Evaluating the Foreign Corrupt Practices Act - Case Study Example

Evaluating the Foreign Corrupt Practices Act (FCPA) 15 USC § 78dd of 1977 College: Table of Contents Table of Contents 2 0 Introduction 32.0 History of the Act 3 3.0 Implementation of the Act 5 3.1 Critics of the Act 6 3.2 FCPA Amendments 7 3.3 FCPA Implementation 8 4.0 Impacts of FCPA 10 5.0 Policy analysis 13 5.1 FCPA Effectiveness 13 5.2 FCPA Weaknesses 14 5.3 Recommendations 15 6.0 References 16 Evaluating the Foreign Corrupt Practices Act of 1977 1.0 Introduction Bribery cases involving U.S officials were a government concern that threatened integrity across the private and public sectors. In 1970s, the market was gradually shifting towards globalization with many multinationals expanding to new markets. The result was that to gain advantage over other players in the market, some U.S firms and individuals bribed foreign government officials for considerations in awarding of contracts and business opportunities that promised increased returns in foreign markets. One of the major corruption scandals that even threatened the government was President Nixon’s Watergate scandal. In 1977, the Congress enacted the Foreign Corrupt Practices Act of 1977 that prohibited bribery of foreign firms or any official by any American corporation or individual. The act aimed at enhancing integrity and repairing the tainted perception of American firms locally and internationally by ensuring firms adhered to high levels of ethics and fairness. This paper will investigate the history behind the act and its respective amendments, the rationale behind implementation of the act, investigating the efficacy of the policy, its implementation and recommending necessary amendments to make the act more effective. 2.0 History of the Act In the mid-1970s, numerous investigations, legal and administrative actions against many local corporations revealed numerous illegal and questionable payments to foreign businesses and government officials. The only mechanism at the time to deal with such payments was through the Securities and Exchange Commission (SEC), which investigated any public corporations for irregular deals concealed from the public (Seitzinger, 1999). The investigated cases were prosecuted by the Department of Justice, DOJ. Through such cases, the government realized that criminalization of bribery practices to foreign officials and enforcement of strict book keeping, accountability and disclosure of firm’s operations to the public were necessary to deal with increasing corruption cases involving American firms in foreign markets. Corruption cases had badly affected American foreign Policies, portraying a negative image of American Democracy abroad. Corruption had badly impaired public confidence in financial integrity in the country’s corporations (Seitzinger, 1999). To deal with these problems, the congress responded by passing the Foreign Corrupt Practices Act of 1977, FCPA. The act was therefore as a result of market failure in ensuring integrity and safeguarding financial integrity in corporations. The act was also motivated by government failure in that the government had failed to effectively implement and put in place measures to reduce bribery under the provisions of the Securities Exchange Act of 1934. The act had failed to ensure effective bookkeeping in corporations to account for all transactions. There was a general lack of elaborate internal accounting control systems that would have guaranteed management’s control, responsibility and authority over a firm’s assets (Seitzinger, 2010). As a public policy prescription, the act discouraged bribery of foreign officials through huge fines and jail terms, which discouraged many from the practice. The act encouraged an accountability culture that improved public’s perception of the country’s corporations. Such change of perception was necessary in ensuring investor confidence and improving the country’s image locally and internationally, which had been tainted by massive bribery and lack of strict financial accountability in public and private corporations. In addition, the act was necessary in regulating marketing agents that are in most cases used by firms to supply goods in foreign markets. Agents are the greatest threat that any company faces with respect to compliance of the laid down laws and procedures (Tarun, 2010). Global manufacturers use agents as purchasing agents, sales agents, tax recovery consultants, or as shipping and receiving agents. Consequently, companies were held liable for any persons or organizations that were authorized to act on its behalf. Failure of the agents to adhere to laws led to massive litigations where the firm would lose greatly without having knowledge of the actions of its agents in violating the act. Therefore, to ensure such agents adhered to the required standards of integrity in representing American corporations, FCPA was necessary to maintain accountability and discourage cases of unethical behaviors that tainted the image of American firms. 3.0 Implementation of the Act FCPA of 1977 had the principle aim of prohibiting any bribery of foreign officials by American firms or persons acting on behalf of the firms. According to Seitzinger (1999), in order to achieve its objectives, the act was designed with three basic provisions. i. The act was enacted to amend section 13(b) of the Security Exchange Act of 1934 in requiring all issuers of securities to register their securities with SEC. This registration ensured the issuers kept detailed records of accounts that clearly detailed all payments and transactions of a corporation. ii. All registered issuers under SEC had to develop and maintain internal accounting control measures to guarantee management’s control, responsibility and authority over the available firm’s assets. iii. Domestic firms registered with SEC or not were strictly prohibited from bribing any foreign official, party official, or any foreign political entity for the sole purpose of obtaining or maintaining an advantage to do business with the parties. The 1977 act made it illegal for any firm to pay any money to any individual through mails or any interstate commerce for consideration of an offer, or payment of anything of value to a foreign party or official so as to influence decision making, or motive them to use their influence in assisting a firm to retain or obtain business (Giudice, 2010). However, the Act made several exemptions that were not considered to fall under bribery to influence decision making. These included payments to employees of a foreign government with clerical or ministerial duties. Moreover, the act did not criminalize “grease payments” to foreign officials. This is any payment intended to expedite shipment of goods through custom services, to place a transatlantic telephone call aimed at obtaining permits, obtaining intended security protection, or other transactions that involve proper performance of duties by foreign entities (Seitzinger 1999). 3.1 Critics of the Act Immediately after enactment of FCPA of 1977, there was wide ranging criticism from within and outside the country questioning the effectiveness of the act in preventing bribery. There were some grey areas that critics described as unclear provisions that resulted in a chilling effect on US exports as many companies kept away from foreign operations to avoid facing the serious uncertainties in the Act (Seitzinger 1999). Most critics called for the congress to enact more clear description of what was permitted and what was restricted under the Act. Some of the areas in contention included “grease payments,” and calls to remove the “reason to know” standard relating to liability of a firm for the actions of its agents in a foreign market (Seitzinger 1999). Businesses called for the removal of the legal liability of the management of a local firm over undirected and illegal actions of its agents without the need of the management to show they had no “reason to know” the agent was using the firm’s funds to bribe foreign officials (Seitzinger, 2010). In addition, critics explained that the 1977 Act was exporting American cultural biasness more than exporting its products. Critics argued that in some cases where payment to government officials or individuals doing business with government was not considered a bribe and was legal under the country’s laws, such cases should not have been considered a bribe and a violation of the Act. Moreover, there were calls for a uniform law, or an international agreement among the major industrialized nations that prohibited businesses from offering bribes to foreign officials. The aim was to prevent cases where businesses from other countries had unfair advantage over American businesses, which would gradually erode the competitiveness of American firms (Seitzinger, 2010). 3.2 FCPA Amendments The critics succeeded in pushing for the1988 amendments signed into law as “Title V of the Omnibus Trade and Competiveness Act of 1988” (Seitzinger, 1999). The three major parts of FCPA 1977 involving accounting standards, anti-bribery provisions, and the requirement to have all issuers registered with SEC were maintained. However, there were major changes to the 1977 Act to solve the issues raised in the above criticism. According to Seitzinger (2010) the 1977 Act was amended as follows. Section 5002 of the trade act amended section 13(b) of Securities Exchange Act (SEA) in doing away with any criminal liability for the violation of accounting standards unless the individual intentionally failed to adhere to a system of reasonable and reliable accounting controls. Moreover, the section stated that any issuer with 50% or less of voting rights in a domestic or foreign company has to use the influence in good faith to facilitate the firm in putting in place acceptable accounting control systems. The amendment made it clear that the accounting standards in contention did not call for any unrealistic decree regarding adherence to accountability standards. On the other hand, section 5003 of the trade Act amended provisions of FCPA that criminalized bribery by issuers. The section still maintained that it was illegal for any individuals to use their influence through mails or any other interstate commerce to offer, pay, give, promise or authorize anything valuable to a foreign official for the sole purpose of obtaining business considerations in return. The word “knowing” was construed to mean willful blindness and a deliberate disregard that included a purpose to avoid learning the truth (Seitzinger 2010). American firms were allowed to offer gifts to foreign officials only if such gifts were lawful under the laws of the foreign officials’ country. However, the exemption did not include corrupting an official to act or not to act as it would not amount to payment in good faith (Seitzinger 2010). The amendment was intended to prevent any undue disadvantage to American firms where giving such tokens to officials was allowed; other non-American firms were using such gifts to have unfair advantage. 3.3 FCPA Implementation Another boost towards implementation of FCPA was the enactment of the Organization of Economic Cooperation Development (OECD) Convention on Combating Bribery of Foreign Officials in International Business Transactions. In 1997 ten years after amendment of FCPA 1977, United States and thirty three OECD members signed the above act in Paris to harmonize laws against bribery across all OECD members in facilitating a uniform platform for multinationals to operate (Cassin, 2008). The enactment of the Paris act by OECD members resulted from growing international interests aimed at standardizing bribery laws. OECD members stressed on the need for all democracies to have a common approach in formulating policies on social and economic issues, leading to the signing of the Paris Convention in 1997 (Seitzinger 1999). The differences between the Paris Act and FCPA necessitated some minor changes in FCPA to conform to the new OECD convention agreement. These changes were later enacted in the 105th congress as P.L 105-366. The amendments revised the Security Exchange Act of 1934 and the FCPA to prohibit any conduct of firms and individuals to corruptly collude with officials or stock issuers in the OECD countries with a purpose of taking undue advantage (Seitzinger 1999). The provision made it illegal for any issuer organized under United States laws to undertake illegal acts within and away from the country, with FCPA amendments making it illegal for any foreign individual or firm to carry out some practices while in United States’ territory. In implementing the FCPA, the U.S sentencing Commission in coordination with the Department of Justice, DOJ have been very instrumental in ensuring individuals and firms adhere to the provisions of the act in reducing bribery cases. In 1991, the U.S Sentencing Commission released detailed sentencing guidelines for Organizations; the guidelines entailed provision of incentives and guidelines for compliance programs (Kaplan, 2011). Consequently, corporations have shown interest in developing efficient programs to comply with the guidelines towards achieving FCPA provisions. To encourage firms to implement FCPA, the U.S Sentencing Commission offers reduced sentences for any firm that has put in place elaborate compliance procedures. To be considered for this sentence reduction, a firm has to prove they have adequately put in place ethics and compliance programs that are in accordance with some minimum standards as set out in the guidelines (Urofsky, Moon & Rimm, 2013). The requirements are designed to ensure any firm exercises due diligence in preventing and detecting any criminal conduct, and puts in place measures to promote an organizational culture that encourages ethical conduct and commitment to comply with FCPA (Urofsky, Moon & Rimm, 2013). In addition, under the Management and Budget Office, an individual or a corporate that had violated FCPA may be permanently barred from doing any business with the Federal government, may be declared ineligible to receive any export licenses by SEC, may be banned from securities business under the Overseas Private Investment Cooperation and Commodity Futures Trading Commission and may be heavily fined for contravening the FCPA of 1977 (Cassin, 2008). In the post-Enron period between 2002 and 2006, enforcement of the act drastically increased. The Sarbanes-Oxley Act signed into law in 2002 created the Public Company Accounting Oversight Board (PCAOB), mandated to control financial reporting in public companies; the act was a further boost to FCPA in controlling corruption in public corporations (Grumet, 2007). The act and other foreign treaties made it easier for U.S authorities to obtain critical information concerning bribes from other countries (Cassin, 2008). The enactment of Sox allowed SEC and DOJ to pursue intermediaries in offshore areas that were used by many firms to bypass FCPA provisions that prohibited such payoffs to foreign officials. 4.0 Impacts of FCPA Since the enactment of FCPA 1977 and the subsequent 1988 amendments, major changes occurred in the American business and social circles. Hines (1995) by using the Business International Corruption Level Index in measuring the extent to which corruption is practiced in business transactions observed that between 1977 and 1982, Foreign Direct Investments FDIs from U.S in high growth but corrupt countries had a median of .80, while the median for U.S FDI in highly developed but less corrupt countries was at 0.99. The results from FDI index portrayed a decline in U.S FDI in corrupt countries. Consequently, FCPA discouraged U.S firms from conducting any business in corrupt countries, preferring the less corrupt countries. Most U.S firms viewed operating in corrupt countries as a risky undertaking considering the prohibitive fines imposed by FCPA. Operating in corrupt countries involved more operating costs than the benefits obtained from operating in such countries. Moreover, firms tried to circumvent anti-bribery legislations by employing other methods. One common practice used by American firms to circumvent bribery was to substitute financial contributions with additional labor. Hines in a regression analysis observed that capital-to-labor ratio in high growth GDP but corrupt countries fell to -3.12%, compared to capital-to-labor ratio of 5.32% in high GDP but less corrupt countries (Hines, 1995). The results indicate that capital-to-labor ratio corruption counter fell 87% compared to that of less corrupt countries. The drastic drop was in line with the negative implications of FCPA in firms suspected of involvement in corrupt deals. Many American firms resulted in abandoning some foreign joint ventures and agents because of the liability that would be incurred by such firms if their agents were suspected to have offered bribes. This trend was observed in the U.S Department of Commerce report on the amount of property and equipment in U.S partners in other countries. In less corrupt countries, the growth rate of majority owned partners was .82 compared to .29 in high GDP but corrupt countries (Hines, 1995). The number of U.S aircraft exports after enactment of FCPA fell as a percentage of the world market. According to Hines, the decline of the exports in more corrupt countries was 21.18% compared to 6.39% decline in less corrupt countries. The above indicators show there was a drastic negative effect on the performance of American firms in foreign markets after enactment of FCPA. The decline was much more pronounced in corrupt compared to non-corrupt countries. Moreover, a 2007 study on FCPA observed that the OECD Paris Convention and FCPA had a significant positive effect in reducing the amounts and rates of international bribes (Alvaro, 2008). The report explained that multilateral efforts to prevent bribery by business officials globally was the only effective solution to enhance a competitive and fair business environment as was achieved under FCPA and the Paris Convention Act. Consequently, there was need for continuous international collaboration in eliminating bribery in all business operations. In addition to improving business environment, FCPA proved to have a major impact on public perception regarding accountability of firms. More people were found to increase their confidence in firms operating in OECD countries due to improved corporate governance and practices (Alvaro 2008). FCPA was necessary to impart high ethical and moral cultures in business. Improved business operating cultures that discouraged unethical behavior in all firms were critical in regaining investor and public confidence. This was achieved through strict implementation of the two acts. The U.S. authorities continued to increase fines for companies and individuals failing to adhere to the act, which led to increased operating costs in businesses. Between 2010 and 2011, U.S authorities recorded the highest default cases in history where many firms were suspected of corrupt deals (Graham & Lam, 2007). All the same, due to the implications of FCPA, businesses have resulted to applying more careful strategies; the act has managed to streamline the actions of many multinationals registered in the U.S. Importantly, the act had negative effects on American businesses operating in China (Graham & Lam, 2007). As China developed towards globalization, more foreign firms fought to have a stake in the country. Moreover, as Chinese financial operations became global, the Chinese were forced to reduce their bribes. FCPA applied to more than 50 largest Chinese firms that include China Life Insurance, Telecom, and Lenovo among others. Though the companies were not within U.S boundaries, FCPA had a direct effect over their executives and staff as they were listed under the American Depository Receipts in the U.S stock exchange (Graham & Lam, 2007). 5.0 Policy analysis 5.1 FCPA Effectiveness FCPA has been very effective in reducing international bribery cases and strengthening financial controls in both private and public corporations. The act has not only affected and streamlined businesses in the U.S alone, but globally. In April 2004, Lucent technologies Inc., a company that merged with French telecom giant Alacatel revealed that four of its officials in China had been fired for violating FCPA regulations, in bribing Chinese officials to gain access to their markets. The bribery case was discovered from a FCPA audit into the company’s practices in Saudi Arabia (Cascini & Delfavero, 2008). In the same year, General Electric through one of its acquisitions, InVision Technologies was charged for having paid bribes to government officials in several Asian countries including China before the company was acquired by GE (Cascini & Delfavero, 2008). Individuals have also been nabbed under the act. Major Gloria D Davis, a contracting officer based in Kuwait committed suicide in Baghdad in 2006. The military officer was charged with making profits from illegal kickbacks in Kuwait (Cascini & Delfavero, 2008). Siemens, a German multinational in 2007 admitted to have discovered about 1.3 billion pounds paid in suspicious transactions globally between 2000 and 2006 (Cascini & Delfavero, 2008). Though Siemens is a German company, it has to operate under FCPA as the company is listed as an ADR on New York exchange and has detailed operations in U.S; the company has to operate under U.S government jurisdiction. Generally, there have been increased cases where corruption dealings are discovered globally by companies listed in the U.S, which have to operate under FCPA. Many companies have been slammed with fines and negative publicity as they are investigated for suspicion of corrupt dealings. This is in addition to high fines, indictments and strict compliance monitoring facing companies suspected of corrupt deals; a company may be fined about 40,000 hours at rates that go up to $700 an hour (Cascini & Delfavero, 2008). Though these fines and rules have placed many firms operating in the U.S at a disadvantage, since enactment of FCPA and SOx, corruption within and outside American boundaries has since faced serious scrutiny and has drastically reduced particularly in post-Enron period. 5.2 FCPA Weaknesses FCPA has been a great success in controlling corruption not only in America, but the act has made it possible to pursue offshore intermediaries and investigating bribery cases in other countries whenever companies registered in the U.S is involved. However, the act has several weaknesses. Many firms and individuals accused of bribery have taken the government to task over several FCPA issues. Mixed findings portraying the difficulties involved in investigating foreign bribery cases beyond the required reasonable doubt (Cascini & Delfavero, 2008). On the other hand, by 2011, the U.S authorities pursued much less cases involving non U.S companies, implying most U.S based companies were a bit disadvantaged by being more targeted than non U.S companies (Cascini & Delfavero, 2008). Despite FCPA claims to extract high fines where bribery allegations were revealed, the penalty in most cases has been less than $25 million. Considering the value of deals that most corporations obtain through bribery, the penalty is much lenient for these companies. U.S authorities have of late portrayed much willingness to accept self-monitoring among firms that have enacted standards of operations that discourage corruption, though this may not be a proof that such corporations are not be involved in corrupt dealings. 5.3 Recommendations In order to deal with the above weaknesses, there is need for future policy makers to increase the value of penalties paid by individuals and firms accused of bribery cases to make unappealing for corporations. In addition, laws should be strengthened to ensure that foreign and U.S based firms are treated equally to avoid disadvantaging some corporations over others. This may be enhanced through multinational registrations that discourage corruption cases. Many companies put the government to task over FCPA implementation due to lack of water tight evidence on corrupt dealings. This may be solved through multinational collaborations where off-shore companies may be netted by their respective authorities in such areas. With these recommendations, FCPA will be strengthened to be more effective than in its current form in preventing and discouraging corrupt dealings. 6.0 References Alvaro, C. (2008). The Effectiveness of Laws Against Bribery Abroad. Journal of International Business Studies. 39, 634-51. Print. Cascini, K. & DelFavero, A. (2008). An Assessment of the Impact of the Sarbanes-Oxley Act on the Investigation Violations of the Foreign Corrupt Practices Act. Business Faculty Publications. Paper 48. Retrieved from. http://digitalcommons.sacredheart.edu/wcob_fac/48 Cassin, R.L. (2008).Bribery Abroad: Lessons from the Foreign Corrupt Practices Act. Washington: Lulu Cornell University Law School.(2010). 15 USC § 78dd–1 - Prohibited Foreign Trade Practices by Issuers. Retrieved from. http://www.law.cornell.edu/uscode/text/15/78dd-1 Giudice, L. (2012). Regulating Corruption: Analyzing Uncertainty in Current Foreign Corrupt Practices Act Enforcement. Boston University Law Review. 91(347), 348-377. Graham, J. & Lam, N. M. (2007). China Now. New York, NY: McGraw Hill. Print. Hines, J.R. (1995). Forbidden Payment: Foreign Bribery and American Business After 1977. Working paper no. 5266. Cambridge: J.F.K. School of Government, Print. Kaplan, J.M. (2011).The Sentencing Guidelines: Field Notes on a 20-year Experiment. FCPA BLOG. Retrieved from. http://www.fcpablog.com/blog/2011 /10/26/thesentencing-guidelines-field-notes-on-a-20-year-experimen.htm Seitzinger, M.V. (1999). Foreign Corrupt Practices Act. American Law Division. Retrieved from. http://www.fas.org/irp/crs/Crsfcpa.htm Seitzinger, M.V. (2010).Foreign Corrupt Practices Act (FCPA): Congressional Interest and Executive Enforcement. Congressional Research Service. Retrieved from. http://www.fas.org/sgp/crs/misc/R41466.pdf Tarun, R.W. (2010).The Foreign Corrupt Practices Act Handbook. Chicago, CH: American Bar Association Urofsky, P., Moon, H.W. & Rimm, J. (2013). How Should We Measure the Effectiveness of the Foreign Corrupt Practices Act? Don’t Break What Isn’t Broken—The Fallacies of Reform. Ohio State Law Journal. 73(5), 1146-1156. Print. Read More