• The Foreign Corrupt Practices Act
  • June 15, 2009 | Author: Mary K. McCormick
  • Law Firm: McCormick International - Minneapolis Office
  • The Foreign Corrupt Practices Act

    By Mary K. McCormick

    A recent special report on corporate social responsibility in The Economist magazine noted that the next wave of trouble on that front might be corporate corruption, citing the heads that have rolled at two of Germany’s biggest companies, Siemens and Volkswagen, because of corruption scandals.  Heightened scrutiny of corporate accounts under the Sarbanes-Oxley Act, and due diligence activities in the course of mergers and acquisitions, are also contributing to greater awareness of bribery issues and the uncovering of corruption-related business accounts.

    Since 1969, the U.S. has denied tax deductions for bribes paid overseas.  The Foreign Corrupt Practices Act (“FCPA”) was passed in 1977, in response to several U.S. bribery scandals involving the Mexican oil company PEMEX and the Tanaka government in Japan.  In the early years, criminal prosecutions under the FCPA were few and far between.  That is now changing.  U.S. cases in the last few years have involved Monsanto, DaimlerChrysler, Titan, GE/Invision, and others.

    The FCPA prohibits paying bribes to foreign government officials.  It covers two types of activities. 

    First, it forbids U.S. companies, issuers or persons anywhere in the world, or foreign persons while within the U.S., from corruptly offering or paying anything of value, directly or indirectly, to a foreign government official, party or candidate, in order to influence an official act or secure improper advantage, to obtain or retain business.   Willful violations of the anti-bribery provisions are punishable by criminal penalties of up to $2 million for companies and $100,000 plus 5 years imprisonment for individuals, including directors, corporate officers, employees, agents or stockholders.  Civil penalties may also be applied of up to $10,000 for companies or individuals found liable, and a “disgorgement” penalty may be twice the amount gained.  Note: The company may not pay fines against an individual.  The anti-bribery provisions are enforced by the Department of Justice.

    The anti-bribery provisions contain an exception for “grease” payments, defined as small payments made to facilitate or expedite “routine governmental actions” such as obtaining licenses and permits to do business in a country, providing police protection, processing visas or government work orders, scheduling inspections, and the like.  There are only two affirmative defenses: 1) payments are allowed if they are legal under the written laws of the foreign official’s country (but good luck finding a country that publicly allows its officials to be bribed…); and 2) payments made as reasonable or bona fide expenditures directly related to the promotion, demonstration or explanation of products or the execution or performance of a contract with a foreign government or agency.

    Second, the FCPA also contains accounting provisions, enforced by the SEC, which require companies to:  1) keep books and detailed records that accurately reflect transactions and the disposition of corporate assets; 2) devise and maintain an adequate system of internal accounting controls; and 3) conduct a periodic review of recorded and actual assets.  In other words, disguised slush funds set up or maintained for illegal bribes are not allowed.  Willful falsification of records attracts criminal penalties of up to $25 million against a company, and up to 20 years imprisonment and/or fines of up to $5 million against an individual. 

    To minimize your company’s risk in this area, do a thorough investigation of all potential sales reps, agents and distributors.  Include an FCPA clause in all contracts with agents, distributors and consultants (although this alone is not enough to foreclose an investigation).  Ensure that your company policies include FCPA principles and educate staff, especially sales and accounting personnel, about FCPA “red flags.”