Introduction
There is a famous quote that “Corruption is the most infallible symptom of constitutional liberty”. In the recent past, there has been quite a lot of awareness and activism about corruption and its prevention worldwide and specifically in India. The U.S. Foreign Corrupt Practices Act, 1977 (FCPA) is the single largest, widely recognised piece of legislation in the world which deals with the issue of various corrupt practices and contains the legislative provisions specifically to prevent such practices. Recently, the UK Bribery Act, 2010 was passed on the similar lines of FCPA.
This article deals with the salient features of the FCPA, FCPA settlements, the global legislative framework relating to prevention of corrupt practices, the Indian scenario and the key considerations for ensuring FCPA compliances.
For Accounting Professionals, an awareness of this important piece of legislation is the need of the hour especially when global companies are setting up shops in India and also Indian companies are expanding their wings globally necessitating the compelling need for a high level of awareness of the FCPA and other corruption prevention legislations.
Essence of FCPA
FCPA generally prohibits U.S. companies and citizens, foreign companies listed on a U.S. stock exchange, or any person acting while in the U.S., from corruptly paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business. Prohibition under FCPA also extends to making and offering to make payments to foreign public officials, including members of political parties, to further business interests. The FCPA also requires ‘issuers’, including foreign companies, with securities traded on a U.S. exchange or otherwise required to file periodic CANCEROUS CORRUPTION reports with the Securities and Exchange Commission (SEC), to keep books and records that accurately reflect business transactions and to maintain effective internal controls.
The above provisions can be analysed under two broad categories, namely,
- Anti-bribery provisions and
- Provisions relating to maintenance of books of account.
The first part is generally enforced by the Department of Justice (DOJ) and it prohibits U.S. persons and U.S. firms, or those listed on a U.S. stock exchange, from making and offering to make payments to foreign government officials to obtain, or retain, business or a business advantage. The antibribery provisions make it illegal to directly or indirectly make payments of money or give anything of value to any foreign government official to influence a decision that will result in obtaining or retaining business or secure an improper business advantage. The anti-bribery provisions apply to domestic concerns, issuers (listed entities in the U.S.) and any person while in the territory of the U.S.
The second part relating to books of account is enforced by the SEC. The FCPA’s Books and Records and Internal Control provisions (which apply only to issuers) require:
(i) that books, records and accounts are kept in reasonable detail to accurately and fairly reflect transactions and dispositions of assets, and
(ii) that a system of internal accounting controls is devised
(a) to provide reasonable assurances that transactions are executed in accordance with the authorisation of the management;
(b) to ensure that assets are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets;
(c) to limit access to assets to management’s authorisation; and
(d) to make certain that recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. In many instances, improper payments to a foreign official to obtain or retain business result not only in anti-bribery charges, but also books and records and internal control charges, given that improper payments are often falsely characterised by giving a different colour in the company’s books and records such as payments towards liaisoning services, commissions, miscellaneous expenses, etc. and given the enforcement agencies’ view that the improper payments would not have been made if the company had effective internal controls.
Under FCPA, the organisation can be held responsible for any improper payments made by their subsidiaries, associates, joint-venture partners, directors, agents, employees, associates or third-party intermediaries and representatives as well. FCPA settlements The past few years have seen a tremendous increase in the settlement of FCPA charges by both corporations and individuals. Violations of the FCPA can result in criminal and/or civil liability for companies, and for their individual officers, directors, employees, and agents. The significant point to be noted in ensuring FCPA compliance is that there is no minimum threshold for the dollar amount of infractions, and even what might be considered as a small bribe can result in big penalties, especially if FCPA problems are systemic. Details of the top 10 FCPA settlements in the recent past are given in the table below; The magnitude of the above settlement amounts indicate the gravity of the problem and the need for enhanced monitoring in ensuring strict compliance with the FCPA provisions. Global legislative framework for prevention of corrupt practices Corruption is like a ball of snow, once it’s set rolling, it must increase !
The magnitude of corruption issue has increased manifold in the recent past and has posed serious challenges in establishing and ensuring a good governance framework globally. Hence, the regulators world-wide have taken up various initiatives to prevent the corrupt practices. Under the OECD Convention, government officials are considered to be a particular risk with regards to corruption, because they have the ability to award valuable contracts, or grant favours, and yet are often paid relatively little. The definition of government officials is also broader and it covers ministers and civil servants, government employees including doctors, law enforcement and military, employees of any enterprise majority-owned or controlled by the state and also the tax authorities and local government officials. As a written international agreement, the OECD Convention specifically sets forth the basic, model elements of a foreign corrupt practices statute that each signatory country has agreed to enact into law soon after each country’s ratification of the Convention. Thus, the Convention has particular significance for all U.S. businesses that operate internationally in the signatory countries.
Due to ever-increasing corruption risks, one of the most important trends in FCPA enforcement is the increased aggressiveness of government. The law enforcement authorities are increasingly focussing on global companies. The US regulators are probably very active in this area, but those in other countries are also catching up fast. Regulators around the world are cooperating with each other, sharing information and levying increasingly punitive fines. The other interesting feature in monitoring corrupt practices is the increased attention of the regulators towards individuals responsible, rather than just the companies. They also focus on the extent of companies’ anti-corruption measures when considering fines.
Other than the FCPA of the United States, very recently, the British Parliament has passed the UK Bribery Act, 2010, which is perceived to be more stringent than the FCPA. Under the UK Bribery Act, companies doing any form of business in the UK are covered by these provisions. Thus, any foreign company with operations in the UK that might have engaged in commercial or government-related corrupt activities anywhere in the world could be prosecuted in the UK. In this regard, it may be noted that FCPA covers only bribing foreign government officials, whereas the UK Bribery Act is very exhaustive in nature and has got extended scope and it does not allow any carve-out for facilitation payments or sponsored delegation visits by government officials.
The need for fighting corruption has forced several countries to come up with a separate piece of legislation to fight this evil and also to continuously fine-tune and improve the existing legislations to put in more and more detective and preventive mechanisms in view of the ingenuity with which the corrupt practices are resorted to.
Indian scenario
Implementation of the FCPA in India poses serious challenges for corporates. Though India has anti-corruption and anti-fraud laws, such as the Prevention of Corruption Act, the Prevention of Money Laundering Act and Rules thereunder, as well as various checks under the SEBI Prohibition of Fraudulent and Unfair Practices Regulations, addressing the risk of corruption has become one of the serious challenges for corporations. The recent episode of corruptions and scandals in India has raised concerns in the country and around the globe.
One of the other major challenge in India is providing gifts, hospitality, entertainment, etc. that step over the dividing line from relationship building and good manners, into attempts to influence key decision-makers. This has been the main focus of anti-bribery legislations. The key point to be noted here is what may be regarded by the industry as normal business development practice could well be seen by a regulator as a bribe!
Transparency International — a reputed NGO and the global anti-corruption organisation — publishes a ‘Bribe Payers Index’, which identifies industry sectors which are most likely to have the practice of bribing the public official. In its report on Corruption Perception Index (CPI) 2010, it has placed India at 87th in the list of corrupt nations with a score of 3.3 on a scale of 10 (very clean) to 0 (highly corrupt). Considering this low score, doing business in India is perceived to have high risk from the perspective of corruption risk.
Similarly, according to TI’s Global Corruption Barometer 2007, which details how individuals rate their country’s corruption levels, 25% of respondents in India said they had paid bribes and 90% expect corruption in India to get worse over the next three years. This assessment carried out in FY 2007 is proving to be true in the light of the recent corruption scandals.
In view of the prevailing challenging environment in India, there is an urgent need for creating greater awareness amongst the public at large in India regarding various corrupt practices, strengthening the existing regulatory framework dealing with such corruptive practices, and vigorous implementation of statutory requirements relating to prevention of corrupt practices, etc.
Key considerations for ensuring FCPA compliances
The FCPA has a far-reaching effect and it does not stop only with the entity under consideration. Parent entities can be held responsible for the actions of their subsidiaries also even when the subsidiary has gone to great lengths to conceal the illegal activity and the parent company is unaware of the activity. Further, parent entities can be held responsible for behaviour prior to an acquisition, joint-venture, or merger, especially if a prior payment has led to ongoing profits.
Keeping the provisions of the FCPA in mind to ensure compliance with the FCPA, the entity management could consider the following;
Risk assessment relating to FCPA compliances
Periodic risk assessment by the entity, suo motu, as regards FCPA compliances would help in identifying the weak spots and the exposures, if any, and the corrective action to be taken. Such an exercise would help in identifying the risks which are pervasive in nature as well as specific to a particular activity or a transaction.
Conducting periodic health checks/due diligences
A system should be put in place to assess the health of the entity from the FCPA compliance point of view. Such an exercise should ideally be carried out by an independent person/third party.
Establishing strong internal audit functions
Having a strong and powerful internal audit system is a boon for fighting FCPA non-compliances. By way of timely identification, the internal audit can escalate the matters to those charged with governance and can also help in putting proper controls in place to prevent such non-compliances.
Anti-corruption programmes/policies and creating awareness
The entities should design their own anti-corruption programmes, policies and procedures. Further, it should arrange for dissemination of knowledge amongst all the employees by way of training programmes and other education programmes. Such an awareness exercise will go a long way in ensuring FCPA compliances.
Regular monitoring of intermediaries/third parties
Since the primary responsibility of ensuring compliance with the FCPA provisions vest with the entity, it should monitor intermediaries/third parties who are doing business for the entity on a continuous basis. Their activities, compliances, etc. need to be on the radar of the entity on a continuous basis. Further, it should also carry out the required background checks before appointing such intermediaries to represent the entity.
Reasonability assessments of payments made to various intermediaries
The amounts paid to the various intermediaries and third parties for the services rendered should be reviewed from the perspective of reasonability. Large sums of money paid to intermediaries which are disproportionate to the services rendered by them to the entity could trigger concerns of FCPA non-compliances which need to be investigated in detail.
Establishment of a system of identifying opportunities for corruption
The management should continuously work toward identifying various opportunities for corruption, so as to plug the loop holes by way of putting appropriate controls in place. Such an activity would help in identifying specific non-compliances of FCPA.
Periodic evaluation of performance targets and its achievements
The entities should review the process of achieving performance targets by various business heads keeping in mind the corruption risks. The pressure of achieving targets could force the employees to resort to incorrect/corruptive practices which need to be monitored and timely efforts have to be taken to prevent such non-compliances.
Self-declarations from all the employees for FCPA compliances
There should be a system of obtaining periodic self-declarations from all the employees of the company regarding FCPA compliances. This declaration should not be a form filling exercise, but should facilitate identification of FCPA non-compliances, if any, in letter and spirit.
Dedicated anti-corruption cell
Entities could have a dedicated anti-corruption cell which focusses on identification of FCPA non-compliances. Their mandate could also include closer review of the commercial decisions keeping in mind the anti-corruption requirements, review of the decentralised business models, greater automated surveillance of e-mails, data, and transactions, evaluation of existing sanctions to prevent corruption, etc.
