Toward an Interest Group Theory of Foreign Anti-Corruption Laws

In a recent speech, the Chairman of the SEC argued that other countries’ failure to enforce foreign anti-bribery and corruption laws may put U.S. companies at a competitive disadvantage to foreign firms. Against the background of aggressive enforcement of the FCPA, Chairman Clayton remarked that “other countries may be incentivized to play, and I believe some are in fact playing, strategies that take advantage of our laudable efforts.”

The Chairman’s remarks point to a fundamental puzzle of foreign anti-corruption laws. Why would the government of one country act to prevent corruption in another? Foreign anti-bribery laws disadvantage domestic businesses vis-à-vis unregulated foreign competitors. Yet foreign anti-corruption laws have proliferated around the globe. How can this be? And now that they are widespread, are such laws not ripe for opportunistic enforcement (or, as Chairman Clayton points out, lack of enforcement) in favor of domestic interests?

In Toward an Interest Group Theory of Foreign Anti-Corruption Laws, Tom Lee and I address these puzzles with a new theory of foreign anti-bribery laws. In contrast to prior theories, which we characterize as “Rights Based,” “Realist,” or “Institutionalist,” we focus on private interest groups rather than state or institutional actors. Our basic claim is that the enactment and enforcement of foreign anti-bribery laws is largely driven by each country’s domestic business lobby.

Our theory explains observed patterns in foreign anti-corruption laws better than competing accounts. For example, “Rights-Based” theories focus on freedom from bribery and corruption as a basic human right. But these theories fail to wrestle with the public good problem inhibiting the passage of such laws. “Realist” accounts make the opposite error. In explaining anti-bribery and corruption law as a form of rent-seeking, these theories cannot answer why such laws are not more commonly enforced. Finally, nuanced “Institutionalist” theories are excessively top-down, focusing on the multi-national institutions through which collaborative action is organized, but failing to account for the political impetus to enact and enforce such laws in the first place.

We therefore offer an alternative “Interest Group” theory, the gist of which is as follows: After the shock of the passage of the FCPA in 1977, the U.S. business lobby had two goals: first, lax enforcement of the law, and second, a “level playing field” vis-à-vis foreign competitors. It achieved the first right away. The FCPA was weakly enforced during its first two and a half decades. The second goal was achieved only later, starting with the OECD convention and other treaties, but becoming meaningful only with aggressive U.S. enforcement against foreign companies.

Once U.S. extraterritorial enforcement began in earnest, the incentives of foreign firms, at least those subject to material FCPA risk, came to mirror those of U.S. firms under the FCPA. They faced an uneven playing field vis-à-vis domestic competitors which, due to their domestic or regional reach, were subject to less risk of U.S. enforcement. Therefore, in order to level the playing field against such competitors, foreign multi-nationals came to favor the importation of a parallel regulatory regime into their own country. In this way, foreign anti-bribery laws spread around the world.

Drawing upon international relations theory, we argue that the future of such laws depends upon whether the promulgation of anti-bribery and corruption laws becomes the mission of a stable group of countries providing the public good (anti-corruption law) for private reasons (ensuring level playing field to their domestic business lobby). Alternatively, a counter-hegemon, perhaps led by China, may support a different norm, in which bribery and corruption are acceptable business practices. If this occurs, multi-nationals may again pressure their home state regulators for lax enforcement in order to compete more effectively with foreign business beyond the reach of foreign anti-bribery laws.

Although the future remains opaque, our theory does allow us to make some predictions. For example, because our theory is driven by the interests of domestic businesses in competition with foreign rivals, countries whose companies do little or no cross-border business have no real impetus to join the multi-national anti-bribery efforts.

Moreover, our theory speaks directly to the concerns raised by Commissioner Clayton. According to our account, foreign enactment and enforcement of anti-bribery and corruption laws depends upon foreign businesses pressuring their politicians and regulators to level the playing field vis-à-vis their domestic and regional competitors. But these foreign firms face an uneven playing field only if they are at serious risk of extraterritorial enforcement by the U.S. Therefore, if the Commissioner wants more cooperation from our international partners, he should direct the SEC to ramp up extraterritorial enforcement. Our international partners are likely to find pressure from their domestic business lobby far more persuasive than the moral suasion of a regulator across the sea.

The full article is available for download here.