FOREIGN CORRUPT PRACTICES ACT
(FCPA)

In the mid-1970s, and in the wake of the Watergate scandal, stories began to surface about U.S. corporations paying officials in foreign countries for favors. Companies from many nations had long engaged in secret payments to public officials. But the U.S. Congress and the public demanded action after the Securities and Exchange Commission (SEC) solicited (and received) voluntary disclosure from more than 400 American companies that they had paid hundreds of millions of dollars in secret bribes to foreign public officials.

The result was the Foreign Corrupt Practices Act (FCPA), passed by Congress and signed into law by President Jimmy Carter in 1977. The act prohibits U.S. companies (incorporated in or having a principal place of business in the United States) from making payments, promises, or offers to give anything of value to foreign officials or anyone else if the purpose is to obtain or retain business, or direct business to any person. These are the antibribery provisions.

In addition, the act imposes two basic accounting requirements on U.S. companies:

1. Financial records and accounts must be kept that, "in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets" of the business.
2. The business must create and maintain internal accounting controls "sufficient to provide reasonable assurances" that transactions are being done in accordance with proper authorization from management.

COVERAGE AND CONTROVERSIES

Violations of the antibribery provisions require some element of knowing or intent to corrupt, while a violation of the FCPA's accounting requirements can take place without any corrupt intent. The FCPA's coverage includes any officer, director, employee, agent, or stockholder acting on behalf of a U.S. company. The intent and effect of these provisions is to correct the widespread earlier practice of making secret payments to foreign officials and accounting for them as commission payments, payments for services, or other business expenses, then deducting those payments on U.S. income tax returns.

The act has been controversial from the start. Until recently (see "The OECD Convention," below) no nation has followed the lead of the United States and created its own foreign corrupt practices act. U.S. businesses have been somewhat disadvantaged in the process of obtaining and retaining business in foreign countries where public officials are prone to ask for or accept gifts or payments in return for favorable consideration. Many have also questioned the ethics of imposing U.S. standards of morality in other parts of the world, though it must be mentioned that the bribery endemic to Italy and Japan eventually undermined the dominant political parties in each country. The FCPA had no causal relation to these political falls from grace—the corruption itself, once made public, was enough to convince many people in each country that wholesale changes in power were due.

1988 AMENDMENTS TO THE FCPA

During the 1980s considerable pressure developed to make the FCPA more amenable to the legitimate needs of U.S. companies doing business abroad. In 1988 Congress amended the FCPA in response to this pressure. First, payments that are lawful in the foreign country are not unlawful under the FCPA. Second, certain "reasonable and bona fide" (good faith) payments may be made to foreign officials when they are directly related to promoting or demonstrating products. If, for example, a foreign official in charge of purchasing tanks were to be given travel expenses for coming to the United States for a demonstration, the payment could be accounted for as a business expense and would not be categorized as a bribe under the FCPA.

The 1988 amendments also increased the criminal penalties for companies violating the antibribery provisions of the FCPA to a maximum of $2 million. Individuals may be fined up to $100,000 and/or be sentenced to up to five years in prison. A successful prosecution under these provisions must overcome three principal areas of ambiguity: the "routine governmental action" exception, the "corruptly" requirement, and the "knowing" requirement.

The first of these ambiguities involves ministerial or clerical actions for which gratuity or grease payments may be routine. There is no clear guidance on what constitutes "routine" payments; U.S. companies continue to guess whether the payment is routine or not. For example, in the case where a customs official grants licenses to every applicant, and payment is made to expedite the processing time, the FCPA is not violated. Payments to higher level officials with discretion to grant or deny a privilege, license, or contract are far riskier.

The second of these ambiguities is the statutory use of the word "corrupt." A negligent or unsophisticated businessperson who naively makes payments to a local foreign agent without realizing that part of the payment is going to a public official will probably not have the requisite "corrupt" state of mind prohibited by the antibribery provisions. Yet the "knowing" requirement imposes a duty to make reasonable inquiries; failing to ask about what you have reason to believe you would discover will establish evidence sufficient to satisfy the "knowing" requirement. Thus, a very large payment made by your agent to a government official would be reviewed by U.S. authorities to discover whether you knew or should have made inquiries about the payment and its ultimate disposition.

THE OECD CONVENTION

Until recently, the only nation with antibribery legislation was the United States. But in 1996, 21 member states of the Organization of American States (OAS) signed the Inter-American Convention against Corruption. In 1997 all 29 members of the Organisation for Economic Co-operation and Development (OECD) signed the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The OECD convention aims for a functional equivalence among measures taken by signatory states that sanction bribery of foreign public officials. Yet such functional equivalence is not meant to-require uniformity or changes in the fundamental principles of a state party's legal system.

The OECD convention criminalizes the corruption of public officials of foreign countries in any of the signatory nations. One predicted effect will be to "level the playing field" for U.S. businesses; one effect of the FCPA had been to put U.S. firms at a disadvantage with non-U.S. firms when foreign officials sought bribes in order to sign off on profitable government contracts. Another predicted effect is that corruption in OECD countries will be reduced as fewer companies offer bribes to public officials.

The OECD convention was signed on December 17,1997, and entered into force on February 15,1999. As of April 1999, 12 countries had accepted, approved, or ratified the convention. Implementing legislation has been enacted in the United States, in the form of Public Law 105-366, approved on November 10, 1998.

The U.S. implementing legislation, known as the International Bribery and Fair Competition Act of 1998, fills in some gaps in coverage of corruption by the FCPA. Under the FCPA, an act of bribery that influences any act or decision of a public official is actionable; under the OECD convention as implemented in the United States, a company that "secures any improper advantage" may also be sanctioned.

Groups such as Transparency International (TI) have worked since 1991 to secure more transparency and accountability in international business transactions involving governments. The OECD convention marks a major step in this direction. Still, TI cautions that how each nation implements the convention will be significant. If nations such as France and Germany, for example, continue to allow tax deductions for payments to foreign officials, the convention will not be nearly as effective.