The extensive reach of the FCPA beyond American borders: Is a bad deal always better than a good trial?

The American Foreign Corrupt Practices Act (FCPA), which aims to fight corruption of foreign officials, applies under some circumstances to foreign firms located outside the United States. Empirical evidence shows that when the Department of Justice or the Securities and Exchange Commission opens a case for an alleged violation of the FCPA against a foreign firm, the latter systematically accepts to settle. We argue that the structure of the pretrial phase led by the prosecutor results in a settlement even when a trial would have led to a more favorable outcome for the defendant. We use a Contest Success Function á la Tullock that we modify to capture the specificities of the procedure under the FCPA. First, we consider the parties’ expenditures during the ‘bargaining process (as opposed to the actual litigation costs) determine the outcome of the trial. Second, we assume that the effect of the prosecuting authority’s expenditures on the probability of winning in case of trial is stronger than that of the defendant’s. We show that in this framework, the case is always settled out of court. Systematic settlement entails a social cost which consists in the total absence of case law regarding the extraterritorial effect of the FCPA.