The Foreign Corrupt Practices Act prohibits payments made directly or through intermediaries to foreign government officials to assist in obtaining business, retaining business, or directing business to any person.
The Foreign Corrupt Practices Act (FCPA) continues to be a high priority of enforcement for the Securities Exchange Commission (SEC) and the Department of Justice (DOJ). The U.S. Government’s aggressive approach to transactional bribery of foreign government officials will be anything but relaxed as companies and business people can expect a continued prioritization of FCPA cases. The DOJ has added more prosecutors and more resources than ever before. Additionally, U.S. regulators have stated that penalty amounts are not going down.
The FCPA designates a foreign government official as any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
The term “foreign official” is very broad and includes traditional foreign government leaders such as Presidents, Prime Ministers, Senators, members of armed forces, cabinet members and other heads of state. “Foreign official” also encompasses employees of various foreign government “departments” and “agencies” such as tax officials, customs officials, and others tasked with issuing foreign government licenses, permits, certifications, etc.
“Foreign officials” can be influenced in many different ways other than cash payments. FCPA enforcement actions have been based on the following “things of value” provided directly or indirectly to a “foreign official”: gifts such as cars, jewelry, etc.; excessive travel and entertainment expenses; educational or executive training expenses; promises of future employment; shares or dividends of a company; and many others.
Companies operating in perceived high-risk locations such as China, Russia, Eastern Europe, South America, the Middle East and Africa continue to be prime targets for investigations and scrutiny. Certain industries including construction, mining, oil and gas, financial services, pharmaceuticals, medical devices, telecommunications, defense, construction, civil engineering, and shipping industries are also prime targets for U.S. Government inquiries.
Individuals and corporations are subject to both criminal and civil penalties if found to be in violation of the FCPA anti-bribery, accounting, or other provisions. This means not only fines, but the possibility of imprisonment for individuals found in violation of an FCPA provision. It has been established that an employer or principal is unable to incur the fine for the individual found in violation of the act.
The DOJ is responsible for the criminal prosecution of FCPA violations. Under the FCPA, each anti-bribery violation incurs a fine of up to $2 million for corporations or other business entities while individuals receive a lesser, but still hefty, fine and the possibility of time behind bars. The penalty for such a violation by an individual such as a director, officer, stockholder, or rank and file general employee of the company includes a fine of up to $100,000 and a maximum of 5 years in prison.
Criminal accounting provision violations carry their own penalties as well. For each such violation, the maximum fine is $25 million for corporations or other business entities and up to $5 million for individuals. Individuals are also subject to a maximum imprisonment of 20 years for each offense.
Civil Penalties may be imposed by both the DOJ and the SEC, based on the authority given under the FCPA. The DOJ is responsible for civil prosecution against violations of the anti-bribery provisions by domestic concerns and those falling under territorial jurisdiction. The SEC, on the other hand, is responsible for civil action taken against issuers, their directors, employees, officers, and the like who violate anti-bribery or accounting provisions of the FCPA.
Each anti-bribery provision violation by a corporation, other business, or individual incurs a maximum fine of $16,000. Each accounting provision violation is penalized based on the specific offense. Based on the nature and scope of the violation, the fine per offense may fall in the range of $75,000 to $725,000 for a corporation or business entity or in the range of $7,500 to $150,000 for an individual. When it comes time to sentence the violator with a penalty, the fine is not to exceed the greater of the specified amount or the value of gain the defendant obtained through his or her violation.
Small to Mid-Size Companies at Risk
The current U.S. Government administration has established goals to increase future U.S. exports. Small and midsize private companies continuing to pursue growth abroad need to be mindful of the Foreign Corrupt Practices Act (FCPA), particularly now that the U.S. Department of Justice (DOJ) has stepped up its enforcement of the act’s provisions.
Lacking the resources of large multinational corporations, smaller companies are often forced to employ independent agents to represent them in foreign countries. Independent agents, consultants, and other third parties pose high risk situations because these intermediaries frequently don’t understand or even do not care about the FCPA. Many companies that use third party intermediaries with businesses abroad are some of the highest risked businesses. Even when a company’s sales from foreign operations are not material when compared with the overall financial statements, FCPA compliance is not an area that can be overlooked, since regulators do not take materiality into account.
Price Waterhouse Coopers recently surveyed U.S. private companies and found that the majority (51%) of U.S. private companies’ surveyed plan to do business abroad in the next one to two years, and 48% already have an international presence. Small companies entering foreign markets for the first time are often unfamiliar with the nuances of the FCPA, and compliance will be an important issue for many small to mid-size companies for some time to come.
Small and midsize private companies do not often retain in house general counsel or a compliance officer and can be at a higher risk for violating the FCPA than some of their larger multinational peers that are typically staffed with appropriate levels of management and executive personnel overseeing their compliance efforts. Violations can come at considerable cost — not just in dollars and reputation, but also in lost business opportunities. If a company has even a few interactions with overseas markets, assessing potential FCPA or other anti-corruption risks is highly recommended.
Smaller companies have been slow to install effective FCPA compliance procedures. They have either completely ignored the issue, or they have made the decision that they’re not at risk. Beyond the risk factor, many smaller firms do not implement steps to assure compliance because of its perceived cost, therefore there is less of a management push or desire to put money into something that is proactive. However, compliance doesn’t have to be unaffordable for small to middle market companies. It’s not enough to have a paper policy, but it doesn’t have to cost six to seven figures either.
Warren Averett and Redstone Government Consulting Can Help
Warren Averett and Redstone Government Consulting have established a strategic alliance to serve the unique accounting and business advisory needs of government contractors. The combined experience of both professional service firms brings together best-in-class tax, audit and advisory services with government contract compliance expertise. Together, we offer a variety of services for large and small government contractors including evaluation, education and training, monitoring and DCAA audit preparation.
We can help small to mid-size companies install and set up a meaningful and robust compliance program on a budget that is in-line with their business risks. We can also help small to mid-size companies meet FCPA compliance program requirements with less formality and fewer resources than larger companies and still meet the guidelines and best practices for FCPA compliance initiatives.
Best practices common to organizations and businesses that are at FCPA risk are to implement a robust ethics and compliance program that includes anonymous reporting and policy management. We start by providing an overall risk assessment by interviewing company leadership, and gaining an understanding of the depth of the business in terms of products, services and a company’s geographical footprint.
Having a management-supported program visible in the organization helps show the company’s commitment to conducting business correctly — and may serve to reduce potential penalties that may be incurred should the company face an FCPA violation.
About the Author
H. Glen Jenkins, CPA, CVA, CFE, is Senior Manager in the Fraud & Forensic Services practice in the Atlanta, Georgia offices of Warren Averett, CPAs and Advisors.