Tuesday, May 16, 2006

FCPA: A 70's Revival?

A venerable statute from the 1970's is going through a 21st Century revival, and that is not good news for companies who are active in the global econonmy or for their directors, officers and employees.

The Foreign Corrupt Practices Act of 1977 (FCPA) is a federal law containing antibribery and accounting requirements. The antibribery provisions make it unlawful for any US person (and certain foreign issuers) to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA (as amended) also added accounting requirements to the Securities and Exchange Act of 1934. These accounting provisions require publicly traded companies to maintain records that accurately and fairly represent the company's transactions and to have an adequate system of internal accounting controls. Under the antibribery provision, corporations are subject to fines of up to $2 mm, and officers, directors, employees and agents are subject to fines of up to $100,000 and up to five years' imprionment. However, as a result of the Sarbanes Oxley Act's enlargement of criminal penalties for willful violations of the '34 Act, violation of the FCPA's accounting requirements subject corporations to fines of up to $25 mm and individuals to fines of up to $5mm and up to 20 years' imprisonment.

The FCPA emerged from SEC investigations in the mid-1970's that led to over 400 US companies admitting having made questionable or illegal payments to foreign governments and officials. The Act was enacted to bring a halt to the bribery of foreign officials and to restore public confidence. The Act was amended in 1998 by the International Anti-Bribery Act of 1998 which as designed to implement the anti-bribery conventions of the Organization for Economic Co-operation and Development (OECD).

In recent years, there have been a rash of FCPA investigations involving US companies. Among the companies involved are Titan Corporation, Universal Corporation, and Immucor. In its most recent 10-Q, United Parcel Service disclosed a FCPA problem with one of its larges subsidiaries. On April 27, 2006, the SEC entered a cease-and-desist order against Oil States International in connection with improper payments by a consultant to the Venezuelan government oil company. Among other things, the SEC found that Oil States' "internal controls failed to ensure that [its subsidiary's] books and records accurately reflected the purpose and nature" of the improper payments.

An increasingly important factor in the escalating number of FCPA actions is the challenge of doing business in China. It is a business cliche these days that every company needs to have its China strategy. But a recent front page article in the Washington Post provides a lengthy examination of the problems US businesses face in China and concludes that "the lure of China profits combined with local corruption is tempting foreign companies and managers and bringing them into conflict with US anti-bribery laws." U.S. Companies find themselves "adopting Chinese-style tactics to secure sales, as they compete in a market in which Communist Party officials routinely control businesses, and purchasing agents consider kickbacks as part of their salary." These conditions have brought an increasing number of US companies into conflict with the requirements of the FCPA. Among US companies recently facing FCPA problems from their Chinese operations are Lucent Technologies, InVision Technologies, Schnitzer Steel Industries, and Diagnostic Products Corp.

The primary reason for the dramatic increase in the number of FCPA investigations and enforcement actions is the enactment of The Sarbanes-Oxley Act of 2002. Sarbanes-Oxley 's requirements that senior management assess their internal controls and verify their financial statements, including the requirement that companies identify any material weaknesses, are increasing management scrutiny and leading to the identification of more FCPA concerns. Companies are obligated to report potential FCPA violations to the company's chief legal officer, or the company's audit committee or full board. The increase in FCPA activity is a result of Sarbanes-Oxley's emphasis on top level management responsibility.

Another important factor for the surge in FCPA actions is The Thompson Memo , which identifies considerations that the Department of Justice will take into acccount in deciding whether or not to prosecute a corporation. A corporation may avoid prosecution altogether if, among other things, the corporation has self-reported and cooperated fully with the authorities. Companies are now choosing to voluntarily disclose FCPA violations in an attempt to receive favorable treatment and to mitigate what might otherwise be harsher penalties. The increased internal scrutiny triggered by Sarbanes Oxley combined with the rise in self reporting has resulted in a substantial increase in FCPA investigations and enforecement proceedings.

In addition to the possibility of criminal punishment, fines and penalties for violation of the FCPA itself, FCPA violations can give rise to follow-on civil litigation. For example, conduct that violates the FCPA may also give rise to to a private cause of action for treble damages under the Racketeering Influenced and Corrupt Organizations Act. For example an action might be brought under RICO by a competitor who alleges that the bribery caused the defendant to win a foreign contract.

Another possibility for follow-on civil lititation arises from Sarbanes-Oxley. While the FCPA imposes certain books-and-record and internal control requirements, Section 404 of Sarbanes Oxley creates disclsoure requirements about internal controls (including a requirement for management's annual "assessment" of internal controls), and Section 302 imposes requirements for CEOs and CFOs to certify their company's financial statements. Shareholders of companies facing FCPA difficulties may allege that prior internal control assessments or certifications were deceptive or misleading due to failure to dislose internal control or other weaknesses that failed to prevent or detect improper payments.

In the wake of Sarbanes Oxley, companies are devoting an increasing amount of effort to maintaining compliance programs, and as the business economy become progressively more global, FCPA compliance will be more important than ever.

A good resource from which to follow FCPA developments is the While Collar Crime Prof Blog.

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