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Foreign Corrupt Practices Act

LEGL MBA
by

Jennie Yoon

on 24 July 2013

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Transcript of Foreign Corrupt Practices Act

Foreign Corrupt Practices Act ('FCPA')
LEGL 653 Final Presentation
Jennie Yoon | Jessica Wong | Mac Oroke

What is FCPA?
Making it illegal to corruptly offer or provide money or anything of value to officials of foreign gov’ts or political parties with the intent to obtain or retain business.
Needing to address accounting transparency requirements under the Securities Exchange Act of 1934.
Three parties
ISSUERS
DOMESTIC CONCERNS
ANY PERSON
Applies to all US companies & individuals and any foreign company listed on a US exchange or that submits reports to the SEC
individual who is a citizen, national or resident of the US and any corporation and other business entity organized under US
Covers both enterprises and individuals
ORIGIN
INTENT: to prohibit U.S. companies and companies operating in the U.S. from paying bribes to foreign government officials & political parties for obtaining business opportunities abroad











Rose from the global unrest, including conflicts with Middle East, rapidly rising oil prices, terrorist attacks, and U.S. disengagement from a war on foreign soil
Enacted as a direct result of the Watergate scandal
1975, Watergate Special Counsel prosecuted several large U.S. corporations for making illegal contributions to the Committee to Re-Elect President Richard Nixon






Report found ~400 companies admitted to paying over $300 million in bribes to foreign officials (over 100 from the Fortune 500 companies)
EVOLUTION
What is FCPA
Origin & Evolution
Impact
Contents of FCPA
Enforcement
Challenges & Reactions
Criticism to FCPA
FCPA Today & Recommendations
IMPACT of Bribes
Causes mis-allocation of capital
Undermines a business’s control over its money
Depletes the country’s natural resources by leaders who enrich themselves
Awards contracts not to best suited corporations but to businesses willing and able to pay bribes
Ex: Corruption in a factory in China that supplies parts to U.S. companies to make automobiles can impact the price American companies pay for those materials as well as the safety of the products using those materials
Corruption conflicts with the underlying tenet of a free market system: that products should be sold based on price, quality, and service.
CONTENTS OF FCPA - Anti-bribery Provisions
Prohibits offering or paying “anything of value” to a “foreign official”
A “foreign official” is “any officer or employee of a foreign government or any department, agency, or instrumentality thereof”
“Anything of value” is not defined
Must show a clear “cause and effect”
CONTENTS OF FCPA - Accounting Provisions
Details specific required accounting and bookkeeping standards that apply to publicly held entities
Companies must file reports with “reasonable detail”
Companies must create internal accounting control provisions (e.g. establishing role of board of directors, assigning authority and responsibility, performing objective internal audit functions, etc.)
AFFIRMATIVE DEFENSES
Two affirmative defenses for companies and individuals:
Payments that are legal in the country in which they are made
Payments for “bona fide expenditures” are permitted
Reasonable “bonafide expenditures” can include travel and lodging expenses incurred for a foreign official if directly related to “promotion, demonstration, or explanation of products or services”
There still exists many questions as to what constitutes “reasonable” and customary payments and expenses
REGULATORY BODIES
Criminal and civil anti-bribery provisions – DOJ
Civil accounting provisions – SEC
Strategy outlined by DOJ:
Criminally prosecute domestic officials who abuse power for personal gains
Assist foreign nations to strengthen government institutions so that they can more effectively resist corruption
Identify and repatriate the proceeds of foreign official corruption
INDIVIDUALS
CORPORATIONS
ENFORCEMENT
In the past, relatively few individual prosecutions due to high burden of proof required
Recent trends indicate a rise in individual prosecutions
Individuals can be fined or imprisoned
Violations can result up to $5 mil in fines and 20 year prison sentence
Corporations can face criminal penalties up to $25 M
Congress has added additional penalties in recent years
Health care industry continues to be a focus
50% of corporate enforcement actions of 2012 involved health care companies (e.g. Pfizer, Eli Lilly)
Small bribes and extortion payments can be difficult to detect (e.g. extra money to custom officials, request for sponsorship of an activity or an event, fictitious fines)
Foreign agents can conceal bribes as “service fees” “facilitation fees” or “commissions” that are hidden to the corporation paying these fees
TRENDS of the FCPA
DOJ and SEC have begun to ramp up investigations
1977-2004 60 Cases Investigated
2005-2009 173 Cases Investigated
Receive 1 FCPA tip per day
Investigating entire sectors now
Medical Supplies, Financial Services, Movie Studios & Defense Industry
Corporations ramping up spending on investigations
Internal and External
Non Prosecution Agreements and Deferred Prosecution Agreements
Save companies money and time
Often comes with rules and requirements (e.g. external monitor)
Unable to dispute facts or fight charges
More countries adopting anti-corruption and bribery laws
UK passed Bribery Act in 2010 for domestic and foreign bribes
Germany and other EU countries establishing similar laws
Foreign governments assistance in FCPA
Very little resistance given
PURSUIT of INDIVIDUALS
Garth Peterson of Morgan Stanley
Managing director of real estate in China living in Shanghai
Worked with Chinese public official and Canadian lawyer to conspire against Morgan Stanley
Transferred real estate interest to shell companies and realized $2.5 million in profit
Pleaded guilty in April 2012
Morgan Stanley not held accountable because of strong internal controls
CRITICISMS
Vague and often misinterpreted
US Chamber of Commerce has put pressure for more explanation
November 2012 DOJ issued A Resource Guide to FCPA
US at competitive disadvantage
Nearly all top market countries have foreign bribery laws in place
AS A BUSINESS OWNER
Make sure you have internal compliance programs
Ethics training, bribery educations
Employee handbooks
Keep detailed and accurate records
External audits
DOJ and SEC will pursue individuals if corporation is shown to be compliant
Corruption/bribery interferes with free market
Products sold based on price, quality and service
Bribery shown to increase costs over time
Hard to shake reputation of corruption
Lower growth rates for companies
Studies show a +1% increase in bribery can lead to -3% in revenue
LOOKING FORWARD
Bribery and corruption will not end
Deeply rooted in many facets of business
Economic pressure has forced companies to do anything for business
World Bank estimates $1 trillion paid in bribes each year
3% of the world economy
No change in current trend of prosecution by DOJ and SEC
Full transcript