Business Library

How the Foreign Corrupt Practices Act is Changing International Business Practices

Patrick Hughes and Jeffrey Harfenist - Managing Directors | UHY Advisors

How much has changed in the past 10 years?

A decade ago, athletes in many sports “juiced” with performance-enhancing drugs, many dot-coms inflated their valuations through “new metrics” and a certain large Texas-based energy company was a much-admired, high-flying company.

When it came to doing business in almost all foreign countries, the practice of paying bribes – frequently justified as paying for access, consultations with ‘experts’ or streamlining the regulatory process – didn’t pose a significant business risk to the arms-length-positioned company involved in the transaction. Bribes were justified as a culturally acceptable business practice to develop long-lasting relationships. In Europe they were even tax deductible.

While a lot has changed, cheaters never stop trying.

Passed in 1977, the Foreign Corrupt Practices Act (FCPA) was a rarity and was roundly criticized as creating an unfair playing field for US companies. Beginning in 1997 the World began to get on board, culminating with the UN Convention Against Bribery of 2003, which required that all countries pass and enforce anti-corruption legislation and most important, to cooperate with one another. To continue its leadership, the U.S. added FBI, Securities Exchange Commission and Department of Justice staff to support targeted law enforcement efforts.

The spirit of the anti-corruption legislation is simple: Do not pay any bribes to anyone. Technically the FCPA applies only to bribes paid (or offered) to foreign government officials to obtain or retain business, or develop an unfair competitive advantage. However, both the concept of bribe and foreign government official are interpreted very broadly. In numerous countries, where the state owns in whole or in part commercial enterprises, you may be doing business with a foreign government official without even realizing it.

For example, take the case of a U.S. company that had a highly successful relationship with an independent contractor representing it in a foreign country. The representative regularly secured profitable contracts with the government, which pleased the company until the relationship caught the attention of investigators during a corruption probe in that country. The government official responsible for the contracts was caught in a scheme to line his own pockets at public expense. The trail led to the U.S. company’s representative, who admitted that he and the official arranged for contracts at above-market rates.

The U.S. company is now under investigation by both foreign and U.S. authorities for violation of anti-corruption laws. The investigation will span the entire operation and may uncover other violations. The costs of the investigation alone will likely exceed the profits made on the contracts, and the U.S. company will likely be found liable in both jurisdictions and settle for substantial fines and penalties. It is also likely the U.S. company’s executive in charge of the foreign operations will face criminal charges individually.

When the anti-corruption investigators come knocking, the accused company is expected to perform an extensive internal investigation at its own cost and then turn over all relevant information to the government. The accused company must work hard to defend its practices or negotiate a settlement in the face of fines, disgorgement of “tainted” gross profits, loss of export licenses, prosecution in foreign jurisdictions and the specter of an outside monitor. If the company investigates proactively, the issues may be addressed before the government gets involved. Often, counsel will suggest turning oneself in, which normally results in leniency.

But how do you know when an aggressive sales rep steps over the line from the much-practiced art of “wining and dining” customers to an illegal activity? Also, would a nominal business gift – popular in so many cultures – constitute a violation?

While only several countries actually define the value thresholds in anti-corruption legislation (the U.S. does not), there can be some best practice guidelines to follow:

  • Develop policies: Understand all U.S. and applicable foreign laws and develop clear corporate policy with consequences meted out for any non-compliance.
  • Training: Companies must have an education program in all relevant locations and languages to explain the company’s policies. Remember many foreign employees and contractors cannot read even their own language.
  • Due diligence: If you are using agents to assist in the sales process, it is critical to conduct background screenings to uncover any past problems or concealed government relationships.
  • Internal audit: The internal audit function should amend practices to include procedures to uncover bribery on the part of its employees and contract representatives.
  • Periodic forensic reviews: Either using in-house resources or outside experts, the company should perform periodic compliance reviews of its existing anti-corruption policies, actual procedures and critical personnel.

Because many companies – even those that may be doing global business for the first time – tend to jump into executing their business plans, it is important to understand the various risks related to any potential non-compliance. Understanding your risks and taking measures to mitigate such risks will prevent your company from becoming a front-page story.

Patrick J. Hughes is a managing director in UHY Advisors’ Albany office. He can be reached at (518) 449-3166 or phughes@uhy-us.com. Jeffrey Harfenist is a managing director with UHY Advisors and is responsible for the firm’s Foreign Corrupt Practices Act-related services. Based in the Houston office, he can be reached at (713) 960-1706 or jharfenist@uhy-us.com.