The FCPA – a goverment regulation dealing with international bribery gone wild

Three U.S. companies spent over $456 million dollars in legal and consulting fees, an amount greater than the GDP of all countries except for the top 28, from Colombia to the United States, for the due diligence of an esoteric U.S. anti-bribery law – Foreign Corrupt Practices Act, of questionable merit and purpose. “The Business of Bribery”, Wall Street Journal, P.B1, October 2, 2012.  Is this the way the U.S. government encourages competition in the international markets?  Let us look at the reality of this regulation, how it is enforced, the attorneys, and the impact on a U.S. company’s ability to trade and operate internationally from my personal experience and observations.

A judge once stated about the interpretation of an out-of-state law, that it was difficult to interpret a law with uncertain ideas, with uncertain results, and with words that are not clearly defined.  Somehow, the FCPA (Foreign Corrupt Practices Act of 1977 (FCPA) (15 U.S.C. § 78dd-1et seq.)) falls right in place with this judge’s comments. Strangely, this law is only 2-3 pages long. Because of the lack of legislative history and these cases are rarely adjudicated, there is hardly any judicial precedence to help interpret the statute. Even the salient term of art in the statute, “foreign official,” begs for interpretation and meaning.  What is a foreign official?  An important political figure or a lowly clerk in Santiago, Chile? None of that is clear.

How broadly can this statute be interpreted?  In a scene of the Scott Ridley’s movie, “Gladiator”, Proximo negotiates with a merchant to acquire raw gladiators at discount at Zucchabar, in North Africa.  If the seller-merchant had been an American company with stock traded publicly and Proximo, a slight governmental official, hundreds of Washington, DC attorneys would swoop down unto North Africa representing the dangers of the FCPA and potential millions of dollars (or Roman coins) of fines even for this slightly absurd scenario. Simply because the buyer is demanding a discount for gladiators since his giraffes were queer, the transaction can be interpreted as a bribe or a gift.  And since the alleged location is international, it falls under the FCPA.

How can these costs sky rocket for any company doing international business? While working for a major law firm in New York, I was shipped to Puerto Rico to begin the due diligence for a major maritime company for alleged FCPA violations for a decade. In many instances, the chronological period covering FCPA allegations has no statute of limitations.  I, with the assistance of a senior attorney, found myself in a large warehouse in Santurce opening hundreds of boxes, reviewing each and every document for two months.  The allegations covered 10 years and that meant looking through hundreds of boxes of stored documents for those years. And then, upon returning to New York, I had to do the same for the company’s headquarters in New Jersey. When one begins to add travel costs, copying files, meals to actual billable hours, the legal fees and disbursements begin to add up.  As the FCPA covers only publicly traded companies, these companies will naturally have substantial far flung operations and paperwork. And any discovery for such companies will be a costly endeavor.

The FCPA enforcers have their own agenda. In Washington DC, the enforcers are US DOJ attorneys earning government wages.  They do work hard but, for most governmental attorneys, their job is only a temporary step to enter into the private sector. They know that if they focus on an esoteric or newly legislated section of U.S. law, browbeat defendants, and successfully prosecute notable cases, they reap the rewards later when they enter into private practice.  Ironically, they charge the exorbitant legal fees to the very same companies they prosecuted, proclaiming that since they know the inner sanctum and procedures, they can deliver positive results. But in my mind, the government attorneys’ righteous claims for enforcing the FCPA sound extremely hollow based on their long term objectives.

Now in the case of the maritime company, I only discovered only a handful of documents that could be considered briberies even when interpreted broadly.  From the partner in charge, I found that the client had incurred several million dollars in legal fees just because of a few potentially incriminating pages. Since the case was settled, we will never know the final determination of what those pages meant under the FCPA, and each page represented several hundred thousand dollars of legal costs.

Can any international U.S. company avoid the FCPA?  I would say yes – by not entering certain markets. As General Counsel, I found many instances that certain representatives in several countries demanded some payment in cash. Even within the country of Saudi Arabia, local representatives demanded some upfront payment to access the Royal family. Given the severity of the FCPA, the company had to avoid any sense of impropriety and, of course, fail to do business in that country. Hence the solution is not to do business in that country.

But this is just of the beginning of a peculiar law that is having a bottom line impact on the U.S. economy.  Virtually all other countries allow their companies to do business in which some payment considered to be bribery under the FCPA can be exchanged as a means to obtain business. Not everyone outside of the U.S. follows the FCPA, an American law with only U.S. impact. And this legal paranoia is summed up by a Russian investment banker who related to me, that when he tried to do business with an American company, the company would arrive at a meeting with a phalanx of lawyers. On the other hand, when he did business with a Chinese company, that same company would close the deal on a handshake without any attorneys present and each company would earn a handsome profit. He therefore rarely transacts with U.S. companies.

Those $456 million of legal fees and costs related to the FCPA could have been allocated for R&D, paid dividends for investors, or reduced costs for manufacturing – investments that would have yielded substantial long term rewards for the shareholders and the U.S.  Instead, they were paid out to service firms. And these monumental legal fees will deter other U.S. companies from being able to compete internationally. Why do U.S. companies lose business to China and other countries?  That Russian summed it up nicely.


About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP,, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy.; For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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