Generally perceived as a hindrance to American businesses operating abroad, the US Foreign Corrupt Practices Act (FCPA), enacted into law 20 years ago, makes it a crime for American companies and individuals to bribe foreign government officials directly-or indirectly through third parties-to obtain or secure business. Although almost every government has laws prohibiting its own officials from accepting bribes, only the United States. through the FCPA, makes bribing another country's public servants a domestic crime.
Many IS companies believe that the FCPA has put them at a severe disadvantage when competing for overseas contracts. Unlike US companies, European and Japanese firms have not faced criminal prosecution for paying bribes. Moreover, other countries' laws have permitted firms to treat such payments as tax deductible business expenses-nine European countries, as well as Australia and New Zealand. have allowed corporations to deduct such "business expenses" from their taxable income.
The Department of Commerce reported in 1996 that the US government had learned of significant allegations of bribery of foreign governments by foreign firms in 139 international contracts, valued at $64 billion, since 1994. The department also estimated that US firms lost 36 of these contracts, worth $Il billion, though whether bribery was the decisive factor remains unclear. US companies have increasingly encountered such situations in Russia and Eastern Europe, where bureaucrats have realized that their power to decide or influence the fate of lucrative deals provides them with substantial money-making opportunities at a time when counterbalancing legal and political institutions are weak or non-existent.
EN FORCING HONESTY
The FCPA, as amended in 1988, prohibits US-based companies and their overseas subsidiaries and affiliates from giving foreign government officials either money or material items of value in return for assistance in obtaining or retaining business. The FCPA also applies to individual US citizens, nationals, and residents. Criminal penalties for violating the FCPA can be as high as $2 million for a corporation, and $100,000 and five years imprisonment for an individual. The FCPA also has separate mandatory record-keeping provisions that apply not only to domestic firms and individuals but also to any issuers of registered US securities, including foreign firms traded in the United States. These provisions require a company's books to reflect accurately the disposition of the firm's funds. tinder this "anti-cove-up`' aspect of the statute, either denominating a bribe as an entertainment expense, or not recording the payment at all, is illegal. Payments to agents or consultants also violate the act if the company knows that such agents will offer or give funds to a foreign official for prohibited purposes. This "knowing" standard, however. is an elusive legal concept. While belief that a payment is not a bribe is a valid defense to prosecution, willful blindness to questionable circumstances is not.
The FCPA exempts from prosecution any payments that facilitate or expedite such routine government actions as the granting of work permits or the inspection of goods in transit. The law also stipulates that there is a valid defense against FCPA prosecution if a payment is legal under the written laws of the host country, or is a bona fide business expenditure related to a product's promotion or a contract s service or performance.
THE FCPA SPIRIT SPREADS
Recent developments indicate that the United States may not have to "go it alone" much longer in legislating against corruption overseas. Both developed and developing nations are coming to recognize that an international environment that condones bribery is not conducive to either economic efficiency or development Reflecting such sentiment, last spring, members of the Organization for Economic Cooperation and Development (OEC[)) dl.rafted an international treaty that criminalizes corporate bribery of foreign officials. OECD countries reached formal agreement on the terms of the treaty on November 20, 1997 According to the treaty hy the end of 1998 each member nation must introduce and enact its own legislation criminalizing bribery The United States also encouraged the OECD, in 1996, to adopt a resolution that prohibits companies from declaring bribes to foreign officials as tax deductions and requires member nations to rewrite their tax laws accordingly.
US efforts have prompted multilateral financial institutions to change their approach to lending. The World Bank has adopted stringent anti-bribery procurement regulations, which require the disclosure of an agent's commissions, provide for the investigation of bribery allegations, and permit debarment of corrupt contractors. The International Monetary Fund (IMF), in some cases, has required developing nations to enact domestic anti-bribery laws to be eligible for IMF assistance, and recently suspended loans to both Kenya and Cambodia because of corrupt practices.
Other multilateral organizations are also espousing the FCPA philosophy. The Organization of American States, for example, adopted the Inter-American Convention Against Corruption-the first anticorruption treaty in the world--which criminalizes transnational bribery in the Westem hemisphere and provides for extradition of corrupt officials. Transparency International-a nonprofit organization devoted to fighting corruption and funded by multinational corporations, foundations, and Western government development agencies-now boasts chapters in over 60 countries.
Some developing countries, too, have moved unilaterally to clean up their business environments. In Malaysia and Singapore, for example, several foreign firms caught bribing public officials have been declared ineligible to bid on future government contracts. And based on widespread suspicion that bribery was involved, President Fidel V. Ramos of the Philippines ordered an investigation in May 1996 into the award of a $7.6 million government computer and telecommunications contract to an American firm.
THE US LAW'S LONG REACH
Notwithstanding the movement of international organizations and individual countries toward the FCPA standard, firms continue to face considerable pressure to engage in bribery of foreign officials when conducting business, particularly in the developing world. The US Department of Justice and the Securities and Exchange Commission (SEC) have undertaken relatively few prosecutions under the FCPA since its inception, not least because of the difficulty of gathering evidence of wrongdoing abroad without the cooperation of the host nation.
But firms should not think that enforcement is unlikely or that the consequences of an investigation will be anything short of wrenching. For example, the SEC, in February 1997, filed a civil action against the Indonesian subsidiary of a Dallasbased oil and gas exploration firm, as well as two of its officers. The complaint charged that the firm and its officers knowingly authorized numerous improper payments to its business agent that were forwarded to Indonesian officials to secure lower tax assessments on its operations. The complaint also charged that the firm concealed the illicit payments by falsely documenting and recording the transactions as routine business expenditures. To settle the case without admitting or denying the charges, the company agreed to pay $300,000, and its two officers paid individual fines. An earlier SEC civil suit in 1996 involved a non-]US company headquartered in Milan, that allegedly paid S400 million in bribes to Italian government officials and concealed the payments on its books in order to misstate its financial condition to the SEC and investors. The case fell within the scope of the FCPA because the firm's American depository receipts. which represent shares of the company's stock, trade on the New York Stock Exchange.
BEWARE OF TRAPS
Despite prospects of a more level playing field for US businesses, corruption will be a continuing reality for American firms doing business in many parts of Asia, Latin America the Middle East. and the former Soviet Union. In Transparency International`s 1997 Corruption Perception Index. 7 of the 15 most corrupt nations were in Asia, with China ranking 12th.
The very real threats of large fines, prison sentences for executives damage to a company's reputation, and expensive legal proceedings are not the only reasons US firms should steer clear of paying bribes. A company also should keep in mind that, as in any extortion situation, willingness to pay a bribe on one occasion marks a company as a target for future demands, and can lead to ever-deepening entanglement in official corruption. What may appear to be a one-time payment to open official doors to a lucrative contract or to secure permission to operate a business can he an invitation to future extortion.
There are myriad ways companies can be drawn into corrupt payment situations. For instance, a US firm pleaded guilty in 1994 to violating the FCPA hy making payments to Dominican Republic officials simply to receive standard contract payments that were long overdue. More recently, foreign firms in Russia have been hit with outrageously high tax demands, followed by official suggestions that negotiations over reduced tax payments would be possible if the company were to deposit a certain sum in a foreign bank account. Paying bribes can also leave a company vulnerable to extortion from within if, for instance, a disgruntled employee is aware of the company's questionable practices.
JusT SAY "NO"
US companies have a number of tools at their disposal to avoid the bribery trap. A US company should begin its anti-corruption efforts by just saying "no" to bribery propositions. The international business climate may well have become more tolerant of a polite rebuff of invitations to bribe foreign officials, particularly if the US firm cites provisions from the FCPA. Although perhaps still in a minority, many corporate executives and salespeople have expressed relief that the FCPA provides an escape hatch for what was fonnerly a more ambiguous area of corporate ethics. Colgate-Palmolive Co., for example, has claimed success with the "just say no approach in the PRC. To reinforce this philosophy, a firm should develop and include in its ethics code a zero-tolerance corporate policy on payments to foreign officials,
A second precaution is to establish a compliance program to ensure enforcement of the company's anti-bribery policy. At a minimum, the compliance regimen should screen payments to foreign officials and to persons who may be wearing two hats-holding an official government position while maintaining private business interests (as is common in formerly communist countries where state-owned industries are being privatized). Companies also should properly record all such payments. fully documenting the source, and confirming the destination of all payments to foreign officials. To avoid the traditional pitfalls endemic to this sort of bribery a company should implement similar screening and record-keeping procedures for company payments to agents, consultants, and other middlemen, and for the transfer of payments by those agents to third parties. Furthermore, companies should make sure to inform employees about and train them in the compliance program.
Before signing on with a business agent. subcontractor, or joint-venture partner, a company should also conduct a thorough background check. A cornpany should not only use all the contacts and information available to the firm, but also engage the services of investigators with overseas experience and capabilities. Because a company's geographic or cultural distance from the locus of events may make complete control over business partners and intermediaries impossible, there is no substitute for cautiously choosing the right agent or joint venture partner from the outset.
But the business community has room for improvement in this area, as shown in an October 1997 survey bv Control Risks Group, an international consulting company. The survey polled international development directors at 100 large firms, selected at random. in the United States and Europe. The survey found that just under 60 percent of US firms, and only 49 percent of European firms, had formal procedures in place to investigate the business practices and honesty of potential partners.
If an FCPA-abiding [JS firm believes that it lost a contract to another US (or US-registered) company that engaged in bribery it should consider notifying either the Justice Department or the SEC. Before approaching government officials, however, the company should confirm its suspicions hy hiring an investigator to conduct an independent inquiry. An independent investigator`s report could prove invaluable should the allegedly corrupt company seek to retaliate by filing a lawsuit for harm to its business reputation.
There is no simple answer to the difficulties of doing business in corrupt environments. In some instances, a firm will choose to forgo a business opportunity because the cost of doing business-a bribe-is simply too high. If recent anticorruption trends continue, however. companies should face this situation less and less, even as investment boundaries expand. In the meantime, US firms should formulate. implement. and enforce compliance procedures that will minimize their exposure to the adverse effects of bribery.
Steven Froot is the US-based associate director of investigations and financial isk managernent for Control Risks Group, where he manages a broad range of investigative services. Mr. Froot previously sen;red as assistant US attorney and deputy chief appellate attorney in the United States Attorney's Office for the Southern District of New York.…