What is the Foreign Corrupt Practices Act?
When I was in middle school, I was puzzled by college superstar Bo Jackson’s decision to reject the opportunity to play for the Tampa Bay Buccaneers who selected him with the number one pick in the 1986 NFL draft. Over time I learned that Jackson’s refusal to sign with Tampa Bay was because he believed the team’s owner intentionally sabotaged his college baseball career. That is, Jackson, a two sport athlete, was declared ineligible from college baseball during his senior year after taking a trip to Tampa to visit with the team. Because the Buccaneers flew Jackson on the owner’s private jet, the trip violated the NCAA rules and cost Jackson his baseball season.
While the rules of the NCAA are designed to promote fairness and integrity, they are at times overbroad in that they penalize conduct that is well-intentioned and uncorrupt. Indeed, conduct that is perfectly acceptable in all other areas of society could potentially subject a college athlete to sanctions under NCAA rules. For Jackson, a simple trip on a private jet to be recruited by a potential employer, which for most college students would be an event to be celebrated and praised, rendered him ineligible from college sports. For other athletes, accepting an invitation to dinner, receiving a gift, or even taking a part-time job could potentially trigger significant sanctions. A college athlete, therefore, must recognize that conduct which may appear innocuous under normal circumstances may nonetheless violate the rules of the NCAA and jeopardize his or her college athletic career.
In the business world, companies, like college athletes, are held to a different standard and are subject to rules and regulations that are designed to promote fairness, integrity and ethical conduct in the global marketplace. Much like the college athlete who must understand the boundaries of permissible conduct, companies must carefully survey the legal and regulatory landscape and recognize that well-intentioned business practices may yet trigger a violation of some rule or regulation. Companies must tailor their business practices to comply with these standards as laws and regulations seeking to enforce fairness and ethical conduct often carry significant civil and/or criminal penalties.
The Foreign Corrupt Practices Act (“FCPA”) is a prime example of legislation designed to promote ethical business practices in the global marketplace. Enacted in 1977, the FCPA bans the practice of bribing foreign government officials for the purpose of gaining an unfair business advantage. A violation of the FCPA triggers significant sanctions. An organization engaged in international business, therefore, must carefully asses its exposure under the FCPA and ensure its compliance program adequately mitigates its risk of a violation.
An Overview of the FCPA.
In 1977, after more than two years of hearings, investigation and deliberation, the United States Congress enacted the FCPA. The FCPA was developed in response to revelations of widespread global corruption discovered during the Watergate investigation. Specifically, Congress learned that major American corporations were using secret slush funds and falsifying corporate financial records to conceal corrupt business practices including the bribing of foreign officials. Prior to the passage of the FCPA, corrupt payments to foreign officials were not expressly prohibited by the laws of the United States and, in fact, were tolerated and condoned by the international community. Some countries even allowed these payments to be deducted as legitimate business expenses.
The goal of the FCPA was two-fold. First, the legislation sought to increase transparency and accuracy in an organization’s corporate financial records. Second, Congress hoped to raise the standards of ethical business conduct by banning the practice of bribing foreign officials. These worthy goals notwithstanding, the FCPA was not without its critics. Some argued that the legislation placed U.S. companies at a competitive disadvantage as they would be subject to anti-bribery standards that did not apply to their foreign competitors. Others believed the statute to be unworkable as it would be difficult to develop a precise definition of bribery that clearly distinguished between legitimate and corrupt business conduct. Ultimately, however, these and other concerns were outweighed by Congress’s desire for the United States to take the lead and rally the world to combat bribery and corruption in the global marketplace.
The FCPA is comprised of two parts: (1) accounting provisions; and (2) anti-bribery provisions. Each part of the legislation stands alone. That is, an organization can violate one without the other.
The accounting provisions apply to all companies that list a class of securities on a securities exchange in the United States. They require these companies to keep accurate financial books and records and to maintain a system of internal accounting controls. Specifically, organizations must record transactions accurately and with reasonable detail so that they fairly reflect the underlying exchange or transfer. In addition, with respect internal accounting controls, organizations must devise and maintain a system that provides reasonable assurances that an organization’s transactions are properly recorded and accounted for in their financial books and records. Because the accounting provisions are included within the FCPA, they are often mistakenly viewed as applying to bribery related violations only. This is not the case. These provisions have a broad reach and apply to all of the organization’s business transactions – even those that occur within the United States, do not involve a government official and are entirely legal and non-corrupt.
The anti-bribery provisions of the FCPA, as compared to the accounting provisions, have a broader scope of application. They apply to all United States companies and citizens, and all organizations, foreign or domestic, traded on a securities exchange in the United States. In addition, these provisions reach foreign individuals or organizations if any act related to their corrupt scheme occurred within the United States or its territories.
Generally speaking, the anti-bribery provisions prohibit offering or giving anything of value, directly or indirectly, to a foreign government official for purposes of obtaining or retaining business. While the standard for liability appears straight forward, the statute is broadly applied and reaches a wide range of business practices including those that, on the surface, may not be perceived as corrupt. Organizations, therefore, must carefully analyze the FCPA enforcement standards and determine which areas of their business are potentially at-risk for violations. Next, these organizations must develop a compliance program that addresses these risk areas, and reduces the organization’s overall FCPA risk. Organizations that fail to make this effort do so at their own peril as FCPA violations carry significant criminal and civil penalties directed at both the individual and the organization. Moreover, an effective compliance program may be rewarded by the government in the form of a reduced penalty or sanction.
The FCPA is designed to elevate the standards of ethical business conduct in the global marketplace. Organizations engaged in international business must develop a detailed understanding of the FCPA, and tailor their business practices to comply with the applicable enforcement standards. This article is the first in a series, and is intended to provide a general introduction to the FCPA. In the coming weeks, we will take a deeper dive into the FCPA and publish articles that answer the following questions: (1) to whom does the FCPA apply; (2) what conduct may trigger a violation of the FCPA; and (3) what are the potential consequences of an FCPA violation. We will conclude this series of articles with Three Twelve Group’s “Top 12 FCPA Compliance Tips”.
*This article is intended to be a source of general information. It is not intended to provide legal advice. For specific counsel or advice, please consult with an experienced professional. For any questions or comments, please contact Three Twelve Group by phone at 404.872.5615 or by email at firstname.lastname@example.org.