The a strong system of internal controls must

The Foreign Corrupt Practices Act can be somewhat confusing,
and it provides little guidance on exactly where or how to look for bribes and
other illegal payments. However, it clearly indicates that virtually all U.S.
businesses, as well as non-U.S. firms registered with the U.S. Securities and
Exchange Commission (SEC), must not engage in bribery and must have systems in
place to detect and prevent illegal payments.

The U.S. Congress enacted the FCPA as an amendment to the
U.S. Securities Exchange Act of 1934. The anti-corruption legislation was
created in response to the revelation that U.S. corporations had given more
than $300 million in bribes or questionable payments to foreign government
officials during the 1970s. Passed in 1977, the FCPA was aimed at preventing
U.S. businesses from engaging in bribe-paying activity and at restoring
confidence in corporate America. In general, the FCPA prohibits U.S. companies,
as well as non-U.S. firms listed with the SEC, from making payments to foreign
officials for the purpose of obtaining or keeping business. The act also
requires issuers of securities to meet its extensive accounting standards.

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The FCPA is well-known for its requirement that corporations
must keep detailed accounting records with an adequate system of internal
controls. Specifically, organizations under the act’s jurisdiction are required to maintain
books and records that, in “reasonable detail,” accurately and fairly
reflect their transactions. Furthermore, the company’s internal accounting controls
system must be able to provide “reasonable assurances” that:

Transactions are executed in accordance
with management’s authorization.

Transactions are recorded in a way that enables
financial statements to be prepared in accordance with U.S. Generally Accepted
Accounting Principles, or any other applicable criteria, and maintains
accountability for assets.

Company assets can be accessed only in
accordance with management’s authorization.

Asset records are compared with existing assets
at “reasonable intervals,” and appropriate action is taken with respect
to any differences.

Amendments made to the FCPA in 1988 strengthened some of the
requirements for internal control, specifying that no one shall knowingly
circumvent or fail to implement internal accounting controls or falsify any
book or record that shows the company’s transactions and assets. The
amendment also clarifies that the terms reasonable assurances and reasonable
detail refer to the “level of detail and degree of assurance as would satisfy
prudent officials in the conduct of their own affairs.”
The FCPA provisions, therefore, clearly indicate that a firm’s
accounting records must be accurate and that a strong system of internal
controls must exist.

The FCPA prohibits “an offer, payment, promise to pay,
or authorization of the payment” of money or gift to any government official,
political party or party official, or political candidate for purposes of
influence. However, the act does not prohibit all bribes. Instead, it
allows for low-level bribes, sometimes referred to as “grease” payments, to facilitate
“routine governmental action.” The 1988 FCPA amendment provides several
examples of routine government actions performed by foreign officials
where these payments are allowed, including:

Obtaining permits, licenses, or other official
documents to conduct business.

Processing governmental papers, such as visas
and work orders.

Providing police protection, mail pick-up
and delivery, or inspections associated with contract performance or transporting
goods across country.

Providing utility services, loading and
unloading cargo, or protecting perishable goods from deterioration.

Certain lower-level payments, however, are still illegal
under the FCPA. Whereas bribes to low-level officials with influence only over
routine government actions are legal, bribes to similar low-level officials
with influence over discretionary government matters are illegal. Beyond
government officials, however, a 1998 amendment to the FCPA expands coverage to
also include bribes made to representatives of public international
organizations designated under the International Organizations Immunities Act.
Organizations covered by the act include the United Nations, International Monetary
Fund, Organisation for Economic Co-operation and Development (OECD), World
Trade Organization, and World Heath Organization. In part, the 1998 amendment
came about because the United States signed, ratified, and implemented the OECD
Convention on Combating Bribery of Foreign Public Officials in International Business
Transactions. This treaty, negotiated in late 1997, expands the FCPA’s
global reach. The convention essentially takes what are defined as illegal
payments by the FCPA and declares them criminal acts in the 34 countries that
have ratified the OECD document. In other words, corporations and corporate
representatives who operate in these 34 jurisdictions can be prosecuted for
violating rules largely equivalent to the FCPA.

Not only is a bribe considered illegal under the FCPA, but knowledge
that an illegal payment has been made, or has likely been made, constitutes
noncompliance as well. Although the original 1977 act specified that “knowing”
of illegal payments was unlawful, the 1988 amendments expanded the definition
of what constitutes such knowledge as follows:

A person’s
state of mind is ‘knowing’ with respect to conduct,
a circumstance, or a result if (i) such
person is aware that such person is engaging in such conduct, that such
circumstance exists, or that such result is substantially certain to occur; or
(ii) such person has a firm belief that such circumstance exists or that such
result is substantially certain to occur. When knowledge of the existence of a
particular circumstance is required for an offense, such knowledge is
established 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.

In other words, under the law, mere awareness of a high risk of
bribery is the same as knowledge of the illegal payment itself. This
clarification becomes extremely important when assessing risk or designing
internal control systems to avoid violations of the FCPA.

Companies that fail to comply with the FCPA can be fined up to US $2
million, and individuals can be fined as much as $100,000 and imprisoned up to
five years. Furthermore, corporations and individuals in violation of the act
are subject to the U.S. Federal Sentencing Guidelines, which can increase the
maximum allowable fines even further, depending on the severity of the offense.


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