This article was originally published in the July 2013 issue of SEC Impact
The FCPA was enacted in December 1977 by President Carter, after numerous congressional hearings looking into business-related payments made directly or indirectly (through third parties, such as agents) by U.S. companies to foreign government officials. Although these payments were not against the law, it was Congress's objective to eliminate them, and since then, Congress has introduced many amendments designed to achieve that objective. To augment the FCPA, the International Anti-bribery and Fair Competition Act of 1998 was signed into law to combat bribery and other forms of inducement for the purpose of obtaining or retaining business with a U.S. entity. At a worldwide conference 33 other countries ratified the idea of mitigating international bribery.
The FCPA is part of the Securities Exchange Act of 1934 and has two main provisions, an anti-bribery provision and a provision relating to books and records and internal control.
The anti-bribery provision applies to issuers having a class of securities traded on a U.S. market or an entity, either U.S. or foreign, required to file reports with the SEC. The provision applies even if there is no U.S. nexus and the exchange of payments is made entirely outside the U.S.
The anti-bribery provision prohibits payments of money or anything of value, such as jewelry, cars, gifts, excessive travel and entertainment expenses, promises of future employment, shares, or dividends, to a foreign official in order to obtain or retain business (which includes payments to secure foreign government contracts). A foreign official can be any officer or employee of a foreign government, agency or public international organization. These individuals can be employed as tax or customs officials, or associated with issuing licenses, certifications, permits, etc.
Payments to a third party agent are subject to this provision. It is advisable for those companies/individuals who use third party agents to perform due diligence to insure the agents adopt policies and procedures that comply with the FCPA. It is important to create safeguards so agents do not make improper payments on a company's behalf which are in violation of the anti-bribery provision.
This provision has one exception: any payment for the purpose of facilitating, expediting or securing the performance of a routine government action by a foreign official, especially of the duties of the official which are essentially governmental or clerical in nature. Payments for travel and entertaining, lodging directly relating to the promotion, demonstration or explanation of products or services, or the execution or performance of a contract, if bona fide, are acceptable.
The second provision of the FCPA relates to books and records and internal control (IC). It requires issuers to create and maintain books and records and accounts which accurately and fairly reflect transactions and dispositions of assets. It is assumed that improper payments would never have been paid initially if detected through an effective IC system, which would include, but not be limited to, FCPA compliance policies, adequate supervision and control of foreign individuals and agents, and other checks and balances relating to issuer spending.
The Department of Justice (DOJ) is the sole agency responsible for criminal enforcement of both FCPA provisions and has jurisdiction over issuers and certain persons other than issuers. The SEC has jurisdiction over issuers (and their employees and agents) and can bring civil charges for violations of both provisions. Both of these agencies identify actions through issuer disclosures, international law enforcement cooperation, embassies, civil society and media reporting, competitor complaints, whistleblower complaints and voluntary disclosures. In addition to fines, the SEC can seek various sanctions such as monetary penalties, disgorgement, interest, and injunctions, or can produce cease and-desist orders to prohibit current and future violations. The FCPA only applies to the payer and not to the recipient, although the DOJ has recently been charging recipients with other crimes, such as money laundering.
DOJ and SEC scrutiny can have severe effects on a business. Professional fees such as attorney fees, forensic accounting fees and data analysis and retrieval costs may exceed fines and penalties assessed. An issuer's stock price and cost of capital raises may be affected. Merger and acquisition transactions and executive compensation issues may also be altered.
The Sarbanes-Oxley Act, which complements the FCPA, requires issuers to maintain effective controls and risk management and compliance functions relating to the FCPA provisions. Effective controls might include the following:
● Due diligence on customers and background checks on officers, owners and those involved in financial reporting;
● Senior management and audit committee discussions on the risks of bribery and corruption;
● Staff training; and
● Independent monitoring.
Since 2007, SEC enforcement actions have been increasing, with approximately 10-15 enforcement actions per year. In 2010, the SEC's Enforcement Division created a specialized unit to further enhance the FCPA. Alleged infractions include payments to foreign governments to influence valuable contracts, such as development of gas and oil fields, improper payments to third parties for drilling rights, payments to employees relating to healthcare, payments to win pharmaceutical business, payments made off the books to pay phony vendors -- and the list grows from there. In light of the DOJ's and SEC's uptick on enforcement actions, all issuers should conduct a risk assessment, review policies and procedures, and evaluate the sufficiency of controls relating to the two provisions discussed above.
The Resource Guide to the U.S. Foreign Corrupt Practices Act, created by the Criminal Division of the DOJ and the Enforcement Division of the SEC, provides more information for businesses and individuals.
If you have any questions about the content of this article, please contact Friedman LLP Partner Neil W. Ehrenkrantz at firstname.lastname@example.org or contact your engagement partner.