gap.

The US Chamber of Commerce, a business lobby, says the FCPA also deters foreign mergers and acquisitions. A firm inherits the sins of a company it buys, even if it has done reasonable due diligence, the chamber says. To avoid this risk, it must conduct the equivalent of a “vast internal investigation”, says the chamber. Many firms find it simpler to stay at home.

A new British anti-bribery law, passed in 2010, appears to have been better crafted. The Bribery Act is broad and tough. It covers bribery within Britain as well as abroad. In contrast to the FCPA, it makes no exception for small “facilitation payments” to speed up routine business such as customs checks or visas.

But it is fair, too. Unlike the FCPA, it has a “compliance defence” that allows a company to avoid the harshest penalties if the wrongdoer is a junior employee and the firm otherwise has a strict anti-bribery policy which is clear to all employees and effectively administered. One rogue employee can't easily cause a crippling probe into an otherwise blameless company.

America's Department of Justice sees no need for such safeguards. And since few cases go to trial, judges have given little guidance as to what the FCPA's bewildering text actually means. So, for now, it means whatever an aggressive prosecutor says it does.