Securities and Exchange Commission Chairman Criticizes Other Nations for Failure to Enforce Anti-Corruption Laws

On September 9, U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton gave a speech at the Economic Club of New York.  While some of his remarks addressed recent SEC initiatives and current market issues that the SEC is monitoring, Clayton also cited “the undesirable effects of a continuing lack of global coordination and commitment” in combating foreign corruption.  In particular, he charged that “many other countries, including those that have long had similar offshore anti-corruption laws on their books, do not enforce those laws.”

Clayton first cited the SEC’s substantial record in enforcing the Foreign Corrupt Practices Act, noting that it “has brought nearly 80 FCPA cases in the past five years alone, involving alleged misconduct in more than 60 countries.”  But he cautioned that

we must face the fact that, in many areas of the world, our work may not be having the desired effect.  Why?  In significant part, because many other countries, including those that have long had similar offshore anti-corruption laws on their books, do not enforce those laws.

Clayton also contrasted the “unique enforcement posture” of the United States with two observations: (1) “the fact that U.S. jurisdiction generally is limited to areas where U.S. and U.S.-listed companies do business”; and (2) “the reality that there are countries where the business opportunities are attractive but corruption is endemic, and the potential for undesirable results becomes clear.”  He cited game-theory economists in identifying “the strong incentives for other countries not to enforce vigorously offshore corruption laws against their companies.”  For “a hypothetical country with business promise, but endemic corruption,” Clayton argued,

when this cooperative, anti-corruption strategy is being pursued by others, the benefits of playing a non-cooperative strategy are great, particularly if your company is the only one who is “cheating”—your company “wins” the lucrative offshore business with no competition.

Clayton commented that “the response to this observation has long been to acknowledge the need for greater international cooperation and cite a few isolated indicia of improvement,” but added that “[s]peaking for myself, I have not seen meaningful improvement.”

Clayton assured the audience that he does not intend to change the SEC’s FCPA enforcement posture.  At the same time, he stated that “[w]e should . . . recognize that we are acting largely alone and other countries are incentivized to play, and I believe some are in fact playing, strategies that take advantage of our laudable efforts.”  He said that when he engages with his international counterparts “on matters where common, cooperative enforcement strategies are essential,” he is mindful that “globally-oriented laws, with no, limited or asymmetric enforcement, can produce individually unfair and collectively suboptimal results.”

Note: Clayton’s remarks on anti-corruption are unusually critical for a senior U.S. official, whose agency constantly depends on smooth and harmonious relationships with its counterparts around the world, to make publicly.  Since the SEC has not previously publicized its dissatisfaction or frustration with the general state of foreign countries’ commitment to combating corruption, Clayton’s remarks may be surprising in some quarters – which may have been precisely the effect he intended.

Those remarks, however, do not indicate how Clayton thinks that state of affairs might be changed.  It is interesting to note that elsewhere in his speech, as he was advocating increasing the attractiveness of public capital markets, Clayton cited a seminal article by Professor George Akerlof, The Market for Lemons.  In that article, as Clayton noted,

Akerlof explained why, for a long time, the used car market included mostly bad used cars—or “lemons.”  Because you could not tell a good used car from a bad used car, buyers assumed all used cars were bad and priced them accordingly.  In turn, because buyers offered only “bad car” pricing, sellers offered mostly bad used cars.  This problem has been partially solved by incentive alignment and information gap bridging techniques, including enforceable used car guarantees.

One could argue that Akerlof’s analysis could be applied to countries with endemic corruption.  If key executives and legislators in those countries are themselves beneficiaries of that corruption, they have no incentive other than to stymie meaningful anti-corruption laws or to offer only weak laws and withhold enforcement resources from the agencies that could enforce those laws.  As Akerlof observed, “The presence of people in the market who are willing to offer inferior goods tends to drive the market out of existence . . . .”

One general approach that Akerlof offered to counteract the effects of quality uncertainty was “counteracting institutions.”  While Akerlof’s citations of such institutions – which included seller guarantees, brand-name goods, and licensing of professionals – were most pertinent to the used-car market, it is not difficult to conceive of other kinds of “counteracting institutions” that could be directed at the market for anti-corruption laws.

Ordinarily, as Akerlof stated, “the difficulty of distinguishing good quality from bad is inherent in the business world.”  Today, however, the information costs associated with finding examples of sound anti-corruption regimes are negligible.  Numerous countries have adopted and implemented comprehensive anti-corruption laws that can serve as models for other countries.

The greater problem is the identification or creation of “counteracting institutions” that can directly address the other asymmetries in the “market” for anti-corruption laws.  To counteract the effects of quality uncertainty in regimes afflicted with high-level endemic corruption, it is clear that those counteracting institutions must include other countries willing to exert sustained pressure on those regimes.  Whether the United States is willing to undertake such an effort, by itself or with like-minded countries, is far from clear at the moment.

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