Does your company transact business outside the United States? Form strategic alliances or joint ventures with foreign individuals or companies? If so, it is imperative that you monitor the evolution of international anti-bribery legislation.
The United States, predictably the champion of the free market economy, has led the fight against commercial bribery for over two decades. Prior to 1977, American companies operating abroad were governed by the Securities Exchange Act of 1934, 15 USC Sec 78, the Mail and Wire Fraud Acts 18 USC 1341 and 1343, the Internal Revenue Code 162 (c)(1), the Currency and Foreign Transactions Reporting Act 31 USC 5316, and the False Statements Act 18 USC 1001. This legislation is still in effect, however, in 1977 the US took an even tougher stand against corruption by adopting all encompassing legislation titled “The US Foreign Corrupt Practices Act 15 USC Sec 78 (FCPA).” Since then, the US has promoted the adoption of the principles of the FCPA internationally. In February of 1999, progress was made with the adoption of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions by 29 members of the Organization for Economic Cooperation and Development (OECDA) and five non-OECDA countries.
The evolution of anti-bribery legislation is a remarkable re-framing of international commerce and business. The thought of eliminating payments to public officials for their favorable treatment is peculiar to many involved in international transactions. Documentation of this practice goes back to the time of the Pharaohs, and the practice is part of the fabric of many cultures. In the Middle East, it is baksheesh, in Mexico, una mordida, in China, huila, in Russia, vzyatka. The discourse over the past 20 years has revealed the tremendous cost of these practices to civil society. Fraud in government procurement robs society of funds to build infrastructure and support its population. National assets, often secured by the “blood and sweat of the people,” are sold off to power brokers and cronies at below-market prices.
“Why is the effort to stamp out bribery so important? First of all, because it’s right. But, also, because bribery of public officials hurts real people.”
William Daley–Former US Secretary of Commerce
The FCPA focuses on two distinct but related subjects: payments to government officials, and business accounting and control practices. Investigators find that, most often, funds used to make bribes are not recorded on the company’s books, or the accounting records are inaccurate. Therefore, the FCPA makes it a crime not only to bribe a foreign official, but also to make false and misleading entries on a company’s books for any reason whatsoever.
Violation of the anti-bribery provisions of the FCPA involves the use of interstate commerce, which is often the use of telephone, fax, e-mail, courier mail, mail and international travel. Another element is the requirement of “corrupt intent,” i.e., the offer, payment, promise or gift is intended to induce the recipient to misuse his official position in order to wrongfully direct business to the person making the payment or his client. Note that it does not require the contemplated action be completed. The third element is that there must be an offer, payment, gift or promise of money or something of value. Although, the offer or payment must be to a foreign official, do not be misled by a lack of an official title. This includes persons employed directly by the foreign government or commercial enterprises owned or controlled by a foreign government, and persons like professionals and agents working for the government. It also covers payments to a third party knowing that the person will pass the payment on to a foreign official.
The OECD Convention is a less-detailed instrument that calls on member states to make foreign official bribery to obtain a business advantage a crime under similar, but not identical, provisions to the US FCPA (Article 1). Also, it calls on them to impose books and records requirements and internal accounting controls (Article 8) to make foreign bribery an offense under money-laundering laws equal to domestic bribery (Article 7), and stipulate to cooperate in the investigation and prosecution of offenses (Article 9). To date, 34 countries have agreed to an OECD Anti-Bribery Convention, with 18 fully ratified.
The US has consistently pressed to internationalize the anti-bribery rules. In 1988 Congress expanded the FCPA, and issued a mandate to the Executive Branch of the U.S. Government to negotiate multilateral anti-bribery rules. The OECD Convention is just one example. The World Bank adopted procurement guidelines to combat bribery, as did the International Monetary Fund. Latin-American Countries adopted the Inter-American Convention Against Corruption, 35 ILM 724. The European Union is pursuing them through the Council of Europe and other conventions.
“As we enter the 21st Century, people throughout the world are rejecting the notion that corruption is inevitable. Success (in fighting corruption) depends on impartial democratic institutions, open elections, and unfettered access to information. Success requires leadership by the private sector and active participation by citizens. Promoting integrity in government and the marketplace improves the global governance climate, nurtures long-term growth, and extends the benefits of prosperity to all people.”
Colin Powell–US Secretary of State
It is advantageous for US companies to take a proactive approach to compliance with these laws by study of FCPA, the OECD and related legislation, and adopting a compliance policy. For example, not all payments to public officials in international business transactions violate the FCPA. These include payments made to expedite routine transactions, i.e., visas, permits, licenses, work orders, extraordinary police and fire protection, site inspections and priority handling of cargo — these are often called “grease payments.” The 1988 amendments to the FCPA identified two affirmative defenses under the FCPA. That is, when payments are lawful under the written laws and regulations of the foreign official’s country, and the other is when the payment was a reasonable bona fide expenditure, such as travel and lodging expenses of an official related to the promotion or demonstration of products or services — or related to the execution of a contract with the foreign government or agency.
These exceptions should not be seen as “loopholes” in the legislation or suggest that the prohibitions be taken lightly. The scope of the FCPA and related multilateral legislation reaches beyond a company paying money to a foreign politician for favorable treatment. The US company, its officers and employees can be charged with violating the FCPA based on the actions of its consultants or joint venture partners.
There is a widespread belief that a majority of US Fortune 500 companies have circumvented the FCPA over the years with various schemes, including counter-trade, agent commissions, and parallel transactions. These companies, as well as those new to the global economy, will do so at very high risk. For example, breach of the FCPA can subject companies to fines of up to $2 million and individual violators to fines of up to $100,000, as well as imprisonment of up to five years. Anti-corruption is no longer a noble US foreign policy objective — it is now an essential factor to profitably doing business globally, and the success of nations.
In 1999, Transparency International (TI) and Gallup International Associates (GIA) conducted 779 in-depth interviews of major companies, commercial banks, law firms, accounting firms and chambers of commerce active in fourteen emerging market countries (accounting for 60% of the exports into all emerging market economies — including Russia, Poland, Hungary, Brazil and India). In October, 1999, TI and GIA issued the following Bribe Payers Index (BPI), in which a score of 0 represents high levels of bribery and 10 represents negligible levels.
Gallup International asked: “In the business sectors with which you are familiar, please indicate whether companies from the following countries are very likely, quite likely or unlikely to pay bribes to win or retain business in this country.”
1999 Transparency International Bribe Payers Index (BPI)
Ranking 19 Leading Exporters (a higher score means a lower level of bribery)
For years, multilateral institutions like the World Bank and the International Monetary Fund took the position that that they would not interfere with the internal politics of the countries that they lent money to. They learned that the cost of corruption to those countries required a shift in policy. Now, they will cut off lending to recipients who ignore corruption.
The evident shift of attitude regarding international bribery is good news to US companies who have complained that, in the past, European and Asian competitors have had an unfair advantage not having to comply with similar legislation. They have had to compete with companies from countries that not only permit overseas bribes, but also encourage them by offering tax deductions for the payments.
It is incomprehensible to American executives that a company could pay a bribe to a foreign public official and then take an income tax deduction for the payment. The US FCPA has specific provisions prohibiting tax deductibility of such payments. There is an international effort to encourage the adoption of legislation eliminating this practice.
Know your friends well, and know your enemies intimately. Transparency International publishes a Corruption Perceptions Index (CPI), which ranks countries by the level of corruption that is perceived to exist among public officials and politicians. The CPI reflects the perception of business people, academics and country analysts. The 2001 Corruption Perception Index is a composite index which draws on 14 surveys from 7 independent institutions. A CPI score of 0 represents the perception that there is high corruption in the country and 10 represents negligible levels.
The 2001 CPI ranks 91 countries. Some of the richest countries in the world scored 9 or higher, indicating very low levels of perceived corruption. But 55 countries — many of which are among the world’s poorest — scored less than 5, suggesting high levels of perceived corruption in government and public administration. The updated 2014 CPI and additional information about Transparency International is available here.
We counsel our clients doing business internationally to invest the time and energy to develop a program to comply with this legislation that includes:
- prohibit the direct or indirect payments to foreign officials, or political contributions in these markets, without written authorization of a decision maker that is versed in compliance with FCPA, OECD and related legislation,
- engage a professional security firm to conduct a due diligence investigation and evaluation of agents and local partners, including background investigation to determine their previous positions in government, education and professional affiliations,
- conduct due diligence investigation and evaluation of agents and local partners, including background investigation to determine their previous positions in government, education and professional affiliations,
- determine the difference between reasonable and unreasonable compensation requests by local representatives under industry practice and local standards,
- develop a system of reporting and investigating alleged violations of the company policies or legislation,
- develop and implement a company-wide training program which includes review and discussion of the company’s policies, realistic case studies, zero tolerance for violation of the policies, and access to the company General Counsel with an open-door policy regarding questions in this area, and
- establish membership in Chamber of Commerce and trade associations to take advantage of the collective wisdom of their members, and press them to lobby foreign governments to enact anti-bribery legislation to protect the company from corrupt practices.
Going global offers tremendous business opportunities to our clients, and that comes with the requirement that they take responsibility for compliance with US and international laws regarding bribery and accounting.
The Bribe Payers Index (BPI) and the Corruption Perceptions Index (CPI) described in this article were developed by Transparency International and are used with its permission. Transparency International maintains a website at www.transparency.org