The Importance Of FIFA by Bill O’Grady of Confluence Investment Management

On May 27th, Swiss authorities arrested several top officials affiliated with Federation Internationale de Football Association (FIFA) on various charges, mostly related to corruption. Later that day, the U.S. Attorney General and the U.S. Department of Justice (DOJ) unveiled indictments against FIFA officials, indicating that the Federal Bureau of Investigation (FBI) had been conducting investigations of corruption for some time and had evidence of illicit schemes going back 24 years.

The ongoing investigation into this scandal continues to unfold as we write this report. Therefore, we will not spend too much time on arrests or new charges. Instead, we will offer a short overview of the arrests and the election and resignation of FIFA President Sepp Blatter. We will discuss the structure of FIFA and how this organization is prone to corruption. We will follow this discussion with the most important part of the report, the extension of U.S. law enforcement into the international realm as a function of the superpower role. As always, we will conclude with potential market ramifications.

A Tale of Corruption

The arrests of 14 FIFA officials are probably just the beginning of the process. U.S. Attorney Lynch noted that the FBI has been investigating FIFA for some time and that further indictments are possible. Despite the growing scandal, FIFA held elections for president on May 29th and the incumbent, Sepp Blatter, won in the second round of voting. He was defiant in his victory, accusing the U.S. of trying to affect the outcome of the election through the timing of the arrests. However, five days later, on June 2nd, Blatter unexpectedly resigned. He will remain in office until a new president is elected early next year.

There have been a number of interesting developments since the scandal broke. Russian President Putin blasted the U.S. for its internationalization of American law, calling it an “overreach.” Several officials, most notably Chuck Blazer, an American who has held several positions in FIFA including the head of the Confederation of North, Central America and Caribbean Association Football (CONCACAF), and the executive VP of the U.S. Soccer Federation, have admitted to taking bribes ahead of the 1998 and 2010 World Cups. We suspect other FIFA officials will start “talking” soon in order to gain favor with prosecutors.

President Blatter has not been indicted yet, and so his decision to step down has led to speculation as to why he decided to resign. There are three theories. First, sponsor pressure may have led to his exit. FIFA sponsors, as we will note below, are a major funding source and thus have some power.

Second, there have been rumors that some of the developed world soccer organizations, likely Europe, were threatening to leave FIFA and create their own organization to compete with FIFA. The loss of Europe and perhaps the U.S. could result in the loss of sponsorship and remove some of the important soccer nations. However, to make a serious difference, this emerging group would likely need to attract South and Central American nations. So far, there isn’t much evidence to suggest this mutiny has gathered momentum and probably isn’t a major factor in Blatter’s decision.

Third, it is highly probable that U.S. DOJ officials have indicated that Blatter may be indicted in the future and stepping down from the presidency may have been an informal plea bargain. Again, we don’t know if any of these three are true. But, Blatter’s decision to step down just after he won reelection does suggest he did not go willingly.

The Structure of FIFA

FIFA has 209 member states and six regional confederations. FIFA’s stated purpose is to promote global soccer. It builds practice facilities and pays coaches all over the globe.

The Importance Of FIFA

This map shows the regional organizations that make up FIFA. Each nation within FIFA gets one vote. And so, power is gained within the organization by gathering lots of votes. Swaying those votes is easier and costs less money in a poor, small nation than in the U.S. or Europe. Simply put, Montserrat, an island in the Caribbean that is 10 miles wide and seven miles long with a population of 5,879, is just as important as the United States in terms of voting. Thus, a decision to build a facility in Montserrat will have a much greater impact on sentiment toward a FIFA president than anything done in the U.S. Each national association gets a $250k annual grant from FIFA and, most recently, $500k in funds from the last World Cup. Thus, small nations are going to be more beholden to the organization.

FIFA gets most of its money from broadcast rights, with sponsors as the second major source of funding. The 2014 World Cup was the most watched event in history. It is estimated that 30 billion viewers watched all the games. From December 2010 to December 2014, FIFA grossed $5.7 bn, with broadcasters funding $2.5 bn and sponsors $1.7 bn. On the spending side, $358 mm was given as prize money for the last World Cup. FIFA had expenses of $2.2 bn and has cash reserves of $1.5 bn. This leaves around $1.6 bn that is unaccounted for.

It does appear that FIFA presidents have used spending in small nations to build a base of support that ensures reelection. There are many tales of graft and corruption. The aforementioned Chuck Blazer has accepted a plea agreement that acknowledges he took bribes and kickbacks in 1992 to ensure France would host the World Cup in 1998. He admitted to similar activities that began in 2004 to facilitate South Africa’s bid to host the 2010 games. He became an informant to the FBI and his information was key to the recent indictments. Reports show he wore a wire and, from this information, DOJ officials indicate that there will likely be more to follow. According to reports, investigators are now looking at the FIFA decisions to award Russia the 2018 World Cup and Qatar the 2022 World Cup. It has been strongly suggested that similar corrupt activities were responsible for these decisions. “Unsurprising, then, is that the progression of World Cup venues during Blatter’s reign have charted a line straight down the Democracy Index; beginning with South Africa (30th place) and continuing to Brazil (47th), Russia (107th), and finally, to Qatar (137th).”

As noted above, President Putin of Russia has reacted angrily to the U.S. prosecution of FIFA and its officials. This is not just because of his anger at America’s extension of its legal system. It is possible that the bidding may be reopened for both tournaments. Qatar’s financial markets have been under pressure on fears that it may lose the World Cup.

Ultimately, the problem for FIFA is the combination of money and the voting structure. Soccer is extraordinarily popular and helping build the game in poorer nations is a noble goal. One solution would be to separate the function of building the game from the production of the World Cup. However, this change would likely starve the business of building global soccer.

There are many structures in business, government, philanthropy, etc. that suffer from conflicts of interest and

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