Foreign Corrupt Practices Act.

AuthorSebelius, Ned
PositionTwenty-Third Annual Survey of White Collar Crime
  1. INTRODUCTION II. ACCOUNTING PROVISIONS A. Covered Parties B. Elements of the Accounting Provisions 1. Record-keeping 2. Internal Controls C. Criminal Liability III. ANTI-BRIBERY PROVISIONS A. Covered Persons B. Elements of the Offense C. Permissible Payments and Affirmative Defenses 1. Routine Governmental Action Exception 2. Affirmative Defenses D. Enforcement 1. Prosecution 2. Attorney General's Guidelines and Opinions IV. PENALTIES A. U.S. Sentencing Guidelines 1. Individuals 2. Corporations B. Additional Penalties V. GLOBAL ANTI-CORRUPTION EFFORTS VI. FCPA CORPORATE COMPLIANCE PROGRAMS VII. RECENT AND ANTICIPATED DEVELOPMENTS I. INTRODUCTION

    In 1977, Congress enacted the Foreign Corrupt Practices Act ("FCPA") as part of the 1934 Securities Exchange Act ("Exchange Act"). (l) The FCPA criminalized the bribery of foreign officials by U.S. corporations and individuals pursuing business in other countries and required that companies with publicly-traded stock meet certain standards regarding their accounting practices, books and records, and internal controls. (2) U.S. businesses were then at a competitive disadvantage in international markets, because foreign competitors were unconstrained by laws prohibiting bribery. (3) Consequently, the FCPA was amended in both 1988 and 1998. (4)

    In 1988, Congress added two affirmative defenses and directed the executive branch to urge America's global trading partners to pass anti-corruption laws to promote international parity with regard to business corruption. (5) In 1998, the FCPA was again amended to implement the Organization of Economic Cooperation and Development ("OECD") Convention on Combating Bribery of Foreign Public Officials in International Business Transactions ("OECD Convention"). (6) Congress ratified the OECD Convention and enacted implementing legislation. (7) These new amendments broadened the reach of potential FCPA bribery violations by expanding the scope of persons covered by the Act to include some foreign nationals. (8) Additionally, the 1998 amendments extended the FCPA's jurisdiction beyond America's borders to allow greater enforcement efforts by U.S. prosecutors. (9) In sum, the 1998 amendments increased enforcement by the Securities and Exchange Commission ("SEC") and the Department of Justice ("DOJ") of the FCPA (l0) and indicated a step forward in the battle against corruption in foreign business practices. (11) Despite this, the impact of corruption remains a potent and debilitating force (12) affecting numerous industries in the international economic arena. (13)

    Currently, the FCPA requires companies to maintain accurate records and a system of internal controls, (14) and outlaws the practice of bribing foreign officials and other categories of recipients for the purpose of obtaining a business benefit. (15) This article will review both the accounting and anti-bribery provisions and the range of penalties for their violations. The article will then review global anti-corruption efforts as well as guidelines and resources for creating an effective compliance program. Finally, the article will conclude with a discussion of developments in the battle against business corruption.


    The FCPA amended the Exchange Act by adding record-keeping and internal control requirements for certain entities already subject to the Exchange Act's provisions. (16) As a result, even non-material payments not recorded accurately could constitute a violation of U.S. law. (17) The principal accounting provisions are contained in 15 U.S.C. [section][section] 78m(b)(2) and b(5), which state the record-keeping and internal control requirements, as well as the necessary standard to impose criminal liability for a failure to meet these requirements. (18)

    1. Covered Parties

      The FCPA accounting provisions generally apply to publicly-held companies that are considered "issuers" in the United States under the Exchange Act, (19) including those companies that hold American Depository Receipts ("ADR"). (20) The term "issuer" refers to those companies that either have securities registered with the SEC under Section 12 of the Exchange Act (21) or are required to file reports under Section 15(d) of the Exchange Act. (22) The accounting provisions are broad and apply to all dealings undertaken by the issuer, regardless of whether the business actually engages in foreign operations or whether the transaction is considered a bribe. (23) In addition, an issuer that controls more than fifty percent of the stock of a foreign subsidiary must ensure that the subsidiary adheres to the books and records provisions. (24)

    2. Elements of the Accounting Provisions

      1. Record-keeping

        The first substantial requirement of the accounting provisions requires all issuers to "make and keep books, records, and accounts, (25) which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." (26) "Reasonable detail" requires a "level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs." (27)

        The record-keeping provisions are designed to prevent three types of improprieties: (i) the failure to record illegal transactions; (ii) the falsification of records to conceal illegal transactions; and (iii) the creation of records that are quantitatively accurate, but fail to specify qualitative aspects of the transaction. (28) In sum, records must include information that would alert the SEC to any possible impropriety. (29) These provisions allow the SEC to discover improprieties that would not normally be apparent under existing accounting systems and prevent issuers from claiming certain defenses, such as a lack of materiality for the undisclosed activity. (30)

      2. Internal Controls

        The accounting provisions also require issuers to create a system of internal accounting controls that provide reasonable assurances that transactions are properly authorized. (31) "Reasonable assurances" are measured against the reasonable detail standard. (32) The purpose of the internal controls provision is to ensure that issuers use accepted methods of accounting when recording economic transactions. (33)

        The SEC considers several factors in determining the adequacy of a system of internal controls: (34) (i) the role of the board of directors; (ii) communication of corporate procedures and policies; (iii) assignment of authority and responsibility; (iv) competence and integrity of personnel; (v) accountability for performance and compliance with policies and procedures; and (vi) objectivity and effectiveness of the internal audit function. (35) If a board of directors creates an audit committee, the SEC requires that the committee must exercise appropriate internal accounting oversight as a means of reasonably assuring that FCPA provisions are followed. (36)

    3. Criminal Liability

      To be criminally liable under either of the accounting provisions, an individual must "knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record or account." (37) Although the intent requirement is designed to reduce potential liability for inadvertent accounting violations, (38) the "knowing" requirement is met by willful blindness. (39)

      The FCPA includes several provisions designed to ensure that commonplace accounting deficiencies do not violate the Act. Under [section] 78m(b)(4), criminal liability is not imposed for technical or insignificant accounting errors. (40) Moreover, a good faith exception applies to issuers who own fifty percent or less of a business concern. (41) A parent corporation is thereby "discharged" from responsibility for violations by its subsidiary as long as the parent acted in good faith to encourage compliance with the FCPA's accounting controls. (42)

      The SEC generally enforces the accounting provisions, while the DOJ prosecutes criminal violations for FCPA accounting violations. (43) The SEC has brought enforcement actions based on violations of the accounting provisions in cases involving both foreign bribery and purely domestic conduct. (44) Penalties imposed by the SEC range from the imposition of a fine to prohibiting the defendant from serving as an officer or director of a public company. (45)


    The anti-bribery provisions of the FCPA, found in 15 U.S.C. [section][section] 78dd-1, 78dd-2, and 78dd-3, criminalizes bribery of a foreign official to influence any official act, induce any unlawful action, induce any action that would assist in obtaining or retaining business, or secure any improper advantage. (46) These provisions prohibit individuals or businesses from directly or indirectly offering, paying, promising, or authorizing to pay (47) money or anything of value to any foreign official. (48)

    1. Covered Persons

      The bribery provisions are much broader than the accounting provisions, which only apply to issuers. (49) Prior to the 1998 amendments, the FCPA covered only "issuers" (50) and "domestic concerns." (51) As a result of the 1998 amendments, which closed a gap in the original FCPA (52) by implementing the OECD Convention requirement criminalizing bribery by "any person," (53) the anti-bribery provisions now also cover "any person" who commits bribery on U.S. territory regardless of whether the accused is a resident or does business in the United States. (54) In addition, the SEC and DOJ can now successfully prosecute individual corporate employees and agents under the FCPA even if their employer is not prosecuted for violations under the FCPA or is found not guilty of such violations. (55) However, foreign officials who receive bribes from U.S. companies cannot be prosecuted under the FCPA. (56) Similarly, foreign officials cannot be prosecuted for conspiracy to violate the FCPA. (57)

    2. Elements of the Offense

      A violation of the anti-bribery provisions of the...

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