Policeman for the World: U.S. Enforcement of Foreign Corruption Regulation and Corporate Investment Policies

Abstract

We provide evidence on the determinants, targets, and consequences of U.S. enforcement of the Foreign Corrupt Practices Act (FCPA). Both U.S. companies and foreign companies under U.S. jurisdiction headquartered in countries that agree to increase cooperation with U.S. regulators (“FCR” firms) experience an increase in FCPA prosecutions in the mid-2000s, particularly for violations of the Act’s accounting provision. Following this increase in enforcement, FCR firms reduce direct investment in corrupt countries; additionally, there is no evidence that non-FCR firms offset this reduction. When acquiring a firm in a corrupt country, FCR firms increase the length of their due diligence and the likelihood of disclosing an accounting advisor. Overall, our evidence highlights (i) the central role of the U.S. in the worldwide enforcement of foreign corruption regulation, (ii) the importance of regulatory cooperation and accounting controls in detecting corrupt practices and facilitating enforcement actions, and (iii) the significant impact of U.S. anti-corruption regulation on corporate investment in corrupt countries.

Keywords: Foreign Corruption Regulation; Enforcement; Foreign Corrupt Practices Act (FCPA); Foreign Direct Investment; Mergers and Acquisitions; Internal Controls

JEL Classification: F50; F60; K2; M4; O1