Foreign Corrupt Practices Act

Awareness of – and compliance with – the FCPA is essential if engaging in international business.

In May 2009, the Wall Street Journal ran a front page article highlighting a surge in FCPA prosecutions by the US Department of Justice (DOJ), reporting that 120 cases were currently under investigation.

Between 1999 and 2009, the DOJ and Securities and Exchange Commission (SEC) prosecuted 76 FCPA cases. These reflected cases of bribery in countries including China, Indonesia, South Korea, Thailand, Malaysia, Vietnam and Philippines

The FCPA is broad in its application – it does not apply only to US companies.

Companies with a US listing; US nationals, incorporated entities, and their agents; foreign nationals and incorporated entities who commit an offence on US territory – all are subject to FCPA.

The FCPA prohibits corrupt payments through intermediaries: using an agent in a foreign country does NOT remove the need for FCPA compliance, as this US company discovered:

“… in December 2005 the US Embassy in Mongolia informed us that it had  forwarded to the Department of Justice allegations that an agent of our Mongolian joint venture had offered payments to a Mongolian government official in possible violation of the FCPA. In April 2006 we became aware that an agent of the Company may have made an offer to pay an Indian government official in possible violation of the FCPA. We, through our Audit Committee, authorized an independent investigation into these matters … The investigation has identified possible FCPA violations in Mongolia, Southeast Asia, India, and China …”

The DOJ advises that “to avoid being held liable for corrupt third party payments, U.S. companies are encouraged to exercise due diligence and to take all necessary precautions to ensure that they have formed a business relationship with reputable and qualified partners and representatives”.

Such due diligence may include:

• Investigating potential foreign representatives and JV partners to determine whether qualified for the position
• Whether they have personal or professional ties to the government
• The number and reputation of their clientele
• Their reputation within local business circles

When to conduct due diligence? This will depend on the particular circumstances associated with a business opportunity, but typically includes:

• Before entering into a new business arrangement
• Before material changes in an existing relationship (such as change of substantial shareholders in a JV partner)
• At intervals during course of an ongoing business relationship
• When a concern has been identified

Why bother to comply? The answer is simple: FCPA violations are subject to both civil and criminal penalties.

Corporate entities can be fined up to US$ 2,000,000; officers, directors, stockholders, employees, and agents can be fined up to $100,000 and be imprisoned for up to five years. Moreover, the Alternative Fines Act allows courts to levy fines representing up to twice the benefit that the defendant sought to obtain by making the corrupt payment.

Furthermore, a fine imposed on an individual may not be paid by his or her employer or principal.

Links:

Department of Justice “Lay Person’s Guide to the FCPA” - http://www.usdoj.gov/criminal/fraud/docs/dojdocb.html

Transparency International - http://www.transparency.org/

OECD: Bribery In International Business Department - http://www.oecd.org/department/0,3355,en_2649_34855_1_1_1_1_1,00.html