Foreign Corrupt Practices Act

The U.S. Foreign Corrupt Practices Act of 1977, as amended in 1988 (hereinafter referred to as FCBA) has two provisions, the accounting provisions (Section 102) and antibribery provisions (Sections 103 and 104).

The accounting provisions apply to concerns registered under the Security Exchange Acts. These concerns have to file reports with the Securities and Exchange Commission (SEC) and/or securities registered with the SEC. Section 102 requires public corporations to:

1. keep accounting books and records which accurately reflect the transactions of and disposition of assets by that company; and

2. devise and maintain adequate systems of accounting controls which assure that:

a. transactions are executed in accordance with management directives;

b. transactions are properly recorded so as to permit preparation of financial statements according to generally accepted accounting principles;

c. access to corporate assets is permitted only as authorized by management; and

d. recorded asset accounts are compared with existing assets at reasonable intervals.

Although the FCPA does not require the adoption of a specific system of accounting, publicly traded companies which are subject to the substantive provisions of Section 103 of the FCPA are required to exercise control over corporate assets to prevent the making of disguised political payments or illegal bribes overseas.

The penalties for the violations of the accounting provisions of the FCPA are a fine of up to $100,000 and/or imprisonment of up to five years.

Section 103 of the antibribery provisions prohibits any issuer which has a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934 or which is required to file reports under section 15(d) of the Securities Exchange Act, or any officer, director, employee or agent of any such issuer, from making payments to certain foreign persons or entities for the purpose of obtaining or retaining business. Section 104 of the FCPA prohibits "domestic concerns" from making similar payments. The term "domestic concern" includes any U.S. citizen or resident; and any corporation, partnership, association, unincorporated organization or sole proprietorship which is organized under the laws of the U.S. or which has its principal place of business in the United States.

The FCPA prohibits publicly held corporations and domestic concerns from making corrupt payments to assist in obtaining or retaining business to any foreign official, any candidate for foreign political position, any foreign political party, or any other person, where the payor "knows" that such person will pass some or all of the payment on to any foreign official, any candidate for foreign political office or any foreign political party.

Any issuer or domestic concern, upon conviction, may be fined up to $2,000,000. Any individual who is a corporate officer, director or domestic concern willfully violating the antibribery provisions may be fined up to $100,000 and/or imprisoned for up to 5 years.

"Retaining business" should not be interpreted to broadly prohibit companies from using funds for lobbying or otherwise representing their interests to foreign governments.

The three exceptions to the law include

1. grease payments, These payments refer to facilitating which are often demanded by lower government officials with ministerial duties rather than discretionary power.

2. payments for certain entertainment expenses. “A company can pay “reasonable and bona fide (costs), such as travel and lodging expenses” of foreign officials provided the costs are “directly related to (A) the promotion, demonstration, or explanation of products or services; or (B) the execution or performance of a contract with a foreign government or agency thereof”” (Martin and Walsh, 1996, p.26).

3. payments which are “lawful under the written laws and regulations” of the foreign country. (Martin and Walsh, 1996, p.26).

The Justice Department has in a place a procedure by which companies can obtain an advanced ruling on the legality of a plan to incur such expenses.

Reference

Martin, Keith and Sheila Malkani Walsh, Beware the Foreign Corrupt Practices Act. International Commercial Litigation, Oct. 1996, no. 13, pp. 25-27.