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Complying with the amended Foreign Corrupt Practices Act.

The Foreign Corrupt Practices Act FCPA) was enacted in 1977 as a response to widely published improprieties involving corporate bribery, kickbacks, payoffs, political contributions and other questionable payments to foreign officials in exchange for international business. The FCPA endowed the U.S. government with the legal authority to eliminate corrupt practices of U.S. multinationals by imposing strict accounting standards and anti-bribery proscriptions. As discussed in an article in the August 1980 issue of Risk Management, the FCPA introduced many new loss exposures that risk managers needed to recognize and confront.

From the moment the FCPA was enacted, however, it was criticized. Opponents of the law argued that its language was vague and raised questions as to the extent exporters were personally liable for unauthorized acts of their agents. Business leaders argued that the FCPA represented an overbearing attempt by the United States to impose unilaterally its moral agenda on foreign nations. They claimed that any dynamic approach to the problem of foreign bribery had to be done within the framework of a multilateral agreement by which foreign nations would not resent the enforcement of U.S. law and would cooperate in an international effort to eliminate the problem of commercial bribery.

Following 11 years of debate and controversy over what constituted acceptable foreign business practices, the Omnibus Trade and Competitiveness Act of 1988 was put into law. It amended the FCPA to narrow its scope and established specific standards for the business community in determining what is permissible conduct under the act. At the same time, the amendments significantly increased the statutory penalties associated with FCPA violations. In light of these changes, corporate risk managers must familiarize themselves with the amendments so they can implement loss control procedures to reduce the possibility that the company or its employees will suffer the sanctions associated with FCPA violations.

While, overall, the FCPA amendments have enhanced the potential for greater competition among U.S. companies in foreign markets, it is now up to the risk manager to inspire management to follow the more structured and carefully delineated rules set forth in the new law. The risk manager should lead management in acquiring an understanding of the FCPA amendments and an appreciation of the steps necessary to reduce exposure in the future.

Historical Perspective

The FCPA grew out of the Watergate probe that uncovered illegal campaign gifts distributed by American corporations to foreign businesses. According to officials at the Securities and Exchange Commission, these substantial contributions came from secret slush funds kept by corporations. The SEC's investigation revealed that only a small portion of the funds were used for campaign contributions. Most of the money was used by foreign agents to procure or preserve foreign business. Approximately 435 corporations told the SEC that they had given a total of $800 million in bribes or other questionable payments to foreign officials.

By 1977, Congress had determined that these practices tarnished the overseas image of the U.S. government and adversely affected public confidence in the integrity of the business community. These disclosures had a powerful impact abroad, leading to the downfall of government leaders in Japan, Korea and the Netherlands. In addition, the power gained by the Italian Communist Party in 1976 parliamentary elections was credited, in part, to political exploitation by the left of the payments made by American firms to Italian officials. In the House-Senate Conference Report, Congress also expressed concern about the unhealthy environment created by corporate bribery, by which business decisions and the sale of products were based on factors other than price, quality and service.

Although U.S. securities, tax and antitrust laws provided some opportunity to exercise authority over these abuses, no laws prior to FCPA addressed the issue of foreign corrupt practices. Against this backdrop, Congress decided to enact new legislation. The FCPA sought to stop corporate bribery as a means of obtaining export business by making it illegal to bribe foreign officials to obtain or retain business, mandating that U.S. firms keep detailed books, records and accounts to accurately reflect corporate transactions and requiring U.S. firms to maintain an internal accounting system to assure that management controls the assets of the firm.

At the time the FCPA was passed, many believed this unilateral action by the United States would encourage other nations to adopt an international code of ethics outlawing commercial bribery. However, the subsequent failure to reach an international agreement on bribery or of any other country to adopt a similar law, despite repeated prodding by the United States, buttressed the business community's claim that other countries disagreed with it.

Perhaps the most vocal criticism of the FCPA was that it placed U.S. businesses at a disadvantage in a competitive world marketplace. While foreign business remained outside the jurisdiction of the FCPA and was free to make questionable payments, a U.S. firm was not allowed to bribe foreign officials. The business community argued that it lost export business and that as a result the U.S. balance of payments in world trade was adversely affected. Despite FCPA supporters' claims that the United States had enjoyed an export boom in recent years, businesspeople argued that increased exports were limited to particular areas such as high technology, and that there had been a marked decrease in the U.S. share of business in world markets in recent years.

1988 Amendments

Recognizing the need for a pragmatic resolution to this ongoing debate, Congress chose in 1988 to eliminate the ambiguities and reduce business anxieties initiated by the FCPA without eliminating its goals and objectives. The FCPA amendments changed the law in several ways. In one regard, it altered the way payments are made to corporate agents by firms or individuals and used by the agents for prohibited purposes. Previously, a businessperson could be prosecuted if he or she had reason to know that the third party may have paid a bribe to secure foreign business. That standard had been criticized for being unnecessarily vague and for placing unreasonable burdens on firms and individuals.

Under the amendments, a person's state of mind reaches a knowing level of culpability only if he or she knows that the agent is engaged in illegal conduct or has a firm belief that such behavior exists or is substantially certain to occur. Knowledge of the existence of a particular fact is established, according to Title 15 of U.S. Code, 'if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.'

The House-Senate conferees decided that the requisite state of mind for this offense should include at least a conscious effort to avoid learning the truth about an agent's actions. Simple negligence or mere foolishness regarding the acts of third parties may not be the basis of liability under the new law. Now the prosecution must prove beyond a reasonable doubt that the defendant meets this tougher standard of awareness. Of course, if the defendant is a corporation, the prosecution may still pool the collective knowledge of individual corporate employees to form the basis of an indictment.

Before the amendments were adopted, the FCPA limited authorized payments to government officials whose responsibilities were essentially ministerial or clerical. That exception was expanded to permit any facilitating or expediting payment to a foreign official to secure the performance of a routine governmental action. The term routine governmental action covers virtually every commonly performed governmental act except those involving an exercise of discretion by a foreign official for the purpose of obtaining or retaining business.

Under the amendments, permissible payments to facilitate or expedite routine governmental action include obtaining permits, licenses or other official documents to qualify a person to do business in a foreign country; processing governmental papers such as visas and work orders; providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or actions of a similar nature.'

The FCPA amendments create affirmative defenses for certain payments permissible under the written laws and regulations of the foreign country or payments for routine business expenses. This modification satisfies a business concern that U.S. law should not prohibit activities clearly legal in the host country or done as part of standard business practices. The House-Senate Conference Report, however, makes clear that the failure of a foreign country to prohibit such payments does not alone satisfy this requirement. As with any affirmative defense, the burden of demonstrating that the action is lawful rests with the defendant. The business expenses covered include travel and lodging paid to foreign officials to cover routine promotions, demonstrations or explanations of products or services or performance of a contract with a foreign government or agency. A payment or gift corruptly made to obtain an official act or omission cannot be a bona fide business expense.

The FCPA amendments modified the accounting provisions of the law to eliminate burdensome reporting requirements for businesses. Congress adopted a standard of reasonableness that takes into account several factors, including the cost of maintaining an internal auditing system which assures that corporate assets are properly accounted for as required by law. The 1988 legislation also codified previous SEC enforcement policy that criminal penalties should not be prescribed for trivial or technical violations of the accounting standards contained in the act. This new provision is intended to eliminate the possibility of criminal prosecution unless the violation is knowingly done. A criminal violation occurs only when the violation is motivated by a desire to falsify books, records or accounts or to circumvent the accounting rules contained in the act.

The FCPA amendments significantly raise maximum penalties for violations of the act. A company found guilty of violating the act is now subject to a fine of $2 million per violation, double the original fine. Maximum prison sentences for individuals remain at five years, and individual fines have been raised from $10,000 to $100,000 per violation. Actual fines can be even greater because the House-Senate conferees indicated that another provision of the federal criminal code, which sets all individual criminal fines at a $250,000 maximum, remains in effect.

Under the recently enacted U.S. Sentencing Guidelines, a defendant, depending on the amount of the bribe and his or her past criminal history, can expect to serve a mandatory prison term from two months to five years. Civil penalties of up to $10,000 may also be imposed on companies, officers, directors, employees, agents and company stockholders found to have violated the anti-bribery provisions. Civil injunctive relief and subpoena authority are granted to the Department of Justice with regard to firms suspected of FCPA violations.

The new law repeals the Eckhardt Amendment contained in the original FCPA which provided a safe harbor from individual liability. The Eckhardt Amendment prevented individual prosecution under the FCPA unless the firm was also found to have violated the act. Now individuals may be subject to criminal liability regardless of whether the corporation has been prosecuted or convicted.

The new law also contains a provision urging the president to pursue multilateral negotiations with major industrialized nations to enact an international agreement on the subject of corrupt business practices. The president is obligated to submit a report to Congress on the progress of the negotiations and recommend action the executive branch and Congress should consider taking in the event that negotiations fail to eliminate the competitive disadvantage incurred by U.S. businesses. If these negotiation efforts prove unsuccessful, this provision is expected to fuel future attempts by business leaders to repeal the FCPA.

Under the FCPA amendments, the attorney general is authorized to issue guidelines outlining examples of export sales arrangements and business contracts that would comport with the enforcement policy of the Department of Justice. No guidelines, however, have been forthcoming from the department. The justice department must also establish procedures for providing opinions on whether or not contemplated conduct would violate the amended law. In addition, the attorney general is required to advise exporters and small businesses unable to obtain specialized counsel on issues involving the FCPA.

Complying With FCPA

Congress has explicitly delineated permissible and impermissible conduct in procuring and retaining foreign business. The FCPA amendments reasonably alert companies and individuals of possible violations of the law. The following are suggestions designed to help the risk manager coordinate a firm's compliance efforts and can be essential components of a loss control program.

Unambiguous, specific policy statements should clarify to employees that management's philosophy does not condone either direct or indirect illegal payments, including bribes, kickbacks or the use of hidden funds, to obtain or retain foreign business. A written code of conduct should be developed which incorporates these general policy statements. Signed acknowledgments of the code by all managers and sales agents should also be obtained.

Employees should be told in simple, concise language which payments or gifts are permissible and which ones are taboo under the FCPA. Specific examples appropriate to typical transactions in the business involved should be given to employees to eliminate any doubt or ambiguity over the law. For risk managers operating in firms that transact business in parts of the world where grease payments are common, special care should be taken in the language employed and the type of examples offered.

Formal approval procedures should be mandatory for all potentially questionable payments. Under the FCPA amendments, knowledge sufficent to convict a corporate officer or director is satisfied if a defendant deliberately closed his or her eyes or acted with reckless, disregard of whether questionable payments occurred. Accordingly, to provide maximum protection from exposure to the company and individuals involved, formal procedures for approval should be established for making questionable payments. If individual employees ignore these procedures, without the actual or constructive knowledge of the company or management, exposure is limited to the specific employees involved.

Because management may not take shelter from the prohibitions of the act by their unwarranted obliviousness to any action or inaction, adherence to company policies should be monitored periodically by internal audits and interviews with key personnel in the field. Every reasonable effort should be undertaken to assure that the procedures established for compliance are strictly observed by all employees.

Although management may be relucant to consult the Department of Justice on complex issues, the risk manager can encourage using these review procedures in situations where the proposed conduct falls within an ambiguous area. Indeed, occasional use of the department's expertise may be an excellent defense to other charges in cases that may arise in the future.

The FCPA amendments discourage prosecution of inadvertent or technical violations of the accounting standards contained in the act. There is no protection, however, when the act or failure to act is motivated by a desire to falsify books, records or accounts or to circumvent the accounting rules contained in the act. Adequate documentation and record keeping are particularly important for any transaction that may be viewed as questionable, because inadequate documentation may result in a claim that the internal accounting provisions of the act are being violated.

The internal controls must be sufficient to provide reasonable assurances that all business transactions are done with the approval of management, and that they are recorded in conformity with generally accepted accounting principles. Access to funds should be allowed only with specific authorization and after careful consideration from management. In addition, the internal control system should regularly be reviewed by external auditors for signs of weaknesses. Surely, deficiencies should be noted carefully and evaluated promptly by management. Failure to correct them may be seen as sufficient evidence of bad faith and non-compliance.

The risk manager should be a central figure in assessing the risks arising from failure to comply with FCPA. FCPA modifications have certainly reduced the risk exposure for U.S. companies seeking to do business overseas. In particular, the amendments have diminished the possibility of prosecution for those firms or individuals that inadvertently transgress the limits of the FCPA and have lessened the vagueness and uncertainty that surrounded the act. Nevertheless, direct and indirect consequences of violating the FCPA have been enhanced and can be severe for both the company and individuals involved. The penalties associated with non-compliance, from prison terms to hefty fines, make it essential that the risk manager take steps to reduce the chances that the firm or its employees will suffer the sanctions associated with FCPA violations.
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Author:Morehead, Jere W.; Gustavson, Sandra G.
Publication:Risk Management
Date:Apr 1, 1990
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