The Evolution and Endpoint of Responsibility: The FCPA, SOX, Socialist-Oriented Governments, Gratuitous Promises, and a Novel CSR Code

Einhorn, Aaron N., Denver Journal of International Law and Policy

Multinational corporations (MNC) have emerged as engines of global development. Over the past fifty years, the number of multinational corporations, the value of multinationals' investments in foreign countries, and the amount of multinationals' wealth have increased dramatically. (1) MNCs in developed countries have taken advantage of well educated and inexpensive labor in developing countries, allowing them to cut costs and generate higher profit margins. (2) The end of the Cold War ushered previously closed economies across Eastern Europe, the former Soviet Union, and China into the global economy, opening untapped markets. (3) Trade liberalization, engineered by the World Trade Organization (WTO) and its member states, has fostered new business relationships and eased corporate access to markets, goods, and services. Foreign direct investment (FDI), defined as "a lasting interest by a resident entity in one economy ... in an entity resident in an economy other than that of the investor," has grown exponentially. (4) In 1989, global FDI stood just below $200 billion. (5) Seven years later FDI doubled to just below $400 billion, and by the year 2000 reached $1.1 trillion. (6) While only ten countries' FDI totals surpassed $10 billion in 1985, corporations in thirty three countries invested over $10 billion abroad in the year 2000. (7)

The wealth corporations have enjoyed has not existed in isolation. Rather, greater corporate wealth has produced greater corporate power that corporations have exercised in both positive and negative manners.

Greater corporate power has cultivated unprecedented advances in health and education over the past forty years. (8) Corporations have developed new medicines, revolutionized transportation (9), provided employment to millions, and generally have assisted in raising the standard of living worldwide. (10) Corporations also have contributed to rapid technological development, particularly in the area of communications. Fiber optic systems and the internet have revolutionized the speed at which ideas and knowledge can flow within countries and across oceans, (11) forging a synergistic relationship between corporations and technology that has propagated new technologies and fed corporate power. (12)

At the same time, greater corporate power has been associated with a host of problems. The wealth multinationals have brought to some countries has bypassed many other countries. (13) In some cases, the activities of multinational corporations in developing countries have retarded economic growth. (14) Multinationals have been accused of committing various human rights violations, such as carrying out extra-judicial killings and employing child labor. (15) Corporate activities in developing countries have been associated with environmental degradation, dangerous work conditions, and mistreatment of indigenous people. (16) However, in contrast to developed states, developing states have not successfully combated the harms that have flowed from increased corporate power. (17) A number of factors-including weak domestic and international legal institutions, non-responsive heads of state, the "race to the bottom," (18) and developed countries' economic dominance --have prevented developing states from effectively addressing the negative economic and social impacts of corporate activities. (19)

The inability of many developing states to manage these problems has sparked calls for a code of social responsibility that is able to regulate multinational corporations. (20) Countries and corporations have responded to these cries. The United States and member States of the European Union (EU), the Organisation for Economic Co-operation and Development (OECD), the United Nations (UN), and the International Labor Organization (ILO) have developed codes that place non-binding social responsibilities on corporations. (21) In addition, many corporations voluntarily have drafted and adopted their own codes of conduct, though, similar to measures drafted by intergovernmental organizations (IGO), these codes are not legally binding. (22)

Because existing codes of conduct have limited ability to prevent and redress corporate human rights abuses, the debate on whether to draft and how to structure a binding corporate social responsibility (CSR) code continues. This article enters that debate. It discusses events and circumstances occurring within the United States, other countries, and the international community which, when viewed in light of one another, suggest that states and corporations are moving towards creating an enforceable code of corporate social responsibility. After discussing these forces, this article offers an organizational framework for developing a CSR code.

The article's first section examines corruption and bribery. It discusses problems corruption creates in developed states and charts the evolution of U.S. and international measures to combat corruption; measures which have placed greater responsibilities upon corporations. The article's second section takes a similar approach, first discussing broad corporate governance concerns that surfaced over the past decade and then considering how the Sarbanes-Oxley Act (SOX), and similar measures in Europe, have addressed these concerns.

After charting how the United States and European Union have placed greater responsibilities upon corporations, the article analyzes a different force contributing to the development of a CSR code. The article's third section explains how the rise of socialist-oriented (SO) governments in Latin America will advance progress towards a code of corporate social responsibility. Next, the article's fourth section discusses human rights abuses and social harms that have accompanied the spread of MNCs through developing states. This section then analyses the various CSR measures the international community and multinational corporations have adopted to counter these harms. The paper's fifth section explains why the CSR measures that states, intergovernmental organizations, and multinationals have enacted cannot successfully regulate corporate activity and proposes a new and potentially useful framework for developing a CSR code. Last, the sixth and final section ties together the information presented in previous sections, summarizes how that information supports the article's thesis, and draws conclusions.

I. CORRUPTION: PROBLEMS AND RESPONSES

While corruption is more pervasive in developing countries, it also produces serious problems in developed states. (23) When the magnitude of multinational corporations' bribery of foreign officials came to light in the United States during the 1970s, Congress passed the Foreign Corrupt Practices Act (FCPA or the Act). In 1998, the U.S. adopted a second round of amendments to the FCPA, enlarging its jurisdiction and expanding its substance. By the turn of the century, states worldwide had joined the battle against bribery, ratifying several anti-corruption treaties. Analysis of how anti-corruption measures have evolved reveals that, over time, states have placed greater responsibilities on corporations and have cut more deeply into corporate power. This trend of imposing greater responsibilities on corporations, when viewed in light of other events such as enactment of the Sarbanes-Oxley Act, the rise of SO governments in Latin America, and the development of non-binding CSR codes, suggests a binding code of corporate social responsibility lies on the horizon.

A. Problems Caused by Corruption

Corruption breeds various problems. When multinational corporations bribe foreign officials to obtain contracts or secure more relaxed regulations, their venal activities undermine effective business practices. (24) Bribery "can damage a company's image, lead to costly lawsuits, cause the cancellation of contracts, and result in the appropriation of valuable assets overseas." (25) Bribery also inflates operating expenses, creating new costs companies would not absorb if they obtained business legally, and wastes valuable resources. (26) Instead of devoting earnings to research and development, infrastructure, or shareholder dividends, companies that pay bribes direct profits into foreign officials' pockets. (27) As is common in other regulatory contexts, a "race to the bottom" ensues. (28) Officials demand greater and greater sums. Corporations, competing with one another for business, pay larger and larger bribes for access to markets and favorable treatment until the marginal benefit of new payments decreases to zero. (29) Such behavior is not good for business.

In 1976, more than four hundred U.S. companies admitted to paying over $300 million in bribes to foreign officials during the first half of the 1970s. (30) Gulf Oil Corporation admitted to paying bribes in various countries, including $4 million to the governing political party in South Korea; General Tire & Rubber Company admitted to bribes in Algeria, Mexico and Venezuela; and Exxon Corporation disclosed bribes in fifteen countries, including $19 million in Italy alone. (31) Most dramatically, the SEC discovered that Lockheed Aircraft Corporation, at that time the largest defense contractor in the United States, had been bribing prime ministers, presidents, and other high-ranking political figures in several countries. (32) By the end of 1976, updated studies revealed four hundred and fifty U.S. companies had paid over $450 million in bribes since the decade began. (33)

This pervasive corruption sparked government action. In 1977, officially recognizing that "corporate bribery is bad business" and that it affects "the very stability of business overseas" as well as "our domestic competitive climate," (34) the United States Congress passed the Foreign Corrupt Practices Act to reign in corruption. (35)

B. The U.S. Response to Corruption: The Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act consists of two general sections: one that establishes record keeping and internal controls regulations and another that prohibits bribery of foreign officials. While the FCPA was first passed in 1977, amendments in 1988 (36) and 1998 refined the Act and broadened its scope. Comparison of the 1977 and 1998 versions reveals the United States has placed greater and greater responsibilities on corporations.

1. The FCPA at the Time of its Passage

The first section of the FCPA creates record keeping and internal controls standards. Since the Act's inception, this section has required issuers with securities registered under the Securities and Exchange Acts to "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." (37) The Act broadly defines records to include "accounts, correspondence, memorandums, tapes, disks, paper, books, and other documents or transcribed information of any type...." (38) Both qualitative omissions, such as omission of a questionable payment to a foreign official, and qualitative omissions, such as mischaracterization of a payment, are proscribed under the record keeping provision. (39) Since 1977, the FCPA also has required issuers to "devise and maintain a system of internal accounting controls" in order to improve corporate accountability and allow corporate directors, officers, and shareholders to detect and prevent the unlawful use of an issuer's assets. (40) An issuer violates this provision if it knowingly circumvents or fails to implement a system of internal accounting controls. (41)

The accounting and control provisions, one of the first federal laws to mandate compliance with corporate governance standards, have allowed the SEC to detect, investigate, and prosecute bribery. (42) For example, in 1996 the SEC brought an action against Montedison, an Italian industrial conglomerate whose shares are traded domestically within the United States. (43) The SEC alleged Montedison violated the record keeping provision by disguising several hundred million dollars in bribes to Italian politicians. (44) Five years later Montedison settled with the SEC, agreeing to pay a $300,000 fine. (45) Similarly, in 1997 the SEC filed a complaint against Triton Indonesia, a subsidiary of Triton Energy Corporation, alleging it "failed to devise and maintain an adequate system of internal accounting controls." (46) Triton agreed to a final judgment that enjoins it from violating the FCPA and exacts a $300,000 fine. (47) More recently, the SEC issued a cease-and desist order and levied a $100,000 fine against Chiquita Brands as a result of internal control violations by its Colombian subsidiary, Banadex. (48)

While the record keeping and internal controls measures have helped to combat bribery, the heart of the FCPA lies in its anti-bribery provisions. Since 1977, Congress has applied the FCPA's anti-bribery provisions to both "issuers" and "domestic concerns." (49) An issuer is any entity that must register under Section 12 of the Securities and Exchange Act or that must file reports under Section 15(d) of that Act. (50) Domestic concerns include U.S. nationals; a juridical entity organized under U.S. law or with its principal place of business within the United States; and any officer, agent, employee, or stockholder of a domestic concern. (51) Under this definition, a domestic concern employed by a foreign entity or subsidiary is amenable to suit under the anti-bribery provisions while his or her principal or employer is not. (52)

Although Congress expanded the FCPA in 1998, since 1977 Congress has required the government to prove the same five, general elements to establish a violation of the Act. First, the entity making a payment must act corruptly. (53) While the Act does not define the term "corruptly", the Eighth Circuit has stated that, for purposes of the FCPA, a corrupt act is "intended to induce the recipient to misuse his official position or to influence someone else to do so" or is "done voluntarily and intentionally, and with a bad purpose of accomplishing either an unlawful end or result, or a lawful end or result by some unlawful method or means." (54)

Second, the entity must use the mail or any other means of interstate commerce in furtherance of an offer, payment, or promise to pay anything of value. (55) Cases not involving the FCPA have held that, under the federal mail fraud statute, a use of the mail that is merely "incident to an essential part of the scheme" constitutes use of the mail. (56) More directly, a United States citizen who traveled to Nigeria with six gold watches intended as bribes for Nigerian officials made use of interstate commerce. (57) These expansive definitions impose heightened responsibilities upon corporations.

The third element the government must establish is an offer, payment, or promise of value made to any foreign official, foreign political party, party official, or foreign candidate for political office. (58) This element is satisfied if an issuer or domestic concern knows that a portion of an offer, payment, or promise of value, although not directly being used to bribe a foreign official, will be re-given or re-promised to a foreign official, foreign political party, foreign party official, or foreign candidate for political office. (59) Thus, this element imposes vicarious liability on issuers and domestic concerns, holding issuers and domestic concerns responsible for the acts of third parties who are not amenable to suit under the Act. For purposes of vicarious liability, knowledge exists if an issuer or domestic concern is aware a third party is committing bribery, firmly believes that bribery is substantially certain to occur, or perceives a high probability that bribery will occur. (60)

Vicarious liability demands greater corporate responsibility; compels more scrupulous oversight of a parent company's subsidiaries, agents, and affiliates; and holds multinationals accountable when they fail to discharge their obligations. For example, in 2004 the SEC lodged a complaint against Vetco Gray, Inc., a foreign corporation traded publicly in the U.S. (61) The complaint alleged Vecto Gray was vicariously liable for payments it made to its foreign subsidiaries because it knew the subsidiaries used the payments to secure oil contracts in Nigeria, Angola, and Kazakhstan through bribery. (62) Vecto Gray agreed to a $5.9 million settlement the day the SEC filed its complaint in Federal District Court. (63) Similarly, if an issuer or domestic concern makes a payment to a foreign sales agent while consciously disregarding information suggesting the agent will use that money to make an improper payment, the issuer or domestic concern likely has violated the Act's vicarious liability provision. (64)

Since 1977, the fourth element of the anti-bribery regulations has required payments to be made for the purpose of influencing an official act or decision; inducing the official to do any act in violation of his lawful duty; or inducing an official to use his power to affect a government act or decision. (65) The issuer or domestic concern need not offer payment for the purpose of influencing the foreign official's own government. Rather, pursuant to the Act's broad language, if an issuer or domestic concern pays a foreign official for the purpose of influencing the U.S. government or a private enterprise, and if all other elements are met, that payment would violate the Act. (66)

Fifth, to establish a violation of the FCPA the government must prove the issuer or domestic concern, in offering a payment, sought to obtain or retain business for any person. (67) This sweeping language has made it easier to address "the concern of Congress with the immorality, inefficiency, and unethical character of bribery...." (68) Two cases illustrate this point. First, in SEC v. Monsanto, the SEC concluded that Monsanto's authorization of $50,000 in illicit payments from an Indonesian consulting firm to a senior Indonesian official, in exchange for repeal of legislation that had adversely affected Monsanto's business, constituted a payment offered to assist in obtaining business. (69) Similarly, in United States v. Kay the Fifth Circuit stated that "Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly, in obtaining or retaining business for some person." (70) The court held that bribes paid to customs officials in order to receive reduced customs and tax rates fall within the Act's proscription if "the bribery was intended to produce an effect-here, through tax savings-that would 'assist in obtaining or retaining business.'" (71)

2. The 1998 Amendments

In 1998, Congress …

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Publication information: Article title: The Evolution and Endpoint of Responsibility: The FCPA, SOX, Socialist-Oriented Governments, Gratuitous Promises, and a Novel CSR Code. Contributors: Einhorn, Aaron N. - Author. Journal title: Denver Journal of International Law and Policy. Volume: 35. Issue: 3-4 Publication date: Summer-Fall 2007. Page number: 509+. © 2009 University of Denver. COPYRIGHT 2007 Gale Group.

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