FCPAméricas Blog
There at the Beginning: Thoughts on the FCPA from the SEC’s Former Chairman (1975-1977)
3.27.2013
Roderick M. Hills was Chairman of the U.S. Securities & Exchange Commission (SEC) during 1975-77, a period in which over 400 U.S. companies disclosed that they had made “questionable payments” to foreign officials. As a direct reaction to these disclosures, the U.S. Foreign Corruption Practices Act (FCPA) was enacted some eight months after he left the agency. He remains active today in governance issues as Founder and Chairman of the Hills Program on Governance at the Center for Strategic International Studies.
Recently, Mr. Hills offered his thoughts on the FCPA during a TRACE workshop in Mexico. His words are of interest because he presided over the agency that uncovered the problem for which the FCPA was designed. Based on his presentation, Mr. Hills shared the following insights with FCPAméricas:
The decision to investigate the U.S. companies who were “paying off” foreign officials was something of an accident. In 1974, an FBI agent found that American Airlines had made an illegal political contribution to President Nixon using a “secret” bank account. When SEC enforcement staff looked at that same account, they learned that it was used to bribe a foreign official to secure landing rights in his country. Disclosure by a few other companies of comparable payments caused the SEC to commence enforcement actions against such companies on the grounds that they had failed to maintain proper books and records and/or that the payments were of a nature that required their disclosure to stockholders.
As we began to understand that the problem was widespread, we announced the Commission’s willingness to exercise prosecutorial discretion with respect to companies that voluntarily disclosed their payments to foreign officials and conducted independent investigations of their practices. At the same time, we made it clear that the failure to disclose such payments would subject companies to enforcement actions. That some 400 companies made such disclosures made it clear to the world that international bribery was all too common.
Our actions were initially met by widespread criticism that we were crippling U.S. business; that bribery in a foreign country was none of our business.
Nonetheless, we also took 3 specific steps to prevent further bribery:
– We required strong internal controls to improve the accuracy of corporate books and records;
– We required that independent auditors report any suspicion about corporate payments to persons independent of that suspicion; and
– We caused the New York Stock Exchange to require listed companies to have audit committees composed of independent directors.
We also encouraged the U.S. Department of Justice to bring criminal action against companies who had failed to disclose substantial bribery activity.
My view at the time was that the problem of bribery that we had uncovered had been dealt with and I did not support the passage of the Foreign Corrupt Practice Act. I was concerned then that broad criminalization of “questionable payments” to foreign officials would adversely affect the incentives for transparency that we had created. Nonetheless, the FCPA was passed and it has been properly amended to reduce the possibility that undue criminal actions will be brought.
It is important to remember that it was the ability of the SEC to cause disclosure that brought the scope of worldwide corporate bribery to light. What began in the 1970’s with the SEC enforcement efforts is now a worldwide crusade against the use of bribes to secure business.
Today I accept that the FCPA has had, on balance, a positive effect on the reduction of bribery and that similar laws in other countries can have a similar effect. However, criminalization alone is not a useful policy. By itself it is an incentive to conceal. Without effective independent auditing, fair enforcement of FCPA type legislation is unlikely. Also, I believe that in the United States and elsewhere, prosecutorial discretion is essential if we are serious about reducing the corruption.
Payments that are made in response to extortion demands or payments that are made by lower level corporate officials contrary to the policies of their employer should surely be treated differently than money crassly offered to buy corrupt official action.
In short, as other countries are following the United States’ lead they need to understand that the criminalization of corporate bribery is not enough. If a country does not have effective means of causing broad transparency with effective auditing and independent oversight, FCPA type laws make it too easy to use improper payments as a political weapon.
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© 2013 Matteson Ellis Law, PLLC
Post authored by Matteson Ellis, FCPAméricas Founder & Editor
Comments
March 28th, 2013 at 3:18 pm
Dear Sirs:
I have great respect for my old friend Rod Hills. Yet, first and foremost, the credit for uncovering huge bribes paid to foreign government officials by US corporations in the 1970s, which paved the way for the FCPA legislation, goes to Senator Frank Church of Idaho, who chaired the US Senate sub-committee on Multinational Corporations and to Stanley Sporkin, who throughout the 1970s served as the SEC’s Director of Enforcement.
I was a business reporter in Washington DC back then for The Times (London) and I use my notes for the chapter “It All Started With Watergate” in my new book, available at Amazon, “Waging War on Corruption – Inside the Movement Fighting the Abuse of Power.”
Sincerely,
Frank Vogl