Regulatory Competition and Anticorruption Law

My paper, Regulatory Competition and Anticorruption Law, which was recently published in the Virginia Journal of International Law, responds to arguments that the recent increase in European enforcement of anti-bribery laws has created a risk of overenforcement. Critics of the current international regime, including the U.S. Chamber of Commerce and several academics, have argued that cracking down on bribery of government officials by rich-world firms will leave the field open to multinationals whose home countries do not care about corruption (China and India typically are mentioned). These critics would have the United States relax its international bribery rules by providing more defenses and safe harbors, as well as bargain for similar regulatory contraction by other major players such as Germany and the United Kingdom. I disagree.

The paper discusses the dynamics of regulatory competition generally and particularly with respect to competition law. Robust government competition regulation of transnational transactions has been around for decades and generated both a rich body of practice and significant academic study. Although some prominent scholars have called for strong international coordination of this regulation, including building competition law into the treaties enforced by the World Trade Organization, these proposals have gone nowhere. This is because the case for stronger coordination is complicated and involves significant risks, including broadening the opportunities for regulatory capture. Moreover, even though competition regulation at the national level easily might generate negative externalities for other states, the benefits of regulatory competition still exist here and might outweigh the cost of these externalities. This explains why we see only very weak policy coordination, such as the technical assistance administered by the International Competition Network and various bilateral agreements to promote exchanges of information among prosecutors.

The paper then argues that however weak the case for international regulatory coordination with respect to competition, it is much stronger than that with respect to anticorruption regulation. A ban on foreign bribery must be understood not as an altruistic favor to the people of the developing world, who suffer from bribe-taking governments, but as a solution to a collective action problem faced by rich-world firms. First, the mechanisms for paying bribes – the creation of black accounts for unsupervised expenditures – leaves firms open to embezzlement as well as misleading investors about firms’ performance. Second, because it cannot be known whether a bribe recipient will perform as promised, the market-for-lemons dynamic applies to bribery. Firms seeking to compete with other bribe payers thus will overpay relative to the value of the services provided. Repressing bribe payments spares firms from bad investments. Because states that regulate foreign bribery internalize significant benefits, the risk of under-regulation of domestic actors is reduced. Moreover, because the rules and policies of anticorruption law are much clearer than those of competition law, it is easier to detect regulatory misbehavior, such as limiting enforcement to foreign firms. Finally, firms whose home states don’t care about corruption will have difficulty expanding their operations in the developing world without seeking access to first-world capital markets, which entails submission to U.S., German or U.K. anticorruption regulation. On balance then, the status quo in international coordination, which takes place mostly through informal exchanges administered by the Organization for Economic Cooperation and Development, seems defensible.

The full paper can be downloaded here.