FCPA regarded as one of the legal regulation in the modern corporate law. The Foreign Corrupt Practices Act was incorporated to prohibit the bribes offered to the foreign government officials that were authorized for the Watergate era’s crackdown on political corruption but remained only weakly enforced for its first two decades.
One of the challenges faced by U.S. corporations doing business in emerging markets is dealing with corruption.
It is not uncommon for local employees to vent to their U.S. managers about demands from government officials for inappropriate payments and about the competitive disadvantage encountered in complying with the U.S. rules in markets where competitors believe in doing things the local way.
Background of FCPA
FCPA is all related to the bribery, financial crime and corruption . Bribery regarded as illegal in US. It crosses the moral expectations of the American Public as a whole. The Foreign Corrupt Practices Act (FCPA) was enacted by Congress in 1977 following SEC investigations involving U.S. companies making inappropriate or illegal payments to foreign government officials to secure some type of favorable actions by foreign government officials as well as to expedite routine government duties. FCPA comprises of anti-bribery and the accounting Provisions.
Congress has explored the transit of FCPA to curb the the bribery and corruption that led blemish image to the US business as a whole. The FCPA was enacted to proscribe bribery of foreign officials. Following are the three provisions:
Provisions of FCPA
- Anti-Bribery Provision
FCPA developed provision where one prohibited from making corrupt payment. It is paid to the foreign national to obtain or retain the business.
The anti-bribery provisions apply to the following categories of individuals
- Issuers (15 U.S.C. § 78dd-1): companies that have securities registered with the SEC or that must file reports with the SEC.
- Domestic concerns (15 U.S.C. § 78dd-2): U.S. citizens or residents and businesses
organized in the U.S. or that have their principal place of business in the U.S. - Territorial concerns (15 U.S.C. § 78dd-3): foreign nationals or entities who engage in
any act in furtherance of a covered corrupt payment while in U.S. territory.
Understanding the Examples
For example, the SEC settled an enforcement action against Statoil, ASA, a Norwegian company listed on the New York Stock Exchange, for paying bribes to an Iranian government official in return for his influence to assist Statoil in obtaining a contract to develop a significant oil and gas field in Iran and to open doors to additional projects in the Iranian oil and gas industry.
An indirect payment may include payments to government officials routed through third parties (whether reimbursed or not), including, but not limited, to agents, distributors, joint venture partners, and nominees. For example, in United States v. Paradigm B.V., Paradigm B.V. admitted to the payment of $22,250 into the Latvian bank account of a British West Indies company recommended as a consultant by an official of KazMunaiGas, Kazakhstan’s national oil company, to secure a tender for geological software. Thecompany did not receive any services from the company.
An indirect payment may include payments to relatives, business associates, favorite charities or funds, and political parties of government officials. For example, in the case of Schering-Plough Corporation, the SEC found that Schering-Plough made payments to a bona fide charity, however, with the intention of influencing the director with respect to the purchase of Schering-Plough’s products.
Main Component of FCPA Violation
The main component of FCPA violation is the corrupt intent. In a case involving Nature’s Sunshine Products, Inc., however, the SEC brought claims against the former CEO and CFO for violations of the books and records provision of the FCPA by holding the executives accountable as “control persons” under Section 20(a) of the Securities Exchange Act of 1934, for failing to adequately supervise the miscreant employees of a subsidiary; the SEC did not allege that the executives had any knowledge of the payments.
A promise to provide anything of value is tantamount to an actual payment. For example, in United States v. Frederic Bourke Jr., among other things, Mr. Bourke was fined $1 million and sentenced to a year and a day in prison for promising to pay a share of profit realized in a case involving the privatization of the State Oil Company of the Azerbaijan Republic—SOCAR.
Antibribery Provision
There are exceptions to the antibribery provision for routine nondiscretionary governmental action, such as processing governmental papers like visas and work orders; providing police protection, providing utilities and scheduling inspections associated with contract performance or the transit of goods across the country. Such payments referred to as facilitation payments. The U.S person or company complied with the anti corruption laws as facilitation payments referred. It prohibited such payments to comply with the books and record.
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Accounting Provision
This provision developed for the issuers to keep accurate records to a reasonable level of detail. To maintain the adequate accounting control the accounting provisions prepared. This provision enacted to keep a watch on the organizations and the corporations to look to conceal the bribes in the different accounts. Also use the corporate funds to use it improperly. Prepare and maintain books, records, and accounts, which in reasonable detail, accurately reflect the transactions and dispositions of assets. Hence, with respect to the books and records provision, it is important to note that reasonable detail implies such level of detail that would satisfy prudent officials in the conduct of their affairs.
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Internal Control Provision
Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions are recorded appropriately and in accordance with rules and regulations. With respect to the internal control provision, it is important to note the following:
- These internal control requirements are not synonymous with those of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX). Section 404 of SOX required the SEC registrants established and maintained an adequate internal control structure and procedures for financial reporting to assist in detecting a material misstatement, whereas the FCPA does not consider the materiality of a transaction.Under the FCPA, transactions must be recorded according to their true nature—gifts to customers must be recorded as gifts, not marketing expense; facilitation payments for customs processing must be recorded as such and not buried in cost of goods sold; and so on, regardless of their size.
- A company that does not have controls in place over payments that may have FCPA implications will have difficulty justifying the adequacy of their control system on the basis that controls were adequate to prevent material errors in financial reporting.
- Similarly, the internal control requirements of FCPA are not synonymous with the periodic certifications of Section 302 of SOX. Section 302 of SOX requires the principal executive and financial officers of SEC registrants to certify on an annual or quarterly basis, the following:
SEC registrants has to certify with the following
o The officers have reviewed the report.
o Report does not contain any misstatements or omissions of material facts.
o The financial statements and financial information fairly present the financial conditions and results of operations.
o They are responsible for establishing and maintaining internal controls. They have evaluated the effectiveness of the internal controls within 90 days of the report. It also have reported on the effectiveness of the internal controls within the report.
o They disclosed to the auditors. The audit committee any significant deficiencies and material weaknesses in internal controls. Therefore, any fraud involving management or other employees who have a significant role in internal controls.
o It reports includes any significant changes in internal controls or other factors affecting internal controls.
The failure to comply with the internal controls provision of the FCPA may result in inaccurate certifications of Section 302.
Purpose of FCPA
The FCPA Act 1977 is illegal for the businessman and the individual. It provides payments to the foreign government officials to retain the business. These payments must be for the purpose of expediting or facilitating routine governmental actions. Hence, these payments properly documented.
Conclusion
With the increasing number of enforcement actions pursued by the SEC and the DOJ
and the potential for director and officer liability. It has become critical for acquirers to assess potential FCPA risks of target companies before agreeing to make the acquisition.
Foreign companies as well as the employees can run of FCPA. In case if their employees or agents cause actions in furtherance of illicit payments to take place in territories of the United States.
