UNITED STATES FOREIGN CORRUPT PRACTICES ACT (FCPA)

SUMMARY

 

The United States Foreign Corrupt Practices Act (FCPA) was enacted in 1977 and acts as the main anti-corruption legislation in the United States (US). The Act was a result of a growing number of events and investigations of which corporate payments were made to foreigners to obtain business overseas.

The recent decades has seen several multinationals being prosecuted for their improper conduct in doing their business in third world countries.

It is important to note that the US FCPA has changed the landscape of doing business within and outside of the US. Any US firms seeking to do business in foreign markets must be familiar with the US FCPA. The same applies to foreigners who conduct business in the US.

In a snapshot, the US FCPA has two (2) major provisions:

  1. Anti-Bribery Provisions : Criminalisation of bribery to a foreign public office to obtain business
  2. Accounting Provisions : Accounting procedures required for publicly traded companies
    1. To keep accurate books and records
    2. Adopt internal controls to prevent corruption from happening

The US FCPA is enforced as follows:

  • Criminal enforcement – Department of Justice (DOJ)
  • Civil enforcement – DOJ and Securities Exchange Commission (SEC)
  • Administrative enforcement – SEC

 

ANTI-BRIBERY PROVISION

There are five (5) elements to an US FCPA bribery violation:  1. A regulated party 
  • Domestic concern – individual and business in USA
  • Issuer – corporation that has issued securities registered in USA and/or entity required to file reports with SEC
  • Agents, subsidiaries or representatives of domestic concerns and issuers
  • Foreign national or business that carries out the act of corruption with the U.S. territory
2. Makes a payment offer 
  • Prohibits paying, offering, promising and/or authorizing to pay or offer money or anything of value (money, charity, scholarship, loans etc)
3. To a foreign official 
  • Members of any foreign agency, entity controlled by foreign government, official of foreign political party, members of public international organization, person activating on behalf of foreign entity
4. With a corrupt intent to influence a decision 
  • Payment has a corrupt intent attached to it and used to influence the recipient to is misuse his/her position
5. With a business purpose 
  • Payment related to obtaining, retaining or directing business
It should be noted that there is an exception for facilitating payments – e.g. “grease payments” made to foreign officials to expedite or secure performance of a routine government action by foreign official e.g. processing government papers such as visas. The enforcement of the anti-bribery provision and resulting penalties are further detailed below: 
    • The DOJ is responsible for the criminal enforcement of the US FCPA as follows: 
    • Fine of $2million per violation and individuals $250,000 and jail 5 years
    • The DOJ and SEC are both responsible for the civil enforcement of the US FCPA as follows: 
    • Injunctions and fine of $10,000 per occurrence for entity and/or individual
    • Additional fines can be imposed by court

ACCOUNTING PROVISION

It is known that corporate bribery mainly comes in the form of illegal payments made and covered as normal commercial transactions in the books and records of companies. An example of which this can arise involve cash flows and payments made internally between subsidiaries and joint ventures and/or payments made to external agents in the form of consultancy fees.The accounting provision acts as an additional preventative check and balance for companies to monitor the cash flows for movements, which involve illegal activities and concealment of bribes. It should be noted that the scope of this particular provision, unlike the anti-bribery provision, which applies to all regulated parties, the accounting provision only applies to issuers and their subsidiaries. The US FCPA imposes two (2) requirements under the accounting provisions:

1. Issuers must maintain accurate books. This will in turn assist in the prevention of corrupt activities such as: 

  • Failure to record improper transactions
  • Falsification of accounts to conceal improper transactions
  • Creation of records that conceal the true purpose of a particular payment


2. Issuers must adopt internal controls to prevent diversion of assets or other improper use of corporate funds. The SEC has considered several  
    factors as listed below to determine the adequacy of such internal controls:
 

  • The role of board of directors
  • Communication of corporate procedures and policies
  • Assignment of authority and responsibility
  • Competence and integrity of personal
  • Accountability for performance and compliance with policies and procedures
  • Objectivity and effectiveness of internal controls

 

The enforcement of the accounting provision and penalties area further detailed below:

  • The SEC who has the rule making authority over the accounting provision has adopted two (2) regulations enforcing the accounting provisions is responsible for the criminal enforcement of the US FCPA as follows:
    • Rule 13b2-1 makes it unlawful to falsify accounts
    • Rule 13b2-1 makes it unlawful to omit material facts or supply false information to auditors in connection with audit or document required to be filed with SEC
  • The SEC can seek civil penalties of up to $500,000 for entities and $100,000 for individuals
  • The DOJ, for criminal prosecution for “wilful” violations, can push for large fines and imprisonment – $25 million for entities, $5 million and 20 years jail for individuals

CASE EXAMPLES

CASE 1 – DIEBOLD INC.

Diebold Inc., a Ohio-based provider of integrated self-service delivery and security systems, including automated teller machines (ATMs) has operations or subsidiaries in 90 countries. In October 2013, the company entered a Deferred Prosecution Agreement (DPA) to settle charges filed by the DOJ as well as paid the SEC approximately $22.97 million in disgorgement and prejudgment interest, for violating the anti-bribery, books and records, and internal controls provisions of the US FCPA.

BACKGROUND
Between 2005-2010, Diebold’s Chinese and Indonesian subsidiaries made payments of cash, travel, and other gifts totalling approximately USD1.6m to employees of majority state-owned banks in China and Indonesia.

Diebold also conspired to provide cash “China Spring Festival” gifts to senior banking officials with the ability to influence purchasing decisions by the banks.

Separately, Diebold’s Russian subsidiary entered into fraudulent contracts with a third-party distributor in Russia, which used the compensation that it received from Diebold to pay USD1.2m in bribes to employees of privately owned banks to obtain or retain contracts from those entities.

PENALTIES

  • Diebold entered into a three-year Deferred Prosecution Agreement with the DOJ agreeing to pay a USD25.2 million penalty, implement rigorous internal controls, and retain a compliance monitor for at least 18 months.
  • Diebold’s agreement with the SEC also required the company to appoint an independent compliance monitor, as well as to pay an additional USD22.9 million in disgorgement and pre-judgment interest, bringing the total financial cost to settle the charges to over USD48 million.
  • Diebold also consented to a final judgment and agreed (once again) to be permanently enjoined from violating the US FCPA.

KEY TAKEAWAYS

  • Companies are expected to investigate red flags thoroughly when they are uncovered, either by a due diligence review or the existence of corruption-related investigations in other jurisdictions.
  • Remediation is an important tool used to foster the appropriate corporate environment and ensure the effectiveness of a company’s compliance program.

CASE 2 – RALPH LAUREN CORPORATION

In April 2013, Ralph Lauren, a New York–based apparel designer, marketer, and distributor, paid in total more than USD1.6m to the DOJ and SEC to resolve allegations that it violated the US FCPA by paying bribes to customs officials in Argentina in return for preferential treatment. Non-Prosecution Agreement (NPA) were entered into with both enforcement agencies.

BACKGROUND
Ralph Lauren’s indirect, wholly

owned Argentine subsidiary paid over USD550,000 to a customs agent for the purpose of paying bribes to Argentine customs officials in order to secure various improper advantages, including clearance of certain merchandise without proper paperwork, clearance of items that were otherwise prohibited, and avoidance of inspection of Ralph Lauren Argentina merchandise. To disguise these payments, the customs agent submitted invoices to Ralph Lauren Argentina for expenses and taxes with no back-up documentation.

The General Manager of Ralph Lauren Argentina had also directly provided or authorized gifts, including perfumes, dresses, and handbags, to three different customs officials to secure the importation of Ralph Lauren products into Argentina.

Certain employees of Ralph Lauren Argentina raised concerns about the use of the customs agent. Ralph Lauren discovered the improper payments after an investigation was conducted and self-reported the conduct to the DOJ.

PENALTIES

  • Ralph Lauren agreed to pay a penalty of USD882,000 to DOJ to resolve allegations that it violated the US FCPA by paying bribes to customs officials in Argentina in return for preferential treatment.
  • Ralph Lauren agreed to pay SEC USD593,000 in disgorgement and USD141,859 in prejudgment interest based on the same conduct.
  • Ralph Lauren was allowed to enter NPA with both enforcement agencies due to its own investigation and self-report to DOJ and SEC.

KEY TAKEAWAYS

  • The DOJ will hold parent companies responsible for the conduct of their foreign subsidiaries. The parent company’s hiring of the general manager of Ralph Lauren Argentina established that Ralph Lauren exercised sufficient control over its Argentinean subsidiary.
  • Ralph Lauren lacked appropriate internal accounting controls.
  • Ralph Lauren did not have an anti-corruption program and did not provide training to employees or otherwise exercise any oversight to prevent misconduct.
  • The Ralph Lauren settlement marks the first time that the SEC has entered into an NPA to resolve US FCPA violations. The SEC cited Ralph Lauren’s remedial efforts and cooperation as the main reason it chose to enter into its first agreement of this nature.

CASE 3 – ALSTOM SA

BACKGROUND

Alstom SA’s power plant turbine refurbishment facility in Rugby, UK paid tens of millions of dollars in bribes to win USD4 billion in projects from state-owned companies in Asia and Middle East for more than a decade from at least 2000 to 2011.  Alstom attempted to conceal the bribes by retaining consultants who actually acted as conduits for the payments to government officials. This case is detected by the auditors for the Swiss Federal Banking Commission through documents that was unearthed, showing possible corrupt payments.

Justice Department conducted investigation into the bribes paid to win power-plant contracts in Indonesia and the Middle East. Alstom falsified books and records to hide the payments and referred internally to the consultants using codes names such as “Mr. Geneva”, “Quiet Man” and “Old Friend”.

Alstom pleaded guilty to two charges, one for violating bribery laws by falsifying records and the other for failing to have adequate controls, in Connecticut federal court.

PENALTIES

Alstom SA (ALO) pleaded guilty and agreed to pay a record USD772 million to end a U.S. prosecution. It is the largest criminal penalty paid to the Department of Justice under the Foreign Corrupt Practices Act. It even eclipsed the USD450 million paid by Siemens AG in 2008.

KEY TAKEAWAYS

The cost of corruption can be very high.

Case 4 – MORGAN STANLEY

BACKGROUND

A former high ranking employee from Morgan Stanley bribed a Chinese official to obtain business. Employee and official were also stealing from Morgan Stanley in the form of “finders fees” for properties.

All parties involved also used “secret” relationship to acquire valuable real estate interest from Morgan Stanley fund.

Morgan Stanley decided on self-disclosure to DOJ and SEC on misconduct (US FCPA). The company cooperated with the government investigations. Remedial actions were undertaken starting with the firing of the employees involved in the crime. The company also invest in bank's internal control system as well as compliance programs.

PENALTIES

  • The employees involved faced criminal charges and jail term,
  • The enforcement agencies (DOJ and SEC) decline to take any actions against Morgan Stanley but charged the employees on the basis of not adhering to company internal controls, lying and cheating for personal profit
  • They faced charges and jail term

KEY TAKEAWAYS

Company

  • Invest in effective internal controls and anti-corruption measures
  • Ensure compliance programs evolve with new regulations
  • Ensure monitoring and implementation

Employee

  • JUST DON’T DO IT (as you are not protected anymore)

CASE 5 – ALCATEL-LUCENT

In December 2010, Paris-based Alcatel-Lucent SA, the world’s biggest supplier of fixed-line phone networks, admitted it bribed government officials in “many countries,” including Taiwan, Malaysia and Costa Rica. The company was prosecuted for violating the internal controls and books and records provisions of the Foreign Corrupt Practices Act.

Alcatel apparently “pursued many of its business opportunities around the world through the use of third-party agents and consultants,” according to a statement of facts admitted by the company in a deferred-prosecution agreement.

“Alcatel and its subsidiaries failed to detect or investigate numerous red flags suggesting their employees were directing sham consultants to provide gifts and payments to foreign government officials to illegally win business,” Robert Khuzami, SEC enforcement director, said in a statement.

The conduct involved the worldwide sales practices of Alcatel SA before its 2006 merger with Lucent Technologies Inc.

Three subsidiaries — Alcatel-Lucent France SA, Alcatel-Lucent Trade International AG and Alcatel Centroamerica SA — pleaded guilty, according to the deferred-prosecution agreement filed in a federal court in Miami.

PENALTIES

  • Alcatel-Lucent must pay a $92 million criminal penalty. Three subsidiaries agreed to plead guilty to anti-bribery provisions of the US FCPA.
  • The company must also pay $45 million to settle civil charges by the U.S. Securities and Exchange Commission.
  • The company must also pay an independent French monitor to oversee its compliance with anti-bribery measures.
  • The Justice Department will defer prosecution and drop the case after three years if the company improves its compliance program. KEY TAKEAWAYS
  • Parent companies are liable for the activities of their subsidiaries
  • Absence of internal control especially in a big organisation encourages corruption and fail to detect when it happen
  • The DPA forced Alcatel-Lucent to have a compliance program by appointing an independent monitor to oversee the company’s compliance with anti-bribery measures.

For more cases, please click on this links:

DOCUMENTS

  • US FCPA
  • US FCPA guide

 

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