Enforcement of the Foreign Corrupt Practices Act (FCPA) has reached an all-time high. FCPA violations can result in many significant costs, both monetary and non-monetary. FCPA compliance has become a top corporate governance issue and has triggered shareholder litigation, tax investigations, and money laundering probes. While many corporate managers, financial officers, board members, internal and external auditors, and forensic accountants are aware of the FCPA's basic objectives and mandates, many may not do an adequate job of protecting their firms and/or clients from the dangerous consequences that can result from FCPA non-compliance. The purposes of this paper are to: (1) describe and analyze the important provisions of the FCPA; (2) make recommendations to help firms improve their compliance with the FCPA; and (3) analyze and describe bribery and FCPA case filings, sanctions, and payments (bribes).
In January 2010, the Department of Justice (DOJ) arrested 22 employees and executives of firms in the military products industry. This was the first instance where the DOJ used FBI undercover operatives to enforce the Foreign Corrupt Practices Act (FCPA), as amended (1) (Foley and Lardner, 2010, p. 1). In April 2010, Charles Jumet of Virginia was sentenced to 87 months in prison, the longest prison term against an individual for paying bribes to former foreign government officials (DOJ, 2010). These cases are the result of the radical increase of FCPA cases during the past decade. While there was only one FCPA case pursued by the federal government in 2000, in 2009 there were 67 cases filed by the DOJ and the Securities and Exchange Commission (SEC) (see Tables 1, 2, and 3). These facts highlight the priority given to FCPA enforcement by the DOJ and SEC--a priority that is second only to the fight against terrorism (Lee, 2009, p. B8).
Table 1--CASES FILED BY SEC--FCPA VIOLATIONS--2000-2009 Year 2009 2008 2007 2006 Number of 15 15 21 11 cases Total 209.489(13) 406.667(12) 86.351(18) 68.485(7) value of SEC sanctions (in million $) (a) Average 16.114 33.889 4.797 9.783 sanction (in million $) Total 6037.370(7) 10759.706(8) 2608.965(13) 945.719(6) value of business obtained (in million $) (a) Average 862.481 1344.963 200.69 118.215 value of business obtained (in million $) Total 182,311(6) 1616.148(13) 86.095 (18) 14.381(11) bribe paid (in million $) (a) Average 30.385 124.319 4.783 1.307 bribe amount (in million $) Average 0.1478 0.2721 0.1935 0.0133 ratio of bribe to value of business obtained Year 2005 2004 2003 2002 2001 2000 Number of 5 3 1 5 7 1 cases Total 35.095(5) 16.426(2) NA 661(3) 0.175(2) NA value of SEC sanctions (in million $) (a) Average 7.019 8.213 NA 0.22 0.087 NA sanction (in million $) Total 151.010(3) NA NA NA 6.457(3) NA value of business obtained (in million $) (a) Average 50.337 NA NA NA 2.125 NA value of business obtained (in million $) Total 5.622(5) 0.186(2) NA 11.960(3) 0.669(7) NA bribe paid (in million $) (a) Average 1.124 NA NA 3.987 0.0956 NA bribe amount (in million $) Average 0.0213 NA NA NA 0.1504 NA ratio of bribe to value of business obtained Note: a Figures in parentheses indicate the number of cases for which data was available. NA - data not available Sources: www.sec.gov; www.doj.gov; fcpa.shearman.com
FCPA violations can happen easily, and when they occur there can be many significant costs. First, violations expose a company, public or private, to criminal and civil penalties and other collateral sanctions such as termination of government licenses and debarment from government contracting programs. Second, the DOJ and SEC, which share joint enforcement of the law, are now seeking disgorgement of profits secured through bribery of foreign government officials. For example, in December 2009, Siemens paid a record $1.6 billion in combined fines and penalties to the U.S. and German governments, including a criminal fine of $450 million to the D0J. (2) Finally, the target of an FCPA enforcement action must consider the immeasurable costs of a decline in company share price and concomitant negative reputational effects. Individual offenders can also experience fines, prison time, and negative reputational effects. U.S. firms need to pay close attention to several trends. First, the number of FCPA cases and the severity of penalties are increasing as the DOJ and SEC emphasize enforcement. Second, FCPA compliance will become a top corporate governance issue leading to more rigorous compliance. Third, FCPA investigations will likely trigger other actions such as shareholder litigation, tax investigations, and money laundering probes (Sulavik, 2009, p. 3). While many corporate managers, financial officers, board members, internal and external auditors are aware of the FCPA's basic objectives and mandates, many may not do an adequate job of protecting their firms and/or clients from the dangerous consequences that could result from failure to comply with the FCPA. (3)
The purposes of this article are to: (1) describe and analyze the important provisions of the FCPA; (2) make recommendations to help firms improve their compliance with the FCPA; and (3) analyze and describe bribery and FCPA case filings, sanctions, and bribes (payments).
Overview of the FCPA
Two central ideas are contained in the FCPA. The first is that no entity or person may offer or pay anything of value to the official of a foreign government or certain international organizations that would cause the official to misuse power or influence to benefit a business interest of any entity or person (antibribery provisions). The second is that if any payment is made to an official, whether the purpose is proper or corrupt, the payment must be reported in the payer's financial statements according to U.S. generally accepted accounting principles (recordkeeping and internal control provisions).
The basic elements of any FCPA bribery violation are:
1. a private or publicly traded firm or any foreign person in the U.S.;
2. who corruptly;
3. pays or offers to pay money or anything of value;
4. to a foreign official or a foreign political party or to any person while knowing that all or part of the payment will be offered or paid to a foreign official;
5. for the purpose of influencing the official to obtain, retain, or direct business to any person or to secure an improper advantage. (4)
Publicly traded firms are required to "make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company." (5) The recordkeeping provisions are intended to prevent three types of improprieties:
1. the failure to record illegal transactions;
2. the falsification of records to conceal illegal transactions; and
3. the creation of records that are quantitatively accurate but fail to specify qualitative aspects of the transaction (Maris and Singer, 2006). (6)
No relevant requirement applies with regard to making and keeping accurate financial records.
The FCPA requires publicly traded firms to design and maintain a system of internal controls. The SEC does not mandate any specific internal controls. Instead, the SEC articulates broad goals that controls should achieve, and it leaves the implementation of specific policies and procedures to issuers. Several factors are considered in the determination of whether a system of internal controls is reasonable under the circumstances:
1. the role of the board of directors;
2. communication of corporate procedures;
3. assignment of authority and responsibility;
4. competence and integrity of personnel;
5. accountability for performance and compliance with policies and procedures; and
6. objectivity and effectiveness of the internal audit function (Maris and Singer, 2006).
Both the SEC and DOJ have enforced the antibribery and recordkeeping/internal control provisions. The SEC brings civil actions against alleged offenders while the DOJ pursues criminal prosecutions. The recordkeeping/internal control provisions have been used to support bribery charges. Prosecution under the antibribery provisions is more difficult because it is harder to obtain evidence in a foreign setting (Deming, 2006).
FCPA Literature Review
The business literature contains a modicum of research on the FCPA. Cragg and Woof (2002) provide a detailed history of the FCPA but question the efficacy of the law. These authors maintain that the FCPA has not had a significant impact on American businesses or raised the standards of conduct on the part of American companies operating in international markets. Deming (2006) notes that the FCPA possesses two principal mechanisms to execute its purposes. The first is a prohibition on bribery of foreign officials. The second is the accounting/recordkeeping and internal control provisions. This author contends that these latter provisions have a broader reach and constitute the more potent mechanism of the FCPA. As prosecutions increase, Deming (2006) expects that the accounting/recordkeeping and internal control provisions will play a more active role than the bribery provisions.
Norton (2006) highlights how compliance with the FCPA antibribery provisions is difficult for U.S. firms doing business in China. By refusing to pay bribes, American firms lose business to companies from other nations. The author concludes that U.S. firms should establish and enforce a rigorous FCPA compliance program for all employees and agents.
The legal literature contains more published research on the FCPA than the business literature. Marceau (2007) examines how the U.S. government has departed from its previous passive enforcement approach to a more aggressive posture, with prosecutors using more novel legal theories to establish liability. The author argues that the government is overstepping the law's bounds and "is willing to prosecute entities and individuals for conduct that is not obviously actionable under a plain text reading of the FCPA." FCPA defendants are urged to challenge "unreasonable extensions of FCPA liability." Baker (2010) outlines the development of the FCPA, as well as its elements, defenses, and civil and criminal penalties for violations. The article also emphasizes FCPA corporate compliance programs.
Other authors have focused on the lack of clear meaning in various parts of the FCPA law. Weinograd (2010) highlights how the FCPA exception for "grease payments" or routine foreign governmental actions contains ambiguities. The author suggests statutory reform based on a tailored monetary cap for "grease payments." "Facilitating payments" below the monetary threshold would carry a rebuttable presumption of legitimacy. Westbrook (2011) notes that the scope of the FCPA is presently unclear. Businesses have little official guidance in designing effective compliance programs. The author suggests that several points should be clarified, including the following questions:
1. Who is a foreign official under the FCPA?
2. What constitutes an "agency or instrumentality" of a foreign government?
3. Does "anything of value" include payments made to persons other than foreign officials?
4. What constitutes "knowledge" under the antibribery provisions?
5. What kinds of facilitating payments would qualify for the "grease payments" exception to the FCPA?
6. When can the FCPA be used to prosecute a parent corporation for a subsidiary's antibribery violation? (Westbrook, 2011).
Cohen et al. (2008) document that it remains unsettled whether the FCPA's definition of "foreign official" includes employees of foreign companies that are owned or controlled by those firms' governments. These authors examine the origin of the FCPA's definition of "foreign official," consider the definition in light of other laws and analyze the impact the DOJ's and SEC's interpretation has had on foreign business transactions. Lipper (2010) indicates that questions surrounding the FCPA's intent requirement will proliferate as prosecutions increase under the law. The author stresses that courts should think harder about the unique demands that FCPA cases place on juries and defendants. Also, Congress should clean up this aspect of the statute.
Lindsey (2009) focuses on successor liability under the FCPA. Firms that overlook an inquiry into an acquireets potential violations of the FCPA risk liability after the deal closes. The author indicates that successor liability is a consideration in the acquisition of small as well as large firms. The article outlines steps that companies can take to avoid or mitigate the risk of acquiring an FCPA liability.
What is the Meaning of the FCPA?
Parties Covered The anti-bribery provisions are broader than the accounting provisions of the FCPA. The former apply to "issuers," "domestic concerns," and "foreign persons" acting within the U.S. An "issuer" is a public company subject to the registration or reporting requirements of the Securities Exchange Act of 1934. A "domestic concern" is any business (including those privately or family owned) that has its principal place of business in or is organized under the laws of the U.S., its states, territories, or possessions. Officers, directors, employees, agents and stockholders of "foreign persons" are subject to the FCPA if they commit a violation while in the U.S.
Generally, the activities of a foreign subsidiary or joint venture of a U.S. corporation are not subject to the FCPA. (7) The U.S. government could have jurisdiction, however, over acts (and those who authorize such acts) that occur outside the U.S. if such acts trigger or cause further acts to occur within U.S. territory (Lindsey, 2009).
Making a Payment "Corruptly" The statute itself does not define the term "corruptly," which presents interpretational problems. One leading case states that "corruptly" means "an offer, promise to pay, payment, or authorization for payment, intended to induce the recipient to misuse his official position or to influence someone to do so and that an act is corruptly done if done voluntarily [a]nd intentionally and with a bad purpose of accomplishing either an unlawful end or result, or a lawful end or result by some unlawful method or means." (8)
Pays or Offers Anything of Value Although the FCPA does not define the term "anything of value," the law prohibits not only consummated bribes but unaccepted offers or bribes. Recent enforcement actions indicate that there are virtually no limitations on what can be considered "anything of value" (Kovacich, 2009, p. 538). The payment or offer of payment of "anything of value" includes employment of officials as consultants, expense paid travel, loans with favorable interest rates and repayment terms, golf outings, sports equipment, transportation of household goods, discounts, and college scholarships. (9) The context in which a promise, offer or payment is made may be dispositive of whether something is "anything of value."
Who is a "Foreign Official?" Under the FCPA, a "foreign official" is anyone who acts in an official capacity for a government and who exercises some discretionary authority, which includes an officer of a foreign government and even an officer in the armed forces. (10) A "foreign official" also includes political parties, party officials, or any candidate for political office. Additionally, the term may include any person employed by a foreign government agency or a corporation or entity owned or controlled by a foreign government or a consultant, broker, or other professional who acts for a foreign government (Youngberg, 2005, p. 23).
While "Knowing" or Knowledge Requirement The anti-bribery provisions define "knowledge" with respect to conduct, a circumstance, or a result as such person being "aware ... that such result is substantially certain to occur" or has a "firm belief that such circumstance exists." (11) Knowledge may also be established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes such circumstance does not exist. A federal district court ruled that the knowledge requirement cannot be met merely by a failure to perform adequate due diligence. (12) Reckless disregard of the facts is insufficient to support a finding of knowledge. Knowledge requires recklessness plus conscious disregard with the aim of avoiding the truth.
Business Nexus Requirement The business nexus element means that an FCPA violator must take some action to influence a foreign official to "obtain, retain, or direct business or to secure an improper advantage." Congress did not define these terms but enforcement actions and limited judicial guidance support a broad interpretation. "Business" is not limited to foreign government contracts but includes any commercial activity. The SEC and DOJ interpret the FCPA broadly to include payments intended to influence any governmental decision that has a positive impact on an issuer's business.
Facilitating or Expediting Payments Exception Congress created the "facilitating payments" exception in recognition of the fact that it is common in many countries. The FCPA itself indicates that payments to expedite routine governmental actions (e.g., obtaining permits, licenses, processing visas and work orders, providing police protection, mail pickup and delivery, etc.) are deemed a "facilitating payment." (13) The FCPA contains no cap on the amount of a "facilitating payment," but those permitted have been under US $1000 (Maris and Singer, 2006, p. 587).
Affirmative Defenses The FCPA states that it is an affirmative defense if a payment, gift, or offer of payment is "lawful under the written laws and regulations" of the foreign official's country. (14) Recognized customs or practices within a particular nation cannot serve as a basis of an affirmative defense. It remains unclear whether the questioned conduct must be specifically allowed under local law or whether the absence of a prohibition is enough to support the defense. A second affirmative defense is "reasonable and bona fide expenditures, such as travel and lodging expenses, incurred by or on behalf of a foreign official" that are directly related to "(a) the promotion, demonstration, or explanation of products or services; or (b) the execution or performance of a contract with a foreign government or agency thereof". (15)
Lack of a Private Right of Action The FCPA itself contains no express private right of action. FCPA enforcement actions, however, have given rise to civil FCPA-derived lawsuits by plaintiffs, including shareholders, other governments, and business partners. in one case, shareholder plaintiffs brought a [section]10b suit (under the Securities Exchange Act of 1934) after the firm's stock price fell upon the initiation of an FCPA investigation by the SEC. (16) Immucor agreed to settle the suit for $2.5 million. Conduct that violates the anti-bribery provisions may also give rise to a private cause of action for treble damages under the Racketeer Influenced and Corrupt Organization Act (RICO), or to actions under other federal laws.
Vicarious Liability Under the Anti-Bribery Provisions Generally, the activities of a foreign subsidiary or joint venture of a U.S. corporation are not subject to the FCPA. (17) The U.S. parent may be held liable (both civilly and criminally) for the foreign subsidiary's or joint venture's acts if the relationship between the parent and affiliate or joint venture is legally close. Officers, directors, employees, and agents of foreign affiliates and joint ventures are not covered by the FCPA, unless they violate the law while in the U.S.
A U.S. parent corporation, venture, or their personnel may be liable for the corrupt practices of foreign affiliates. The parent is not liable absent knowledge of the corrupt purpose of the payment. (18) Criminal liability may be based on parent acquiescence to an affiliate's corrupt payments. A vital issue is the extent to which corrupt payments made by an affiliate were documented and discussed with the parent (Marceau, 2007, p. 298).
Accounting and Internal Control Provisions
All public companies that file Form 10-K reports must observe the accounting provisions whether or not they engage in foreign operations. (19) Officers, directors, employees, and stockholders or agents of publicly traded firms, are also subject to the accounting provisions. The accounting provisions apply to all kinds of corporate activity, even wholly domestic activity, and the manner in which those activities are reflected in corporate records. (20) A U.S. publicly traded firm must ensure that any majority-owned foreign subsidiary adheres to the accounting provisions. A parent issuer may be held responsible in some cases of less than 50 percent ownership (Deming, 2006, p. 474). The SEC applies practical tests in the determination of whether an issuer controls the foreign subsidiary.
Accurate and Complete Books and Records Although the FCPA does not define "books, records, and accounts," the law applies to a wide variety of corporate records. (20) For FCPA purposes, records include "accounts, correspondence, memorandums, tapes, disks, papers, books, and other documents or transcribed information of any type. ...". (21) One federal court has observed that "virtually any tangible embodiment of information made or kept by an issuer is within the scope of the accounting provisions". (22) The FCPA also encompasses minutes of board of director meetings and board resolutions but does not cover every memorandum or note taken by an employee.
Transactions must be accurately recorded "in reasonable detail." "Reasonable detail" means "such level of detail ... as would satisfy prudent officials in the conduct of their own affairs". (23) Parent companies have been held liable for recordkeeping inaccuracies in a subsidiary despite a lack of knowledge of any inaccuracy. One reason for this legal stance is that no scienter (intent to deceive) requirement exists to establish a willful or deliberate violation of the recordkeeping provisions. (24)
Internal Controls The FCPA requires publicly traded firms to design and maintain a system of internal controls sufficient to provide reasonable assurances that transactions:
* are executed in accordance with management's authorization;
* are recorded in conformity with GAAP or any other criteria;
* maintain accountability of assets;
* permit access to assets only in accordance with management's authorization; and
* recorded assets are reconciled with the existing assets at reasonable intervals and appropriate action is taken with respect to any difference. (25)
FCPA provisions relating to recordkeeping and internal accounting controls provide an almost endless series of ways for the SEC to initiate civil legal action against an issuer. When fraud or other abuses are allegedly involved, the issue arises as to whether internal controls were adequate. The standard of proof in civil actions involving these provisions is preponderance of the evidence.
Criminal Liability For criminal liability to attach for the conduct of third parties, a publicly traded firm must possess knowledge that the third party has circumvented or intends to violate the accounting provisions. (26) Deliberate ignorance or conscious disregard can satisfy the knowledge requirement. (27) Knowledge may reside with one person or may be the collective knowledge of various employees acting within the scope of employment. (28)
The accounting provisions have been used to support charges under the anti-bribery provisions. Prosecution under the anti-bribery provisions is more difficult because of obtaining evidence in a foreign setting (Deming, 2006, p. 492). No need exists to prove "corrupt intent," whether a "foreign official" was involved, or to demonstrate whether a promise, offer or payment was made to "obtain or retain business" or "secure an improper advantage." The elements of an accounting violation are limited to whether the business record is covered by the accounting provisions, whether the conduct was willful, and whether the record was accurate in reasonable detail. (29)
Civil Liability. Unlike the anti-bribery provisions, a civil enforcement action under the accounting provisions does not require knowledge. An entity can be vicariously liable for actions taken by an officer, director, employee, shareholder, or agent. (30) An entity can also be strictly liable for the actions of a subsidiary where it has an interest greater than 50 percent (Giudice, 2011, p. 353).
Criminal and civil penalties can result from violation of the FCPA. A company that violates the anti-bribery provisions may be fined up to $2 million per offense and be subject to civil penalties of $100,000 per violation. (31) An individual may be fined up to $100,000 per violation and imprisoned for five years for a willful violation and may be subject to civil penalties of $10,000 per violation. (32)
A company that knowingly violates the accounting provisions may be fined up to $25 million and face civil penalties of up to $500,000. (33) An individual may be fined $5 million, imprisoned for 20 years, and face up to $100,000 in civil penalties. (34)
Analysis: The Extent of Bribery and FCPA Violations
The Extent of Bribery
Precise quantitative estimates of the dollar amount of bribery are impossible to obtain since neither the bribe-givers nor bribe-takers disclose the extent of their activities. The World Bank Institute has estimated that the total amount of bribes paid per year may be $1 trillion (Rose-Ackerman, 2004, ch. 6, pp. 1-2). According to Ernst & Young's 10th Global Fraud Survey, about 23 percent of almost 1200 corporations across 33 nations admitted their organizations had been approached to pay a bribe to retain or win business during the prior two years (Brandfon, 2008, p. 1).
Analysis of FCPA Cases
We extracted and analyzed available data on Foreign Corrupt Practices Act cases filed by the Securities and Exchange Commission (civil) and the Department of Justice (criminal) for the years 2000-2009. Tables 1, 2, and 3 highlight the number of cases filed by the SEC and the DOJ, individually and collectively, the number of cases disposed of and pending, and the number of cases against corporations, individuals and foreign corporations, monetary sanctions, and bribes paid. The number of FCPA cases filed annually escalated considerably after 2004 (Table 3). In 2005, 14 cases were initiated. By 2009, the number of cases initiated had ballooned to 67, with criminal cases filed by the DOJ being responsible for most of the increase (Tables 2 and 3). For example, in 2006, a total of seven DOJ criminal cases were filed. In 2009, that number had risen to 52, an increase of 643% in only three years (Table 2).
Table 2--CASES FILED BY DOJ--FCPA VIOLATIONS--2000-2009 Year 2009 2008 2007 2006 Number of 52 32 26 7 cases Total 438.908(11) 508,889(16) 91132(18) 8.284(6) value of SEC sanctions (in million $) (a) Average 39.901 31.805 5.063 3.047 sanction (in million $) Total 6542.504(29) 9582.188(21) 5816.416(17) 751.590(5) value of business obtained (in million $) (a) Average 225.604 456.295 342.142 150.318 value of business obtained (in million $) Total 217.280(26) 1168.823(25) 383.168(20) 20.200(7) bribe paid (in million $) (d) Average 8.357 46.753 19.158 2.886 bribe amount (in million 5) Average 0.1359 0.2222 0.1077 0.0462 ratio of bribe to value of business obtained Year 2005 2004 2003 2002 2001 Number of 9 5 4 4 8 cases Total 17,458(7) 6.0518(2) 2.406(3) 2.406(3) 0.063(3) value of SEC sanctions (in million $) (a) Average 2.4941 3.025 0.802 0.802 0.021 sanction (in million $) Total 112.055(3) 450.300(4) 1101.000(2) 2.270(3) 9.0975(4) value of business obtained (in million $) (a) Average 37.352 112.575 NA 0756 2.275 value of business obtained (in million $) Total 914462(9) 2,604(4) 1011.000(5) 0.757(4) 1,595(4) bribe paid (in million $) (d) Average 101.607 0.651 202.2 0.189 0.399 bribe amount (in million 5) Average 0.0296 0.0101 NA 0131 0.2896 ratio of bribe to value of business obtained Year 2000 Number of 0 cases Total NA value of SEC sanctions (in million $) (a) Average NA sanction (in million $) Total NA value of business obtained (in million $) (a) Average NA value of business obtained (in million $) Total NA bribe paid (in million $) (d) Average NA bribe amount (in million 5) Average NA ratio of bribe to value of business obtained Note: (a.) Figures in parentheses indicate the number of cases for which data was available. NA--data not available Sources: www.sec.gov; www.doj.gov; fcpa.shearman.com Table 3--SUMMARY DATA--FCPA VIOLATIONS--2000-2009 Year 2009 2008 2007 2006 2005 2004 2003 2002 2001 Total number 67 47 47 18 14 8 6 9 15 of cases filed Number of 17 30 29 7 8 6 0 3 4 cases against corporations Of which are 1 17 6 3 1 3 0 1 0 foreign corporations Number of 50 17 18 11 6 2 6 6 11 cases against Individuals Cases 32 43 46 18 14 8 5 7 15 disposed Cases pending 35 4 1 0 0 0 1 2 0 at end of year Year 2000 Total number 1 of cases filed Number of 1 cases against corporations Of which are 0 foreign corporations Number of 0 cases against Individuals Cases 1 disposed Cases pending 0 at end of year Sources: www.sec.gov; www.doj.gov; fcpa.shearman.com
During the years 2000-2009, there were 232 FCPA cases initiated (Table 3). Over 80 percent of cases filed in the last decade occurred in the five years between 2005 and 2009. Cases are being vigorously pursued with more than 80 percent of cases initiated in the last ten years having been disposed of or resolved. It is also interesting to note that more cases have been brought against individuals than corporations during the years 2000-2009.
There has also been a pattern of increasing monetary sanctions in both SEC and DOJ cases during the last decade (Tables 1 and 2). Both total and mean monetary sanctions have increased considerably. In 2004, total SEC monetary sanctions were $16.4 million. By 2007, those sanctions exceeded $86 million and in both 2008 and 2009 total monetary sanctions were over $200 million. For 2008, the mean sanction was over $33 million. For 2009, it still exceeded $16 million. Total DOJ monetary sanctions climbed significantly throughout the last decade. In 2004, total DOJ monetary sanctions were just over $6 million. In 2008 and 2009, such sanctions exceeded $400 million. Mean monetary sanctions escalated from $3 million in 2004 to over $30 million in 2008 and 2009. Total SEC and DOJ monetary sanctions have increased for two reasons. First, the rise in the number of FCPA cases has increased the total monetary sanctions collected by the government. Second, the size or amount of the fines levied has also risen.
Table 1 presents a summary of data on total and mean business obtained from bribes (value of business obtained by bribers), the amount of bribes or payments, and the mean ratio of payments (bribes) to business obtained in SEC cases. A lack of available data makes it virtually impossible to draw any conclusions about the value of business obtained from bribes for the years 2000-2004. In the second half of the last decade, a steady increase occurred in the total value and mean value of business obtained from bribes except from 2008 to 2009. This decline may be attributable to the severe global recession. Since 2005, Table 1 highlights an increase in the mean amount of bribes paid to foreign public officials. One cannot conclude, however, that more money is being spent on bribes to obtain or retain a dollar's worth of business. One must consider the mean ratio of bribes paid to business obtained. Since 2005, this ratio has varied from 1.3 percent to over 27 percent. From 2005 to 2009, the weighted average ratio of bribes paid to business obtained is about .1533. This means that bribe givers spend just over $.15 in bribes for each $1 in business obtained or retained for SEC cases.
Table 2 summarizes data on total and mean values of business obtained by briber givers, the amount of bribes or payments, and the mean ratio of payments (bribes) to business obtained in DOJ cases. Since 2005, the total value of business obtained from bribes rose from about $751 million to $6.5 billion in 2009. The mean value of business obtained from bribes increased from $37.3 million per case in 2005 to $225 million per case in 2009. The mean value of business obtained from bribes per case is lower in 2009 than in 2007 and 2008, but still significantly higher than 2005.
In 2005, the total amount of bribes paid increased exponentially compared to the early 2000s (except 2004). Total bribery payments then tailed off significantly in 2006 for DOJ cases. A look at total bribery payments for the years 2006-2009 shows a substantial increase but much volatility.
FCPA Compliance Provisions
The main reasons for an FCPA compliance program are to prevent violations prior to their occurrence, quickly detect any violations, and mitigate the penalties in the event a violation occurs. The DOJ and SEC have noted that the existence of a compliance program is a significant factor taken into account in deciding whether to bring charges, what charges to bring, and what penalties to impose (McNulty, 2006, pp. 12-16). The failure to establish an FCPA compliance program may be seen as evidence of a lack of internal controls that might in and of itself be a violation of the accounting provisions (Witten et al., 2009).
U.S. Federal Sentencing Guidelines and several FCPA settlement agreements outline criteria by which a compliance program is evaluated by the SEC and DOJ. (35) Although these criteria are not legally binding, they provide solid guidance on the contents of an effective FCPA compliance program. These criteria include:
* Clearly stated corporate policy against violations of the FCPA, and establishment of compliance standards and procedures that are reasonably capable of diminishing the prospect of violations;
* Assignment of the responsibility for compliance oversight to appropriate senior corporate officials who report directly to the audit or compliance committee of the Board of Directors;
* Identification of high-risk countries or businesses, and performance of periodic anti-bribery audits of operations in such countries;
* Regular FCPA training for officers and employees involved in foreign projects, and for agents, consultants, and subcontractors:
* Adoption and implementation of accounting and internal controls to ensure compliance with the accounting and recordkeeping provisions of the FCPA;
* Establishment of a reporting system for officers, employees, agents, consultants, joint venture partners, and distributors to report suspected criminal conduct without fear of reprisal; and
* Adoption and implementation of procedures to ensure that the company's agents, consultants, joint venture partners, and distributors are not likely to engage in improper activities (Witten et al., 2009).
Conducting a due diligence investigation of agents, partners, or consultants of a firm that potentially violate the FCPA is one way to reduce the risk of FCPA violations. Company procedures should require that a due diligence process be undertaken before the firm enters into a relationship with a foreign agent, representative, or business partner. FCPA due diligence concerning consultants, partners, or agents should include the following elements:
* Determining the competence, expertise, and reputation of the party, as well as the party's contacts with important government officials. The party's experience, education, former government or military service, family and business relationships, and reputation for honesty are important and serve as the basis for inquiry;
* Evaluate whether the proposed compensation to be paid in exchange for the services rendered or products delivered is reasonable. "Success fees" deserve special scrutiny;
* Assure the maintenance of accurate books and records by the consultant, agent, or partner;
* Contact local counsel to ensure that the proposed arrangement will not violate local law and, depending on the circumstances, contact FCPA counsel;
* Apply a common sense "smell" test to the proposed arrangement;
* Insert standard representations and warranties concerning compliance with the FCPA; and
* After due diligence is finished, prepare a file memorandum to record the due diligence steps taken (O'Melveny and Myers, 2003).
Different sources to help ascertain a consultant's or agent's reputation, expertise and relationships include auditing firms, law firms, the relevant U.S. embassy, the Commerce Department, the State Department, financial institutions, and possibly private investigations (O'Melveny and Myers, 2003).
Companies using foreign consultants, agents, or representatives should place protective covenants in consultancy, partnership, or agency agreements such as:
* The parties' confirmation of an awareness of the terms of the FCPA;
* An agreement not to violate the FCPA;
* An agreement not to pay money or anything of value to foreign officials;
* A representation that the party is not an employer, officer, or agent of a foreign government or candidate for public office, and an agreement that the U.S. party will be advised if the partner or consultant assumes the position of a government official during the relationship;
* An agreement that the party will keep accurate books and records;
* A covenant that will allow the U.S. firm to review or audit all the books and records of the consultant or agent relating to its activities for the benefit of the U.S. firm; and
* An agreement that payments under any contract will be made only by check or wire transfer to an account in the name of the contracting party located in the host country (O'Melveny and Myers, 2003).
It is critical to have the appropriate tone from the top for FCPA compliance. The entity's FCPA policies and procedures must be endorsed by both senior and mid-level management. The latter are important because they actually conduct the firm's daily business operations. Each entity should also conduct periodic reviews of its FCPA compliance program, with a view toward remedial action so that any missteps are not repeated. Continuous monitoring for FCPA compliance should be linked to other antifraud efforts, because a relationship exists between the way bribery is conducted and the kinds of schemes that are used for fraud (Taylor, 2009).
The FCPA now plays a pivotal role in addressing U.S. firms' involvement in bribery of foreign public officials and requiring that publicly traded firms meet certain standards regarding internal controls and accounting practices, books, and records. The SEC and DOJ have increased enforcement of the FCPA during the last few years, to such an extent that many publicly traded firms have FCPA audits performed by internal and/or external auditors.
The anti-bribery provisions criminalize the payment or offer of payment, either directly or indirectly, of money or anything of value to an official of a foreign government, public international organization, foreign political party or candidate for public office, made with corrupt intent to obtain or retain business or secure an improper advantage. The anti-bribery provisions are much broader than the accounting provisions.
All public companies that file Form 10-K reports must observe the accounting provisions, whether or not they engage in foreign operations. Officers, directors, employees, and stockholders or agents of a public company, acting on the latter's behalf, are subject to the accounting provisions. The latter are aimed at prohibiting the establishment of off-the-books accounts, making of off-the books transactions, recording of non-existent expenditures, and the use of false documentation for concealing bribery activities.
The FCPA also requires publicly traded firms to design and maintain a system of internal controls. Although the SEC does not mandate any specific controls, it does articulate broad goals that controls should achieve, and it leaves the implementation of specific policies and procedures to issuers.
FCPA compliance programs are a key means to demonstrate cooperation in the event of a violation. A firm's board of directors and senior management should establish a compliance culture through preventive training and ongoing monitoring. Specific audits focused on the FCPA have become more common in many firms.
In sum, the FCPA and its enhanced enforcement represent an important step towards combating bribery in international business transactions and promotion of more transparent financial reporting. Increased enforcement of the FCPA should result in a reduction of the level of corruption and fraud. Only then will the global marketplace become a level playing field that embraces the principles of fairness and transparency and promotes confidence in the arena in which international and securities transactions occur.
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Brandfon, S. 2008. Company Executives Risk Fines and Jail by Ignoring Anti-Bribery Laws. Business Wire, May 15.
Cohen, J., M. Holland, and A. Wolf. 2008. Under the FCPA, Who Is A Foreign Official Anyway? The Business Lawyer 63(4), 1243-1275.
Cragg, W. and W. Woof. 2002. The U.S. Foreign Corrupt Practices Act: A Study of Its Effectiveness." Business and Society Review 107(1), 98-144.
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Department of Justice. 2010. Virginia Resident Sentenced to 87 Months in Prison for Bribing Foreign Government Official. Office of Public Affairs, April 19.
Foley and Lardner. 2010. Government Sting Snares 22 Individuals Employed by Military Equipment Suppliers. Legal News Alert, January.
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McNulty, P.J. 2006. Memorandum to Heads of Department Components. U.S. Attorneys, available at http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf.
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U.S. Sentencing Commission. 2010. Supplement to 2010 Guidelines Manual. [section]8B2.1, 504-506.
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(1.) Foreign Corrupt Practices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494 (codified as amended at 15 U.S.C. [section][section]78m(b), (d)(1), (g)-(h), 78dd-1, 78dd-2, 78dd-3, 78ff (2008)), amended by Foreign Corrupt Practices Act Amendment of 1988, Pub. L. No. 100-418, 102 Stat. 1107, 1415 (1988) (codified at 15 U.S.C. [section]78dd-1 to 78dd-3, 78ff (2008) and the International Anti-Bribery and Fair Competition Act of 1998, Pub. L. No. 105-366, 112 Stat. 3302 (1998)(codified at 15 U.S.C. [section][section]78dd-1 to 78dd-3 (2008)).
(2.) U.S. v. Siemens Aktiengesellschaft, No. 1:08-CV-00367 (D.D.C. Dec. 12, 2008), available at http://w1.siemens.com/press/pool/ce/events/2008-12-PIC/DOJ.2.pdf; SEC Files Settled Foreign Corrupt Practices Act Charges Against Siemens AG for Engaging in Worldwide Bribery with Total Disgorgement and Criminal Fines of Over $1.6 Billion, Litigation Release No. 20829 (Dec. 15, 2008), http://www.sec.gov/litigation/litreleases/2008/1r20829.htm.
(3.) A staggering 52 percent of American corporate leaders know little or nothing about the FCPA according to Ernst & Young's 10th Global Fraud Survey (Brandfon, 2008). In fact, according to a survey from Deloitte LLP, only 32 percent of 620 responding firms increased internal controls to prevent FCPA violations despite higher fines, more prison sentences, and more frequent prosecutions.
(4.) 15 U.S.C. [section][section]78dd-1 to -3 (2008).
(5.) 15 U.S.C. [section]78M(b)(2)(A) (2008).
(6.) Corporate records must include information that would alert the SEC to any possible impropriety. These provisions permit the SEC to uncover irregularities that would not normally be apparent under the existing accounting systems (Mark and Singer, 2006).
(7.) Dooley v. United Technologies Corp., 803 F. Supp. 428 (D.D.C. 1992).
(8.) U.S. v. Liebo, 923 F.2d 1308, 1312 (8th Cir. 1991). The federal appellate court found that a jury could infer corrupt intent where the evidence showed: (i) a close temporal link between the gift of airline tickets and the approval of a contract; (ii) a close relationship between the recipient of the gift and influential government officials; and (iii) a classification of the gift by the giver as a commission in company records.
(9.) U.S. v. Foley, 73 F.3d 484 (2nd Cir. 1996); U.S. v. Liebo, 923 F.2d 1308 (8th Cir. 1991); U.S. v. Hare, 618 F.2d 1085 (4th Cir. 1980); U.S. v. Sawyer, 85 F.3d 713 (1st Cir. 1996); U.S. v. McDade, 827 F.Supp. 1153 (E.D. Pa. 1993), affd. in part, 28 F.3d 283 (3rd Cir. 1994).
(10.) 15 U.S.C. [section]78dd-2(h)(2)(2008).
(11.) 15 U.S.C. [section]78dd-1(f)(2); 15 U.S.C. [section]78dd-2(h)(3); 15 U.S.C. [section]78dd-3(f)(3)(2008).
(12.) U.S. v. Kozeny and Bourke, 664 F. 3d 369 (S.D.N.Y. 2009).
(13.) 15 U.S.C. [section][section]78dd-1(f)(3)(A), 78dd-2(h)(4)(A) (2008).
(14.) 15 U.S.C. [section]78dd-2(c)(1)(2008).
(15.) 15 U.S.C. [section]78dd-2(c)(2)(2008).
(16.) In re Immucor Inc. Secs. Litig., 2006 U.S. Dist. LEXIS 72335 (N.D. Ga. Oct. 4, 2006).
(17.) Dooley v. United Technologies Corp., 803 F. Supp. 428 (D.D.C. 1992).
(18.) 15 U.S.C. [section]78dd-2(h)(3)(A)(2008).
(19.) 15 U.S.C. [section][section]78m(b)(2)(A) and 78m(b)(6); (Mans and Singer, 2006, p. 579); (Deming, 2006, p. 482).
(20.) U.S. v. CropGrowers Corp., 954 F. Supp. 335 (D.D.C. 1997).
(21.) 15 U.S.C. [section]78C(a)(37)(2008).
(22.) SEC v. World-Wide Coin Inv., 567 F. Supp. 724 (N.D. Ga. 1983)
(23.) 15 U.S.C. [section][section]78m(b)(2)(A) & (b)(7) (2008); SEC v. Battenberg, 2011 U.S. Dist. LEXIS 88255 (E.D. Mich. August 9, 2011).
(24.) McConville v. SEC, 465 F. 3d 780, 789 (7th Cir. 2006); SEC v. Softpoint, Inc., 958 F. Supp. 846, 866 (S.D.N.Y. 1997).
(25.) 15 U.S.C. [section]78M(b)(2)(B)(2008).
(26.) 15 U.S.C. [section]78m(b)(4)-(b)(5)(2008).
(27.) U.S. v. Picciandra, 788 F. 2d 39 (1st Cir. 1986).
(28.) U.S. v. Bank of New England, 821 F. 2d 844 (1st Or. 1987).
(29.) U.S. v. Wilson, 2001 U.S. Dist. LEXIS 9572 (S.D.N.Y. July 13, 2001).
(30.) U.S. v. Softpoint, Inc., 958 F. Supp. 846 (S.D.N.Y. 1997).
(31.) 15 U.S.C.[section][section]78dd-2(g)(1); 78dd-3(c)(1); 78ff(c)(1) and (c)(2)(2008).
(32.) 15 U.S.C. [section][section]78dd-2(g)(2) and -3e(2)(2008).
(33.) 15 U.S.C. [section][section]78v(d)(3)(B)(iii) and 78ff(a)(2008).
(34.) 15 U.S.C. [section]78ff(a) (2008).
(35.) U.S. Sentencing Commission, Supplement to 2010 Guidelines Manual, [section]8B2.1 (2010); U.S. v.Titan Corp., No. 05CR0314 (S.D. Cal. March 1, 2005)(Plea Agreement), available at http://www.justice.gov/criminal/fraud/fcpa/cases/titan-corp/03-01-05titan-plea.pdf; U.S. v. DPC Tianjin Ltd., No. CR05-482 (C.D. Cal. May 20, 2005)(Plea Agreement), available at http://www.justice.gov/criminal/fraud/fcpa/cases/dpc-tianjin/5-19-05dpc-tianjin-plea-agree.pdf.
Katherine Barker, Zayed University, Dubai, United Arab Emirates
Carl Pacini, University of South Florida-St. Petersburg
Dave Sinason, Northern Illinois University, DeKalb, IL