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Laying down the law on Lockheed: how an aviation and defense giant inspired the promulgation of the Foreign Corrupt Practices Act of 1977.

Abstract: This paper examines the events that led to the passage of the Foreign Corrupt Practices Act of 1977 (FCPA 1977, or simply, the Act). Central to the narrative are the actions undertaken by Lockheed Corporation, the politico-economic context in which it operated, the international scandals that resulted from its practices, and the landmark law that resulted from these events. The paper concludes with an analysis of dramatic changes in the subsequent enforcement of FCPA 1977, and a consideration of the efficacy of this reform as viewed from various lenses provided by economics, law, philosophy, and political science.

INTRODUCTION

The entity that eventually became known as Lockheed Corporation originated as the Alco Hydro Aeroplane Company, founded in 1912 by brothers Allan and Malcolm Lockheed. The firm has undergone numerous reincarnations, and currently exists as a merged entity, Lockheed Martin Corporation, that continues to be a leading arms manufacturer responsible for a variety of weapons systems and platforms [Girard, 2005]. In the late 1970's, reports of numerous bribery payments made to foreign governments by Lockheed and other US corporations surfaced, and the resulting scandal culminated in the passage of FCPA 1977, a law which pervades the study and practice of accounting. Although Lockheed was not alone among the bribe-payers, it was documented to have been the biggest contributor. Furthermore, so notorious were Lockheed's corrupt activities that contemporary accounts of similar bribery came to be referred to as "based on the Lockheed model [Noonan, 1987]." William Hartnung, author and head of the Arms and Security Initiative at the New America Foundation referred to Lockheed as being "at the cutting edge of corruption" because of its practices in the prelude to FCPA [Hartnung, 2011], Many of the techniques by which the bribes were made and hidden by Lockheed were specifically proscribed in the provisions of the FCPA.

The events that surrounded these briberies, the promulgation and implementation of FCPA 1977, the evolution in the law's enforcement, and various theoretical and empirical perspectives that explain this evolution are the subject of this paper. The events leading up to and following the Act, as well as its impact on accounting in general, and financial reporting, auditing, and accounting information systems, in particular are described. Additionally, various analyses grounded in economics, law, philosophy, and political science are undertaken to reveal the significance of these events, and offer a prognosis of the future of FCPA 1977 and its effect on business practices. By recounting the history of the Act and the different ways in which it has since been applied, the paper attempts to elucidate the interplay of geo-political context, prevailing business practices, and accounting and business regulation in the light of a multidisciplinary theoretical framework.

The remainder of this paper discusses the significance of FCPA 1977 to accounting faculty and practitioners, describes the various theoretical frameworks used in analyzing how the Act has been enforced, and recounts its origin, enactment, and implementation. The paper concludes with an analysis of the evolution in the Act's enforcement and its possible future effect on accounting and business.

ACCOUNTING AND FCPA 1977

Accounting academics and professionals make frequent reference to FCPA 1977 whether in the context of business ethics, professional responsibilities, or internal controls. This is because although the main intention of the Act was to curb the practice of bribery of foreign officials by US corporations, a major part of the legislation was comprised of accounting provisions that required the maintenance of accurate records and appropriate internal controls, and have wide-ranging applications across specific accounting functions [US Department of Justice, 2012], These accounting provisions are embodied in Title 15 of the US Commercial Code, and state that US corporations should:

a) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer

b) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed in accordance with managements general or specific authorization; transactions are recorded as necessary; access to assets is permitted only in accordance with management's general or specific authorization; and the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences

In consequence, the Act is discussed in several different accounting courses. The Act also has implications for different accounting specializations.

In financial accounting, reference is made to the FCPA to provide context to global business issues in financial reporting and to motivate an introduction to the relationship between assets and internal controls [Williams et al, 2012]. Accounting information systems traces the origin of both financial and managerial accounting controls and computer information systems controls to FCPA [Gelinas, et al, 2012; Romney and Steinbart, 2012], Business ethics implications of FCPA are patent and multifaceted [Shaw, 2011; David-Barrett, 2012].

In auditing, the testing of internal controls mandated by FCPA is standard practice in a financial statement audit, and beyond these, there are specific procedures by which compliance with FCPA is tested and assured. According to Price Waterhouse Coopers partner Albert Vondra, these differ significantly in scope, focus, and procedures from other types of attestation and assurance endeavors [Bogoslaw, 2013]. Specialized FCPA compliance audit software also exists, which apply specifically to the anti-bribery and accounting requirements of the Act [Audit and Control Language, 2010].

Despite the all-pervasive impact of FCPA, its implementation is hard to describe precisely because of the differences between the firms that need to implement it. FCPA's influence on accounting seems amorphous not because it is evanescent or insubstantial, but because it is all-encompassing and multifarious.

When the various accounting related provisions of the Act were discussed in Congress, it was acknowledged that these were "motivated by a desire to improve the reliability of the books and records of US issuers and to help foster a climate in which attempts to evade systems of corporate accounting would be frustrated by adequate internal controls [US Rep., 1977]." However, no specific guidance was provided regarding exactly which controls or records were to be put in place for particular firms, because, as was correctly concluded, "the appropriateness of particular accounting controls is a matter of judgment for expert personnel [US Rep., 1977]."

Indeed, Pacini et al. [2013] state that although the act does not specifically identify what "accounting books and records" are to be maintained, in practice, these include a wide variety of corporate records, beyond journals, ledgers, and financial statements. Pacini et al. go on to state that these include even internal managerial communiques, communications with third parties, and data and information in digital and electronic formats. Because of this, compliance with the books and records provision of FCPA 1977 involves the active participation of all of a corporation's accountants, including those concerned with financial reporting, managerial accounting, and accounting information systems.

Prior to FCPA, auditors were concerned mainly with reliability of financial statement assertions [Dorrell and Gadawski, 2012], and any consideration of internal controls was undertaken only as "they bear directly on the reliability of financial data [AICPA, 1958]." After the advent of the Act, which made both bribery and the failure to keep controls that detect and deter bribery illegal, the role of auditors changed consequently [Stenzel, 2008]. Statement on Auditing Standards 17, published shortly after FCPA was introduced, prescribed procedures to detect illegal acts, determine the materiality of such acts, and measures to take if clients refuse to take remedial action, including withdrawing from the engagement [AICPA, 1977]. Furthermore, the emphasis of the auditor's efforts shifted from merely verifying transactions to considering the system of internal controls and information flows [Lee and Azham, 2008], an approach which serves a broader set of objectives, including assessing compliance with laws such as FCPA [Pfister, 2009].

Maris and Singer [2006] state that both internal and external auditors play a big role in fulfilling the mandates of the Act. To determine if a firm has complied with FCPA 1977, the internal audit function is evaluated according to its objectivity and effectiveness, and both the external auditor and the board of directors' audit committee are judged according to whether or not they provided proper oversight, particularly with respect to internal controls that have an impact on preventing, detecting, and curtailing bribery. Furthermore, external and internal auditors are required to report and evaluate accounting records in "reasonable detail," for example, considering payments to anonymous entities or checks written to bearer, or vague documentation for any other transactions for further analysis [Pacini et al., 2012], As will be seen later, these were some of the same techniques employed by Lockheed to cover up the bribery.

THEORETCAL PERSPECTIVES ON A SCANDAL

In order to provide a broader perspective on FCPA 1977, literature from a variety of other disciplines will inform the discussion in this paper. These non-accounting sources provide a framework for assessing the significance of the events narrated herein, and also aid in the attempt to analyze the future direction of the enforcement of FCPA 1977 and its effect on accounting and business practices. Collectively, they suggest possible scenarios that might ultimately result from the Lockheed scandal and the promulgation of the Act.

Works from political science, including Thompson [2000] and Weeber [2008], provide a background to different types of scandals, and the various ways by which they might be resolved. These works are relevant because they give clues as to the efficacy of FCPA 1977 in curtailing the type of bribery that engendered the Act. Both state that in different types of civilizations and societies, scandals will either result in a reform and reaffirmation of the society's core values (functionalist theory of scandals), facilitate a change in the socio-political order (subversive theory), or degenerate into a focus on the personalities and other inessential facts regarding the scandal, without fostering meaningful discussion about the causes and cures of the conditions leading to the scandal (trivialization theory).

David-Barrett [2012] attacks the issue from a philosophical angle, analyzing the consequences of bribery upon the bribe-paying firm, and the logic or illogic of such payments. David-Barrett grounds its argument against bribery in the school of moral philosophy referred to as consequentialism, which evaluates the acceptability of a course of action by looking at its consequences or results to various parties. In David-Barrett's model, bribery results in primary and secondary consequences. Primary consequences directly affect the transacting parties to the bribe, and include enrichment of the bribed government official, and facilitation of service or shaping of policy to the benefit of the bribe paying firm. Secondary impacts of the bribery arise much later, often as unintended, unforeseen, and indirect consequences of the transaction, such as (usually) negative consequences to the society governed by the bribe taker and non-bribe paying firms competing with the paying firm. However, David-Barrett also indicates that the bribe-paying firm may suffer the secondary consequences as well under certain circumstances, something that applied to the Lockheed affair and discussed later in this paper.

Wrage [2007] expands the scope of David-Barrett, applying criminal law motive analysis to the bribe-payer and bribe-taker, and evaluates the feasibility of bribery as a strategy in the context of a prohibitive environment such as that enforced by the Act. In this paper, the actions (or inaction) of the bribe taking government official makes bribe paying an ultimately suboptimal strategy for the paying firm. First, there is no guarantee that the payment of a bribe will in fact lead to the result desired by the payer. Second, the nature of the transactions between the bribe payer/seller and the bribe taker/ buyer is often of a protracted or recurring nature; every succeeding transaction would also engender additional bribe payments instead of just one.

Economics also provides a number of works that guide this paper's assessment of the Act. Dal Bo and Rossi [2006] and Kauffman and Wei [1999] will provide econometric evidence of the consequences of different types of bribery from international samples of firms. Dal Bo and Rossi [2006] examines the consequences to 80 electric utility firms from 13 countries which have paid their respective governments' regulators for a bigger share of the power distribution grid. The firms are found to be negatively impacted by corruption, because the time spent by firm management dealing with the corrupt government is a diversion from their duties, and therefore detrimental to firm operational efficiency. Furthermore, Kauffmann and Wei [1999], which sampled 1,000 firms from 50 countries, shows that facilitation payments or "grease money," which are intended to reduce red tape not only has a net negative effect on efficiency because of time spent dealing with payee governments, but also raises cost of capital, with all results significant at the .05 level.

These empirical works, together with the theoretical perspectives supplied by David-Barrett, Thompson, and Wrage, will be used to analyze the future impact of FCPA 1977 on business practices. This analysis will also be discussed in the context of trends in the enforcement of the Act.

THE COLD WAR AND THE MILITARY INDUSTRIAL COMPLEX

The origin of the law is as multi- faceted as its current application. The briberies that gave rise to the Act occurred in several different countries, involved monarchies, republics, and dictatorships, and were the result of competitive pressures and geo-political complexities faced by corporate executives and heads of state. The geographical scope of the crimes that motivated passage of the law spanned from Japan in the Far East, to Saudi Arabia in the Middle East, and to several countries in Western Europe [Singh, 1998]. The political context underlying these crimes includes the Cold War and the resulting military industrial complex that developed because of it.

In President Dwight Eisenhower's 1961 farewell address, he outlined both the need for and the dangers of the "conjunction of an immense military establishment and a large arms industry (that) is new in the American experience." He stated that:

"We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications.... In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist [Eisenhower, 1961]."

As one of the main architects and implementers of the Allied effort against Axis aggression in World War II, and one of eight US Presidents (the others being Presidents Truman, Kennedy, Johnson, Nixon, Ford, Carter, and Reagan) during the Cold War, Eisenhowers words are particularly striking. But the poignant dissonance between the Presidents career and his final public pronouncement is not the only reason why this passage is significant. The effects of the "unwarranted influence" he spoke against were not limited to the politico- military sphere, where the proliferation of arms correlates with a propensity for war, though this might have been the primary focus of his admonition. There would be ramifications in the business world as well for as he stated with uncanny, or perhaps apparent but unintentional prescience, the corrupt operations of aerospace and defense firms which form the commercial and manufacturing base for the military- industrial complex ultimately led to the FCPA.

LOCKHEED, AERONAUTICS AND DEFENSE FIRMS, AND INTERNATIONAL CORRUPTION

Wrage [2007] characterizes the aerospace and defense industries as "egregiously corrupt." A report by Trace International [Trace International, 2011], a non-profit consortium of private anti-corruption consulting firms, states that since 1977, the year the Act was implemented, firms in the aerospace and defense industries have accounted for the second biggest percentage of FCPA enforcement actions after firms in extractive industries (12% and 19% respectively). Recent enforcement in this sector include actions against firms such as Pacific Consolidated in 2003, Faro Technologies in 2008, United Industrial Corp. in 2009, BAES in 2010, and Armor Holdings and NORDAM in 2012. The BAES settlement for $400,000,000 is the third highest in FCPA history, behind those of KBR/ Halliburton and Siemens. Furthermore, the first sting operation used to enforce FCPA was targeted at defense contractors at the Las Vegas SHOT Convention in 2010 [Latham and Watkins, 2013].

But this is not a new phenomenon. In the days leading up to the passage of FCPA, Representative Les Aspin reported a list of 20 US firms from whom a total of $306,000,600 had "been channeled ... over a period of years ... to foreign consultants and agencies, political parties, and government officials [Solomon and Linville, 1976, p. 303]."

The list included three aerospace and defense industry firms: Lockheed, McDonnell Douglas, and Northrop. Furthermore, Lockheed, which paid $202 million, exceeded all firms in its corrupting contributions. The firm paid out 67% of the questionable payments according to Aspin's list.

The Lockheed briberies were initially revealed in a diary presented by Lockheed ex-employee Ernest Hauser to the US Senate Committee on Foreign Relations, Subcommittee on Multinational Corporations in February 1976, revealing bribes paid to various European government officials, including Prince Bernhard of the Netherlands. The manner by which Lockheed perpetrated these frauds was also revealed in a report by its auditor, Arthur Young and Co. presented when subpoenaed by the US Senate [US Senate, 1976].

According to the auditing firms testimony, Lockheed employed a network of trust accounts, overseas law firms, and domestic and foreign marketing and political consultants to channel payments to those whom they hoped would take action on their behalf in obtaining contracts with foreign governments. Among those that helped channel these payments were prominent Italian lawyers, the brothers Antonio and Ovidio di Lefebvre, who were descended from the Counts of Balsorano, rulers of a part of Abruzzi in Southern Italy, and Kodama Yoshio, an ultranationalist major in the Imperial Japanese Army during the Second World War, and one of a number of war criminals rehabilitated and coopted by the US to bolster the pro-US, anti-Communist Liberal Democratic Party that ruled Japan for most of the latter half of the 20th century. Entire companies, such as the European multinational consulting firm Ikaria Establissment and the Japanese conglomerate Marubeni were also used to channel funds [US Senate, 1976]. The use of third-party conduits for bribes to high-level foreign government recipients came to be known as the Lockheed model [Noonan, 1987].

Lockheed also made use of simpler techniques of obfuscation, such as making payments to bearer or cash [Noonan, 1987], In Japan, invoice amounts were deceptively (and humorously) denominated in "peanuts" rather than dollars or yen, with the payee referred to as "locust" [Schlessinger, 1999].

The amount of bribe payments varied. Between 1968 and 1973, funds aggregating half a million dollars were shuffled between unnamed marketing consultants, foreign law firms, and trust accounts in an unspecified country, before being paid out to another unnamed marketing consultant for unspecified reasons [US Senate, 1976]. Much larger bribes were also paid. Payments made through the Hong Kong office of Lockheed Asia, all made to bearer or cash, aggregated to over four million dollars throughout the fiscal year 1973 [Noonan, 1987].

The role of Arthur Young in this affair stands in sharp contrast to the crime-enabling function its descendant, Arthur Andersen, played in the Enron affair three decades later. According to Braithwaite [2002] and Noonan [1987], the auditing firm made repeated attempts to inform Lockheed's management and audit committee of these suspicious payments, but was rebuffed. Chairman of the Board Daniel Haughton allegedly replied, with archness reminiscent of Marie Antoinettes mangent a la gateau, "So why don't you just put it in the LA Times? [Noonan, 1987]." Ultimately, according to Braithwaite [2002], the turning point at which Lockheed's management began to reform its corporate culture was when Arthur Young refused to certify Lockheed's financial statements, in 1978, a year after FCPA was passed.

The reasons why Lockheed would have an especially strong temptation to bribe foreign powers were patent. For Lockheed, boosting sales at the time was especially important because of financial problems arising from production and marketing setbacks related to its multi-role jet, the L-1011, which was designed to serve as both a civilian airliner and troop transport. In hearings before the US Senate following initial revelations of bribery and questionable payments, it became apparent that Lockheed had been very concerned with marketing the L-1011 and other products because of the need to repay a government bailout necessitated by those problems [US Senate, 1975], The fact that the L-1011 had been rejected by domestic buyers such as American Airlines in favor of the McDonnell Douglas DC-10 made foreign contracts especially critical [Boyne, 1998].

Furthermore, at that time, such a practice was widely condoned, on the grounds that they were acceptable practices in the countries in which the bribes were paid, that the cessation of such payments would result in loss of market share for the US firm, and even that these were necessary to promote Western-style democracy, presumably because it facilitated the arming of US allies with weapons and other ordnance supplied by US firms [Solomon and Linville, 1976], Lockheed executives, in testimony to the US Senate, characterized such payments as crucial to its present and future foreign arms sales contracts and even to American foreign policy [US Senate, 1975], As Lockheed CEO Carl Kotchian allegedly quipped, only in England and the US could a plane be sold without making such payments [Noonan, 1987].

Perhaps most tellingly, Lockheed's payouts were demonstrably paying off. "Foreign sales (had) grown from $146 million in 1970 (when the political payments began) to $650 million in 1974. [TIME, 1975]."

Nevertheless, although the practice was not illegal according to US law, and widespread beyond the Anglo-American business world, there were political, economic, and even tax stewardship issues involved. These concerns were raised in discussions in Congressional investigations of the briberies [US Representatives, 1975, First, Session, 94th Congress].

Rep. Robert Nix stated: "(Although the) payments made to foreign officials are not a violation of American law at present ... it is a requirement ... that American corporations make full disclosure ... to the SEC and IRS. It is also true that if the purpose of the payments was anticompetitive ... DOJ would have basis to begin legal proceedings [US Rep., 1975]."

Another concern was the negative foreign policy ramifications of the payments. Rep. Nix cited the ouster of Honduran President Oswaldo Arellano, as a result of the publication of similar bribes by US banana importers to his government, while Rep. Stephen Solarz expressed concern over payments made by Northrop and other defense firms including Lockheed to Arab states committed to the destruction of the State of Israel, a US ally [US Rep., 1975], It also emerged that one recipient or conduit of the Lockheed bribes, Japanese businessman and political activist Kodama Yoshio, in addition to being a former war criminal, had amassed his fortune through smuggling activities and was in Sen. Frank Church's words "a very questionable character [US Senate, 1976]."

Finally, Gen. Howard Fish, Assistant Secretary of Defense, testified that defense corporations supplying weapons to foreign nations under the Military Assistance Program might have been passing the cost of bribes to these governments on to the US taxpayer. Under the program, foreign governments could buy weapons from US defense firms at a discount, with the difference being charged by the supplying firm to the US government. Gen. Fish stated that it would be possible that some of the charges claimed by defense firms were comprised of bribes and questionable payments [US Rep., 1975].

The Lockheed bribes were spread across several nations, and involved (and ruined) many prominent personages. Kakuei Tanaka, Premier of Japan from 1972 to 1974 was forced to resign and sentenced ultimately to a four year jail sentence, which he never served, dying before his appeals were adjudicated ... a delay helped by the fact that he and his political allies managed to retain their seats in the Japanese Diet through the use of their extensive and well-funded political machine [Schlesinger, 1999].

In the Netherlands, Prince Consort Bernhard was charged with "unacceptable" behavior in his dealings with Lockheed because of $1.1 million that Lockheed allegedly paid him. However, the Dutch parliament voted overwhelmingly against prosecution after he resigned his post as Inspecteur Generaal der Krijgsmacht (Inspector General, Dutch Armed Forces) and issued a statement that he had "not been critical in ... judgment of initiatives presented to (him) ... and not observed the caution ... required as Consort of the Queen and Prince of the Netherlands [p. 167, Singh, 1998]."

In Italy, a huge furor arose when Lockheed's CEO Kotchian revealed in testimony to the Senate Committee on Foreign Relations, Subcommittee on Multinational Corporations that the company had been making payments to an unnamed Italian government official code named "Antelope Cobbler," whose identity remains unknown to this day [US Senate, 1976]. As a result, Giovanni Leone, President of Italy, eventually resigned his presidency.

ENOUGH'S ENOUGH: THE ORIGIN OF FCPA 1977

The revelation of the scandals produced vastly different reactions in the corporate world on the one hand, and in society at large, on the other. As discussed earlier, the questionable payments were, at the time, viewed as normal and necessary by the firms involved (Solomon and Linville, 1976). Because of this, the direct effects on managers of these corporations and the corporations themselves were negligible (Darrough, 2004). Although Lockheed's board chairman Daniel Houghton and CEO Carl Kotchian resigned, Agrawal, et al. (1999) did not find evidence of increased turnover of senior executives as a result of the scandals, and Griffin (1976) found that while there were declines in the stock prices of implicated firms, these decreases were small and temporary. Public opinion, however, was strongly condemnatory of the acts that were revealed, a reaction in line with the general dissatisfaction with the image of the Establishment, so tarnished by recent political scandals such as Watergate.

The revelations resulted in a flurry of SEC and Congressional investigations, culminating in FCPA 1977. These included a series of special hearings before the Senate's Banking, Housing, and Urban Affairs Committee as well as the Foreign Relations Committee during the first session of the 94th Congress, and an SEC action against Lockheed under Federal securities law in 1975 [Solomon and Linville, 1976]. Ultimately, Lockheed was specifically mentioned in House Bill 3815, introduced in the first session of the 95th Congress, which eventually became FCPA 1977 [House Report, 1977].

"As a result of SEC investigations in the mid-1970s, over 400 U.S. companies admitted making questionable or illegal payments [US Department of Justice, 2012]." The payments included both bribery of high foreign officials to secure some type of favorable action by a foreign government, as well as so-called facilitating payments or "grease money" that allegedly were made to ensure that government functionaries discharged certain ministerial or clerical duties. Ultimately, Congress enacted the FCPA, making it unlawful to bribe foreign government officials to obtain or retain business, although an exception existed that allowed facilitating payments. The logic behind the exception was that this grease money was for services that the payer would legitimately receive from the foreign government, and the payment merely ensured the expeditious rendering of that service, and was therefore less reprehensible [David-Barrett, 2012; US Department of Justice, 2012].

These prohibitions were eventually adopted by other countries as well. Concern arose that American companies were operating at a disadvantage compared to foreign companies who routinely paid bribes, so in 1988 the Congress directed the Executive Branch to negotiate with the United States' major trading partners to enact legislation similar to the FCPA. As a result in 1997, the United States and thirty-three other countries signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions [US Department of Justice, 2012].

The new law also had accounting and auditing implications. These accounting provisions were designed to guide firms in their compliance with the anti-bribery provisions of the FCPA, by requiring them to keep accurate accounting records about the firms' transactions, and to devise and maintain an adequate system of internal accounting controls. In so doing, the likelihood of obfuscating illegal payments would be minimized [US Department of Justice, 2012]. Furthermore, as Judge Stanley Sporkin who helped advise Congress in drafting the Act opined, not only do adequate accounting records and controls make bribery difficult to commit and conceal, it is also easier to prove the lack of such records and controls than the bribery itself, as related in a retrospective analysis of Sporkin's influence on FCPA by Volkov [2013].

While FCPA 1977 was not as foundational or comprehensive as the Securities and Exchange Act of 1934, which remains the basis for the regulation of the entire US financial system [Goldschmid, 2003], it addressed a growing concern (illegal payouts) that was prevalent at the time. More importantly, it helped to focus attention to the importance of ethics and integrity and sufficiency of internal controls which are aspects of the financial reporting system that are difficult to operationalize (and therefore often ignored) because of the wide variety of industries and transactions in which firms are involved.

PIANO ... PIANO ... CRESCENDO! FCPA'S SUBSEQUENT ENFORCEMENT HISTORY

According to Huskins [2008], the enforcement of FCPA during its first 25 years was "minimal at best," with an average of two actions per year. Indeed, the SEC's website [Spotlight on FCPA] reveals that there were three actions in the 1970's, three in the 1980's, and two in the 1990's. Between 1987 and 1996, there were no enforcement actions at all. This period of inactivity was the result of a time when international anti-bribery regulation lagged that of the US [Wright and Billings-Kay, 2012]. As a result of this, concern that US firms were being disadvantaged vis-a-vis non-US firms because of the Act led to a diminution of enforcement [Wouters, et al., 2012]. Later, as European countries began to enact their own versions of the FCPA, and the OECD agreement of 1997 was signed, the concern was alleviated, and the US began to enforce the Act again, President Clinton making it a special thrust of his Administration [Wouters, et al., 2012].

Since 2004 enforcement of the FCPA began to intensify further, with SEC, DOJ and the FBI all creating special units dedicated to enforcement of the Act. Throughout the latter half of the first decade of the 21st century, prosecutions had jumped to the order of over a dozen per year [Bixby, 2010], This increase in enforcement was driven by comprehensive enforcement strategies characterized by "industry- wide sweeps," defined by Harmon and Medina [2013] as investigations of multiple firms in a particular industry, increasing globalization, recent legislation like SOX 2002, and the fight against terrorism [Bixby, 2010; Stevenson and Wagoner, 2011; Lawrence et al., 2012].

DISCUSSION: SUCCESSFUL REFORM OR FAILED DETERRENCE?

It has been more than three decades since the Lockheed scandals broke out and FCPA 1977 was passed. For the pessimist, the scandals enumerated form a continuum of progressively egregious events. From frauds in the millions, the more recent nefarious activities have involved billions [SEC, 2013]. For the optimist, the events described in this paper demonstrate the essential effectiveness of the legislation, as it continues to punish and perhaps deter international corruption and help thwart international terrorism as well.

However, besides one's own native predilection or disinclination towards hopefulness, literature from law and political science provides a more rigorous indication as to the significance and ultimate outcome of this cycle of scandal and reform. Thompson [2000] and Weeber [2008] enumerate the possible results of scandals as a reform and reaffirmation of the society's core values (functionalist theory of scandals), a change in the socio-political order (subversive theory), or a fatuous focus on personalities and other inessential facts regarding the scandal (trivialization theory).

Scandals arising from sexual transgressions lend themselves to a trivialization denouement, but those involving abuse of power or misappropriation of public funds are typically resolved another way [Thompson, 2000]. Clearly, because shareholders' wealth, public accountability of government authority, and the rule of law are diminished by the bribery transgressions described in this paper, trivialization could not have been one of their effects, leaving subversion and functional effects as possibilities.

It is more debatable if these scandals have a subversion effect. Certainly, at the time of the original bribery scandals in the 1970 s, the regimes ruling the various countries in which Lockheed had distributed bribes were threatened and in some cases, collapsed. In Japan, Prime Minister Tanaka was forced to resign and jailed. Italian President Giovanni Leone resigned as well. And though the Dutch parliament voted against prosecuting him, Prince Consort Bernhard was forced to resign his military post, and his wife, Queen Juliana, ultimately abdicated favor of their daughter Beatrix in 1980. So extensive was the political fallout that Congress concluded that the Lockheed scandal "created severe foreign policy problems for the United States ... alleged payments by Lockheed, Exxon, Mobil Oil, and other corporations eroded public support for the Government and jeopardized U.S. foreign policy [House Report, 1977]." Ultimately, however, while the specific persons and groups involved in the briberies were swept away, the states that they governed survived the crisis as did their fundamentally friendly relationship with the US. Thus, if there was any subversive effect, the subversion engendered by the scandal was limited.

The last possible outcome is that the reform emanating from the scandal will be effectual and lasting as functionalist theories assert. However, whether or not this reform will indeed be effective and have persisting benefits is open to question, as the increasing frequency of prosecuted violations and rising dollar amounts of bribes and fines indicates. Thus, the other aforementioned theoretical and empirical works from philosophy, law, and economics will be consulted to help determine whether this has been or will be the case. These works consider the likelihood of FCPA 1977's lasting success at stamping out or at least curtailing bribery as a business practice by analyzing the feasibility of bribery as a strategy from the prospective bribe paying firm's perspective.

David-Barrett (2012) grounds its consequentialist condemnation of bribery on primary and secondary consequences of different types of bribery. One type of bribery, facilitation payments or the so-called "baker's bribe" [Duvanova, 2013], which merely speed up the performance of legitimate government service to the benefit of the bribe payer has two primary consequences: an expedited bureaucratic processing of a legitimate transaction to which the bribe paying firm was entitled to even without payment (but otherwise would have taken longer), and enrichment of the bribed government official. It has no or negligible secondary consequences, except perhaps a slight delay for other parties (who have not paid bribes) waiting for government service [David-Barrett, 2012], A second type of bribe, the so-called "banker's bribe" [Duvanova, 2013], wherein the bribe payer pays for a change or departure from legitimate policy by the bribed government, such that the payer gains an unfair advantage to which it was not entitled while the government official is enriched (primary consequences), is more heinous. This is because the departure from legitimate policy has secondary consequences which are either absent or occur at much lower levels with facilitation payment type bribes, such as the gross misallocation of resources, undermining of the efficiency of markets, and weakening of government institutions [David-Barrett, 2012].

The bribery that was committed by Lockheed and which is targeted by FCPA 1977 is of the banker's variety, wherein contracts were awarded to the bribe payer because of the payment, not necessarily because their products or services offered the greatest value, which is what would have happened absent the bribery in efficient markets. In this case, the secondary consequences are also harmful to the firm because "companies benefit from there being a legal order, they should not (therefore) undermine that legal order [David-Barrett, p.16]."

A famous and extreme example is Iran, a former Lockheed client, whose main troop transport in the Imperial era was the Lockheed C-130 Hercules, but currently relies on the Russian Ilyushin 11-76 Kandid to fill that role (Flightglobal, 2013). This resulted from the Islamic Revolution which was significantly, if not solely, effected by a perception of corruption in the ancien regime, to which Lockheed contributed [Leigh and Evans, 2007]. Indeed as Shawcross [1989] and Harney [1999] state, bribery appeared to be a more significant cause of popular discontent than other concerns, such as the authoritarianism of the Shah. Historically, traditional societies have tolerated authoritarian government so long as corruption is minimized. Harney [1999], a contemporary account by a British diplomat who had served in Iran, and who was the agent of a banking consortium in Iran at the time of the Revolution, and went on to become the head of the British Persian Studies Institute, goes so far as to state: "If the Shah can rally himself and strike down ... corruption he will yet survive (p. 21)."

Another theoretical work [Wrage, 2007] portrays bribery as suboptimal for the prospective bribe paying firm from the perspective of criminal motive analysis, an examination process developed in jurisprudence by which the attitudes and motivations behind criminal actions are examined to determine if a crime has likely taken place or will take place, or to affix the culpability of an act known to have happened. It is thus a complement to consequentialism in that rather than looking at what results from a crime it focuses on what came before it [Young, 2008]. Wrage's model [2007] shows how the actions (or inaction) of the bribe taking government official make bribe paying an ultimately suboptimal strategy for the paying firm. Prima facie, paying bribes appears to be an attractive course of action because they promise a guaranteed favor in exchange for a relatively small disbursement. However, both clauses of the argument are flawed.

First, there is no guarantee that the payment of a bribe will in fact lead to the result desired by the payer. An example that illustrates this is a case involving KPMG and tax authorities in Indonesia, which resulted in a subsequent FCPA action. KPMG had paid a bribe on behalf of one of its clients in the hope of gaining favorable treatment on pending tax deductions. Ultimately, the Indonesian payee disallowed the deductions in spite of the bribe [SEC, 2013]. In other situations, where the desired outcome is the acquisition of a sale or contract for services, there is the possibility that competing firms might have outbid the bribe payer with even bigger bribes. In all situations, the ultimate outcome is dependent on the payee, whose integrity is obviously questionable, and whose compliance with the payer's expectations cannot be enforced by legitimate authority.

Second, the nature of the transactions between the bribe payer/seller and the bribe taker/ buyer is often of a protracted or recurring nature. Many sales transactions involve related service contracts that may need to be renewed several times over the useful life of the purchased asset. Each renewal could entail a concomitant bribe payment. The highly bureaucratic nature of many foreign governments, with multiple approvals necessary for every transaction would also engender a stream of bribe payments instead of just one. For many firms, the maintenance of a long term relationship with a government customer is a necessity for survival [Stevenson and Wagoner, 2011]. In environments where the payer and payee are engaged in a long term relationship, there is also the possibility of escalating bribe amounts required. This is a feature that arises when turnover of the foreign government's officials is low because of the undemocratic power dynamics that often prevail in such places.

In addition to the theoretical works that model the consequences and motives of prospective bribe payers, and collectively reach the analytical conclusion that bribe paying is suboptimal and ultimately works against the bribe payer's interest, empirical studies from economics such as Kauffman and Wei [1999] and Dal Bo and Rossi [2006] will now be considered. As mentioned earlier, both of these works find that bribe paying, whether of the policy-shaping, contract-seeking "banker's" type as in Dal Bo and Rossi [2006], or the facilitating "baker's" type as in Kauffman and Wei [1999], are ultimately detrimental to the bribe paying firms. These result from an increased amount of time and other resources expended in dealing with the corrupt government (avoidance of which ironically is a reason for bribe paying), as well as increased costs for the firm to raise capital.

As recounted in the preceding paragraphs, David-Barrett [2012], Wrage [2007], and Dal Bo and Rossi [2006] and Kauffman and Wei [1999], show that bribery is not only ultimately ineffective, but also costly and harmful not just to society and the legal order, but to the very firm that pays the bribe. Thus, even absent the risks of discovery and costs that anti-bribery regulation such as FCPA embody (where fines and disgorgement alone can reach close to a billion dollars, and where debarment of the firm could be an even more fatal consequence), the payment of bribes is far from a small cost that guarantees success. Indeed, it can be argued from the foregoing that laws such as FCPA actually serve the interests of US corporations that seek business in foreign countries as it discourages them from engaging in dysfunctional activities.

However, just because it can be argued from the preceding literature that bribery is a self-defeating strategy, and that the advent of the Act will make it an even more detrimental course of action for bribe payers does not necessarily prove that FCPA 1977 has or will stamp out or decrease bribery. Indeed, none of the works mentioned directly tests whether there has been a decrease in bribery incidents since FCPA. And while it is hoped that management of firms facing the temptation to pay bribes will be guided by the a priori and empirical logic of the preceding studies, if not by the ethical blandishments of the better angels of their natures, such may be more an ideal rather than an actual state of affairs. As discussed in the following section, the number of prosecutions has actually increased dramatically at the cusp of the 20th and 21st centuries, making it difficult to square with the idea that the Act is curing the ill of corrupt payments.

Research has documented an increase in FCPA related prosecutions, especially in the last several years [Bixby, 2012], These recent developments seem to indicate that bribery is on the rise rather than on the wane.

However, while it might be perceived as a symptom of the failure of FCPA, the increase in enforcement actions in recent years may actually be the result of more aggressive policing, not of failed deterrence. Bixby [2012], which likens the intensified enforcement efforts of FCPA to an "awakened lion," traces the increase in prosecutions to a "heightened sense" of anti-bribery sentiment around the world, and the development of "anti-corruption cooperation between nations." Furthermore, the loci of the majority of FCPA enforcement actions is no longer Western Europe and the Global North, where the initial scandals that prompted passage of the FCPA broke out, but the developing world. As of 2011 most cases have emanated from bribery of officials in the Peoples Republic of China, Iraq, and Nigeria which account for 7%, 6.5%, and 5.3% of documented incidents [Trace International, 2011], The same report states that in the countries where the initial bribery scandals precipitating FCPA occurred, the proportion of incidents was 1.9% for Italy and the proportions for Japan and the Netherlands were unmentioned, presumably because they were infinitesimal. Admittedly, other macro-economic dynamics may be responsible for this phenomenon, besides the deterrent effect of FCPA. An unfortunate short-term concomitant of increased economic activity is an increase in the incidence of corruption [Yan, 2004], although in the long-term, as incomes increase and socio-economic well-being trickles down through all levels of society, equalizing them and making the newly empowered general public less tolerant of arbitrary official action, corruption decreases [Hofstede, 2001]. Furthermore, Tanzi [1998] suggests that the increased attention to foreign corrupt practices may partially be attributed to the end of the Cold War, resulting in a focus on two new arenas of corruption: the former Soviet bloc where autocratic opacity had been suddenly removed, and certain less developed pro-Western bloc countries where "there was a tendency to overlook obvious cases of ... corruption" because these nations were in the "right political camp [Tanzi, p. 563]."

In conclusion, this paper has discussed prior research that suggests FCPA should help minimize bribery, a policy which these various studies have demonstrated to be ultimately detrimental to a firm's interests for several reasons. Juxtaposed against these findings are the increase in FCPA prosecutions and reports of incidents of bribery which seem to indicate that this past literature may be offering an overly sanguine prognosis. Nevertheless, these increases must be interpreted in the light of a more aggressive program of enforcement, a wider scope of operations due to better cooperation between the US and other countries, increased global trade especially with emerging economies where corruption is still endemic, and other politico-economic developments. In other words, the recent increase in prosecutions and documented incidents may not necessarily mean that FCPA has failed in its deterrent function ... merely that it is being applied to a wider realm of operations. To frame it in terms of the possible consequences of scandal in Thompson [2000] and Weaver [2008], the scandals that brought about FCPA have not brought about a trivialization of corruption, nor has it resulted in a subversion of political and economic structures. And while the number of documented and prosecuted incidents of bribery belies the notion that the business world has been thoroughly reformed as the functionalist theory of scandals describes, a hopeful and plausible interpretation is that it is a reform in progress, albeit far from its desired conclusion.

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Frank Badua

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