FCPA Meets FOREX: Anti-Corruption Law and Foreign Exchange Dysfunction Don't Mix

CEE Staff
Nov 23, 2024
5 min read

Last week, the U.S. Department of Justice (DOJ) announced an $85.2 million settlement with Telefónica Venezolana, the Venezuelan subsidiary of the Spanish telecommunications giant Telefónica, S.A. The case, resolved through a deferred prosecution agreement, was for conspiracy to violate the Foreign Corrupt Practices Act (FCPA). At first glance, it appeared to be a standard FCPA enforcement action: a multinational subsidiary bribing foreign officials to secure a business advantage. But the details of the case reveal a far more complex and troubling dynamic-one that lies at the intersection of anti-corruption enforcement and the macroeconomic dysfunction plaguing many emerging markets.

Telefónica Venezolana’s crime was not to win a contract or evade a tax, but to gain access to U.S. dollars. In 2014, facing a severe currency crisis, the Venezuelan government tightly controlled access to foreign exchange through a system of government-sponsored auctions. For a company like Telefónica, operating in a market with a dollarized supply chain and a need to repatriate profits, access to dollars was not a luxury; it was an operational necessity. To secure its place in the auction, the company funneled approximately $28.9 million in corrupt payments to Venezuelan officials through two suppliers, concealing the bribes by purchasing equipment at inflated prices. The scheme worked: Telefónica was able to exchange its rapidly depreciating bolivars for over $110 million, representing more than 65% of all the dollars awarded in that auction .

The DOJ’s message was unequivocal. As Principal Deputy Assistant Attorney General Nicole M. Argentieri stated, “Telefónica Venezolana chose to support a corrupt regime to circumvent the difficulties of conducting legal business in Venezuela” . The enforcement action makes clear that operational duress is not a defense for bribery. Yet the Telefónica case is more than just another story of corporate malfeasance. It is a stark illustration of a systemic risk facing multinational corporations in a growing number of emerging markets where severe foreign exchange (FX) shortages create a fertile ground for corruption, placing companies in a seemingly impossible position.

A Dual-Sided Hit: When FX Scarcity Meets Corruption Risk

The operating environment in countries like Venezuela-and, to varying degrees, in places like Nigeria, Egypt, Angola, and Pakistan-creates a dual-sided challenge for multinational companies. On one side is the acute business crisis driven by FX scarcity. On the other is the heightened legal and reputational risk of corruption that this scarcity engenders.

First, the business crisis. In many of these markets, the official supply of hard currency is dwarfed by demand. Central banks, facing dwindling reserves, implement capital controls and rationing systems. This leaves legitimate businesses unable to pay foreign suppliers, service foreign-currency-denominated debt, or repatriate profits. The official exchange rate becomes a fiction, with a thriving black market operating at a significant premium. For a company with sunk costs, local employees, and contractual obligations, simply exiting the market is often not a viable option. The inability to access FX is an existential threat.

Second, this environment of scarcity and government control inevitably creates opportunities for corruption. When a government has discretionary power over the allocation of a scarce and valuable resource-in this case, U.S. dollars at a favorable official rate-the incentives for rent-seeking are immense. Officials can demand bribes to grant access, speed up approvals, or simply move a company’s application to the top of the pile. The system itself, designed to manage a macroeconomic crisis, becomes a primary driver of corruption. As seen in the Telefónica case, bribery becomes the mechanism to “circumvent the difficulties of conducting legal business.”

This dynamic is not unique to Venezuela. In Nigeria, a severe dollar shortage has led the naira to plummet, with the government deploying a 7,000-person task force to crack down on “dollar racketeers” as businesses scramble for hard currency . In Egypt, a chronic balance of payments deficit has led to periods of FX rationing and a flourishing black market for dollars . In Angola, another oil-dependent economy, access to foreign exchange is tightly controlled by the central bank, creating an opaque system vulnerable to corruption in a country that already ranks poorly on global transparency indices . In each case, the pattern is similar: macroeconomic instability leads to FX controls, which in turn create both a desperate need for hard currency and a corrupt system for obtaining it.

The Enforcement Dilemma

The FCPA and similar anti-bribery laws in the U.K. and Europe make no exception for difficult operating environments. The DOJ’s stance in the Telefónica case is that the company made a choice to engage in corruption. From a legal standpoint, this is correct. The company was not forced to bribe officials; it chose to do so to solve a business problem. The FCPA is designed to prevent U.S. and foreign companies with U.S. ties from exporting corruption, regardless of the local context.

However, this enforcement-first approach raises difficult questions. Does it effectively deter corruption, or does it simply punish companies that are caught in a systemic trap? By treating the symptom (bribery) without addressing the root cause (FX scarcity and state-controlled allocation), enforcement actions may have unintended consequences. Companies facing this dilemma may be pushed further into the shadows, relying on more opaque intermediaries and shell companies to navigate corrupt systems, making detection even harder.

Alternatively, they may be forced to withdraw from these markets altogether, ceding ground to less scrupulous competitors and depriving the host country of legitimate investment and employment.

This creates a policy dilemma for both home and host governments. For the U.S. and other enforcement jurisdictions, the question is whether the current approach adequately accounts for the structural pressures that drive corruption in these specific contexts. While no one is advocating for a “business necessity” defense for bribery, a more nuanced understanding of the operating environment could inform enforcement priorities and resolutions. For instance, resolutions could place greater emphasis on advocating for macroeconomic reforms in the host country as part of a broader anti-corruption strategy.

For host countries, the dilemma is even more acute. The currency controls implemented to preserve foreign reserves are the very policies that fuel corruption, deter foreign investment, and undermine the rule of law. The Telefónica case demonstrates how these controls can be exploited by corrupt officials to enrich themselves at the expense of the state, as a single company was able to capture two-thirds of the hard currency in a national auction through bribery. This should be a wake-up call that the long-term solution to this problem is not stricter enforcement against bribery alone, but fundamental macroeconomic reforms that eliminate the scarcity and discretion that make bribery so tempting in the first place.

A Structural Problem Demanding a Broader Solution

The Telefónica settlement is a powerful reminder that corporate compliance does not exist in a vacuum. A company can have a robust compliance program, as Telefónica claimed to, but still fall victim to overwhelming operational pressures in a dysfunctional market. The case highlights a structural risk at the intersection of macroeconomics and anti-corruption law that is likely to become more prominent as global economic volatility continues.

Moving forward, multinational corporations, policymakers, and international financial institutions need to view this issue not just through the narrow lens of anti-bribery enforcement, but as a broader challenge of governance and economic stability. For companies, this means integrating macroeconomic risk assessment much more deeply into their compliance programs.

For enforcement agencies, it may mean developing a more sophisticated understanding of how their actions interact with underlying market pathologies. And for host countries, it is a stark reminder that sustainable development requires not only fighting corruption, but also creating a stable and predictable economic environment where businesses can operate legally and transparently without having to pay bribes simply to survive.