"Economic growth is a good thing, even when it's lubricated by graft."
So argued Chicago Tribune columnist Steve Chapman, dismissing concerns about corporate bribery raised amid reports that Wal-Mart officials have covered up evidence tying the company to bribery in Mexico. Chapman's Sunday column defended Wal-Mart, whose largest subsidiary (Wal-Mart de Mexico), is under investigation by the Justice Department (DOJ). The New York Times reported:
In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company's largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.
The allegations of illicit payments put Wal-Mart under the jurisdiction of DOJ, which is investigating potential violations of the Foreign Corrupt Practices Act of 1977, a law that has been described as an "anti-bribery, anti-corruption measure enacted...to prohibit American companies from paying off foreign officials and to create an international example for ethical business practices."
The law has been in effect for 35 years, but Chapman questioned the wisdom of using U.S. law to govern corporate behavior overseas:
The question is why it's the duty of the U.S. government to dictate business practices in nations with very different business climates. You would think the Justice Department has plenty to do enforcing American laws on American soil without trying to sanitize the rest of the world.
Our idea of appropriate business practices ought to prevail in America, but less developed countries are entitled to do things their own way. If Mexico doesn't police bribery and can't change its economic culture, why should Uncle Sam take on the job? [...]
By deterring American companies from investing in such places, we deprive their citizens of goods and jobs that would improve their lives.
When extortionate officials block Wal-Mart from opening stores in Mexico, ordinary Mexicans suffer. Economic growth is a good thing, even when it's lubricated by graft.
The FCPA was passed with this explanation for why the law was necessary and spelling out why the United States should be concerned about its companies bribing foreign officials:
The payment of bribes to influence the acts or decisions of foreign officials, foreign political parties or candidates for foreign political office is unethical. It is counter to the moral expectations and values of the American public. But not only is it unethical, it is bad business as well. It erodes public confidence in the integrity of the free market system. It short-circuits the marketplace by directing business to those companies too inefficient to compete in terms of price, quality or service, or too lazy to engage in honest salesmanship, or too intent upon unloading marginal products. In short, it rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business.
Bribery of foreign officials by some American companies casts a shadow on all U.S. companies. The exposure of such activity can damage a company's image, lead to costly lawsuits, cause the cancellation of contracts, and result in the appropriation of valuable assets overseas.
Moreover, the lawmakers noted that often, by exploiting corruption abroad, American businesses were adversely affecting domestic markets. "In a number of instances," they wrote, quoting former Secretary of Commerce Elliot Richardson, "'payments have been made not to "outcompete" foreign competitors, but rather to gain an edge over other U.S. manufacturers.'"
The legislators also argued that corporate bribery "creates severe foreign policy problems for the United States," by lowering opinions of the United States and "lend[ing] credence to the suspicions sown by foreign opponents of the United States that American enterprises exert a corrupting influence on the political processes of their nations."
Chapman argued that the FCPA has been a failure, pointing out that bribery persists in developing countries and other foreign markets -- but the FCPA's bribery provisions were enforced only sporadically in the three decades following its passage; a post-Enron era of corporate accountability has led to a corruption crackdown in recent years. In October 2006, then-Assistant Attorney General Alice Fisher reiterated the need for FCPA enforcement in today's globalized economy:
I think it is worth taking a moment to explain why enforcing the FCPA in particular is so important. The answer is simple. We are enforcing the FCPA to root out global corruption and preserve the integrity of the world's markets. Corruption is the linchpin of so many different global problems. It undercuts democracy and the rule of law. It stifles economic growth and sustainable development. It destabilizes markets. And it creates an uneven playing field for U.S. companies doing business overseas.
By enforcing the FCPA, we are demonstrating our commitment to combating global corruption, maintaining the integrity of U.S. markets, and setting an example for other countries around the world.
Experts in the private sector agree. Last June, the Wall Street Journal published a KPMG LLP poll of 214 executives in the United States and the United Kingdom that found "only 39% believed anti-corruption laws had hurt them competitively." And Fortune recently took a look at the hidden costs suffered by companies who engage in bribery abroad:
For Wal-Mart, bribes allegedly bought the retail giant everything from zoning approvals to reductions in builder fees, helping it build hundreds of new stores at a pace where competitors struggle to catch up, according to the New York Times. If the allegations are true, Wal-Mart appears to have gained plenty from the strategy. Whereas the U.K. is the chain's biggest overseas market , generating an average of 8% sales growth in 2000 to 2010, Mexico's lesser-developed market averaged 12% growth over the same period, according to London-based research firm Planet Retail.
Indeed, the gains are impressive. But it becomes less so once the hidden costs are factored in, according to a World Bank study by Daniel Kaufmann and Shang-Jin Wei. Companies that pay bribes actually end up spending more time negotiating with bureaucrats since the hopes of a pay-off give officials an incentive to haggle over regulations. For instance, in a separate study looking solely at the Ukraine, Kaufmann found firms that paid excessive bribes spent about 30% more time with government officials than firms that didn't.
What's more, companies pay about 10% of their earnings to corrupt officials, according Bloomberg, citing a study released last week by the Business Coordinating Council's Private Sector Economic Studies Center. Corruption ultimately breeds more corruption, as bribes give bureaucrats more incentive to raise red tape and regulatory hurdles, which in turn opens companies up to pay even more.