As more and more companies, large and small, look outside the U.S. for business opportunities, the impact of federal legislation that applies to that activity looms larger. Unfortunately, many companies, large and small, are unaware of how much of such legislation exists and the magnitude of the penalties for violating these laws. One law that is becoming the focus of our friends in Washington is the Foreign Corrupt Practices Act (“FCPA”). This article will provide an overview of that law and how seriously it is viewed by the federal government.
The FCPA is federal legislation that was enacted in 1977. It was a response to what was perceived as uncontrolled participation by U.S. companies in the corruption of foreign governments for financial gain. During the Watergate era, the federal government began investigating the extent to which U.S. multi-national companies were engaged in corruption involving foreign officials. During the mid-1970s, over 400 U.S. companies admitted to making payments to foreign officials in excess of $300 million (and that was 1970s dollars).
One of the reasons that this information caused so much distress is that, even though payoffs to government officials is deemed to be SOP in many foreign countries, the U.S. holds itself to higher standards. Many countries in which that conduct is commonplace are in serious need of economic development. Making government officials wealthy while the general population starves is seen as contributing to social, economic, and political decay. People who purport to wear white hats are not supposed to engage in such conduct.
The FCPA has two parts. The first part is the one that applies to everyone. It contains anti-bribery provisions. It prohibits (read: makes a crime):
- authorizing, providing, or offering to provide
- directly or through a third party
- anything of value
- to an official of a foreign government, a foreign political party, or a candidate for political office
- for the purpose (intent) of influencing acts or decisions or inducing violation of duties in order to obtain or maintain business or to gain an unfair business advantage
Let’s look at those components. “Authorizing, providing, or offering to provide” and “directly or through a third party” seem basic enough. But note:
- The FCPA covers improper payments to any person while knowing that all or a portion of the payment will be offered, given, or promised, directly or indirectly, to a foreign official.
- “Willful ignorance” will not prevent a violation of the FCPA.
In other words, handing a someone a briefcase full of money with a wink will not let you off the hook when that money is traced to an official who made a decision that favors your business.
Also, note that “anything of value” means just that. It includes discounts, gifts, use of materials, facilities, or equipment, entertainment, drinks, meals, transportation, lodging, insurance benefits, promises of future employment.
So who falls into the category of “foreign official”? It is broader than you might think. It is “any officer or employee of a foreign government or any department, agency, or instrumentality of a foreign government or any person acting in an official capacity for or on behalf of any such government, department, agency, or instrumentality.” That is interpreted as including all employees of state-owned or state-controlled entities, which are considered to be “instrumentalities” of the foreign government. Any thought that the person receiving the “thing of value” must be a high-ranking official should be dismissed as inaccurate.
There is an exception that can actually be a trap. A person may make payments to facilitate or expedite the performance of “routine governmental action.” Read that as “cutting through bureaucratic red tape.” But care must be taken when relying on that exception. It only includes fairly ministerial matters. The potential trap is the interpretation of “routine governmental action.” Be very careful not to interpret that too broadly. Paying someone to move toward the top of the stack your application for a license to transport goods is not the same thing as paying someone to give you an exclusive right to transport goods within a certain territory.
There is another way to avoid prison for bribing a foreign official. An affirmative defense to a charge of violating the FCPA is that the payment was lawful under the written laws of the foreign official’s country. Again, be careful. Even countries in which “everybody does its” rarely have laws that condone bribing government officials.
There is a second part of the FCPA. But it only relates to publicly traded companies. The FCPA requires those companies to make and keep books, records, and accounts that accurately and fairly reflect the transactions and dispositions of its assets They must also devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that
- transactions are executed in accordance with management’s authorization,
- transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and maintain accountability of assets,
- access to assets is permitted only in accordance with management’s authorization, and
- the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to the differences.
Even though these requirements only apply to publicly traded companies, they can be instructive for all companies when considering ways to avoid FCPA violations.
The FCPA is one of a few federal laws relating to overseas business activity that have recently been the focus of governmental agencies. The fines can be staggering. A company can be fined up to $2 million per violation of the anti-bribery provisions and up to $25 million per violation of the books and records provisions. Perhaps more important to the individuals involved, a person can be sentenced to up to five years in prison for violating the anti-bribery provisions and up to 20 years for violating the books and records provisions. In addition to these penalties, violators can lose government licenses, and can be debarred from government contract programs.
The key for any company that is transacting, or is planning to transact, business in foreign companies is to understand the FCPA, institute a written compliance program, and train its employees appropriately. It should also implement internal controls and accounting procedures that are designed to discover inappropriate payments. Just as important, the company should ensure that any affiliates that are acting on its behalf in foreign countries are not engaged in activities that could violate the FCPA.
Keep in mind that the efforts and costs associated with avoiding violations of the FCPA pale in comparison with the efforts and costs that will be associated with defending against charges of violating the law (not to mention dealing with the consequences of successful charges). If systems are in place to prevent violations, the government will likely look more favorably on an “inadvertent” violation than if your company makes no effort to comply with the law.