I saw G__ on a number of occasions, though I never formally met him face to face. He frequently drove by our house when he escaped the Chicago area, where he lived most of the time, for his “retreat” in the country, the house on the family farm a mile south of us that he inherited from his parents. G__ was a prosperous second-cousin of my mother’s, but we didn’t really associate with him. My grandmother had no use for him, though I didn’t learn that until after her passing. In her estimation, I understand, he was little better than a common hoodlum.
Before he retired, G__ worked for what was then one of the largest conglomerates in the food industry -- until one of the most notorious private equity firms of the heyday of corporate raiding swooped in, cannibalized the company, and in the space of a few months made a Fortune 500 corporation –- poof! – disappear. G__ had retired long before the company met that ignominious end, though. A some point in his career, his job, at least according to family scuttlebutt, had been to travel around South America bribing government officials and greasing the wheels on behalf of his employer, and though, as it turns out, there was nothing illegal in doing that as far as the United States was concerned -- or even in the laws of some of the countries where he practiced his craft – it was more than adequate to offend my grandmother’s Baptist moral sensibilities. Anyone who wanted to remain in her good graces did not associate with G__’s kind!
WalMart’s smiley-face is wearing a frown these days over allegations that high-level officials in the corporation participated in a cover-up of wide-spread bribery of Mexican officials in violation of the Foreign Corrupt Practices Act. While the folks in Bentonville lawyer-up and work out the choreography of their song and dance numbers for the Department of Justice, let’s hop aboard the old Way-Back Machine and take a look at how the FCPA came about in the first place.
The nineteen-seventies was a decade that was tough on Americans. It was a time in which the public, which had languished in blissful ignorance in the post-war era, was brutally jolted into awareness and a mirror held up to their collective face. And many Americans didn’t like the ugly visage that stared back at them.
John Dean sworn in at Watergate hearings
The unfolding investigation into White House involvement in the break-in at Democratic headquarters in the Watergate Hotel in 1972 consumed the summer of 1973. As it dragged on, one of the things discovered was that the Nixon campaign had received illegal contributions from hundreds of U.S. companies, and that some of those contributions came from secret slush funds the companies maintained. The Securities and Exchange Commission subsequently uncovered some 400 U.S. companies operating such clandestine accounts, concealed from their stockholders.
On May 11, 1973, a week before the Senate opened its legendary Watergate hearings, a federal judge presiding over the trial of Daniel Ellsberg and his colleague Anthony Russo threw out the case after admissions of government misconduct were revealed. It was discovered that the administration had sent members of the White House “plumbers”, some of them the same people involved in orchestrating the Watergate fiasco, to break into the office of Ellsberg’s psychiatrist. Additionally, the FBI had illegally wiretapped his phone and top-level White House staff had attempted to bribe the judge in the case with a promise of the directorship of the FBI. There was even a bizarre plot, never carried out, to try to ‘dose’ Ellsberg with LSD before he was scheduled to speak to a rally of supporters.
As the Watergate investigation was underway, a September 11, 1973 military coup overthrew the government of Chile, resulting in the death – through suicide or assassination, chose your side – of duly-elected President Salvador Allende. In short order, rumors of CIA involvement, at the behest of giant, U.S.-based multi-national corporations such as International Telephone and Telegraph, Purina, Pfizer, Bank of America, and others, began to surface.
The following year, the New York Times published an article by Seymour Hersh exposing secret CIA and FBI spying on U.S. citizens, the planting of informants and even instigators in the antiwar movement, leftist groups, black power organizations, and even staid civil rights groups. The government’s actions against Daniel Ellsberg during the Pentagon Papers affair still fresh in the mind, the Senate was prompted to convene hearings, in January of 1975, before the Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities, which would become known in popular parlance as the Church Committee after its chairman, Frank Church (D-ID). The following month a short-lived House Select Committee on Intelligence was formed under the chairmanship of, Lucien Nedzi (D-MI), and though it was soon disbanded, a new committee was quickly formed headed by Otis Pike (D-NY) which opened a similar probe into the activities of the CIA and the broader intelligence community.
Senator Frank Church
The revelations that poured out of these hearings portrayed an intelligence apparatus behaving, in the words of Church, like a “rogue elephant”. Though much of the evidence provided to the committees was classified and withheld from the public, the committee organization leaked like a sieve, and seemingly daily revelations of new and ever more offensive activities found their way into the news media. Besides the incidents of domestic spying and attempting to influence the direction of organizations toward outrageous actions intended to discredit those organizations in the public’s eye, the leaks also provided a glimpse into the seamy underbelly of the CIA’s foreign activities. Long suspected by some observers, the leaks seemed to confirm CIA involvement in a myriad of coups, revolts, and assassinations throughout the third world and beyond. Terms like ‘covert’, ‘clandestine’, ‘black ops’, and ‘wet work’ became unwelcome household words.
The lid of the chest was being opened a crack and the American public was getting its first look, however shrouded, at the CIA’s “family jewels”. Greece, 1946 and 1948; Iran, 1953; the Philippines, 1953; Guatemala, 1954; Laos, 1960; Cuba before, during, and after the revolution, including the Bay of Pigs in 1961 and some truly bizarre attempts to assassinate Castro; The Congo, 1961; Dominican Republic, 1961 and 1963; Ecuador, 1961; Iraq, 1963; South Vietnam, 1963; Brazil, 1964; British Guiana, 1964; Indonesia, 1965; Ghana, 1966; Greece, 1968; a repeat performance in Iraq in 1968; Cambodia, 1970 – Chile, it seemed, was only the most recent. And lurking in the shadows behind virtually every one of these actions were American corporations whose profits were being threatened and which expected the American defense establishment to bail them out. It was something that had been going on for a very long time.
I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.
Maj. Gen. Smedley Butler, War Is A Racket (1935)
While the secret corporate slush funds that had been uncovered by the Watergate hearings and the Securities and Exchange Commission had been used to influence the outcome of United States elections, that was not their primary purpose. The funds existed a as source for bribe money for operating in foreign markets. They paved the way for corporations to get a foothold in a foreign market, and bought them license to behave badly. And if it all blew up, they could rely on the CIA, or the military, to come in and bail them out.
It all started in the wake of the Watergate scandal, when an investigation into illegal contributions to President Nixon's re-election campaign lead to the discovery of cash slush funds in hundreds of U.S. corporations. The Securities and Exchange Commission (SEC), which regulates publicly traded companies, revealed that 400 American companies had spent hundreds of millions of dollars bribing everyone from prime ministers to police overseas.
It turned out, however, that bribing foreign government officials to obtain or retain business was not illegal. In some European countries, a foreign bribe could be deducted from corporate tax returns as an expense. It was simply considered the cost of doing business in the international market.
Frontline Spotlight: History of the FCPA - How a tough U.S. anti-bribery law came to pass
Even as all this was being unraveled, on-going bad behavior by US corporations was being exposed. In 1974, United Brands (formerly the United Fruit Company) was discovered to have bribed a Honduran official to the tune of $2.5 million to cut in half a tax on bananas, saving the corporation’s Chaquita Bananas division about $7.5 million. After arguing unsuccessfully with the SEC that the bribes should be kept secret because their disclosure would hurt the company and its stockholders, the company then tried to get the State Department to intervene and prevent the SEC from releasing the information on the argument that the disclosure would harm US diplomatic relations with Honduras. In the end, the bribes were revealed, the military government of Honduras overthrown, and many of United Brands’ holdings in the country either nationalized or divested.
Another series of hearings chaired by Frank Church in 1975-76 by the committee on Banking, Housing, and Urban Affairs revealed Lockheed Corporation had engaged in widespread bribery and corruption in Europe. And since the US government had bailed out the struggling aircraft maker in 1971, the implication seemed clear – by the principle of fungibility, at least, US taxpayer dollars had been used to bribe foreign officials in West Germany, Italy, Japan, the Netherlands, and Saudi Arabia to the tune of more than $22 million. The revelations unleashed a diplomatic shitstorm and led to the resignations of both top Lockheed officials and high-ranking officials throughout Europe and Japan.
The cumulative bad taste left in the public’s mouth had its effect. With President Gerald Ford’s pardon of his predecessor in 1974, he had probably already sealed his fate, but the seemingly unending procession of scandals only added to a reformist, anti-Washington house-cleaning fervor. In the 1976 Presidential election, perhaps in a display of atonement, the public sent a Baptist Sunday school teacher to the White House.
This was the atmosphere, then, when the new Senate convened in 1977. In May of the previous year the SEC had delivered to the Banking, Housing, and Urban Affairs committee a report titled “Report on Questionable and Illegal Corporate Payments and Practices” detailing the widespread use of the secret slush finds for bribery of foreign officials, and the concealment of these funds and activities from stockholders. The SEC requested legislative action by the Congress in response to the problems that had been uncovered. Various bills were proposed during 1976 and an anti-corruption bill, S-3664 passed in the Senate on a unanimous vote of 86-0 in mid-September, but the House failed to complete work on the bill before adjourning at the beginning of October.
Senator William Proxmire
Shortly after the 95th Congress convened on January 18, 1977, Senators Proxmire and Williams introduced S. 305. As introduced, title I of the bill was identical to S. 3664, the measure which the Senate had passed unanimously during the prior Congress and title II was substantially the same as Title II of S. 3084.
The committee held hearing on S. 305 on March 16, 1977, and received testimony from Senator Metcalf, the Securities and Exchange Commission, the Department of the Treasury, the American Bankers Association, and the Securities Industry Association. Subsequently, on April 7, 1977, the committee met in open session to consider S. 305. The committee ordered the bill, with an amendment, to be reported to the Senate.
Legislative History – Senate Report 95-114 - FOREIGN CORRUPT PRACTICES AND DOMESTIC AND FOREIGN INVESTMENT IMPROVED DISCLOSURE ACTS OF 1977
The reaction from the companies involved in bribery was unanimous. They
had to be allowed to engage in bribery. To do otherwise would put them at a competitive disadvantage against their competition. But in the end the committee ignored their complaints. The Senate passed the bill in May. The bill passed through the House in November with minor changes which were worked out in conference committee, and the final bill was signed into law by President Carter December 19, 1977.
Corporate bribery is bad business. In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet. Corporate bribery of foreign officials takes place primarily to assist corporations in gaining business. Thus foreign corporate bribery affects the very stability of overseas business. Foreign corporate bribes also affect our domestic competitive climate when domestic firms engage in such practices as a substitute for healthy competition for foreign business.
Managements which resort to corporate bribery and the falsification of records to enhance their business reveal a lack of confidence about themselves. Secretary of the Treasury Blumenthal, in appearing before the committee in support of the criminalization of foreign corporate bribery testified that: "Paying bribes - apart from being morally repugnant and illegal in most countries - is simply not necessary for the successful conduct of business here or overseas.''
The committee concurs in Secretary Blumenthal's judgment. Many U.S. firms have taken a strong stand against paying foreign bribes and are still able to compete in international trade. Unfortunately, the reputation and image of all U.S. businessmen has been tarnished by the activities of a sizable number, but by no means a majority of American firms. A
strong antibribery law is urgently needed to bring these corrupt practices to a halt and to restore public confidence in the integrity of the American business system.
Legislative History – Senate Report 95-114 - FOREIGN CORRUPT PRACTICES AND DOMESTIC AND FOREIGN INVESTMENT IMPROVED DISCLOSURE ACTS OF 1977
With the implementation of the act, the United States became the only country in the world to prohibit the bribery of foreign officials.
In the years that followed, there have been changes (and attempted changes) to the act. Almost immediately, an attempt to eviscerate the act was introduced by the Reagan administration in 1981, but was beaten back by Democrats in Congress. The 1988 Omnibus Trade Bill amended the law in order to establish a uniform standard among the partners in our trade agreements. The act was most recently amended in 1998 to comply with an international agreement by members of the Organization for Economic Co-operation and Development.
The act has been controversial since its enactment, with some critics attacking it as ineffective and the American business community complaining that it places U.S. enterprises at a competitive disadvantage abroad. Since the late 1990s, however, it has become a model for international efforts to stamp out corruption and improve the business climate in the developing world.
[…]
The complaint that the FCPA created a competitive disadvantage for American businessmen was addressed through the adoption of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of the OECD, which went into effect on February 15, 1999.
This convention, ratified by thirty-four countries as of 2003, requires participating countries to make it a crime to offer, promise, or give a bribe to a foreign public official to obtain or retain international business deals, and is based in large part on the FCPA. A related text effectively puts an end to the practice according tax deductibility for bribe payments made to foreign officials practice that used to be accepted in many major trading countries, such as Germany.
enotes: Foreign Corrupt Practices Act (FCPA)
The Foreign Corrupt Practices Act remains the law of the land, but there is still potent opposition to the law. Even now, the U.S. Chamber of Commerce, with the support of all the usual suspects, is pushing for changes to weaken the act. Eternal vigilance, friends, eternal vigilance.
And that, dear Kossacks, is where regulation comes from -- not from bored bureaucrats sitting in an office in Washington trying to think up ways to make life miserable and expensive for some innocent and unsuspecting businessman, but from real human suffering and tragedy brought about, all too often, by people who shirk what should be obvious responsibilities, who neglect basic diligence, who sacrifice safety for profit. They bring suffering on those who trust them and their products, and society adopts measures to make sure it never happens again. We have to force them, through regulation, to behave as they should have been behaving all along. That's how regulation came to be.
Previous installments of How Regulation came to be: