Navigating Global Troubles Columbus Couldn’t Imagine: Foreign Corrupt Practices Act

August 2009

IN THIS ISSUE

— The High Price of Doing Business Abroad? Defining Bribery and Incentives
— All Stick, No Carrot: Increased FCPA Enforcement Efforts
— In the next issue

GREETINGS!

Welcome to the August 2009 edition of our newsletter! In this issue, we’ll examine the finer points of transacting business with foreign entities and complying with the U.S. Foreign Corrupt Practices Act.

THE HIGH PRICE OF DOING BUSINESS ABROAD? DEFINING BRIBERY AND INCENTIVES

Although it has only been 32 years since the United States passed the Foreign Corrupt Practices Act, which defined bribery in an international commercial context, as well as the sanctions and penalties for such behavior, graft and influence peddling may be one of the world’s oldest professions. Against the centuries of such behavior taking place, as well as the differing cultural norms and values in each country or region, simply defining bribery can be seen as a daunting task, let alone combating it. Yet the FCPA tries to do so, making exceptions in some instances, such as allowing payments when a private entity pays a government official an “incentive” to expedite completion of a transparent, already agreed upon contract. “Payments to foreign officials may be legal under the FCPA if the payments are permitted under the written laws of the host country,” according to one article on the subject. “Certain payments or reimbursements relating to product promotion may also be permitted under the FCPA.”

The basic statute itself is intentionally broad as to what is prohibited, generally barring any attempt by a U.S. business person “to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value” to a foreign official. This line can be very murky in countries such as Nigeria, where many ministers maintain interests in private companies even while serving in office; in instances where these companies do business with U.S. interests or form joint ventures with U.S. firms, the line between compliance and illegal behavior can seem hopelessly blurred.

ALL STICK, NO CARROT: INCREASED FCPA ENFORCEMENT EFFORTS

Much like any sweeping, multi-national enforcement action emanating from Washington, the FCPA has been a slowly evolving creature. As early as 1980, a Government Accountability Office study found “extensive dissatisfaction with the clarity of the act’s accounting provisions. Controversy exists over whether the provisions contain a materiality standard – a threshold for financial disclosure that limits management’s reporting responsibilities to only material items. The GAO survey shows that business believes compliance is unreasonable without a materiality standard. The act’s anti-bribery provisions have also been criticized as being vague and ambiguous.”

In a 1999 report, the Congressional Research Service noted, “Opponents have argued that ‘grey’ areas of the law, where what is permitted may not be clear, have had a chilling effect on United States export trade because many companies have ceased foreign operations rather than face the uncertainties in the Foreign Corrupt Practices Act,” potentially impeding as much as $1 billion in trade annually.

The FCPA was amended in 1988 to include the “expediency” clause noted earlier, but also raising penalties from $1 million to $2 million. The U.S. reluctance to loosen FCPA seems to have had an influence on the Organisation for Economic Co-operation and Development, or OECD, a consortium of largely highly developed nations. In November 1997, the 29 OECD member states were joined by five other nations in adopting standards which were very similar in scope and severity to FCPA.

Enforcement actions undertaken by the U.S. Justice Department and Securities and Exchange Commission have risen from five in 2004 to 33 in 2008, with another 19 reported in the first half of 2009 alone. The cost of non-compliance is measured beyond fines, in terms of reputational damage. We have performed pre-transactional compliance checks from Ireland to Ghana and many points in between, often altering our clients to “business as usual” in the home country that would not sit well with U.S. regulators. As with any transaction, foresight of potential risks is priceless, and this is never more true than when conducting business in our increasingly globalized world.

IN THE NEXT ISSUE

In the September issue, as authorities continue to investigate the circumstances of Michael Jackson’s death, we’ll look at how reports of his physician’s financial troubles have shed new light on the importance of civil records when conducting pre-employment screening.