|Title:||United States number of Foreign Corrupt Practices Act actions for 2004 to 2010 and through August 1, 2011|
Start of full article - but without data
FCPA Actions in 2004 - 2011 (Through August X, 2011)
Note: Table made from bar graph.
Rooting out shady business deals is becoming big business these days.
The U.S. Department of Justice (DOJ) and the U.S. Securities & Exchange Commission (SEC) together have stepped up their investigations of violations of the Foreign Corrupt Practices Act of 1977 (FCPA). Not to be outdone, the U.K. has added the Bribery Act, with provisions similar to those of the FCPA. In addition, XX countries have signed an agreement to criminalize bribery of foreign government officials.
With this resurgence in anti-corruption enforcement, corporate managers are looking to bolster internal controls to prevent costly and embarrassing violations. The purpose of this article is to present an overview of the FCPA provisions and the upward trend in enforcement through historical information and examples of recent cases. We'll conclude by identifying red flags that management should evaluate to enhance compliance with the Act.
Enforcement with a Capital "E"
Over the past two years, both the DOJ and the SEC have aggressively brought criminal actions, civil actions, or both against companies and individuals for violations of the FCPA. In 2010 alone, the federal government assessed fines and penalties exceeding $X.X billion. As of August X, 2011, the U.S. government had brought charges against XX more companies or individuals, clearly signaling that the FCPA continues to be a major enforcement objective (enforcement reports are listed at www.fcpablog.com). Take a look at some of these recent high-profile cases:
* During January 2009, the DOJ conducted a sting operation and coordinated arrests on two continents, including XX arrests at a security products trade show in Las Vegas. The dealers thought they were paying a bribe to an intermediary of a foreign government who turned out to be a Federal Bureau of Investigation (FBI) agent. What happens in Vegas may not stay in Vegas!
* In 2010, Daimler and its subsidiaries agreed to pay $XX.X million in criminal fines and surrender $XX.X million in profits after being charged with paying illegal gratuities to government officials in at least XX different countries to secure foreign contracts.
* In August 2010, the DOJ settled a probe of bribery at Hewlett-Packard (HP) in which the Justice Department alleged that HP executives paid bribes in Russia. HP agreed to pay $XX million to settle the case.
In 2009, the SEC announced the reorganization of its Enforcement Division to include a new unit to focus more proactively on FCPA violations. Congress followed up with the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted July XX, 2010. The Dodd-Frank Act provides greater incentives for whistleblowers: When recoveries exceed $X million, whistleblowers can receive between XX% and XX% based on information they provide. (Using the Daimler case as an example, this would have resulted in whistleblower payments between $XX.X million and $XX.X million.) According to testimony recorded before the bill was passed, whistleblowers are XX times more effective in uncovering fraud than are external auditors and the SEC. (For more on the topic of whistleblowing, see "Can Ethics Education Impact Whistleblowing?" in the Summer 2011 issue of Management Accounting Quarterly, available at www.imanet.org under the "Resources & Publications" tab or at www.mamag.com.)
The increase in enforcement actions underscores every organization's responsibility to consider the possibility of FCPA violations and to establish an effective compliance program to prevent them. Once violations occur, corporations will be in a very difficult spot because disclosure of a potential FCPA violation to the external auditor would appear to trigger a Section XXA investigation, which requires the independent auditor to report the potentially illegal acts to management or the SEC (but may ultimately be preferable to a whistleblower action).
Clearly, avoiding illegal activities, including those prohibited under the FCPA, has become a corporate imperative. (Individuals who violate FCPA provisions are also subject to prison sentences and substantial fines.) Large multinational companies-and expanding smaller ones, too-need to understand recent enforcement actions and trends and also be familiar with measures to ensure compliance with the Act.
When Is a Bribe Truly a Bribe?
During the 1970s, there was increasing concern over the practices of U.S. companies doing business overseas. In an SEC investigation, more than XXX U.S. companies admitted to making questionable or illegal payments to foreign government officials, politicians, and political parties. The actions ranged from bribery of foreign officials to facilitating payments (or "grease payments") to ensure certain ministerial or clerical duties got done on time. As a result of this investigation, Congress enacted the FCPA of 1977. A strong business lobby, however, convinced Congress that U.S. companies operated at a disadvantage because many foreign companies routinely paid bribes, and some countries even permitted the deduction of a bribe as a business expense. Therefore, in 1988, Congress directed the administration to begin discussions in the Organisation for Economic Cooperation and Development (OECD) to help enact legislation similar to the FCPA among major U.S. trading partners. In 1997, the U.S. and XX other countries signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which provides for international cooperation in criminalizing the bribery of foreign government officials.
Anti-Bribery Provisions. The first provision of the FCPA criminalizes the bribery of foreign government officials in order to obtain or retain business. In a typical violation scenario, a company with a U.S. connection (incorporated in the United States or having a U.S. presence) makes a payment to a foreign official, either directly or through an agent, with the purpose of securing business with the government customer or an enterprise controlled by the foreign government. Payments sometimes are disguised as commissions or other marketing expenses and channeled through entities where scrutiny is less likely. Or they're part of otherwise legitimate contractual payments. A Wall Street Journal article published last August reported that the United States is investigating a high-ranking Mexican official who received a Ferrari, a luxury yacht, and several million dollars in exchange for lucrative contracts for two U.S. companies. A Mexican citizen living in Houston, who allegedly set up a company in Mexico to serve as an intermediary between the Mexican official and the two companies, has been arrested in the case.
In the Las Vegas case mentioned earlier, security product dealers at a convention were given the impression that they were making a payment to an agent who would carry it to government officials in an African country, allegedly Gabon. But the agent was an FBI employee, and a number of dealers were arrested under the FCPA. This brings up an important point: The FCPA requires only intent, not actual malfeasance. Maximum penalties for culpable individuals for violating the anti-bribery provisions include a maximum criminal fine of $XXX,XXX and five years in prison. A corporation found in violation can be fined upwards of $X million.:
To constitute a violation of the Act, five elements must be present
X. An Entity Paying the Bribe. The FCPA covers payment made by citizens, nationals, or residents of the United States or a business entity that is organized in one of the states, territories, possessions, or commonwealths of the U.S. or has its principal place of business in the U.S. This includes issuers of securities registered in the U.S. who file reports with the SEC. Foreign corporations and nationals are also subject to the FCPA if the bribe takes place on U.S. soil.
In addition, the Act includes a "knowledge standard" that assumes that securities issuers and domestic entities should be aware of possible violations related to their international business associates, including consultants, joint-venture partners, distributors, subcontractors, and suppliers. Various DOJ cases have concluded that a corporation violated the FCPA because a reasonable person would have realized the existence of violations and the offender consciously chose not to ask about them.
X. Intent of the Bribe. The entity making the bribe must have a corrupt intent, such as to induce a foreign government official to misuse his or her position. As mentioned earlier, the FCPA doesn't require that the act take place, only that the intent was corrupt.
X. Payment of the Bribe. The FCPA prohibits paying, offering, or promising to pay anything of value -- not just money -- to obtain or retain business. Payments to facilitate routine government actions (facilitating payments or "grease payments"), such as obtaining permits, licenses, utilities, phone service, police protection, transportation, and inspections, are generally exceptions to -- and are therefore excluded from -- the Act.
X. Recipient of the Bribe. Though foreign government officials are clearly within the FCPA's scope, it's less clear whether officials of state-owned enterprises, members of the royal family, or a member of a legislative body would be considered a foreign government official. But the DOJ has an opinion process for determining whether an individual would be considered a foreign official.
X. Business Purpose Test. The Act prohibits any payment that may help an entity obtain or retain business. The DOJ interprets "obtaining or retaining business" very broadly in that the term includes more than the mere award or renewal of a contract.
Accounting Provisions. The second provision of the FCPA requires that companies establish and maintain books and records that reflect their transactions accurately and fairly. Specifically, the accounting requirement attempts to prevent three types of improprieties:
* Failure of the company to record illegal transactions,
* Falsification of records that help to conceal illegal transactions, or
* Creation of records and documents that quantitatively are accurate but nevertheless may mislead by failing to identify the substantive aspects of the transaction.
How seriously do the feds take these mandates? An individual knowingly circumventing or failing to implement the accounting provisions not only can be criminally fined up to $X million and be sentenced to XX years in prison, but he or she would also be barred from serving as an officer or director of a public company. In short, a conviction under the Act would be a career killer.
Putting the Hammer Down: Recent FCPA Violations
As Figure X shows, the DOJ and SEC have seen a fairly steady rise in FCPA actions. The DOJ alone reported that XX cases were filed in 2010. As of August X, 2011, the SEC had taken action on XX FCPA cases, and the DOJ reported filing five cases.
Let's look at some examples.
X. UTStarcom subsidiary violates FCPA by providing trips to popular tourist destinations in exchange for telecom contracts. (DOJ Justice News, December XX, 2009, and SEC Litigation Release No. XXXXX)
UTStarcom, a Delaware corporation headquartered in Alameda, Calif., and listed on the Nasdaq (UTSI), is a global telecommunications company that designs, manufactures, and sells network equipment and handsets. UTStarcom has historically focused on doing business in Asian markets, with a particular emphasis on China, through its wholly owned subsidiary, UTStarcom China (UTS-China).
UTS-China arranged and paid for employees of Chinese, state-owned telecommunications companies to travel to popular tourist destinations in the United States, including Hawaii, Las Vegas, and New York City. The trips were purportedly for individuals to participate in training at UTStarcom facilities. In fact, according to a DOJ press release, UTStarcom had no facilities in those locations and conducted no training. UTS-China then falsely recorded these trips as "training" expenses, but their true purpose was to obtain and retain lucrative telecommunications contracts.
Under its agreement with the DOJ, UTStarcom was required to pay a $X.X million penalty, implement rigorous internal controls, and cooperate fully with the Department. The agreement recognizes UTStarcom's voluntary disclosure, its thorough self-investigation of the underlying conduct, and its remedial efforts to prevent future violations. As a result, the DOJ will not prosecute UTStarcom or its subsidiaries, provided that the company satisfies its ongoing obligations under the agreement.
X. Technip violates FCPA with bribes to Nigerian government officials. (SEC Litigation Release No. XXXXX, June XX, 2010)
Technip, a global engineering, construction, and services company based in Paris, France, settled with the SEC in June 2010 for multiple violations of the FCPA. The company had become a U.S. securities issuer, and thus subject to the FCPA, in August 2001.
According to the SEC, between at least 1995 and 2004, senior executives at Technip and other members of a four-company joint venture cooked up a scheme to bribe Nigerian government officials to obtain multibillion-dollar contracts to build liquefied natural gas (LNG) pro-duction facilities. The complaint alleged that, from the inception of the joint venture, Technip and its partners paid bribes to help obtain the LNG contracts. The joint-venture partners formed a "cultural committee," composed of senior sales executives at each company, to consider how to carry out the bribery scheme. To conceal the illicit payments, a shell company controlled by a U.K. solicitor and a Japanese trading company entered into phony contracts that served as conduits for the bribes. Payments to these two agents topped $XXX million.
The SEC also alleged that Technip's internal controls failed to detect or prevent the bribery and that the company falsified its records to cover up the scheme. Although Technip was aware that what it was doing was against the law, it didn't implement adequate controls to ensure compliance with the FCPA. Instead, its due diligence was a "perfunctory exercise" so that the company could show some documentation in its files. Technip was ordered to disgorge $XX million in ill-gotten profits derived from the scheme, plus prejudgment interest. It also agreed to pay a criminal penalty of $XXX million.
X. Manager violates FCPA by paying government officials to gain access to tobacco processing facilities. (DOJ Justice News, August X, 2010)
A former foreign manager for a Virginia-based tobacco company pleaded guilty in August 2010 for his role in a conspiracy to bribe officials of the Republic of Kyrgyzstan. The employee plead guilty to one count of conspiracy to violate the FCPA and received three years' probation and a $X,XXX fine.