The Foreign Corrupt Practices Act can be somewhat confusing,and it provides little guidance on exactly where or how to look for bribes andother 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 andExchange Commission (SEC), must not engage in bribery and must have systems inplace to detect and prevent illegal payments.
The U.S. Congress enacted the FCPA as an amendment to theU.S. Securities Exchange Act of 1934. The anti-corruption legislation wascreated in response to the revelation that U.S. corporations had given morethan $300 million in bribes or questionable payments to foreign governmentofficials during the 1970s.
Passed in 1977, the FCPA was aimed at preventingU.S. businesses from engaging in bribe-paying activity and at restoringconfidence 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 foreignofficials for the purpose of obtaining or keeping business. The act alsorequires issuers of securities to meet its extensive accounting standards. The FCPA is well-known for its requirement that corporationsmust keep detailed accounting records with an adequate system of internalcontrols. Specifically, organizations under the act’s jurisdiction are required to maintainbooks and records that, in “reasonable detail,” accurately and fairlyreflect their transactions.
Furthermore, the company’s internal accounting controlssystem must be able to provide “reasonable assurances” that:· Transactions are executed in accordancewith management’s authorization.· Transactions are recorded in a way that enablesfinancial statements to be prepared in accordance with U.S. Generally AcceptedAccounting Principles, or any other applicable criteria, and maintainsaccountability for assets.· Company assets can be accessed only inaccordance with management’s authorization.· Asset records are compared with existing assetsat “reasonable intervals,” and appropriate action is taken with respectto any differences. Amendments made to the FCPA in 1988 strengthened some of theact’srequirements for internal control, specifying that no one shall knowinglycircumvent or fail to implement internal accounting controls or falsify anybook or record that shows the company’s transactions and assets.
Theamendment also clarifies that the terms reasonable assurances and reasonabledetail refer to the “level of detail and degree of assurance as would satisfyprudent officials in the conduct of their own affairs.”The FCPA provisions, therefore, clearly indicate that a firm’saccounting records must be accurate and that a strong system of internalcontrols 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 ofinfluence. However, the act does not prohibit all bribes. Instead, itallows for low-level bribes, sometimes referred to as “grease” payments, to facilitate”routine governmental action.” The 1988 FCPA amendment provides severalexamples of routine government actions performed by foreign officialswhere these payments are allowed, including:· Obtaining permits, licenses, or other officialdocuments to conduct business.
· Processing governmental papers, such as visasand work orders.· Providing police protection, mail pick-upand delivery, or inspections associated with contract performance or transportinggoods across country.· Providing utility services, loading andunloading cargo, or protecting perishable goods from deterioration. Certain lower-level payments, however, are still illegalunder the FCPA. Whereas bribes to low-level officials with influence only overroutine government actions are legal, bribes to similar low-level officialswith influence over discretionary government matters are illegal.
Beyondgovernment officials, however, a 1998 amendment to the FCPA expands coverage toalso include bribes made to representatives of public internationalorganizations designated under the International Organizations Immunities Act.Organizations covered by the act include the United Nations, International MonetaryFund, Organisation for Economic Co-operation and Development (OECD), WorldTrade Organization, and World Heath Organization. In part, the 1998 amendmentcame about because the United States signed, ratified, and implemented the OECDConvention on Combating Bribery of Foreign Public Officials in International BusinessTransactions. This treaty, negotiated in late 1997, expands the FCPA’sglobal reach. The convention essentially takes what are defined as illegalpayments by the FCPA and declares them criminal acts in the 34 countries thathave ratified the OECD document.
In other words, corporations and corporaterepresentatives who operate in these 34 jurisdictions can be prosecuted forviolating rules largely equivalent to the FCPA.Not only is a bribe considered illegal under the FCPA, but knowledgethat an illegal payment has been made, or has likely been made, constitutesnoncompliance as well. Although the original 1977 act specified that “knowing”of illegal payments was unlawful, the 1988 amendments expanded the definitionof what constitutes such knowledge as follows:A person’sstate of mind is ‘knowing’ with respect to conduct,a circumstance, or a result if (i) suchperson is aware that such person is engaging in such conduct, that suchcircumstance exists, or that such result is substantially certain to occur; or(ii) such person has a firm belief that such circumstance exists or that suchresult is substantially certain to occur. When knowledge of the existence of aparticular circumstance is required for an offense, such knowledge isestablished if a person is aware of a high probability of the existence of suchcircumstance, unless the person actually believes that such circumstance doesnot exist.In other words, under the law, mere awareness of a high risk ofbribery is the same as knowledge of the illegal payment itself.
Thisclarification becomes extremely important when assessing risk or designinginternal control systems to avoid violations of the FCPA.Companies that fail to comply with the FCPA can be fined up to US $2million, and individuals can be fined as much as $100,000 and imprisoned up tofive years. Furthermore, corporations and individuals in violation of the actare subject to the U.S. Federal Sentencing Guidelines, which can increase themaximum allowable fines even further, depending on the severity of the offense.