Kickback backlash: under the US Foreign Corrupt Practices Act, overseas firms with business interests in the US are being prosecuted for allegedly bribing public officials in other countries. Neil Hodge reports on an escalation in Washington's worldwide war on corruption.

[ILLUSTRATION OMITTED]

While the UK government has been busy ratifying global conventions and enacting domestic legislation to battle corruption committed by British citizens and companies in foreign parts, it's the long arm of a US anti-bribery law that's been reaching further and causing more consternation.

The Foreign Corrupt Practices Act (FCPA) was created in 1977 after an investigation by the US Securities and Exchange Commission (SEC) found that over 400 American firms had made questionable or illegal payments totalling hundreds of millions of dollars to foreign government officials and political parties. The act has extended significantly in scope over the past three decades, with prosecutors using it in the tenacious pursuit of corporate wrongdoing, both in the US and abroad. Owing to the extra-territorial nature of the law--and its highly punitive measures--experts believe that many UK organisations and individuals could now be in the firing line without fully appreciating the danger.

Over the past few years authorities such as the SEC and the US Department of Justice (DoJ) have turned their attentions towards the more questionable activities of foreign companies. All overseas firms that do business in the US are subject to scrutiny, along with those that use service providers based there. The FCPA allows prosecutors to take action against such companies for corruption even though the illegal transactions may be taking place in another country.

Given that companies based in the world's leading economies are clearly prepared to grease palms in exchange for a more lucrative deal, it looks as though the US regulators will be able to declare open season on foreign companies, according to Transparency International. The anticorruption group's Bribe Payers Index is a measure of how willing a nation's businesses are to resort to giving backhanders. Ever keen to secure new contracts, Switzerland tops the chart, followed by Sweden, Australia, Austria, Canada, the UK, Germany and the Netherlands. The US comes equal ninth with Belgium. These countries account for more than a third of global exports. Curiously, given their countries' reputations for corrupt domestic practices, firms from Russia, China and India are among the least likely to pay bribes abroad.

[ILLUSTRATION OMITTED]

The DoJ has put some high-profile foreign firms under the microscope in recent months. In June 2007 it announced that it would be scrutinising transactions at BAE Systems after the British defence company secured contracts with the government of Saudi Arabia--a case that the UK's Serious Fraud Office had decided not to continue. In November 2006 the DoJ announced that it was investigating Siemens after the German electronics and engineering giant won contracts worth up to 420m [euro] (313m [pounds sterling]) in Nigeria and Saudi Arabia. It was also looking into possible violations concerning the United Nations oil-for-food humanitarian aid programme in Iraq. There's a real possibility that more firms in Germany could be targeted under the FCPA given that a number of corporate governance scandals have recently been unearthed there.

As the international scope of prosecution has increased, so have the penalties. Baker Hughes, a Houston-based oil services firm, agreed to pay the DoJ $44m (22m [pounds sterling]) last May to settle a case in connection with its operations in Angola, Indonesia, Kazakhstan, Nigeria, Russia and Uzbekistan. It's the largest sum paid out in an FCPA enforcement action.

"In recent years the emphasis on ensuring that businesses are whiter than white has led the FCPA to be interpreted broadly," says Tony Parton, a partner in the forensic practice at PricewaterhouseCoopers. "When the act initially came into force, an amnesty encouraged over 500 companies to admit to violations and there were few prosecutions, but 1995 proved a milestone. That year Lockheed was fined $25m for improper payments relating to contracts in Egypt and, for the first time, an individual was given a custodial sentence for violating the law."

Recent reports that the SEC is looking to open offices in London are a clear sign of the growing emphasis on FCPA enforcement, according to Parton. This, he believes, "demonstrates the growing determination to police businesses that have shares listed in the US, regardless of where they're based".

If convicted under the FCPA, a company's officers, directors, stockholders, employees or agents may be liable to fines of up to $100,000 and imprisonment for up to five years. And, under the Alternative Fines Act, the penalty to the company may be up to twice the sum that it had sought to obtain through bribery. So, for example, if it had paid an official $10,000 to secure a $30m contract, the SEC and DoJ are entitled to seek $60m. Furthermore, fines imposed on individuals may not be paid by their employer.

Compare that with the level of enforcement and punishment in the UK. According to the Organisation for Economic Co-operation and Development (OECD), 108 allegations of corruption have been recorded against UK citizens or companies since February 2002. Of these, 24 were closed owing to insufficient evidence, one was discontinued and in 32 cases no action was taken because the allegation was not substantiated.

Evidence suggests that UK companies are unaware of the US legislation and the risks it presents. According to KPMG Forensic's recent survey of firms doing business in the US, just under half either thought that they weren't subject to the FCPA or weren't sure whether they were covered or not.

UK anti-bribery legislation--which has been in place since 1889--is actually tougher and more wide-ranging than the FCPA in some respects. In 1916 the law was changed and the presumption of corruption was introduced, shifting the burden of proof. Under this provision, if a contractor gives a gift to a public official, that gift shall be presumed to be corrupt unless the accused party can prove otherwise. In effect, the presumption of innocence is denied, although the Law Commission has recommended that this be abolished, while the government has indicated that it will repeal the law soon.

Over the past decade the UK has ratified the OECD's convention on combating bribery of foreign public officials in international business transactions (see panel, opposite page)--a voluntary framework aimed at reducing corruption in developing countries--and has strengthened its legislation with the Anti Terrorism, Crime and Security Act 2001. Part 12 of the act gives UK courts jurisdiction over crimes committed abroad by British citizens and organisations. In 2006 the government brought laws covering issues such as international co-operation in the enforcement of overseas forfeiture orders in line with the United Nations convention against corruption.

"The US definition of corruption is about bribing a foreign government official," says Jennifer Hammond, director at KPMG Forensic. "It is not about bribing individuals, third parties or other companies--all of which are deemed corrupt in UK law."

She also points out that a person charged with breaching the FCPA may assert as a defence that a payment was legitimate under the laws of the other country concerned or that the money was spent in the course of demonstrating a product or performing a contractual obligation. Moreover, if a guilty company can prove that it had sound internal systems in place to detect and tackle corruption, any fines levied against it may be reduced by up to 90 per cent.

As a result, some feel that the threat of prosecution is overstated. Mark Jones, a partner in the internal audit practice at accountants RSM Bentley Jennison, says that the FCPA should theoretically pose few problems for British firms because it focuses purely on the bribery of public officials. The real difference, he says, lies in enforcement.

"The US regulators are more proactive in tackling such abuses and do not shy away from taking companies to task," Jones says. "In the UK there hasn't been a single prosecution of a company for corrupt practices abroad. That situation does not look like changing in a hurry."

Simon Bevan, head of the fraud services unit at BDO Stoy Hayward, largely agrees. He points out that in the UK there hasn't been a prosecution for corrupt corporate practices abroad in the decade since the OECD's convention came into force, even though the US championed this to ensure that its trading partners would clamp down on corruption abroad as strongly as it had.

"It is little wonder, therefore", Bevan says, "that US firms are becoming increasingly willing to point the finger at non-US firms and prompt regulators to investigate the practices of rivals working in the same sector."

The global bung-fight

The key international agreements in place to combat bribery and corruption around the world are as follows:

* The Council of Europe criminal law convention on corruption (1999) obliges signatories to criminalise a wide range of acts of corruption, which it defines as the "requesting, offering, giving or accepting, directly or indirectly" of a bribe. A pioneering aspect of the convention is that it extends criminal responsibility for bribery into the private sector.

* The OECD convention on combating bribery of foreign public officials in international business transactions (1999). Countries that have signed the convention are required to put in place legislation that criminalises the act of bribing an overseas public servant.

* The United Nations convention against corruption (2003) includes measures on prevention, criminalisation, international co-operation and asset recovery. There are currently 140 signatories.

What to do if you're put on the spot

How should you react if you feel pressured to offer inducements or bribes? Colleagues or superiors might imply that it's acceptable or even expected, or the pressure might be coming from outside if an external party suggests it as a way for your company to get ahead, writes Danielle Cohen. Section 250 of CIMA's code of ethics is clear on such matters. It states: "A professional accountant in business should not offer an inducement to improperly influence professional judgment of a third party."

The code contains guidance intended for members or students who may be experiencing this kind of pressure. Part A describes a framework for managing ethical conflicts, which is explained at www.cimaglobal.com/ethics. CIMA also provides the following ethics support services:

* Ethics helpline: 0800 358 7663 ([e-mail]).

* Whistle-blowing advice line (UK only): 0800 358 7665.

* Legal advice line (UK members only): 0800 092 1980. Other organisations tackling corruption around the world include:

* Bribeline: www.bribeline.org.

* TRACE: www.traceinternational.org.

* Transparency International: www.transparency.org.

* Tiri: www.tiri.org.

* Malaysian Institute of Integrity: www.iim.com.my.

* United Nations global compact: www.unglobalcompact.org.

Danielle Cohen is CIMA's ethics manager.