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The Foreign Corrupt Practices Act: Definition and Examples
The Foreign Corrupt Practices Act (FCPA) was enacted by Congress to make it unlawful to make payments to foreign government officials to obtain or retain their business. It was designed to prevent corrupt practices, protect investors, and level the playing field for honest companies trying to win business based on quality and price rather than bribery. This law has been in place since 1977 as a result of investigations after the Watergate Scandal that revealed that U.S. companies had spent hundreds of millions of dollars bribing foreign officials to secure business abroad. Alternative name: Anti-bribery law Acronym: FCPA This law has two sections:
Public companies that have securities registered or must file reports with the U.S. Securities and Exchange Commission (SEC) U.S. citizens or residents and businesses organized in the U.S. that have their principal place of business in the U.S. Foreign nationals who engage in a covered corrupt payment within U.S. territory
- The accounting section specifically requires public companies to:
Have an accounting system that records the transactions of the corporation “accurately and fairly” Have an adequate system of internal controls and exercise due diligence in business matters
The accounting provisions, however, don’t apply just to bribery-related violations. They require all public companies to account for all of their assets and liabilities accurately and in “reasonable” detail. Some actions can be illegal under both sections of the law. For example, a company that pays for senior officials of a country to travel first class with their spouses on an all-expenses-paid trip to Las Vegas (where the company is not located) violates the law’s anti-bribery provisions. In addition, if the trip is entered into the company’s books as a legitimate business expense, it violates the FCPA’s accounting provisions.
Examples of Recent FCPA Cases
Some companies must pay to resolve charges against subsidiaries. In 2020, Herbalife Nutrition, Ltd, a direct-selling company, agreed to pay more than $67 million to resolve charges that it violated the books, records, and internal accounting controls provisions of the FCPA during a bribery scheme orchestrated by its China subsidiary. Companies that violate the FCPA may also face criminal charges. In 2019, Microsoft agreed to pay more than $24 million to settle SEC charges related to FCPA violations in several countries and additional criminal charges in one of those countries. In addition to charges against a business for FCPA violations, a company executive may also be held personally liable for violations. In 2019, the chief operating officer of Cognizant, a New Jersey-based technology company, agreed to pay a fine to settle charges for his role in a bribery scheme. Cognizant, in turn, agreed to pay $25 million to settle violations of anti-bribery, internal accounting controls, and recordkeeping provisions.
How the Foreign Corrupt Practices Act Works
The FCPA applies to many issuers, including individuals and businesses listed on U.S. stock exchanges or companies that are required to report to the SEC. Actions by these issuers that are considered to be prohibited types of bribes include:
Winning a contract Influencing a procurement (buying) process Violating rules for importing products Gaining access to nonpublic tender information Getting exceptions to regulations Avoiding contract termination
Enforcement and Penalties for FCPA Violations
Both the Department of Justice (DOJ) and the SEC have the authority to enforce the FCPA. The process begins with an investigation, initiated by the following sources:
Tips (including whistleblower information)Other investigationsSelf-reports or public disclosures by companiesReferrals from other offices or agenciesPublic sources, like media reports and trade publicationsProactive investigations by the DOJ or SEC.
The SEC can:
Bring civil actions against issuers and their officers, directors, employees, stockholders, and agentsRequire violators to give up up ill-gotten gains and pay prejudgment interest and substantial civil penalties
The DOJ, meanwhile, has criminal FCPA enforcement authority over issuers and both criminal and civil enforcement for the FCPA’s anti-bribery provisions over:
U.S. citizens, nationals, and residentsU.S businesses and their officers, directors, employees, agents, or stockholders acting on the company’s behalfCertain foreign persons and businesses that act to further an FCPA violation while in a territory of the U.S.
Whistleblower Provisions of the FCPA
The FCPA is a whistleblower law, meaning that many of the investigations begin with tips from whistleblowers. Federal and state laws protect issuers from retaliating against FCPA whistleblowers who send information to the SEC or DOJ. In addition, the SEC can give monetary awards to eligible individuals who voluntarily give “high-quality, original information” leading to over $1 million in sanctions.
