Introduction
In the recent past, there has been a remarkable global interest in combating corruption. This is seen through numerous regional conventions including Criminal Law Convention on Corruption, the Inter-American Convention against Corruption, the African Union Convention on Preventing and Combating Corruption, and the Civil Law Convention on Corruption. The U.N. has also undertaken actions to eliminate corruption on the global level. Recent studies indicate that corruption has negatively influenced the economic growth of various countries. Corrupt practices have encouraged businesses to develop effective bribery programs, instead of the overall efficiency and a good work product. Corruption has also undermined the economic interest of the U.S. through allowing the businesses to remain competitive by lowering their ethical standards instead of encouraging competition based on quality products and services. United States has thus set the global standards in regulating the businesses internationally by making the U.S. corporations comply with the provisions of the FCPA. This paper highlights the Foreign Corrupt Practices Act. It also examines the challenges and the difficulties that corporations are faced with as a result of the FCPA. The thesis statement thus is, “Reinforcement of accounting transparency and anti-bribery requirements of FCPA, have made corporations to focus more on Research and Development (R&D) as well as Corporate Social Responsibilities (CSR) so they could provide incentives in order to grow and enter in to new markets which should yield positive effect on people and environment.”
History and Background of Foreign Corrupt Practices Act (FCPA)
The Foreign Corrupt Practices Act (FCPA) is a United States federal law that addresses both the accounting transparency requirements and the bribery of foreign officials. It was passed in the wake of the Watergate scandal in the 1970s (Maki, 2003). The United States Securities and Exchange Commission investigated and uncovered over 400 cases of U.S. businesses involved in illegal or questionable payments to the officials of foreign government, amounting to over $300 million. The participants were some of the largest and most widely known public companies in the U.S. and the discovered abuses were vast, ranging from the bribery to the facilitating payments made in order to ensure ministerial or clerical duties are discharged by the government functionaries. Examples included Lockheed bribery scandals where the officials of Lockheed Company paid the foreign officials so that the products of their company could be favored; and Bananagate scandal where the Honduras president was bribed by Chiquita Brands so that taxes could be lowered. Congress found that the payment of bribes was highly influencing the acts and decisions of the foreign officers, which led to unethical, unnecessary and bad business. In 1977, Congress enacted the Foreign Corrupt Practices Act as a means of discouraging the bribery of foreign officials and restoring public confidence and integrity to the American business system. On 19th December 1977, President Jimmy Carter signed the Act into law. Later, the International Anti-Bribery Act of 1998 amended law.
Provisions of FCPA
The provisions of FCPA are broken down into three categories: the anti-bribery provisions; books and records and internal control provisions; and the third-party payment provisions.
The anti-bribery provisions prohibit people and corporations from engaging in a variety of activities and transactions that may otherwise lead to a grant of a favor by foreign officer. The provision highlights that issuers of certain U.S. securities or any officers such as directors, employees, or the agents of the issuers, are prohibited to use the phone systems, mails, internet or any other instrumentality of interstate commerce as a payment, a promise to pay, an offer, or an authorization to make an offer, or gift to any foreign officer, foreign political party, or a candidate for a foreign political office. The provision applies to situations where there is a corrupt intention or act to influence an action or decision of the foreign officer, to obtain or retain business, to direct a business to a particular person, and to secure an improper advantage. In its simple sense, it is unlawful for U.S. individuals, companies and foreign issuers listed on the U.S. securities exchanges, to bribe foreign officials (Rebecca, 2005).
The book and record-keeping and internal control provisions require the U.S. corporations to keep their books, records and the accounts in reasonable detail, in a manner that fairly reflects their transactions and the dispositions of their assets. The accounting provisions require that the issuers of securities must prepare and keep the records, books, as well as the accounts, which reflect fairly and accurately the dispositions and transactions of the issuer’s assets. The provision also requires the issuers of securities to develop and uphold internal controls systems in accounting that is sufficiently enough to provide assurances that: there is an execution of transactions in an agreement with the management’s specific or general authorization, and are recorded in order to permit the preparation of the statements in compliance with the conventional accounting principles and other accepted criteria that is applicable to the statements of such kind, and to maintain the accountability for the assets. The issuers of securities must also provide reasonable assurance that accessing the assets is only permitted in agreement with the specific or general authorization of the management, and the accountability for the assets, as recorded, is considered against the presented assets at intervals that are reasonable, and the appropriate action taken with regard to any disagreements.
The third-party payment provisions guides the actions of foreign subsidiaries and other third parties. The major concern is the payments made to the foreign officials by the third parties. The provisions prohibit corrupt payments through intermediaries. According to the provisions, it is unlawful to make a payment to a third party if a portion of such a payment goes directly indirectly to a foreign official. Intermediaries include the joint venture partners or agents. To avoid the liability resulting from corrupt third party payments, the companies are encouraged to express due diligence and to take the necessary precautions to ensure that the business relationship is formed with reputable and qualified partners and representatives.
The FCPA provisions give the Security and Exchange commission authority over the whole requirements for financial management and reporting of publicly held United States companies. The purpose of these provisions is to stop the issuers of securities from concealing bribes and to discourage the fraudulent accounting and reporting practices. The provisions also provide the basis for ascribing liability to U.S. parent companies of foreign subsidiaries. Due to the fact that the violations of the accounting provisions do not require a proof of criminal intent, corporations can more easily be legally held responsible for the actions of a foreign subsidiary.
Requirements of FCPA
The FCPA stipulates various requirements regarding book keeping, records, and accounting transparency, and anti-bribery. These requirements are as stated in the provisions above. In a nutshell, the book and record-keeping transparency requires that the recorded information accurately reflect the transactions and dispositions of the assets of the issuer. The accounting transparency, on the other hand, requires that a system of internal accounting controls sufficient to provide reasonable assurances highlighted under the provisions above is devised and maintained. The anti-bribery requirements are also highlighted under the acts’ provisions, which prohibits the bribery or facilitating payments to the foreign officials.
Fines and penalties
The violations of the Books, Records and Internal Control provisions of the FCPA can subject the individuals and the corporations to both criminal and civil penalties. For the individual officers, employees, or directors of a company, there may be a prosecution for the violation of the FCPA even if the company is not legally held responsible. Criminal violations mostly lead to substantial fines and imprisonment while civil liability leads to considerable fines. Violating the Books, Records and Internal Control provisions may make the individual or the firm be ruled ineligible to receive export licenses; be suspended; and be imposed with civil penalties.
The violation of the anti-bribery provisions results into criminal, civil, and other governmental penalties. The criminal penalties include: a fine of up to $ 2,000,000 for the corporations and business entities; and a fine of up to $100,000 and an imprisonment for up to five years for officers, employees, directors, stockholders, and agents. Under the Alternative Fines Act, the actual fine can be up to twice the benefit that was to result from the corrupt payment to the defendant. A civil action may be instituted by the SEC or the Attorney General and may include a fine of up to $10,000 against the firm or the officer, the director, the employee, or the agent of a firm, or stockholder acting on behalf of the firm, whose action violates the anti-bribery provisions. Other penalties may include barring, suspending, or otherwise excluding the person or the firm that violates the FCPA provisions from doing business with the Federal government or participating in the procurement or non-procurement activity (U.S. Department of Justice).
Business challenges of the Corporations due to the FCPA
The FCPA has presented the corporations with various challenges, some of which are related to the disclosure of the companies’ financial information to the public. This raises concerns from both the investors and the creditors. If a company is weak financial, disclosure of such information to the prospective investors may discourage them. Potential creditors may also shy away from such a company. The FCPA has greatly limited the international growth of some corporations especially in developing countries. In these countries, the business culture entertains and encourages gift giving e.g. China, with accounting practices that are not sufficiently transparent to satisfy the requirements of FCPA. In some large markets, the nature of the market and the business relations may necessitate the use of agents. However, the FCPA provisions disgruntle the employees, the agents, and lower the competition. Some countries do not view the use of connections or corporate nepotism to obtain business in the same manner that the U.S. companies do (Harris, 2011).
Solutions to the Business challenges
The companies should develop sound strategies for meeting the market requirements within the provisions of the FCPA. This can be achieved through research and development on long-term profitability, the new extraordinary, out of competition products, and the use of competitive and innovative technologies. Corporate social responsibility is a must for every company. Every company should be ethical in the behavior and contribute positively to the economic development and at the same time improve the quality of life of the workforce and their families, as well as the local community and society at large.
Conclusion
The Foreign Corrupt Practices Act was a ground-breaking step by the government of the United States to deal with the growing realization of the amount of improper payments occurring abroad. This does not mean that U.S. corporations were the sole culprits of these practices; however, U.S. was the first country to try and shape its international interest.
The FCPA subjects the U.S. businesses to a biased playing field in a competitive global environment. However, despite its many weaknesses and impracticable application to U.S. business operations in most developing economies, it is greatly important in shaping the ethical behavior and decreasing the amount and frequency of international bribery in the international business. FCPA is very essential in maintaining the stance of the United States on eliminating corruption and preserving the integrity of the global market. Even though the U.S. government and the U.S. corporations desire a complete elimination of corruption problems in most growing economies like China, the solution must take time. It’s a common notion that corruption is so deeply rooted in fast-growing economies that distinguishing whether things are improving or degrading is a problem. It therefore requires that U.S. corporations carry out conclusive research and development in the new markets they wish to explore. For the growth in such markets, the corporations should focus as well in the corporate social responsibilities. This eventually yields positive effect on the people and the environment.
The problems associated with the compliance of the FCPA results from lack of guidance provided to U.S. businesses, as well as the act’s vague language. This calls for efficiency and overall education on FCPA so that both the corporations and the government can benefit. The employees of U.S. corporations may make improper payments through the third-party intermediaries under misguided assumptions. When the foreign agent is not subjected to the FCPA, the conduct of such an agent may create FCPA exposure for the U.S. corporation. This calls for proper research and education on such markets where business operations require the use of local agents such as China.
Works Cited
Committee on Banking, Housing and Urban Affairs, Foreign Corrupt Practices and Domestic Foreign Investment Improved Disclosure Act of 1977, S. REP. NO. 95-114 (1977).
Harris, Ajani, "The Impact of the Foreign Corrupt Practices Act on American Business from 1977-2010" (2011). CMC Senior Theses. Paper 129. Retrieved from http://scholarship.claremont.edu/cmc_theses/129
Maki Hishikawa, The FCPA: An Outgrowth of Corporate Scandals, JAPAN COMMERCE ASSOCIATION OF WASHINGTON, DC, Mar. 2003.
Pedersen, Eric M. The Foreign Corrupt Practices Act and its Application to U.S. Business Operations in China. The Journal of International Business & Law (8/10/2008).
Rebecca Koch, The Foreign Corrupt Practices Act: It’s Time to Cut Back the Grease and Add Some Guidance, 28 B.C. INT’L & COMP. L. REV. 379, 379 (2005).
The United States, Department of Justice. Foreign Corrupt Practices Act. Retrieved at http://www.justice.gov/criminal/fraud/fcpa/
