Class 12 - FCPA

Foreign Corrupt Practices Act (FCPA)

The FCPA is the primary anti-corruption legislation in the US, enacted in 1977. It makes it illegal for US companies or individuals acting anywhere in the world to, directly or indirectly, offer or pay anything of value to foreign officials for the purpose of obtaining or retaining business. It also applies to foreign companies with US-registered securities or who file reports with the SEC, and to foreign persons/companies who take any act in the US to promote a corrupt payment.

Two main parts of the FCPA

The two main parts of the FCPA are: Anti-Bribery Provisions and Accounting Provisions.

Anti-Bribery Provisions

The Anti-Bribery Provisions criminalize the bribery of a foreign public official to obtain or retain business.

Five elements of the Anti-Bribery Provision

The five elements are: 1. A regulated body 2. Makes a payment or offer 3. To a foreign official 4. With corrupt intent to influence a decision 5. With a business purpose.

Regulated Body

Regulated persons include: Domestic concern: a person resident of the US or a business entity's principal place of business is in the US. Issuer: a corporation that issued securities registered in the US or files periodic reports with the SEC. Agents, subsidiaries, or other representatives of domestic concerns or issuers. Foreign national or business that takes up any act in furtherance of a corrupt payment within the US.

Prohibited Payment

Prohibited payments include paying, offering, promising to pay, or authorizing to pay or offer money or anything of value. This can include money, gifts, charitable contributions, donation of benefit to a foreign official, in-kind service, scholarship to a foreign official's relative, overpayments for shares, and loans at favorable terms.

Foreign Official

A foreign official is broad and includes: Members of any foreign department or agency, Member of any entity substantially owned or controlled by a foreign government, Any official or candidate of a foreign political party, Member of a public international organization, Any person acting in an official capacity on behalf of any of the above entities.

Corrupt Intent

Corrupt intent means the payment was intended to influence the recipient to misuse their position.

Business Purpose

The payment must be related to a specific business purpose, meaning it must be related to obtaining business, retaining business, or directing business.

Purpose of the FCPA's Accounting Provisions

The accounting provisions were enacted by Congress to promote transparency and prevent public companies from disguising bribes as legitimate business transactions.

Two requirements of the Accounting Provisions

The two requirements are: 1. Must maintain accurate books and records (Record Keeping) 2. Must adopt internal controls to prevent the improper use of corporate funds.

Record Keeping Provision of the FCPA

It requires an accurate record of all transactions, keeping receipts and other support for transactions. It is intended to prevent: The failure to record improper transactions The falsification of records to conceal improper transactions * Creation of records that are quantitatively correct but fail to specify aspects of the transaction.

Purpose of the Internal Controls Provision of the FCPA

It is designed to prevent unauthorized or unrecorded transactions. A company must maintain robust compliance policies and take reasonable steps to ensure affiliates maintain suitable internal controls.

Aspects of adequate internal controls

Adequacy includes: The role of the Board of Directors (BOD) Communication of corporate procedures and policies Assignment of authority and responsibility Competence and integrity of personnel Accountability for performance and compliance Objectivity and effectiveness of the internal audit function.

Civil penalties for violating the accounting provisions of the FCPA

The SEC can seek civil penalties of up to $500,000 for covered entities and $100,000 per individual.

Criminal penalties for individuals convicted of willful violations

Individuals may be fined up to $5 million and face a prison term of up to 20 years.

Criminal penalties for corporations convicted of willful violations

Corporations may be fined up to $25 million.

Definition of Corruption

Corruption is any scheme where a person uses their influence in a business transaction to obtain an unauthorized benefit contrary to that person's duty to the organization.

Four classifications of Corruption

The four classifications are: 1. Bribery schemes 2. Illegal gratuity schemes 3. Economic extortion schemes.

Bribery

Bribery is the offering, giving, receiving, or soliciting of anything of value to influence an official act.

Traditional Bribery

Traditional bribery statutes proscribe payments to influence government agents or employees for an 'official act'.

Commercial Bribery

Commercial bribery involves offering something of value to influence a business decision rather than a government act, often with an under-the-table payment to an employee without the employer's consent.

Categories of Bribery

Bribery is typically broken into kickbacks and bid-rigging.

Illegal Gratuities

Illegal gratuities are similar to bribery, except that something of value is given to an employee to reward rather than influence a decision.

Concern of Illegal Gratuities

They are a concern because most companies forbid unreported gifts from vendors, and illegal gratuity schemes can evolve into bribery schemes by influencing future transactions.

Economic Extortion

Economic extortion is when an employee demands a payment from a vendor in order to make a decision in that vendor's favor.

Relation of Economic Extortion to Bribery

It is essentially the flip side of a bribery scheme where the employee demands the payment instead of being offered one.

Kickback Schemes

Kickback schemes almost always attack the purchasing function of the victim company.

Nature of Kickback Schemes

They involve undisclosed payments made by vendors to employees of the purchasing company to influence business transactions.

Bid-Rigging

Bid-rigging occurs in a competitive bidding process where several suppliers/contractors are vying for contracts.

Mechanism of Bid-Rigging

It involves one person paying a bribe to another to gain the benefit of the recipient's influence.

Fraudulent Assistance in Bid-Rigging

An employee fraudulently assists a vendor in winning a contract through the competitive bidding process, giving the vendor a valuable advantage.

Potential Targets for Bribes in Bid-Rigging

Potential targets for bribes include decision-makers/influencers in the buying process like buyers, engineers, contracting officials, etc.

Conflict of Interest

Conflict of Interest occurs when an employee, manager, or executive has an undisclosed economic or personal interest in a transaction that adversely affects an organization (or company).

Key Element of Conflict of Interest

An 'Undisclosed' interest is the key.

Influence in Conflict of Interest

It involves the exertion of an employee's influence to the detriment of their employer, often through self-dealing.

Employer Awareness in Conflict of Interest

If the employer is aware of the conflict, then there is NO conflict of interest.

Corrupt Employee in Kickback Schemes

This often involves a corrupt employee in an overbilling scheme or to win new/extra business, often resulting in higher prices.