Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Diageo Charged With Bribing Asian Officials

The Securities and Exchange Commission today charged Diageo, one of the world’s largest producers of premium alcoholic beverages, with widespread violations of the Foreign Corrupt Practices Act. The SEC alleges that Diageo made improper payments to government officials in India, Thailand and South Korea over a period of six years.

Which no doubt has some people asking: Why on earth do U.S. securities regulators care if Diageo is bribing Indian government officials?

The Foreign Corrupt Practices Act of 1977 criminalized the bribery of foreign officials by U.S. corporations.

This is often seen as a byproduct of post-Watergate moralizing. During the Watergate investigations it was discovered that some U.S. companies had been bribing foreign officials to gain business benefits. The lack of an anti-bribery statute to apply to these situations was seen as a loophole that needed to be closed.

Congressional objectives underlying the legislation were complex, but they included a desire to improve the American business image abroad, prevent the spread of corruption in friendly governments and restore legitimate commercial competition.

Hard-nosed people tend to regard the FCPA as a bit of over-zealous legislative moralizing that could actually handicap U.S. businesses.

After all, most other countries do not pursue their own companies for bribing foreign officials. And in some countries, bribery is the only way to get business done.

But these hard-nosed people aren’t quite right. A more sophisticated view of the law is that it was not, in fact, pure moralizing. A more sophisticated approach would hold that the FCPA was intended to cut down on anticompetitive behavior by U.S. corporations. In this view, U.S. corporations were using bribery of foreign officials to gain advantages over U.S.-based multinational competitors. So the FCPA is a kind of antitrust for international business.

But I still think that's still too simple. I doubt that the "honest" companies would have been able to get the Congress to pass the FCPA if it was really a fight between the bribers and the honest.

I think that the FCPA was put in place to stop the expatriation of corporate profits to foreign government officials. The lack of a law covering foreign bribery had created a bribery arms race among U.S. corporations. But this arms race was a dead weight cost since bribery is zero sum.

U.S. companies faced a prisoner's dilemma when it came to bribes. They'd all benefit if none paid bribes, but the risk of defection was too high. The point of the FCPA was to increase the cost of defecting.

In effect, the FCPA was a disarmament agreement by U.S. corporations that individually would prefer to avoid paying bribes but could not afford to risk the competition would pay bribes. It was a conspiracy in restraint of bribery.


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