Foreign Corrupt Practices Act of 1977

Foreign Corrupt Practices Act of 1977

The Foreign Corrupt Practices Act of 1977 (FCPA) evolved from investigations by the Office of the Special Prosecutor that provided evidence of illegal acts perpetrated by U.S. firms in foreign lands. More than 400 U.S. companies admitted to making questionable payments to various foreign governments and political parties as part of an amnesty program (U.S. Department of Justice http://www.usdoj.gov). Given the environment of the 1970s and the proliferation of white-collar crimes (e.g., insider trading, bribery, false financial statements, etc.), particularly the payments made to foreign officials by corporations, Congress felt obligated to introduce legislation that led to the act. Congress's objective was to restore confidence in the manner U.S. companies transacted business.

THE ACT

The FCPA is unique. Throughout history, governments have had laws making it illegal for governmental officials to take a bribe. One basic provision of the FCPA is that it prohibits U.S. partnerships, companies, and organizations from not only giving payments but also offering or authorizing payments to foreign officials or political parties with the objective of encouraging or assuring business relationships.

There are two types of bribery provisions. The first prohibits any bribes made directly by the U.S. company. The second prohibits any organization from knowingly arranging for a bribe through an intermediary. Many thought that the FCPA would place U.S. companies at a disadvantage in the international marketplace since they could no longer influence foreign governments, officials, political parties, or candidates through gifts or payments. There has been no conclusive evidence that this has actually happened.

The FCPA includes record-keeping provisions for companies not involved in criminal conduct. These provisions were an amendment to the Securities and Exchange Act of 1934. The FCPA amendment requires all firms under SEC jurisdiction to maintain an adequate system of internal control whether or not they have foreign operations. This provision of the act applies to issuers of registered securities and issuers required to file periodic reports with the SEC.

ACCOUNTING PROVISIONS

The accounting provisions require companies to "keep books and records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets". The purpose of this accounting provision is to make it difficult for organizations to "cook the books" or use slush funds to hide any corrupt payments. Representative means for transfer of corrupt payments included:

Overpayments
Missing records ("No receipt")
Unrecorded transactions
Misclassification of costs (bribes recorded as consulting fees or commissions)
Retranscription of records

The accounting provisions include a requirement that companies design and maintain adequate systems of internal accounting controls that provide reasonable assurance that:

Transactions are executed in accordance with management's authorization
Transactions are recorded as necessary
Access to assets is permitted only in accordance with management's authorization

Any internal document that misrepresents the actual nature of a financial transaction could be used as the basis for a charge that the "books and records" section of the FCPA has been violated.

ENFORCEMENT

Enforcement of the act is shared. Civil and criminal enforcement of the bribery provisions for those not required to file with the SEC rests with the Department of Justice. Responsibility for civil enforcement of the bribery provisions for those who have SEC filing requirements rests with the SEC.

In 1988 the FCPA was amended to allow for "facilitating payments" for expediting routine governmental action. These payments are distinguishable from corrupt payments in that these "grease payments" are for facilitating the performance of officials who are obligated to perform said duties. Questions regarding this amendment, affirmative defenses, or other provisions of the FCPA should be directed to counsel, or companies may wish to use the Department of Justice's Foreign Corrupt Practices Act Opinion Procedure. Under this procedure, upon receiving a question from a company or individual, the attorney general has thirty days to issue an opinion regarding the inquiry. The objective is to alleviate uncertainty regarding acts covered by the FCPA.

PENALTIES

The FCPA provides penalties for violations. Criminal penalties for bribery violations include fines of up to $2 million for firms; fines of up to $100,000 and imprisonment of up to five years for officers, directors, and stockholders; and fines of up to $100,000 for employees and agents (fines imposed on individuals cannot to be paid by companies). The SEC or attorney general may also bring actions that lead to civil penalties. Also, the act's penalties do not supersede penalties or fines levied under the provisions of other statutes. A violation of the bribery provisions of the FCPA may give rise to a private cause of action for treble damages under RICO (Racketeer Influenced and Corrupt Organizations Act).

The penalties can have long-term ramifications for companies. For example, a company found guilty of violating the FCPA may be barred from doing any business with the federal government. A company indicted for an FCPA violation may not be eligible to obtain various export licenses.

COMPLIANCE

Clearly, large multinational corporations cannot monitor every transaction of every dollar amount by every employee. However, companies do have a due-diligence obligation to implement adequate systems with sufficient internal controls. Key ways to avoid violation and liability include establishing policies and procedures that provide reasonable assurance that the business is adhering to the act's provisions. Suggested due-diligence steps for compliance with the FCPA include the following:

Utilizing the compliance program under the Corporate Sentencing Guidelines Act (see next section)
Performing a risk evaluation of locations known for unethical business practices
Performing risk evaluation of employees/agents who operate out of the home country
Assuring that personnel who work out of the home country are knowledgeable regarding the provisions of the FCPA
Assessing internal controls to be assured they are sufficient
Monitoring internal controls, including reviews by auditors
Reviewing critical transactions, such as those related to consulting services
Establishing a procedure requiring that critical employees, vendors, and contractors provide written statements that they are in compliance with the requirements of the FCPA

SUBSEQUENT DEVELOPMENTS

On November 1, 1991, the Corporate Sentencing Guidelines Act was enacted. The guidelines appear to be a direct descendent of the FCPA. The guidelines for organizations "are designed so that the sanctions imposed upon organizations and their agents will, taken together, provide just punishment, adequate deterrence, and incentives for organizations to maintain internal mechanisms for preventing, detecting, and reporting criminal conduct" (U.S. Sentencing Guidelines, chapter 8, intro. comm., appendix p. Al).

In most corporations, accountants and auditors have responsibility to prevent, detect, and report errors and irregularities. The Corporate Sentencing Guidelines are legislation to deter white-collar crime. The guidelines' major objective is requiring organizations to monitor business activities to detect criminal conduct within their own ranks.

The guidelines allow organizations to use mitigating factors to reduce their exposure to fines. One mitigating factor is maintaining a corporate compliance program. The corporate compliance program is to be the responsibility of an officer or high-level employee. Elements of the compliance program include:

Established standards and procedures
Communication of the standards to employees
Systems designed to detect criminal conduct
A reporting system in place whereby individuals may report criminal conduct
Disciplinary mechanisms that are consistently enforced

FURTHER GUIDANCE

Information regarding the FCPA or the Foreign Corrupt Practices Act Opinion Procedure may be obtained from the Fraud Section of the Criminal Division, U.S. Department of Justice, Room 2424, Bond Building, 1400 New York Avenue, NW, Washington, DC 20530; (202)-514-0651.