Foreign Corrupt Practices Act (1977) (Major Acts of Congress)
Jonathan S. Berck
Aseries of corruption scandals in the early 1970s led to the Foreign Corrupt Practices Act of 1977 (FCPA) (P.L. 95-213 91 Stat. 1494), which prohibits bribery of foreign officials by American and certain other companies. The act has been controversial since its enactment, with some critics attacking it as ineffective and the American business community complaining that it places U.S. enterprises at a competitive disadvantage abroad. Since the late 1990s, however, it has become a model for international efforts to stamp out corruption and improve the business climate in the developing world.
In the 1970s a complex of scandals collectively known as Watergate consumed both government and public attention. Misdeeds committed during the administration of President Richard M. Nixon prompted investigations, including scrutiny of the conduct of major American corporations with close ties to the administration. Investigators learned of hidden slush funds and substantial payments of bribes by over 400 U.S. companies to foreign officials or political parties to obtain major contracts or other advantages. Following extensive hearings, Congress enacted the FCPA in 1977. Significant amendments followed in 1988 and in 1998. The 1998 amendments incorporated technical changes required by the anticorruption treaty of the Organization of Economic Cooperation and Development (OECD) that went into effect in 1999.
In addition to the anticorruption fervor that swept the United States in the post-Watergate period, the major justification for enacting the FCPA was the belief that bribery is also an economic evil. In this view, bribery is a hidden cost of doing business, and the award of business for other than economic reasons distorts competition. Those most concerned about bribery believed that contracts should be awarded only on the basis of the merits of products and services as well as fully disclosed prices.
There are three significant parts to the FCPA: prohibitions on activities, reporting requirements, and an exception for small "grease," or facilitating payments.
Prohibitions. The FCPA bars U.S. companies from "corruptly" offering, paying, promising to pay or authorizing the payment of money or other things of value to any foreign official in order to (1) influence any act or decision by the official, (2) persuade the official to do anything contrary to his or her duty, (3) secure any "improper advantage," or (4) induce the official to use his or her influence with a foreign government to influence its acts or decisions, in each case for the purpose of "obtaining or retaining business" or directing business to any person. A parallel section covers the same acts when made to political parties or candidates. Penalties include fines of up to $2 million against the company and up to $100,000 against officers or directors, as well as prison terms of up to five years. The U.S. Department of Justice generally is responsible for prosecuting violations of these provisions.
For a company to be found guilty of violating these prohibitions, there must be some sort of "quid pro quo"ome exchange of value for advantage. The "corrupt" requirement makes guilty intent an element of the crime. In short, it is very hard to violate the FCPA inadvertently.
The FCPA provides two primary defenses to an accusation of bribery: a company can claim (1) that the offending act was in fact legal under the written laws of the foreign country, or (2) that the act was a "reasonable and bona fide" expenditure directly related to promotional activities or to the execution or performance of a contract with a foreign government.
Reporting Requirements. The FCPA also has provisions requiring publicly held companies to fully record and report to investors and the Security and Exchange Commission (SEC) all expenditures made in violation of the prohibitions described above. In addition, such companies must have policies in place to ensure that all transactions comply with management's directions and are recorded in accordance with generally accepted accounting procedures. The SEC generally enforces these provisions. Civil liability to company shareholders is also possible. The penalty for violation of the reporting requirements is civil fines. There are no criminal penalties unless the violation was knowing or willing.
These requirements were a reaction to the revelations about secret slush funds maintained by companies involved in the bribery scandals, as well as bribes disguised to look like legitimate transactions. Given the intent requirement of the prohibitions described above, it is generally easier to prove misrepresentation in the financial statements than that an actual "quid pro quo" transaction has occurred. Put another way, these requirements provide a basis for prosecuting a wrongdoer even if the basic crime cannot be proved, much as the gangster Al Capone was finally jailed for tax evasion rather than for more blatant criminal activities like gang shootings.
"Grease" or Facilitating Payments. The 1988 amendments to the FCPA responded to businessmen's complaints that minor officials in many underdeveloped countries demanded small payments, known as "grease"hether in the form of fees, tips, or giftsor the provision of routine services such as the issuance of visas, licenses, and permits, as well as for speedy service. These payments, no matter how minor, were illegal under the FCPA as originally enacted. As a practical matter, American business interests were having trouble even getting into countries where petty corruption was common. Congress therefore loosened the FCPA slightly, to permit such payments for the provision or expedition of "routine government action," so long as the payments were not made for the purpose of influencing the award or retention of business.
A major rationale for the FCPA was the notion that eliminating corruption would create a level playing field for free competition. American businessmen, though, complained bitterly that in fact the opposite was created: U.S. business was placed at a competitive disadvantage as only U.S. companies were barred from paying bribes, whereas no such restrictions were in place for companies from other countries. The result, these critics charged, is that major contracts went to foreign companies willing to engage in graft.
Other critics attacked the FCPA as being ineffective. They charged that open bribery is prohibited, whereas more sophisticated forms of exerting influence continue to be perfectly legal. For example, payments of charitable contributions or the tacking on of extraneous goods and services outside the economic scope of a contract often serve the same purpose of a corrupt appeal for business. Similarly, the defense of expenditures for bona fide promotional activities can easily be abused. In this cynical view, all the FCPA requires is that companies act in a more refined way than handing over a suitcase filled with cash.
THE OECD ANTIBRIBERY CONVENTION
The complaint that the FCPA created a competitive disadvantage for American businessmen was addressed through the adoption of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of the OECD, which went into effect on February 15, 1999.
This convention, ratified by thirty-four countries as of 2003, requires participating countries to make it a crime to offer, promise, or give a bribe to a foreign public official to obtain or retain international business deals, and is based in large part on the FCPA. A related text effectively puts an end to the practice according tax deductibility for bribe payments made to foreign officials practice that used to be accepted in many major trading countries, such as Germany.
Building on the OECD Convention, many programs for the provision of aid in the form of grants or loans from developed countries to the developing world insist that the latter put reforms in place to prevent corruption, so that the aid reaches its targets and goes to the purposes earmarked by the donors rather than into the pockets of corrupt officials. In this way, developed countries seek to further create a level playing field for open competition for international contracts in an increasingly globalized world.
See also: BRIBERY ACT.
Goldbarg, Andrea. "The Foreign Corrupt Practices Act and Structural Corruption." 18 Boston University International Law Journal 273 (fall 2000).
Johnson, J. Lee. "A Global Economy and the Foreign Corrupt Practices Act: Some Facts Worth Knowing." 63 Missouri Law Review 979 (fall 1998).
Transparency International. Business Principles for Countering Bribery. .
Foreign Corrupt Practices Act of 1977 (Encyclopedia of Business and Finance)
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 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.
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:
- 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 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.
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.
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
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
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.
Foreign Corrupt Practices Act (FCPA) (Encyclopedia of Business)
In the mid-1970s, and in the wake of the Watergate scandal, stories began to surface about U.S. corporations paying officials in foreign countries for favors. Companies from many nations had long engaged in secret payments to public officials. But the U.S. Congress and the public demanded action after the Securities and Exchange Commission (SEC) solicited (and received) voluntary disclosure from more than 400 American companies that they had paid hundreds of millions of dollars in secret bribes to foreign public officials.
The result was the Foreign Corrupt Practices Act (FCPA), passed by Congress and signed into law by President Jimmy Carter in 1977. The act prohibits U.S. companies (incorporated in or having a principal place of business in the United States) from making payments, promises, or offers to give anything of value to foreign officials or anyone else if the purpose is to obtain or retain business, or direct business to any person. These are the antibribery provisions.
In addition, the act imposes two basic accounting requirements on U.S. companies:
- Financial records and accounts must be kept that, "in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets" of the business.
- The business must create and maintain internal accounting controls "sufficient to provide reasonable assurances" that transactions are being done in accordance with proper authorization from management.
COVERAGE AND CONTROVERSIES
Violations of the antibribery provisions require some element of knowing or intent to corrupt, while a violation of the FCPA's accounting requirements can take place without any corrupt intent. The FCPA's coverage includes any officer, director, employee, agent, or stockholder acting on behalf of a U.S. company. The intent and effect of these provisions is to correct the widespread earlier practice of making secret payments to foreign officials and accounting for them as commission payments, payments for services, or other business expenses, then deducting those payments on U.S. income tax returns.
The act has been controversial from the start. Until recently (see "The OECD Convention," below) no nation has followed the lead of the United States and created its own foreign corrupt practices act. U.S. businesses have been somewhat disadvantaged in the process of obtaining and retaining business in foreign countries where public officials are prone to ask for or accept gifts or payments in return for favorable consideration. Many have also questioned the ethics of imposing U.S. standards of morality in other parts of the world, though it must be mentioned that the bribery endemic to Italy and Japan eventually undermined the dominant political parties in each country. The FCPA had no causal relation to these political falls from gracehe corruption itself, once made public, was enough to convince many people in each country that wholesale changes in power were due.
1988 AMENDMENTS TO THE FCPA
During the 1980s considerable pressure developed to make the FCPA more amenable to the legitimate needs of U.S. companies doing business abroad. In 1988 Congress amended the FCPA in response to this pressure. First, payments that are lawful in the foreign country are not unlawful under the FCPA. Second, certain "reasonable and bona fide" (good faith) payments may be made to foreign officials when they are directly related to promoting or demonstrating products. If, for example, a foreign official in charge of purchasing tanks were to be given travel expenses for coming to the United States for a demonstration, the payment could be accounted for as a business expense and would not be categorized as a bribe under the FCPA.
The 1988 amendments also increased the criminal penalties for companies violating the antibribery provisions of the FCPA to a maximum of $2 million. Individuals may be fined up to $100,000 and/or be sentenced to up to five years in prison. A successful prosecution under these provisions must overcome three principal areas of ambiguity: the "routine governmental action" exception, the "corruptly" requirement, and the "knowing" requirement.
The first of these ambiguities involves ministerial or clerical actions for which gratuity or grease payments may be routine. There is no clear guidance on what constitutes "routine" payments; U.S. companies continue to guess whether the payment is routine or not. For example, in the case where a customs official grants licenses to every applicant, and payment is made to expedite the processing time, the FCPA is not violated. Payments to higher level officials with discretion to grant or deny a privilege, license, or contract are far riskier.
The second of these ambiguities is the statutory use of the word "corrupt." A negligent or unsophisticated businessperson who naively makes payments to a local foreign agent without realizing that part of the payment is going to a public official will probably not have the requisite "corrupt" state of mind prohibited by the antibribery provisions. Yet the "knowing" requirement imposes a duty to make reasonable inquiries; failing to ask about what you have reason to believe you would discover will establish evidence sufficient to satisfy the "knowing" requirement. Thus, a very large payment made by your agent to a government official would be reviewed by U.S. authorities to discover whether you knew or should have made inquiries about the payment and its ultimate disposition.
THE OECD CONVENTION
Until recently, the only nation with antibribery legislation was the United States. But in 1996, 21 member states of the Organization of American States (OAS) signed the Inter-American Convention against Corruption. In 1997 all 29 members of the Organisation for Economic Co-operation and Development (OECD) signed the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The OECD convention aims for a functional equivalence among measures taken by signatory states that sanction bribery of foreign public officials. Yet such functional equivalence is not meant to-require uniformity or changes in the fundamental principles of a state party's legal system.
The OECD convention criminalizes the corruption of public officials of foreign countries in any of the signatory nations. One predicted effect will be to "level the playing field" for U.S. businesses; one effect of the FCPA had been to put U.S. firms at a disadvantage with non-U.S. firms when foreign officials sought bribes in order to sign off on profitable government contracts. Another predicted effect is that corruption in OECD countries will be reduced as fewer companies offer bribes to public officials.
The OECD convention was signed on December 17,1997, and entered into force on February 15,1999. As of April 1999, 12 countries had accepted, approved, or ratified the convention. Implementing legislation has been enacted in the United States, in the form of Public Law 105-366, approved on November 10, 1998.
The U.S. implementing legislation, known as the International Bribery and Fair Competition Act of 1998, fills in some gaps in coverage of corruption by the FCPA. Under the FCPA, an act of bribery that influences any act or decision of a public official is actionable; under the OECD convention as implemented in the United States, a company that "secures any improper advantage" may also be sanctioned.
Groups such as Transparency International (TI) have worked since 1991 to secure more transparency and accountability in international business transactions involving governments. The OECD convention marks a major step in this direction. Still, TI cautions that how each nation implements the convention will be significant. If nations such as France and Germany, for example, continue to allow tax deductions for payments to foreign officials, the convention will not be nearly as effective.
[Donald O. Mayer]
Foreign Corrupt Practices Act. U.S. Code. Vol. 15, secs. 78dd-1 and 78dd-2.
"Inter-American Convention against Corruption, 29 March 1996." International Legal Materials 35 (1996): 724. International Bribery and Fair Competition Act of 1998. Public Law 366. 105th Congress. 2nd sess. 1998.
Organisation for Economic Co-operation and Development. Anti-Corruption Unit. "Combating Bribery of Foreign Public Officials in International Business Transactionsext of the Convention." Paris: Organisation for Economic Co-operation and Development, 1997. Available from www.oecd.org/daf/nocorruption/20novle.htm.