Severity of US sanctions against foreign firms: evidence from the FCPA enforcements
| DOI | https://doi.org/10.1108/JFC-12-2021-0267 |
| Published date | 24 January 2022 |
| Date | 24 January 2022 |
| Pages | 114-129 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Emre Kuvvet |
Severity of US sanctions against
foreign firms: evidence from the
FCPA enforcements
Emre Kuvvet
Nova Southeastern University, Fort Lauderdale, Florida, USA
Abstract
Purpose –The purpose of this study is to examine whether foreign firms pay disproportionately higher
monetarypenalties after controlling for factors that affectthe sanctioning of the firm.
Design/methodology/approach –In this paper, a cross-sectional data analysis has been used to
examine the enforcement actions of the ForeignCorrupt Practices Act (FCPA) against all private and public
companiesfrom 1978 to 2019.
Findings –The findings indicate thatthat foreign firms pay disproportionately higher monetary penalties
than domesticfirms after controlling for factors that affectthe sanctioning of firms. On average, foreign firms
pay $43.3m more to the US government than US firms pay. This is a considerable difference in monetary
penaltiesand equal to 68.95% of the average monetary penalty.
Originality/value –This paper shows that the US government treats US firms more favorably than
foreign firms in monetary sanctions. Because the FCPA is not applied equally, this is contrary to US
government guidelines and to the rule of law. The government needs to reconsider the consequences of
imposing disproportionatelyhigher penalties on foreign firms. Given the lack of judicialscrutiny of the FCPA
settlement amounts against foreign firms, prosecutorial harshness against them can be remedied by
amendingthe FCPA to eliminate the unequal treatment of foreign entities.
Keywords Foreign firm, Monetary penalty, Government sanction, Corruption, Bribery,
Foreign Corrupt Practices Act (FCPA)
Paper type Research paper
1. Introduction
Since the passage of the Foreign Corrupt Practices Act (FCPA) in 1977, the US government
has levied monetary sanctionsagainst firms that bribe foreign public officials. To determine
the appropriate penalty, the Department of Justice (DOJ) and the Securities and Exchange
Commission (SEC) are expected to look at the severity of the briberyviolation and the facts
specific to the crime [1]. Whether the defendant firm is domestic or foreign should have no
bearing on the amount of the sanction, but most of the largest monetary penalties in the
history of the FCPA have been imposed on foreign companies. In addition, 72.29% of all
monetary penalties in FCPA-related enforcement actions are paid by foreign firms even
though they make up only 29.41% of the firms sanctioned in FCPA-related enforcement
actions.
Treating domestic and foreign firms differently in FCPA-related sanctions violates
Article 5 of the Organization for Economic Cooperation and Development Convention on
Combating Bribery of Foreign Public Officials in International Business Transactions
adopted in 1997. The article states that the “investigation and prosecution of the briberyof a
JEL classification –D73, F23, F51, G38, K22, K42, L51
JFC
30,1
114
Journalof Financial Crime
Vol.30 No. 1, 2023
pp. 114-129
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-12-2021-0267
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
foreign public official...shall not be influenced by considerations of national economic
interest...or the identityof the natural or legal persons involved”[2].
In this paper, we look at whether foreign firms pay disproportionately higher monetary
penalties after controlling for factors affecting the sanctioning of the firm. By analyzing
FCPA-related enforcement actions against 221 distinct private and public companies from
1978 to 2019, we find that foreign firms violating the FCPA pay disproportionate monetary
penalties compared to the severity of their violations. The results are also economically
significant. On average,foreign firms pay $43.3m more to the US government than US firms
pay after controlling for relevant factors that affect the sentencing of the firms. This is a
considerable differencein monetary penalties and equal to 68.95% of the averagepenalty.
Our paper proceeds as follows. Section 2 provides background on the FCPA and
discusses the research question; Section 3 explainsthe data and research method; Section 4
discusses the empiricalresults; and Section 5 presents our conclusions.
2. Foreign Corrupt Practices Act and research question
2.1 Foreign Corrupt Practices Act
The FCPA of 1977 makes it illegal for persons or entities to make payments to foreign
government officialsfor the purpose of assisting, obtaining or retaining business. The FCPA
also includes accounting provisions that require firms to keep books and records that
accurately and fairly reflect company transactions, together with devising and maintaining
an adequate system of internal accountingcontrols. The accounting provisions of the FCPA
are intended to make it difficultfor firms to conceal bribery payments.
The FCPA also gives enforcement authority to the DOJ for all criminal enforcement of
the FCPA provisions and for civil enforcement of the anti-briberyprovisions with respect to
domestic concerns and foreigncompanies and nationals and to the SEC for civil enforcement
of both the anti-briberyand accounting provisions with respect to theissuers of securities.
The FCPA applies not only to foreign issuers of securitiesin the USA but also to foreign
firms who cause, directly or through their agents, an act in furtherance of such corrupt
payments to occur withinthe territory of the USA.
Prior empirical studies examine the effect of the FCPA and the consequences of FCPA-
related enforcement actions. For instance, Hines (1995) finds that US business activities in
corrupt countries declined after the FCPA’s enactment. Similarly, Beck et al. (1991) show
that its enactment had a negative effect on US exports. Christensen et al. (2019) also find a
negative effect of FCPA-related enforcement actions on corporate investment in corrupt
countries. In addition, Sampath et al. (2018) show that public firms facing FCPA
investigations from 1978 to 2010 lost $60.61bn in market value. Even so, none of the above
studies examined whether the US government is impartial when it sanctions FCPA-related
violations for domesticand foreign firms. Our paper seeks to address that question.
2.2 Research question
The sentencing of FCPA-related enforcement actions should not be influenced by whether
the defendant firm is domestic or foreign. This is becausethe DOJ and the SEC are expected
to follow sentencing policiesand practices promulgated by the U.S. Sentencing Commission
for the conviction of federalcrimes.
A resource guide to the FCPA published by the Criminal Division of the DOJ and the
Enforcement Division of the SEC states: “When calculating penalties for violations of the
FCPA, DOJ focuses its analysis on the U.S. Sentencing Guidelines (Guidelines) in all of its
resolutions, including guilty pleas, deferred prosecution agreements (DPA), and non-
prosecution agreements (NPA). The Guidelines provide a very detailed and predictable
Severity of US
sanctions
115
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