Congress passed the Foreign Corrupt Practices Act in 1977 to stop Americans and American companies from bribing foreign officials. The likelihood of one of its own getting involved in such shenanigans likely wasn't within the lawmakers' contemplation. But in June Rep. William Jefferson of Louisiana became the first U.S. government official to be indicted under the FCPA, when prosecutors alleged Jefferson bribed Nigerian Vice President Atiku Abubakar. Jefferson faces up to 235 years in jail if convicted on all counts.
If the allegations are true, Jefferson picked a really bad time to engage in such illegal behavior. In recent years, the SEC and DOJ have dramatically stepped up FCPA enforcement. Between 2001 and 2006, the average number of enforcement actions rose to 6.2 from an average of 1.3 in the preceding five years. Currently, there are more than 30 open investigations, not including the ones that have moved to the prosecution stage.
The consequences of violations have kept pace with the volume of enforcement actions. In April Baker Hughes Inc., a Houston-based oil services and equipment company, paid a record $44.1 million to settle enforcement actions founded on illegal payments of $4.1 million its subsidiary, Baker Hughes Services International, made to secure contracts in Kazakhstan.
"The new wave of enforcement has produced a cultural change," says Homer Moyer Jr., a partner at Miller & Chevalier who has served as an SEC-approved independent compliance consultant in FCPA cases. "The level of attention paid to this law by U.S. companies is dramatically different than it was 10 or 15 years ago."
An important driving force behind the increasing enforcement is SOX. The law's stringent accounting and reporting provisions draw attention to dealings that may have slipped under the radar in the past.
"One serendipitous result of SOX's disclosure and certification requirements has been an increase in voluntary disclosure of FCPA issues," Moyer says.
SOX also led both the DOJ and the SEC to beef up their resources and adopt an aggressive enforcement posture.
"Both the SEC and the DOJ have deemed FCPA enforcement a top priority," says Pat Brady, a principal with Deloitte Financial Advisory Services. "The DOJ, for example, has assigned more prosecutors to FCPA cases, and the FBI has a newly formed task force focused on the law."
In addition, the M&A frenzy that has permeated the U.S. economy of late has driven the growth in FCPA cases.
"The target of a merger or acquisition by a U.S. company is likely to be required to make representations about whether it has acted in ways that were inconsistent with the FCPA," Moyer says. "An important link has developed between such due diligence and voluntary disclosure."
Indeed, there have been four significant recent cases involving FCPA issues that arose during the M&A process. In each the acquiring company insisted the target company resolve the issues before the deal closed. Three of the targets did so, collectively paying fines and penalties in excess of $46.5 million.
Finally, the upsurge in FCPA enforcement is part of a larger trend of heightened U.S. scrutiny of cross-border transactions, as evidenced by the anti-money laundering provisions in the USA Patriot Act and tightened export-control regulations.
With so many forces driving it, then, FCPA enforcement is unlikely to wane, which means companies will have to find a way to deal with its many perils.
Paying the Price
Chief among the perils are the severe penalties. The maximum criminal penalty under the FCPA is $10 million, and civil penalties can reach $25 million plus twice the value of the benefit received from the illegal activity.
Also, because the law is extraterritorial and imposes vicarious liability for the misdeeds of third parties and employees, its ambit is sweeping.
"If a company has branch offices, employees, consultants or agencies anywhere in the world, the FCPA goes where they go," Moyer says. "The law was intentionally written this way because Congress wanted to avoid situations where a company contracted with a third party and then turned a blind eye to whether bribes were being paid."
In addition to prohibiting bribery, the FCPA prohibits deceptive record keeping. The law requires companies to have accounting systems that reasonably assure that companies record transactions properly. At first blush this requirement may appear to do nothing more than mandate good accounting practices. But obtaining the required documentation can be a challenge in many countries, including important trading partners such as China. Unfortunately, such difficulties are no defense to an FCPA enforcement action.
"Many companies have controls in place at the regional level, but the FCPA requires them to have the same type of controls at the local and individual unit levels," says Neil Hochberg, managing director of FTI Consulting's forensics and litigation practice. "So companies that fail to approach FCPA compliance in a proactive way do so at their peril."
Which raises the question of just how to approach the law.
Reviewing the Books
"Materiality is not a component of FCPA liability, so the key to FCPA compliance is understanding how financial information goes from individuals to local offices, from local offices to country or regional offices, and from regional offices to headquarters," Hochberg says.
In other words, a subsidiary doing $3 million worth of business in Nigeria for a multinational corporation would not be considered "material" to the company's affairs. Yet, Hochberg says, "you can still get into a lot of trouble for transactions that may be very minor in the overall scheme of things."
This means that senior management must review the accounting systems its subsidiaries use and integrate them into a global accounting package supported by a system of internal controls and review.
"Although there's some overlap with SOX compliance measures, there's a tremendous amount of additional work involved when you're dealing with the FCPA," Hochberg says. "The costs vary with the risk, but the consequences--including a prohibition on doing business with the U.S. government--can be huge and the costs should vary accordingly."