Allegations of a Foreign Corrupt Practices Act violation can easily cost a company hundreds of millions of dollars. And that's before the U.S. Department of Justice or the Securities and Exchange Commission levies one dollar in fines or penalties.

Internal investigations can quickly spiral into multi-million dollar affairs.  Walmart, for example, spent nearly half a billion dollars over two years on its investigation into possible FCPA violations, according to a January Form 10-K filing.  When Avon, announced results for its first quarter, it said it accrued a total of $135 million related to its FCPA investigation; its settlement with the SEC and Justice Department would run another $135 million.

FCPA investigations usually encompass multiple foreign locations, Lauren Resnick, an attorney with Baker Hostetler, says. “These are expensive investigations to run.”

Then there is the hit to a company's reputation and the other problems that can cause the company's stock price to decline. According to a study by the Searle Civil Justice Institute at George Mason University, the initial revelation of an FCPA charge is associated with an average drop in companies' market capitalizations of 2.9 percent, the study found.  For a company like Walmart, with a $240 billion market cap, that equates into nearly $7 billion in lost shareholder value.

“It's the FCPA's many ripples,” Mike Koehler, a law professor at Southern Illinois University School of Law and author of the FCPA Professor blog, says. He notes that along with the settlements or fines, the hit to their stock prices, and the expenses incurred in investigating and rectifying potential violations, companies also can find it costs more to borrow money, and potential merger and acquisition partners may back out, at least until the charges are settled. “If a company is under FCPA scrutiny, not many people want to dance with it,” he says. 

When companies do decide to settle charges with regulators, the fines and penalties they face are also climbing. Between 1978 and 2004, the average, inflation-adjusted penalty was $5.4 million, with a median penalty of $.2 million, according to the George Mason study. From 2005 to 2011, those numbers skyrocketed to an average of $60 million, and a median of $7.8 million.

The Fraud Multiplier

The magnitude of the cost of FCPA allegations varies dramatically with the type of charges. Firms facing bribery charges alone experience an average cumulative reduction in market value of 2.7 percent, while those charged with both bribery and fraud saw their values plummet 55 percent. “We found that the market reacts much more adversely to announcements of firms intending to deceive,” Jerry Martin, associate professor of finance at American University and a principal investigator on the study, says.  Nearly all the bribes (86 percent) examined in the study were intended to gain sales; 7 percent were made in exchange for political or regulatory favors.

For firms charged just with bribery, and not financial statement fraud, the market's reaction can be explained as a rational calculation of the impact of the cost the firms incur to investigate potential violations and to cover any fines or penalties, Martin says. “This completely explains the abnormal market reaction.”  That's not true for companies that were engaged in financial fraud, where a reputational hit comes into play, he says.

While few would claim that an FCPA investigation can (or should) be conducted on the cheap, can they be managed more effectively? “Some of the reported costs of the investigations are stupefying,” Homer Moyer, an attorney and FCPA expert with Miller Chevalier, says. “It raises the question whether costs of that magnitude are necessary or efficient.”

“We found that the market acts much more adversely to announcements of firms intending to deceive.”

—Jerry Martin,

Associate Professor,

American University

“There's a lot of fear-based marketing when it comes to the FCPA,” Koehler says. That's because the “where else?” question looms large once a company is charged with an FCPA violation. “Every instance of FCPA scrutiny has a point of entry,” he explains. If a company has problems in Asia, the next task should be to identify other regions where the activity might have occurred, and that determination takes time, expertise, and money.

Companies should continually assess whether FCPA-related funds are being spent prudently, and take steps to keep the costs from growing out of control, Moyer says. First, they need to understand the factors that drive up costs, including the number of legal professionals involved and how far back the investigation goes.

Managing Investigation Costs

One question that often arises in FCPA investigations: Is it more effective to have various teams on the ground in different countries, or one team that travels to the various locations? “Almost always, a single traveling team will be more efficient than multiple teams in different locations,” Moyer says. Various teams will likely have different levels of FCPA expertise, he explains, and considerable time and expense may be required to coordinate multiple findings.


Below is an excerpt from the George Mason University Law & Economic Center's study of the FCPA's economic impact, which describes trends in FCPA enforcement and associated costs.

FCPA enforcement has been on a dramatic upward trend since the early 2000s. Of the 189 total actions from 1978-April 2013, 70 percent have occurred since 2005. Corporate penalties have also increased markedly. As documented in the 2012 Report, average real (2010 dollars) corporate penalties were $5.4 million from 1978-2004, compared to $60.2 million from 2005-2011. Penalties, however, are only one component of FCPA enforcement costs. Internal investigations into FCPA violations as well as compliance and monitoring programs put into place as part of settlements can easily cost more than the penalties themselves.

In addition to these direct costs, firms charged with violating the FCPA's bribery provision could suffer indirect costs associated with a diminished reputation. Previous research shows that many firms experience reputational losses when they are incriminated in other types of illegal or opportunistic behavior. A reputation loss refers to the present value of the firm's loss that accrues when counterparties change the terms of trade by which they are willing to do business. For example, firms that sell defective products experience declines in sales, and firms that restate earnings experience higher borrowing costs. Indeed, for some types of misconduct, the reputation loss swamps all of the direct costs incurred by the firm, and represents the most consequential impact on firm value.24 Consequently, one argument against more intense bribery enforcement is that shareholders of firms charged with foreign bribery may already suffer large reputational losses in the form of decreased sales and increased costs. This is an empirical matter that we seek to address by examining actual FCPA enforcement actions.

Source: George Mason University.

The scope of an investigation will also affect the cost. An investigation has to be rigorous and comprehensive, and one way to achieve that, yet keep the scope in check, is to identify when it makes sense to stop investigating and start remediating, Moyer says. For example, if an initial investigation finds that third parties in several countries were working without contracts, it might not make sense to engage in a global review. The company simply can begin to attack the problem. “Instead of asking 47 times, just get the contracts in place,” Moyer says.

Similarly, an investigation may uncover behavior that raises a red flag, but an investigation seems unlikely to arrive at a clear-cut answer as to whether improper behavior actually occurred. Again, it may make sense to take action, rather than continue to investigate, Moyer says. “A comprehensive, scorched-earth investigation may be much less valuable than prompt, decisive remediation,” he says. “For instance, an investigation may find strong evidence that a third party used bribes to win business, but stops short — even with continued investigation — of uncovering conclusive evidence.” Information already obtained may be enough to decide it makes sense to sever ties with the third party.

The myriad costs companies incur when facing FCPA charges highlight the value of a robust compliance program. Resnick notes that although the FCPA doesn't (unlike the U.K. Bribery Act) contain a compliance defense provision, the Justice Department and the SEC take into account the rigor and comprehensiveness of a compliance program when deciding how, if at all, to proceed. A resource guide on the FCPA prepared by these agencies says that “these considerations reflect the recognition that a company's failure to prevent every single violation does not necessarily mean that a particular company's compliance program was not generally effective.”

That's not the only return on investment companies can gain from their efforts to boost FCPA training, controls, and compliance. “You will end up with a stronger firm, with better internal controls and better compliance efforts,” Martin says.