U.S. Foreign Corrupt Practices Act (FCPA)

What is Foreign Corrupt Practices Act (FCPA)?

The Foreign Corrupt Practices Act (FCPA) is a United States law passed in 1977 that prohibits U.S. firms and individuals from paying bribes to foreign officials in furtherance of a business deal. The FCPA places no minimum amount for a punishment of a bribery payment. The Foreign Corrupt Practices Act also outlines the required accounting transparency guidelines.

The act applies to actions that occur worldwide and is intended to protect against corruption and other abuses of power. FCPA covers oversight of the actions of listed companies their directors, officers, shareholders, agents, and employees.
This includes coverage of others such as consultants or third-party service providers engaged by the company. The companies cannot use these third parties as shields to protect them against bribery. If a consultant pays bribes and the company reimburses, then they are equally liable.

The FCPA anti-bribery provisions apply to all issuers of securities registered on stock exchanges and companies organized under the laws of the United States and any citizen or resident of the United States. Such companies and individuals can be held liable based upon actions taken within the United States. Also, companies whose principal place of business is the United States then the FCPA provisions apply equally.

FCPA – A perspective

Effectiveness of the Act

The Foreign Corrupt Practices Act (FCPA) gives US companies a mechanism to fight corruption in a very organized way. It has also been an effective tool for foreign countries to reduce bribery, and it has led to billions of dollars in fines.
There are several reasons why multinationals not only have an interest in preserving the FCPA but see its infrastructure as a benefit to the business.
FCPA can help US businesses. Corporations would always want to maintain their competitive advantage. In a business environment where corruption is stifled due to regulations such as FCPA, it provides a great degree of confidence to their customers and allows then to distinguish themselves.

Corporations are risk-averse. They want to protect their reputational exposure at all costs. Corporations are motivated to comply with these regulations or force their clients and customers to provide assurance that these laws are implemented because it helps them manage risk and protect their reputations.

Protects business from unknown costs: With the law in place, the business is fully aware of the costs they will incur in order to comply with the respective jurisdictional requirements. This introduces a great sense of predictability of the costs of doing business.

Accounting – Audit and FCPA

As CPA students it is paramount to understand the linkages between regulations and accounting. The better you understand more transparent your accounting process would be. It is important for the readers of the financial statements to get a true and fair view. 

The accounting provisions do not have a materiality requirement and are not limited to transactions above a certain amount. Therefore, any transaction, even ones of low amounts, can create FCPA liability.

Falsified records can result in books and records violations. But these provisions are not just about falsified records. Off-the-book payments or records that fail to show the real purpose or nature of a transaction also violate the FCPA. For example, entertainment of government officials or officers of influence should be recorded as such and not classified under other costs.

For example, in the case of a Steel company, the SEC brought an enforcement action for bribes paid to managers of private steel mills in China and South Korea that were falsely described as “sales commissions”, “commission to the customer”, “refunds”, or “rebates” in the company’s books and records. Related enforcement action was brought by the Department of Justice.

An audit of compliance with Foreign Corrupt Practices Act policies is no easy task. It requires skilled personnel, data analytics, and an understanding of the difference between an audit and an investigation.

FCPA audits could be done for internal business units; third parties; pre- and post-acquisition due to diligence reviews concerning a merger or acquisition. That means, as always, starting with a risk-based approach to narrow the scope of the audit to those issues needing the most attention. Maybe you want to focus on a particular high-risk geography, for example, or a high-risk third party, or a combination of both.

CPA equips you with the right level of auditing background to be able to conduct these audits subject to relevant experience.

SEC Enforcement Actions

Multinational Telecommunications Company agreed to pay more than $1 billion to the SEC and DOJ to resolve charges that it violated the FCPA by engaging in a large-scale bribery scheme involving the use of sham Consultants to secretly funnel money to government officials in multiple countries. (12/6/19 – source sec.gov*)

A marketing solutions and printing service provider agreed to pay nearly $10,000,000 to resolve charges that it violated the FCPA by engaging in multiple bribery schemes in Peru and China and creating false records to conceal commercial transactions with a state-controlled Cuban telecommunications company that were subject to U.S. sanctions and export controls laws. (9/26/19 – source sec.gov*)

New Jersey-based Technology Company agreed to pay $25 million to settle violations of the anti-bribery, internal accounting controls, and recordkeeping provisions. (2/15/19 – source sec.gov*)

If you look at the above examples it does highlight the range of fines that the SEC can impose if one violates the requirements under the FCPA. As students of CPA would you appreciate that it is very important to build really good auditing and accounting skills to be able to identify and report these problems within an organization.

Former company officials were charged with authorizing $2.5 million in bribe payments to a government official in India. (2/15/19 – source sec.gov*)

This example above will indicate that though this regulation is legislated in the United States of America the applicability is worldwide. Officers in the US have authorized bribe payment in India and they were still implicated under the law and punished.

FCPA Exceptions

Reasonable and Bona Fide Expenditures: 

Certain expenses can be considered as reasonable and do not violate the FCPA provisions if we can establish that they are directly related to the promotion, demonstration, or explanation of products or services or negotiation, execution, or performance of a contract with a foreign government or agency.  

To illustrate if you reimburse flight charges or provide meals when government officials visit your premises as long as these are not extravagant or lavish which could influence them during such visits. This helps companies build appropriate business relationships with foreign officials in the course of conducting business.

Sometimes payments are required to be made to an inevitable process. Such payments could be acceptable provided it does not influence a decision or make it unduly favorable to only a limited set of companies or individuals. 

A facilitation payment is made to cover a routine government action. These may require an inspection to be made by the government or say certain work permits to be issued by local government authorities. Further, say for example you require to set up a factory outside of the main town which may not have all the required facilities. You may have to incur expense on your books though it would be the job of the local authority. Such payments may not be considered as an FCPA violation since it is required to be incurred to start your factory. 

As CPA’s we must make sure we make an assessment of these exceptions and be fully satisfied that these were indeed payments required to be made in order to conduct business.

Conclusion

The FCPA dominated international anti-corruption enforcement from its introduction until around 2010 when other countries began introducing broader and more robust legislation, notably the United Kingdom Bribery Act 2010.

The International Organization for Standardization introduced an international anti-bribery management system standard in 2016. In recent years, cooperation in enforcement action between countries has increased.

The 42-year span of the FCPA’s existence leaves no question that there has been continuous enforcement of the law. And that enforcement has steadily increased over time. This has been evidenced by some very strict enforcement and record fines running into millions of dollars that have been collated.