Foreign Corrupt Practices Act (FCPA)

Foreign Corrupt Practices Act (FCPA).

Introduction.

In 1977, the United States Congress enacted a federal law which was titled, the Foreign Corrupt Practices Act (FCPA). The FCPA act is currently well renowned for its two main provisions that address bribery and accounting transparency. The provision concerning accounting transparency is based on the Securities Exchange Act that was enacted into law in 1934 (Colton 891). 

Basically, the main precept of the act is the prohibition against bribing representatives of foreign entities (such as governments, companies or parastatals). This necessitates the need for public companies to ensure that their financial books, records and financial statements are accurate and dependable, in case an investigation may become necessary. Moreover, there is need for the public company to come up with apposite and comprehensive internal controls system that would ensure that all the transactions of the company are properly executed and documented; and that the assets of the company are also accounted for and recorded down as per the authorization of the companies’ management team, as this will ensure that the financial statements are prepared in conformance with the precepts of GAAP (Generally Accepted Accounting Principles). FCPA applies within and outside the territorial limitations of the US government. Its provisions apply to the issuers (this term is used to describe publicly traded companies) and their employees, directors, agents, officers and all the other stakeholders. According to the act, agents can include consultants, joint-venture partners, third-party agents and distributors among other (Murphy 121). Thus, it is apparent that the provisions of FPCA apply to both US and foreign companies. Personally, this trans-territorial (across the whole globe) application of FPCA ensures that companies whose aim is to further corrupt payments, to foreign entities and governments, do not find a safe haven for their illegal transactions. This ensures that there is effectiveness and equity during the enforcement of the law.

The act is jointly enforced by the Justice department and the SEC (Securities and Exchange Commission).  The Department of Justice deals will all the criminal and civil aspects of law enforcement of all the anti-bribery provisions with regards to national concerns and foreign companies (and their associated individuals). SEC deals with the civil aspects of enforcement of all the anti-bribery provisions with regards to issuers (Breuer & Khuzami 4).

Provisions of the FCPA.

The provisions of the act are categorized into two component provisions: anti-bribery provisions and the accounting provisions. The accounting provisions operate in tandem with the anti-bribery provisions (Breuer & Khuzami 10).

These provisions apply to the following subjects:

(a)    Issuers: This describes any corporation (foreign or domestic) that has registered its class of securities, and it also files report in conformance with the 1934 SEC act(Breuer & Khuzami 10).

(b)   Domestic concerns: This describes any business entity that has been organized in conformance with the US constitution in order for it to conduct its principal business transactions within the US, and, any individual (US national, resident or naturalized citizen) or state that is associated with such a business entity (Breuer & Khuzami 11).

(c)    Any person: this is a broad term that covers individuals, enterprises and businesses (Breuer & Khuzami 10).

The provisions of the two main components of the FCPA are stated below.

       I.            The anti-bribery provisions.

These provisions prohibit any promise, offer, payment and/or any authorization to pay cash or anything of value to any foreign political party, foreign official or any foreign candidate who is vying for any public office. Moreover, this provision also prohibits any payment that is made with the intention to influence decisions (or similar acts) so that one can obtain or retain a business (Breuer & Khuzami 12). This provision introduces two new terms that are described below.

(a)    “Anything of value” is a collective term used to describe payments in cash, vehicles, computer (and its accessories), industrial equipments and medical provisions among other things (Breuer & Khuzami 14).

(b)   “Foreign official” is a term that describes any employee or officer of any foreign government (or its department, agency and the instrumentality thereof) and any (foreign-owned) international public organization and any party that is acting on its behalf (Breuer & Khuzami 20). Personally, based on the above definition, the term includes foreign military officers who are in charge of procurements contracts for their respective governments, foreign officials acting in their capacity as ministry-level officers and any employee of any foreign parastatal.

These provisions also prohibit all forms of paying indirect bribes. An indirect bribe is a bribe given to any person with the “knowing” that the person will use some portion of or all the kickback to bribe prohibited recipients such as foreign officials. The term “knowing” applies here as the willful blindness to awareness that there is an indubitable high prospects of bribery (Breuer & Khuzami 14).

However, there are situations whereby payments made to foreign officials cannot be considered as a contravention of these anti-bribery provisions. These situations can be approached using the following perspectives: routine government action and affirmative defenses (Breuer & Khuzami 23).

Routine government action is exempted from liability as per the FCPA.  In several situations, a person can use an approach that is based on the principles of the “routine government action” in defense of his actions, and also to avert liability as per these anti-bribery provisions. What is required is for a person to provide evidence that the challenged conduct is in conformance with the routine government action. Routine government action includes actions that are performed by foreign officials in order to (Breuer & Khuzami 26):

Ø  Obtain official documents (such as licenses and permits) that would enable an entity (individual or partnerships) to conduct business within a foreign nation.

Ø  Process official government papers such as work orders and visas.

Ø  Provide security (police protection) for collection and delivery of mails, and to schedule inspections related to contract performance or transit of merchandise within the country.

Ø  Provide utilities such as water, electricity and telephone services; and also provision of cargo services (loading or unloading of cargo) or protect perishables (commodities, consumables and other products) from deterioration.

Ø  Any action of a similar nature to the beforementioned actions.

The issuers are required to ensure that their authorized facilitation payments are subjected to the apposite internal controls protocol and compliance procedures in order guarantee that such payments are in conformity with the precepts of routine governmental actions. Moreover, such facilitation payments must be appropriately documented in the financial books and records of the issuers (Breuer & Khuzami 26).

Affirmative defenses are the assertion of undeniable facts and their related arguments which if proven would enable a person to defeat the prosecution claims (of contravention against FCPA), even if these claims are true. Under the anti-bribery provisions, there exist two affirmative defenses which are described hereafter. In the following two circumstances, payment, promise or offer of anything of value to any foreign official does qualify as an affirmative defense (Breuer & Khuzami 24):

Ø  If the gift, offer, promise or payment of anything of value is legal as per the written constitution of the country and/or the political party of the foreign official.

Ø  If the gift, offer, promise or payment of anything of value is a bona fide and reasonable expenditure (for instance hostel, entertainment and travel expenses) that is related to the explanation, promotion and/or demonstration of products or performance or execution of contracts with the foreign entity or foreign government.

Also, the issuer who incur these expenses on the behalf of a foreign entity (government, corporation or otherwise) is required to have apposite compliance procedures and internal controls that would ensure that these expenses fit categorically in the bona fide and reasonable criteria of affirmative defenses, and they must also be appropriately approved and thereafter documented in the financial book and records of the issuer (Breuer & Khuzami 24).

Thus personally, it is apparent that affirmative defenses are based on written constitutions, and thus the following rules and regulations are not considered during an affirmative defense: unwritten policies, local customs and traditional practices.

    II.            Accounting provisions.

The accounting requirements of FCPA are categorized into two: internal controls, and books and records (Breuer & Khuzami 38). These categories are described below.

The provisions regarding books and records require a business entity or company to create, maintain and update their financial records, account statements and financial records, to an appropriate and reasonable extent of detail and accuracy in order to ensure that financial information reflects the actual transactions of the business entity, alongside its disposition of assets (Breuer & Khuzami 39).

The provisions regarding internal controls require a business entity to devise, prepare, maintain and execute an apposite system of internal controls that would provide adequate and rational assurances that (Breuer & Khuzami 40):

Ø  All the transactions in the company are executed in conformity with the authorization of the management team.

Ø  All the transactions are properly recorded, in order to facilitate the preparation of an accurate and factual financial statement, and to also ensure that accountability, with regards to the company’s assets, is maintained.

Ø  The access to the assets of the company is limited to the authorization by the management.

Ø  The recorded information about the accountability for assets (of the company) is compared and measured up against the current assets at practical intervals, and that appropriate actions are taken with regards to any established differences.

Penalties.

Violations of the provisions of FPCA do attract severe penalties. The company that violates the FCPA act risks the following penalties(Breuer & Khuzami 68):

Ø  Imprisonment.

Ø  Disgorgement of profits

Ø  Civil litigation by SEC, and at times shareholder suits.

Ø  Retention of government compliance monitors who would ensure that there is compliance with the provisions of the act.

Ø  Damage to the reputation and public image of the company, thus negatively impacting on the goodwill of potential customers.

Ø  Criminal fines which usually amount to $2 million for every violation, and sometimes it could amount to double the amount of the pecuniary gain obtained from violations.

Ø  Civil penalties.

Ø  Debarment (or suspension) of the company from applying for government contracts.

Thus, it can be inferred from the provisions and the related penalties of FCPA act that multinationals, corporations, and other huge business entities must conduct a comprehensive risk assessment of their transactions in the international markets (Breuer & Khuzami 56). Personally, the best options for multinationals business entities is for them to formulate and execute an effective compliance plan that would ensure that all the deals done in the international market are carried out with due diligence.

FCPA and Companies.

Absence of materiality in FCPA implies that this act prohibits any form of bribery. All US and foreign companies that have issued securities in conformance with the SEC act are obliged to adhere to all the provisions of FCPA. According to the provisions of FCPA, a representative, official or employee of a registered company cannot make any form of payment to any foreign official with the intended aim of securing or retaining a business. Moreover, since 1998, the US Department of Justice (DOJ) and SEC have increased their surveillance on companies that have been suspected of utilizing their US base of operations to further corrupt payments to foreign entities (especially governments or their representatives thereof) (Cassin 8).

Based on the rather broad definition of a foreign official according to FCPA, a public company that has been registered in the US cannot offer any form of payment to a bank owner who also doubles as a finance minister of his respective country. Moreover, employees of the United Nations are also regarded as foreign officials and as such no form of payment may be advanced to them by any company registered in the US (Breuer & Khuzami 21).

Usually, during the enforcement of the act, DOJ and SEC focus mainly on the intention for bribery (rather than the actual amount of bribe paid) when they charge a company for violations of the provisions of the act. Due to the stiff penalties imposed by the act, most corporations have formulated and executed policies aimed at protecting their public image and reputation by ensuring that they outsource their internal compliance assurance duties to third party due diligence companies. This ensures that these companies do comply with FCPA (Breuer & Khuzami 60).

The DOJ has identified the following best practices that must be incorporated in the compliance programs of companies: appropriate code of conduct, annual review, education, ongoing advice and related guidance, tone at the top, anti-corruption procedures and policies, risk assessment, management oversight and apposite reporting, accounting and financial internal controls, contractual compliance, constant assessment, appropriate and dependable reporting system and the use of agents (or other  business partners) (Breuer & Khuzami 60).

The accounting provisions require companies to prepare their financial statements as per the guidelines of GAAP (Breuer & Khuzami 45). Currently, the provisions of FCPA do accept financial statements that have been prepared as per the precepts of IFRS (International Financial Reporting Standards). The IFRS framework aims to harmonize accounting across the globe, and as such its principles on maintaining books of accounts have been adopted as the international accounting standards (Murphy 161). Personally, this explains why some multinational companies prefer to prepare their financial statements in accordance to the IFRS rather than GAAP.

Both IFRS and GAAP do share the same concepts concerning maintenance of physical capital, and maintenance of financial capital in standard monetary units. However, there is a fundamental difference between IFRS and GAAP. In IFRS, maintenance of financial capital is based on the constant purchasing power, while GAAP does not recognize this concept. Hence, IFRS factors in the dynamic inflation and deflation of the global economy, while GAAP does not factor in these dynamic factors. At the present time, there are ongoing deliberations about updating the FCPA accounting provisions in order to incorporate the framework of IFRS in its whole entirety (Murphy 212).

                            Several companies have had issues with foreign payment. Some of these companies have been penalized for their contravention of the provisions of the FCPA. Below is a case study of three companies that had foreign payment issues and how they tackled these issues.

Case study: Application of FCPA.

1.      Biomet Inc.

            The Securities and Exchange Commission did bring forward charges that Biomet Inc through its subsidiaries in South America and china had used their agents to pay bribes to doctors in Brazil, China and Argentina for a period of about 11 years in order for the company to obtain business contracts. The top management team of Biomet Inc had analyzed an internal audit report which clearly described most of the unlawful payments that were made to surgeons. Moreover, this internal audit report also stated that these payments were recorded in the financial books of the company. However, this report did not determine the underlying reason why these dubious payments were made. One of the complaints of SEC was that this report had stated that the company had adequate mechanisms of internal controls, but the same report did not explain why the royalties paid to surgeons were not documented and why the term “commission expenses” was replaced by the term “royalties”. Furthermore, investigations uncovered that false documents were regularly created and accepted in order to conceal suspicious payments. Finally the management of Biomet Inc was forced to pay a criminal fine amounting to about US$17.3 million in order to resolve the charges of violations against the provisions of FCPA. Subsequently, Biomet Inc paid US$5.5 million as pre-judgment interests to SEC, and as a disgorgement of profit (Cassin 111).

2.      Halliburton.

            Immediately prior to 1996, Halliburton secured a contract to build petrochemical plants for the Nigerian government at Port Harcourt. According to the company’s insiders, the top executives manipulated and coordinated bids with other foreign companies, with the intended aim of securing the contract. Moreover, a former top executive at Halliburton pleaded guilty to charges of paying bribes amounting to over US $180 million to several Nigerian government officials. Thereafter, the former executive entered into a plea bargain where he agreed to pay US $ 10.8 million as restitution fees. Later on, Halliburton agreed to pay US $559 million in order to resolve the charges of violations against the provisions of FCPA (Cassin 121).

3.      Wal-Mart.

            Several years ago, one of the former executive of a Wal-Mart subsidiary in Mexico came forward and stated that the subsidiary concealed illegal facilitation payments that were made in 2005 by the company’s US headquarters. These payments were used to bribe Mexican officials in order for Wal-Mart to obtain the prerequisite construction permits. An internal investigation that was done by Wal-Mart investigators established that both American and Mexican laws were broken when these illegal transactions were carried out. However, the senior executives of the company discarded the report of the internal investigator’s and instead, they altered the audit reports for that particular subsidiary. Later on, an international audit firm did an investigation and also evaluated the anti-fraud units and internal audits of Mexico and the results confirmed that Wal-Mart had contrived both the anti-bribery and accounting provisions of FCPA. The results also showed that the Mexican anti-fraud units and internal audits were grossly ineffective. Recently, the US chamber of commerce and Wal-Mart have been campaigning for the amendment of the provisions of FCPA, which according to opponents, is aimed at weakening the law in order for Wal-Mart to avert a highly probable litigation. Currently, enforcements agencies are reported to be evaluating the effectiveness of the internal audits of Wal-Mart (Cassin 107).

Conclusion.

            The FCPA is currently well renowned for its two main provisions that address bribery and accounting transparency. Absence of materiality in FCPA implies that this act prohibits any form of bribery. All US and foreign companies that have issued securities in conformance with the SEC act are obliged to adhere to all the provisions of FCPA. The provisions of the act are categorized into two component provisions: anti-bribery provisions and the accounting provisions. The accounting provisions operate in tandem with the anti-bribery provisions. Several companies, such as Biomet Inc, Halliburton and Wal-Mart, have had issues with foreign payment, and to resolve these issues, they were penalized by the US courts.

Works cited.

Breuer, Lanny & Khuzami, Robert. A Resource Guide to the U.S. Foreign Corrupt Practices Act.

            Washington DC: Government Publisher, 2012. Print.

Cassin, Richard. Bribery Abroad: Lessons from the Foreign Corrupt Practices Act. New York:

            Lulu Publishers, 2008. Print.

Colton, Natasha. "Foreign Corrupt Practices Act." American Criminal Law Review 38 (2001):

            890-901. Print.

Murphy, Aaron. Foreign Corrupt Practices Act: A Practical Resource for Managers and

            Executives. New Jersey: John Wiley & Sons, 2011. Print.