The US is infamous for passing laws that apply to people and businesses everywhere in the world. And while that may be annoying as hell if you are a US citizen having to pay income tax in the US even though you don’t live there anymore, it can in some cases have positive unintended consequences.
One of the ‘global laws’ is the Foreign Corruption Practice Act (FCPA). Every company with a listing on an American stock exchange, even if they are not US businesses but only have ADRs listed in the US is subject to this law. And that means that if a business engages in corruption, bribery, and similar acts, the SEC can fine them.
For many years, this law wasn’t really enforced all that well but in 2004, the SEC dramatically stepped up enforcement. The fines got larger, and the SEC named and shamed businesses publicly on this website. In 2023, the list shows businesses from the US like 3M, as well as abroad like Rio Tinto.
The case of Rio Tinto is particularly interesting because the SEC fined the company for paying $10.5m to a consultant to bribe a government official in Guinea. Unfortunately, corruption is all too common in Africa and other parts of the global south. But this allowed Hans Christensen and his collaborators to see what effects the stricter enforcement of the FCPA had on the ground.
Once the SEC stepped up enforcement of the FCPA in 2004, the night-time brightness of villages and towns close to an existing mine in Africa started to increase. Settlements within 10km of a mine saw their night-time light emissions increase by 15%.
What is going on here?
Change in night-time light emissions (left) and cash-wage employment (right) after stricter enforcement of FCPA
Source: Christensen et al. (2024)
If you look at the right-hand chart above, you see that not just light emissions increased but local employment increased as well. Effectively, instead of bribing government officials, companies that were running the mines stepped up their investment in local infrastructure and hired more people to run the mines. The money ended up in the pockets of local communities instead of Swiss bank accounts of government officials.
This becomes also clear when we look at the chart below which shows a significant drop in corruption perception in communities around mines after the FCPA was properly enforced.
Change in corruption perception after stricter enforcement of FCPA
Source: Christensen et al. (2024)
In the end, the stricter enforcement of the FCPA from 2004 onward meant that the US government made more money by generating larger fines from businesses and that local communities in Africa had better infrastructure and better jobs. If that isn’t a good regulation, I don’t know what is.
Now say it with me: three cheers for better regulation.
Hip Hip, …
No? Ok, maybe not.
It’s amazing how you’re able to find these gems …
‘three cheers for better regulation […] maybe not.’ – I’m not sure if I quite agree. I’m all for _better_ regulation – as opposed to _more_. ‘Less but better’, as Dieter Rams put it in his ‘10 Principles of Good Design’.
When I was 20 years old, I studied "Institutions, Institutional Change and Economic Performance" by Douglas North.
It gives concrete historical examples of how a nation can flourish or fail depending on how large the transaction costs are, and I believe that corruption makes them rise a lot...