US anti-corruption law: Overseas companies too are being prosecuted for bribes

Any company that lists securities in the US, including many companies from India, China and other developing countries, can be prosecuted under the Foreign Corrupt Practices Act

Corruption is the scourge of the poor. On Transparency International's Corruption Perception Index, you do not get to a poor country (Botswana) until number 30. Most of the European countries are in the top 20. Of the BRICs, Brazil and China just make it into the top half. India is down at 94 tied with Greece, Benin, Columbia, and Moldova. It is estimated that over $1 trillion is paid each year in bribes. Two out of three urban Indians have personally experienced corruption and it is likely that every Indian has been asked for a bribe. And India is hardly alone. It is not only the bribes themselves that cost. The economy suffers in many ways including: misallocation of assets, slowing commerce, diversion of state funds, lack of social services especially education, and failure of regulation to protect a country's citizens.
Although there are many possible solutions, one of the most feared is the Foreign Corrupt Practices Act (FCPA) of the US. This act was passed over 36 years ago. It was passed as a result of several scandals. The most notorious concerned officials of US aerospace company Lockheed. Lockheed paid around $3 million in bribes to the office of Japanese Prime Minister, Kakuei Tanaka. It also bribed officials in Germany, Italy, the Netherlands and Saudi Arabia. Lockheed was not alone. Investigations by the US securities watchdog, the Securities and Exchange Commission (SEC) showed that over 400 companies admitted making questionable or illegal payments in excess of $300 million to foreign government officials, politicians, and political parties.    
Shocked and outraged in a fit of moral fervour and no doubt a bit of jealousy, the American Congress passed the FCPA. The FCPA makes it a crime for any US citizens, including corporations, to make a payment to a foreign official for the purpose of obtaining or retaining business. Not happy just going after Americans the Act was amended in 1998 by the International Anti-Bribery Act of 1998, which was designed to implement the anti-bribery conventions of the Organization for Economic Co-operation and Development (OECD). This amendment extended it to certain foreign persons most notably foreign corporations.
However, just because it is a law, does not necessarily mean that it will be enforced. When it was passed, bribery was considered just to be a part of international business. No other country forbade its companies to bribe government officials. It was even encouraged by tax deductions as a competitive advantage. Since US companies would have been severely disadvantaged, the law was simply ignored for most of its 36 year history. Very few cases were brought.
The policy began to change with the OECD convention in 1998. Increased enforcement really began after the UN convention in 2003. The OECD convention has 38 signatories and the UN convention over 100, but there have been little enforcement. According to a Transparency International's 2010 report, between 2009 and 2010, the number of signatories actively enforcing the law increased from four to 10. The number of countries moderately enforcing the law increased from eight to 16. However, the small number of counties actively enforcing the statute disguises the impact. The active enforcers make up 30% of the world's exports.
The lack of enforcement in other countries was not matched in the US. The US Department of Justice (DoJ) and the SEC together brought 40 cases in 2009, up from 12 just five years earlier. They brought 74 cases 2010, 48 in 2011 and 23 in 2012. One of the reasons for the new zeal is simple: Money. Fines from violation of the FCPA totalled $4.84 billion so far. The proceeds have been more than enough to fund new enforcement actions. Some of the victims include Wal-Mart, Baker Hughes, Halliburton, KBR, Lucent Technologies, Monsanto, Titan Corporation, Triton Energy Ltd, Avon Products, and Invision Technologies.
The reach has broadened as well. Not only American companies are subject to the Act but non-US companies and even non-US citizens. The jurisdiction though is limited. To grab foreigners there must be some connection to US territory. But this restriction was not sufficient to protect such global companies like BAE Systems Daimler AG and Siemens. In fact, five of the six largest settlements under the act have been with companies headquartered outside the US. Basically, any company that lists securities in the US including many companies from India, China and other developing countries can be prosecuted.
What does the FCPA attempt to prohibit? The statue says that it is unlawful to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. So, you can't give something to a foreign official. Does that include small gifts? Yes. I am sure that the enforcement agencies would not care about a nice bottle of wine, but both cash and non-cash gifts can trigger the act. For example, Alcatel-Lucent of France settled with US regulators who found that factory visits and training trips laid on by the telecommunications group for a set of Beijing's bureaucrats mostly involved time spent at Disneyworld and Universal Studios or in Las Vegas.
Who is an official? Basically, anyone connected with the government. It is not just the minister of finance. Various US drug companies have been prosecuted for gifts to Chinese doctors. The doctors were government officials because they worked for government-owned or managed hospitals. Anyone working for a government-owned or managed institution or enterprise would be considered an official. Therefore, it is not just a person working directly for a government, but anyone working for a government owned business or instrumentality.
Hiring third parties or agents will not shield a company from violation. The SEC is presently investigating several companies for hiring Chinese 'princelings', scions of high Chinese government officials or revolutionary heroes.
There is one exception, the so-called 'grease payments'. These are payments made to government officials to encourage them to do their job. They can only be made to an official for non-discretionary acts or "routine government action". These include things like obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country; processing governmental papers, such as visas and work orders; and other similar ministerial or clerical acts. The American authorities dislike this exception and construe it narrowly, so it is best not to rely on it.
The real question though is whether the FCPA works in limiting corruption. Is it anything more than a profit centre for US regulators and a large transaction cost for businesses? The answer is probably yes. It certainly would make a company think long and hard before bribing an official. As such, it is changing corporate culture. For many years, bribes were considered simply part of doing business: a cultural issue of concern only to local authorities. But as more countries adopt the convention and start enforcing it, the incentives and disincentives change. There is now more of an incentive to 'rat' on your competitors and under new US legislation even a reward for doing so. Under the new US financial legislation, employees and others will get a reward of a minimum of 10% of the recovery. Since this can reach hundreds of millions of dollars, it is no small change. So think twice before you bribe. The person who is being bribed might just be setting you up for paying his pension.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)

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