Settlement amounts in FCPA enforcement actions have grown over the past decade. This much you already knew.
A significant contributing factor is the increased use of disgorgement in FCPA enforcement actions. For instance, as highlighted in this prior post, 96% of SEC FCPA enforcement settlement amounts in 2010 consisted of disgorgement and prejudgment interest.
The theory seems to be this, if Company A made an improper payment in violation of the FCPA to obtain Contract A, all of the Company A’s net profits associated with Contract A are subject to disgorgement.
In my opening remarks at the World Bribery and Corruption Compliance Forum in London in September 2010 (see here) I observed as follows.
“Another issue in need of deeper analysis is the commonly held enforcement view that the contract (and thus net profits of the contract) at issue was secured solely because of the alleged improper payments made by the corporate. This ignores the fact that most of the companies settling enforcement actions are otherwise viewed as industry leaders presumably because they offer the best product or service for the best price. With such companies, can it truly be said that the alleged improper payments were the sole reason the company secured the contract at issue, thus justifying the company being forced to disgorge all of its net profits associated with the contract? Does a but for analysis have a place in bribery laws – in other words should the enforcement agency have to prove that but for the improper payment, the company would not have secured the contract at issue?”
In a recent piece titled “Economic Analysis of Damages under the Foreign Corrupt Practices Act,” (here) Dr. Patrick Conroy (here) and Dr. Graeme Hunter (here) – both of Nera Economic Consulting – spend some time in the “but-for” world.
The authors note that “to date there has been little consideration of the true benefit of the bribe” but “with fines in the hundreds of millions of dollars and increasing enforcement, it is necessary to clearly understand what effect a bribe had on profits and to carefully establish what the but-for profits would have been without the bribe.”
The authors note that “while a bribe may have led to very high gains, the but-for profits could have been high (and the gain from the bribe low) if the bribe would have little effect on the probability of winning the work or if alternative projects were similarly profitable.”
The authors state as follows. “If a company pays a bribe to secure a project, what is the gain to the company from the bribe? While one answer might be the profits earned by the project, we outline [in the article] a number of considerations based on the incremental probability of winning generated by the bribe and the opportunity cost of the project won that will lead to a more realistic, and sometimes lower, calculation of the true economic profits from the bribe.”
The authors conclude as follows. “International bribery has become a regulatory enforcement priority based on the FCPA in the US and the soon-to-be-implemented Anti-Bribery Act in the UK. Applying greater precision to the financial benefits of bribery is necessary given increasing enforcement.”
A thought-provoking read and time well spent in the “but-for” world.