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SCJI FCPA Report: Bribery, Fraud Impacts Market Cap

June 13, 2014
Categories: FCPA

A report recently issued by the Searle Civil Justice Institute (SCJI) on the enforcement of the U.S. Foreign Corrupt Practices Act found that a combination of bribery and fraud charges more negatively affects a company’s market standing than a bribery charge alone.

The report found that when charged with bribery under the FCPA, firms experienced an initial 1.5% average reduction in market capitalization, as opposed to 16.3% when charged with both bribery and financial fraud.  More strikingly, firms charged with bribery experienced a cumulative reduction of 2.7%, as compared to 54.9% for firms dually charged.

Why such a wide gap? According to the report, it is caused by the reputational losses associated with financial fraud.  Indeed, the indirect costs of an FCPA investigation, represented in this study by shareholder losses, are tied to a 46.3% reduction of market capitalization for firms accused of both bribery and fraud, far exceeding direct costs such as fines or internal monitors.

Also reported was an overall upward trend in FCPA enforcement since the early 2000s. Seventy percent of the 189 total FCPA actions brought between 1978 and 2013 occurred after 2005. SCJI’s 2012 report found that corporate penalties from 178-2004 and 2005-11 were $5.4 million and $60.2 million respectively.

As enforcement agencies become more serious about penalizing FCPA violations, and as market capitalization continues to decrease for companies that are charged, it becomes increasingly important for companies to manage their risk and ensure compliance throughout their organizations and supply chains.

To access the report, click here.

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