FOREIGN CORRUPT PRACTICES

ACT (FCPA)
1

Chris Duffy
Brian D. Feito
Jessica R. Ferrante
FCPA OVERVIEW
 FCPA enacted in 1977 to bring a halt to the
bribery of foreign officials and help restore public
confidence in the integrity of the American
business system.

 Varying degrees of enforcement since enactment.

 FCPA increasingly effective in the prevention of

corrupt practices.

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BACKGROUND

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 PROVISIONS OF THE LEGISLATION

1. Books & Records Provision

 SEC registered issuers:
 must keep detailed books, records, and accounts that
accurately record corporate payments and transactions

 must institute and maintain an internal accounting

control system to assure management’s control,
authority, and responsibility over the firm’s assets

2. Anti-Bribery Provision
 Prohibits domestic corporations (registered or not) from
bribing foreign officials, political parties, party officials,
or candidates for obtaining or maintaining business
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ANTI-BRIBERY PROVISION
TO WHOM DOES IT APPLY?
 U.S. jurisdiction over corrupt payments depends upon
whether the violator is an "issuer," a "domestic concern,"
or a foreign national/business.

 “Issuer" - corporation that has issued securities that

have been registered in the US or who is required to file
periodic reports with the SEC.

 “Domestic concern" - citizen, national, or resident of the

US, or any corporation, partnership, etc. which has its
principal place of business in the US.
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ANTI-BRIBERY PROVISION
TO WHOM DOES IT APPLY?

 Issuers and domestic concerns are

liable if they take an act in
furtherance of a corrupt payment to a
foreign official.

 U.S. parent corporations may be held

liable (>50% ownership) for the acts of
foreign subsidiaries if they authorized,
directed, or controlled the activity in 6
question.
 ANTI-BRIBERY PROVISION
TO WHOM DOES IT APPLY?

 1998Amendments expanded the FCPA to

assert territorial jurisdiction over foreign
companies and nationals.

A foreign company/person is subject to

the FCPA if it causes, directly or through
agents, an act in furtherance of the
corrupt payment within U.S. territory. 7
 ANTI-BRIBERY PROVISION

2. CORRUPT INTENT

 Payment must be intended to induce the

recipient to misuse their official position to
direct business wrongfully to the payer or
any other person.

 The offer or promise of a corrupt payment

can constitute a violation.
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ANTI-BRIBERY PROVISION
3. PAYMENT

 Prohibits paying, offering, promising to pay (or

authorizing to pay or offer) money or anything of
value.

4. RECIPIENT

 “Foreign official” - any officer or employee of a foreign

government (regardless of rank or position), a public
international organization, or any department or
agency.

5. BUSINESS PURPOSE TEST

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 Prohibits payments made to assist the firm in
obtaining, retaining, or directing business to, any
 THIRD PARTY PAYMENTS

 Unlawful to make a payment to a third

party, while knowing that portion or all
the payment will go directly or indirectly
to a foreign official.

 The term "knowing" includes conscious

disregard and deliberate ignorance.

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PERMISSIBLE PAYMENTS AND
AFFIRMATIVE DEFENSES
Facilitating Payments for Routine
Governmental Actions
 Exception for payments to facilitate or expedite
performance of a "routine governmental action“
i.e. obtaining permits, licenses, or other official
documents.

Affirmative Defenses
 Payment was lawful under the laws of the foreign
country.
 Money spent as part of demonstrating a product
or performing a contractual obligation.
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SANCTIONS AGAINST BRIBERY

CRIMINAL
 Corporations - fines of up to $2M.
 Officers, directors, stockholders, employees, and
agents - fines of up to $100K and imprisonment for up
to 5yrs.

CIVIL
 Civil penalties up to $10K.

OTHER GOVERNMENTAL ACTION

 Person or firm may be barred from doing business with
the Federal government.
 Ruled ineligible to receive export licenses; the SEC
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may suspend or bar firms from the securities business.
FCPA ENFORCEMENT
 Pre-9/11 – lax enforcement
 Initial enthusiasm under Carter, but weakening of
statute and enforcement under Reagan
 16 prosecutions for bribery from 1977 to 1995
 Late 1990s – Increase in FCPA enforcement

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FCPA ENFORCEMENT
 Post 9/11 – New emphasis on enforcement
 Justice Department – 2009 – Enforcement of the
FCPA second only to terrorism in terms of priority
 SEC – Expansion of FCPA Enforcement Team
 2010 – Record breaking year in number of cases
 48 DOJ enforcement actions under FCPA, up from 2 in 2004
 26 SEC enforcement actions under FCPA, up from 3 in 2004

 Recent notable cases:

 Siemens (2008) - $800 million
 Halliburton (2009) - $579 million

 BAE (2010) - $400 million

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2010 RECORD YEAR IN CORRUPTION
ENFORCEMENT

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MAJOR PROBLEMS WITH LEGISLATION
 Uneven application of record keeping
requirement
 Self-regulation

 Legality of “facilitating” bribes

 Unclear language

 Corporate competitiveness

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UNEVEN APPLICATION OF RECORD
KEEPING
 Applies only to issuers, i.e, companies that have
offered and sold securities registered with the
SEC
 Non-application to private companies allows smaller
concerns to fall through cracks, undermines
effectiveness of FCPA

 Self-Regulation
 Ineffective – internal controls do not monitor
decisions made at the top level
 Companies incur substantial costs

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LEGALITY OF FACILITATING BRIBES
 Only bribes paid to obtain or retain business are
illegal - “Facilitating” bribes, or “greasing” legal
under FCPA

 “Facilitating” Bribes – Payments to “facilitate or

expedite performance of a "routine governmental
action.”

 Differences between prohibited and allowed bribes

unclear due to lack of case law

 Still allows certain types of corruption 18

UNCLEAR LANGUAGE
 Language in bribery provision is unclear, can
lead to unintentional violations
 Are employees of state-owned companies “foreign
officials”?
 Are businessmen who are members of the Chinese
Communist Party “political party officials”?
 Is the payment of travel expenses “something of
value”?
 Do payments to customs officials to reduce duties and
taxes assist in “obtaining or retaining business”?

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CORPORATE COMPETITIVENESS CONCERNS
 Competing interests:
 US Government – foreign policy motivations
 Image of United States, free markets, globalization

 US business – competitiveness with businesses in

countries without such provisions
 Why should American firms have to play by different rules?
 Bribe payments are made to increase probability of

obtaining or retaining business, increasing value for

shareholders
 Bribery ≠ embezzlement

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CORPORATE COMPETITIVENESS CONCERNS
 Lack of foreign legislation
 In many countries, including Germany until 1998,
corporations could deduct bribe payments from taxes
 As long as majority of countries not bound by anti-
foreign corruption statutes, those who adhere are at a
disadvantage

 Lack of foreign enforcement

 2004 – UK Serious Fraud Office inquiry into bribes
paid by British firm to secure weapons contract with
Saudi Arabia
 2006 – Saudi Arabia threatens to break relations if
investigation not dropped; December – investigation 21

dropped
CORPORATE COMPETITIVENESS CONCERNS
 Diminished ability to compete → loss of business
 1994-2001 – US Companies lost contracts valued at
over $200 billion to over 400 foreign competitors
 US market share in bribery prone countries declined
as a result of the FCPA

 Loss of business → ineffectiveness of FCPA

 Competing incentives: risk sanctions or lose
business?
 2006 – US ranked 9th out of 30 countries in
propensity to bribe (13th in 2002, 9th in 1999)
 Law ineffective due to competitiveness concerns
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OECD ANTI-BRIBERY CONVENTION
 Pre-convention – only two countries (US and
Sweden) with anti-foreign bribery legislation
 1997 – OECD adopts Convention on Combating
Bribery of Foreign Public Officials in
International Business Transactions
 Requires signatories to pass legislation outlawing
bribery of foreign officials
 38 signatories, including all 34 OECD members plus
Argentina, Brazil, Bulgaria and South Africa
 Entered into force 1999
 Varying degrees of enforcement
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 China, India and Russia invited to join
ENFORCEMENT OF ANTI-BRIBERY LAWS

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POLICY PROPOSAL
 Pressure on OECD Anti-Bribery signatories to
enforce their national laws more stringently
 e.g., Japan, Canada, France
 Pressure on China, India, Russia to accede to
OECD Anti-Bribery Convention or similar
measure
 Currently no anti-foreign bribery provisions
 2006 – Out of 30 countries, Russia 28th, China 29th
and India 30th in propensity to bribe
 Rising importance of these countries in international
business → increased competition from their firms
 If these countries do not pass anti-foreign corruption laws,
US companies will still face the dilemma of having to break
FCPA in order to compete 25

 Institutional capacity?
REFERENCES
 Foreign Corrupt Practices Act – Anti-bribery Provisions
http://www.justice.gov/criminal/fraud/fcpa/docs/lay-persons-
guide.pdf.
 Michael V. Seitzinger. Foreign Corrupt Practices Act:
Congressional Interest and Executive Enforcement.
Congressional Research Service (Oct. 21, 2010).
 The Foreign Corrupt Practices Act: The Failure of the Self-
Regulatory Model of Corporate Governance in the Global
Business Environment, Journal of Business Ethics, Vol.
88:615-661 (2009)
 Compliance with anti-bribery law may conflict with local
customs and practices.
 D. Hilzenrath. The price of global business, Washington
Post (March 23, 2011).
 Alvaro Cuervo-Cazurra. The effectiveness of laws against
bribery abroad. Journal of International Business Studies, 26
Vol. 39:634-651 (2008).
REFERENCES
 Sterling and Sterling, LLP (2008). “Recent Trends and
Patterns in FCPA Enforcement”.
 Transparency International (2009). “OECD Anti-Bribery
Convention Progress Report 2009.
 Darrough, Masako N. (2009). “The FCPA and the OECD
Convention: Some Lessons from the U.S. Experience”.
Journal of Business Ethics 93:255-276.
 Booher, R., Phillips T., and Richardson, E. (2009). “Is That
a Crime: Understanding Risks and Obligations in the
Foreign Corrupt Practices Act”. Tennessee Law Journal.
 Beck, J., Maher, M., and Tscheogl, A. (1991). “
The Impact of the Foreign Corrupt Practices Act on US
Exports”. Managerial and Decision Economics 12: 293-303.
 Cragg, W., Woof, W. (2002). “The U.S. Foreign Corrupt
Practices Act: A Study of Its Effectiveness”. Business and 27
Society Review 107: 98-144.