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Sarbanes Oxley : Governance : Thought Leader
FCPA Compliance Post-Sarbanes-Oxley
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The Foreign Corrupt Practices Act of 1977 (FCPA) has come under new light as a result of provisions added to the Act in recent years. In this article we?ll address what every CIO, CFO and General Counsel should be aware of in terms of modern-day compliance practices. The Act was originally passed as a result of SEC investigations in the mid-1970s which uncovered questionable payments of over $300 Million to foreign government officials and politicians.
In general terms, the FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining business. Prosecutions under the Act often include the mail and wire fraud statutes, and the little-known Travel Act, which provides for federal prosecution of violations of commercial bribery statutes.
Firms that have paid bribes to foreign officials have been the subject of civil and criminal enforcement actions, resulting in significant fines and suspension from federal procurement contracting. Officers and employees have gone to prison. In order to avoid these dire consequences, many firms have implemented detailed compliance and training programs. Subsequent to the passage of the FCPA, Congress, in order to create a level playing field, directed the Executive Branch to commence negotiations in the Organization of Economic Cooperation and Development (OECD) to obtain the agreement of other countries to enact similar legislation. In 1998 an OECD Convention was ratified with 33 trading partners, which was expanded to 35 signatories by 2004. Since 1998, the provisions of the FCPA not only apply to U.S. issuers (primarily public companies and their foreign subsidiaries) but they apply to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States.
FCPA Requirements
The FCPA requires companies with listed securities in the U.S. to meet its accounting and internal control provisions, policies and procedures. U.S. parents may be held liable for the acts of foreign subsidiaries where they authorize or direct the activity. The FCPA requires corrupt intent, i.e., the payment must be intended to induce the recipient to misuse official policy. The prohibition extends to corrupt payments to foreign officials, political parties or candidates. The FCPA prohibits corrupt payments through intermediaries. It?s therefore illegal to utilize a third-party conduit, knowing the monies will flow to a foreign official. The term ?knowing? includes conscious disregard or deliberate ignorance. The standard is awareness of a high likelihood.
Intermediaries can include joint ventures, agents, or any of a variety of structures. U.S. firms should be aware of ?red flags? which may include unusual payment patterns in terms of high consulting, promotional, advertising or contribution expenses, countries which have a history of corruption, refusal by the foreign joint venture partner to provide sub-certifications that no actions will be undertaken that would create a violation of the FCPA by a U.S. firm, and lack of professional qualifications by the consultancy group that is being retained. In other words, because an individual is the brother of an important legislator is not sufficient reason to employ him as a qualified consultant.
Exceptions to the FCPA anti-bribery prohibitions include payments for ?routine governmental actions? or ?facilitating payments? which would include obtaining permits, licenses or other official documents. Several multinational companies have adopted policies to deal with routine facilitating payments. Regardless of the exception provided, no payments are made without multiple levels of approval in the chain of command. Routine governmental action does not include decisions by foreign officials to award new business or continue in business with a particular party.
Payments made for ?reasonable and bona fide? expenditures related to marketing of products are also allowed. The FBI normally investigates criminal violations of the FCPA on behalf of the Dept of Justice, and the SEC usually pursues civil sanctions. Since indictment alone can lead to suspension of the right to do business with the government, firms must be particularly careful to utilize due diligence in all of their foreign payments. In addition, a person or firm found guilty of FCPA violations may lose export licenses and the SEC may suspend or bar persons from the securities business. The Department of Justice has a FCPA Opinion Procedure whereby the Attorney General will issue an opinion in response to a specific inquiry within a thirty-day window of receiving an appropriate request.
Truth or Consequences
Political campaign contributions are a particularly sensitive area. It would seem on the surface that any donations for political purposes are tainted and subject to prosecution under the FCPA. Record-keeping violations are a violation of the SEC Exchange Act of 1934 and could include not booking or improperly classifying entries related to foreign payments. Substance over form is of course the rule. Books and records actions have been brought by the SEC against numerous violators which have resulted in civil penalties.
A Berlin group does an annual study called ?Transparency International 2006 Bribe Payers Index? which looks at the propensity of companies from 30 leading exporting countries. The seven lowest-ranking nations on the 2006 Index (from the lowest score upwards) are India, China, Russia, Turkey, Taiwan, Malaysia and South Africa. Companies should have very high levels on internal control policies in place when dealing within these particular countries, including mandatory vacation policies for senior personnel whereby their work can be reviewed by others. Standardized contracts should be reviewed for any departure from norms.
Organizational Sentencing Guidelines can result in massive fines to public corporations. According to the Guidelines, any organization is liable to sentencing, fines and probation for federal offenses including FCPA violations which may be inclusive of bribery, money laundering, conspiracy and mail and wire fraud. An organization operates through its managers and therefore is liable for the offenses committed by them. The base level of fines is up to $ 72.5 Million and the level is liable to be increased substantially so that the maximum fine may reach $ 290 million and higher in some cases.
However, companies that have proven an effective compliance program often have fines reduced substantially. Compliance programs include a Code of Conduct that is inclusive of FCPA provision, oversight by high-level personnel (executive-level), due diligence and care upon selection of foreign consultants, a comprehensive training program, auditing and monitoring of internal controls with results reported to the Audit Committee, and enforcement of discipline.
Companies considering mergers and acquisitions need to determine if the target corporation has an FCPA compliance program. A large proposed merger could be thwarted at the last minute if there arise disclosure issues regarding payments that may violate the FCPA. Failure to adhere to FCPA laws can have significant costs. Inaccurate recording of FCPA payments violate the Exchange Act as well. Independent of prudence required for FCPA purposes, an effective compliance program is mandated by the Sarbanes-Oxley Act of 2002, which requires that public companies implement a system of effective disclosure controls and procedures and a functional code of ethics.
Conclusion
It?s interesting that no materiality standard exists under the FCPA. Therefore there is no de minimis level of payment of value that falls under the standard. Formation of an entity, promise of credit or provision of equity interests all create monetary consideration at any level. Consultants need to provide adequate representations about the detail of monies that will flow through them as conduits. A questionnaire is often advised to obtain the due diligence necessary to deal with a foreign consultant. Assignment of consultant fees should be prohibited.
In summary, a team needs to be created to guide a corporation through implementation of the FCPA compliance process. Sarbanes-Oxley types of controls need to be established at a variety of levels. A clear corporate policy with assignment of responsibility with a senior information or compliance officer is required, initial and annual training of appropriate personnel is essential, anti-bribery clauses need to be in all foreign consulting contracts, and sub-certifications of internal controls need to be addressed quarterly particularly in foreign subsidiaries after the compliance program is initiated. FCPA violations can have severe impact on publicly-held corporations in addition to civil and criminal penalties. FCPA violators can be barred from federal purchases and contracts, and adverse public relations including derivative lawsuits could be the consequences of a no-action policy.
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