Foreign Corrupt Practices Act / Bribery Act

Awareness of, and compliance with, legislation such as the US Foreign Corrupt Practices Act and the forthcoming UK Bribery Act is essential if engaging in international business – particularly where a company is using sales and marketing agents or consultants as an element of its business model.

Additional compliance challenges can be faced in many Asian countries, such as China, where the giving of gifts to business associates is commonplace (and often expected) within the local culture. Further challenges – in respect of interaction with state officials - arise in countries such as ChinaVietnam, where state-owned enterprises are primary players in key sectors such as mining, petrochemicals, telecommunications. and

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 – and the pace of enforcement is increasing.

In 2010, FCPA related settlements have included:

• BAe Systems: Fined US$ 400 million after pleading guilty to conspiring to defraud the United States by making false statements about its FCPA compliance programme. The DOJ charged that BAE regularly retained ‘marketing advisors’, to whom the company made improper payments in order to secure sales
• Daimler AG: Fined US$ 180 million arising from charges of bribing government officials in at least 22 countries including China, Indonesia, Thailand and Vietnam.
• Alcatel-Lucent: Fined US$ 137.4 million for alleged bribes paid in Costa Rica, TaiwanKenya. Alcatel-Lucent will also stop using sales and marketing agents in conducting its business. and
• Innospec, Inc.: US$ 40.2 million global settlement arising from allegations of bribes paid in Iraq and Indonesia.

Foreign Corrupt Practices Act

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.

Bribery Act

The new United Kingdom Bribery Act comes into force in April 2011 and will:

• Introduce a corporate offence of failure to prevent bribery by persons working on behalf of a business. A business can avoid conviction if it can show that it has adequate procedures in place to prevent bribery.
• Make it a criminal offence to give, promise or offer a bribe and to request, agree to receive or accept a bribe either at home or abroad. The measures cover bribery of a foreign public official.
• Increase the maximum penalty for bribery from seven to 10 years imprisonment, with an unlimited fine.
  

Links:

Department of Justice “Lay Person’s Guide to the FCPA”
http://www.justice.gov/criminal/fraud/fcpa/

United Kingdom Ministry of Justice guidance on the Bribery Act
http://www.justice.gov.uk/publications/bribery-bill.htm

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