FCPA - Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. 78dd-1, et seq. ("FCPA"), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person. Since 1977, the anti-bribery provisions of the FCPA have applied to all U.S. persons and certain foreign issuers of securities. With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States. The FCPA also requires companies whose securities are listed in the United States to meet its accounting provisions. See 15 U.S.C. 78m. These accounting provisions, which were designed to operate in tandem with the anti-bribery provisions of the FCPA, require corporations covered by the provisions to (a) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain an adequate system of internal accounting controls.

In 1998 the United States Congress and 33 other countries acted against the bribery of foreign officials, essentially government officials in an attempt to reduce corruption and money laundering through the global financial system. Corrupt political officials and those in high army office were targeted with a view to preventing government officials from exploiting their positions to gain unfair commercial advantage. The FCPA has and will continue to have a profound impact on the way US firms undertake business in at home and abroad. Financial institutions are the most impacted group under the legislation as they are required to meet stringent requirements relating to the use of the global financial system by criminals. Essentially financial institutions must show that they have robust controls in place to understand their customers. Due diligence of both customer and transaction is a requirement of the Act and particular care must be taken with Politically Exposed Persons (PEPs). Financial firms must be comfortable with the clients they are dealing with, but beyond that they must be in a position to prove to regulators that they have undertaken the necessary level of due diligence and care when transacting business on behalf of customers. The detail within the FCPA is such that it is an offence for a US person, entity and certain applicable foreign entities (mainly issuers of securities on a US exchange) to make bribes or offer any inducement for the purpose of obtaining or retaining business with a US firm. The Act extends to anyone transacting business while in the USA. The purpose of the FCPA is to crackdown on the bribery of foreign officials official statistics show that 400 American firms have collectively paid $300 million in bribes and other questionable payments to foreign governments, political parties and also directly to the accounts of government officials.

Any breach of the FCPA is taken as a serious offence. The penalties for breaking the Act extend to being barred from tendering for US government contracts, large fines in some cases criminal convictions for prosecuted company executives. Some of these convictions have resulted in jail time for the guilty. The Act is not merely restricted to the United States, although their signatory clearly adds weight. USA is a joint signatory along with 33 other OECD member governments in the application of FCPA. Substantial fines for the lack of effective controls to prevent the bribing of overseas officials have been levied in several signatory countries including the UK. Financial firms need to ensure they operate effective controls often referred to as a solid Know Your Customer regime to understand their customers and particularly Politically Exposed Persons. It is clear that the law requires firms to understand the details of the management structure, group ownership and financial dealings of the firms they do business with in order to ensure that they have no dealings with criminals or their money.

The Foreign Corrupt Practices Act complements other legislation in this area such as the USA Sarbanes Oxley Act which also requires firms to operate effective systems of control and come clean about instances of fraud. For the Risk Management and Compliance functions of financial firms there is no getting away from these pieces of legislation indeed compliance with one assists the other. Prevention is better than cure. Effective controls to ensure adherence to the Act (and more importantly to prevent your institution from doing business with criminals) would include:

Due diligence on customers and the business they undertake. Does your organisation understand the nature its customers the financial transactions they effect. Conducting Senior Management meetings where the risks of bribery and corruption are reviewed, discussed and minuted. Staff Training Independent Monitoring Ensuring the above is in place is the role of any professional compliance function, particularly for businesses with operations in emerging markets.

History As a result of U.S. Securities and Exchange Commission investigations in the mid-1970s, over 400 U.S. companies admitted making questionable or illegal payments in excess of $300 million to foreign government officials, politicians, and political parties. The abuses ran the gamut from bribery of high foreign officials to secure some type of favorable action by a foreign government to so-calledfacilitating payments that were made to ensure that government functionaries discharged certain ministerial or clerical duties. One major example was the Lockheed bribery scandals, in which officials of aerospace company Lockheed paid foreign officials to favor their company's products.[2] Another was the Bananagate scandal in which Chiquita Brands had bribed the President of Honduras to lower taxes. Congress enacted the FCPA to bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system. The Act was signed into law by President Jimmy Carter on December 19, 1977, and amended in 1998 by the International Anti-Bribery Act of 1998 which was designed to implement the antibribery conventions of the Organization for Economic Co-operation and Development.

Legislative history

Introduced in the Senate as S. 305 by William Proxmire (D-WI) on January 18, 1977 Committee consideration by: Senate Banking, House Commerce Passed the Senate on May 5, 1977 () Passed the House on November 1, 1977 (in lieu of H.R. 3815)

Reported by the joint conference committee onDecember 6, 1977; agreed to by the Senate onDecember 6, 1977 () and by the House on December 7, 1977 (3490) Signed into law by President Jimmy Carter onDecember 19, 1977 Persons subject to the FCPA Issuers Includes any U.S. or foreign corporation that has a class of securities registered, or that is required to file reports under the Securities and Exchange Act of 1934 Domestic concerns Refers to any individual who is a citizen, national, or resident of the United States and any corporation and other business entity organized under the laws of the United States or having its principal place of business in the United States Any person covers both enterprises and individuals