Firms At Risk As Fight Against Corrupt Practices Heats Up

The U.S. and U.K. Crack Down on Bribes While in Russia and China Giving Gifts Remains Common Practice

Authorities have been escalating their campaign against corruption in the last few years, resulting in a sharp spike in enforcement actions in the United States and the enactment of a new anti-bribery law in the United Kingdom.

For years, the U.S. has led the way in the fight against corruption with the Federal Corrupt Practices Act, which prohibits companies with U.S. operations from engaging in corrupt practices overseas.

Although the law has been in effect since 1977, it is in the last few years that enforcement has skyrocketed. This comes at a time when other countries are also cracking down on corruption.

The U.K.’s Bribery Act, for instance, goes into effect in April 2011 and prohibits companies with U.K. operations from engaging in bribery. Germany and other members of the Organization for Economic Cooperation and Development also have increased investigations and are collaborating more with the U.S.

U.S. companies that do business outside the country are more vulnerable than ever. The risk goes beyond their internal operations. Many companies that have solid policies in place for their own operations are vulnerable when it comes to their supply chains and past activities of entities that have been acquired.

Losses associated with this risk can be substantial. Businesses face hefty defense costs as well as the possibility of fines and penalties if convicted. Individuals, including chief executives, chief financial officers and others can be charged with violations of the law and be sentenced to jail. The negative publicity can significantly damage a company’s reputation.

Without a well thought out plan to manage this risk, companies are at risk of a serious loss that is largely uninsurable.

FCPA Enforcement

Every year, businesses pay billions of dollars in bribes in an effort to get favorable treatment, secure new business or even just to get necessary paperwork expedited. While these practices are still a part of the business culture in many developing countries, the U.S. and Western Europe have been cracking down on them.

Until 1977 when the FCPA was passed, no government had made it a crime to bribe officials of a foreign country and many governments even allowed companies to count bribes as tax deductions, according to a report “Restoring Balance,” by the U.S. Chamber of Commerce’s Institute for Legal Reform.

Under the FCPA, however, companies are prohibited from bribing foreign officials and prohibited from hiding illegal payments through misleading or inaccurate accounting practices. Companies are also required under the FCPA to implement internal accounting controls.

There has been a marked increase in the enforcement of the FCPA in the last decade by both the Department of Justice and the Securities and Exchange Commission, according to the “Restoring Balance” report. In the last five years, the report says, there has been nothing short of a boom in enforcement. More enforcement actions are being brought, fines and penalties have risen dramatically and the government has shown an increased willingness to seek jail terms for individual defendants.

The size of FCPA settlements also has increased dramatically. Five of the top 10 settlements occurred in 2010 and the remaining five have occurred since 2007.

In one high-profile case, German engineering company Siemens agreed to pay a total of $1.6 billion in penalties and disgorgement of profits, the highest FCPA settlement in history, according to PricewaterhouseCoopers in its “Corruption Crackdown” report. In that case, Siemens was accused of a widespread and systematic practice of paying bribes to foreign government officials to obtain business.

Defense costs alone for an FCPA case such as the one against Siemens can run into the hundreds of millions of dollars. The fines and penalties can be millions more.

Executives may have coverage for the directors & officers’ exposure related to a corruption investigation, but there is no insurance for the organization. There also could be some coverage for individuals named in a government investigation, but again, there is no coverage for corporate entities.

U.K. Bribery Act

The fight against corruption also will gain traction in the U.K., where the new Bribery Act goes into effect next year. The scope of the Bribery Act, like the FCPA, is very broad; it will apply to companies that carry on some or part of their business in the U.K. Activities conducted anywhere in the world by a company that does business in the U.K. will be subject to its anti-bribery provisions. Offenses fall into four key categories: bribery, receiving a bribe, bribing a foreign public official and failing to prevent bribery.

The law creates a strict liability offense for companies and other commercial organizations that fail to prevent bribery. The law also calls corporate hospitality into question.

Risk Management

Multinationals need to make sure that operations here and abroad are meeting the standards imposed by the U.S. and U.K.

A company that has operations in multiple countries will have to understand the business practices and the culture prevalent in each of those countries. While the U.S. and U.K. take a dim view of corrupt practices, it is not uncommon in countries such as Russia and China to give bribes or gifts to officials.

In fact, bribery is so common in Russia that it has been estimated at close to $300 billion a year, equivalent to about 20 percent of the country’s GDP, according to Russian government studies and U.S. State Department statistics.

In China, the situation can be further complicated because senior corporate executives are often relatives of senior government officials and the distinction between the government and private sector can often be unclear.

Multinationals operating in these countries can face difficult situations as they attempt to compete for business and maintain cordial relationships with foreign governments while also abiding by corruption laws.

Even if a company’s own policies are clear cut, an organization’s supply chain represents a significant vulnerability. Under the FCPA and the Bribery Act, companies are accountable not only for their own practices, but for the actions of their suppliers as well.

Another Achilles heel has to do with the past practices of acquired companies. When a company acquires a business, it also acquires its liabilities and the corrupt practices of a buyout target become the liabilities of the new owners.

In addition to these problems, there are also questions about the treatment of facilitation payments and corporate hospitality under the Bribery Act. In some cases, it is not entirely clear when a practice might become unacceptable. The U.K. Serious Fraud Office, for instance, has said that lavish hospitality could pose a problem. But what constitutes lavish hospitality?

To minimize the risk of any violation of corruption laws, multinationals first need to make sure they understand the standards imposed by these laws and establish an unambiguous FCPA policy statement that outlines expectations and procedures.
Senior executives must be involved and must sign off on company policies just as they do with other critical compliance issues. A compliance program has to be seen by prosecutors and employees as driven from the top of the organization.

Companies also should consider appointing a senior executive as the FCPA compliance officer. Businesses also need to train employees so they understand the risks and the potential pitfalls.

Businesses should insist that their suppliers and vendors have FCPA compliance programs that are in line with their own internal policies and procedures. Managers then should audit their suppliers from time to time to be sure that they are fulfilling their responsibilities under those policies. Documentation of these reviews can later serve as part of a defense if necessary.

When it comes to mergers and acquisitions, companies must conduct thorough due diligence with regard to FCPA procedures, compliance and books and records. Anything that could pose a problem should be considered carefully and included in the documentation related to the deal. If a violation does occur, the company must alert the board and investigate.

If a violation did occur, prosecutors are likely to look more favorably on a company that has demonstrated a strong compliance initiative, self-reports an incident, and moves swiftly to correct an identified problem.

Multinationals need to understand that the legal environment is changing. Officials are less willing to turn a blind eye and are more willing to take aggressive action in their crackdown on corruption. By establishing a sound compliance program, requiring suppliers to comply with the organization’s procedures and taking care with due diligence on acquisitions, multinationals minimize the risk of a corruption law violation.

Topics Trends USA Russia China Uk