If an African village chief demands a chicken for permission to conduct some local business transaction, is that considered a facilitating payment under the Foreign Corrupt Practices Act?
The question may sound like a bit of FCPA-related humor—and OK, it really is pretty funny—but it also is a genuine example of the compliance questions global companies are facing these days when trying to stamp out bribery. It was one of many FCPA questions compliance executives struggled to answer last week at the Compliance Week 2008 annual conference.
(And for the record: Yes, the chicken would be a facilitating payment under the FCPA, since the chief is a quasi-government official seeking something of value to take action to help the business.)
Anyone following enforcement trends knows that the Department of Justice and the Securities and Exchange Commission have significantly increased their enforcement efforts related to the FCPA, which bars U.S. companies and citizens from bribing foreign government officials to win business. The two agencies have racked up a record number of enforcement actions and penalties. Based on comments from enforcement officials, that trend shows little sign of abating.
Speaking at Compliance Week’s conference last week, Deputy Assistant Attorney General Barry Sabin reiterated that the FCPA is “a significant priority” for the Justice Department. Increasingly, the DoJ is bringing actions in tandem with the SEC, which enforces the law’s books-and-records provisions.
“There’s significant relationship between our prosecutors and the lawyers at the SEC,” Sabin said. “We have regular discussions. We work out timing considerations with the SEC to send a consistent message.”
Beyond coordination with the SEC, Sabin said the DoJ is working with its foreign counterparts around the globe to maximize enforcement efforts. And the focus isn’t solely on U.S. corporations, as shown by recent enforcement actions against Flowserve and Volvo. Any company registered on U.S. exchanges or with a business presence in the United States is fair game too.
If the prospect of the Justice Department or the SEC knocking isn’t enough to focus companies’ attention on FCPA compliance, the potential hit to the company coffers—and reputation—should be, according to experts.
“The reputational risks for companies have never been higher,” noted Joshua Hochberg, a partner in the law firm McKenna Long & Aldridge and a former chief of the Justice Department’s fraud section. During a discussion on FCPA enforcement and preventative steps, Hochberg noted that, in what may be a sign of the times, “The New York Times is running FCPA articles on the front page.”
Companies facing potential FCPA problems have good reason to want to settle them quickly, Hochberg and others say. Offenders risk debarment from government contracts and the possible loss of their export licenses, which can put a company out of business. But even those companies inclined to resolve potential problems quickly don’t face an easy task: Investigating an FCPA problem can take years and can cost a company millions of dollars.
Hochberg cited one case where an internal investigation that revealed $6.7 million in suspect contracts ultimately cost the company $60 million. Offshore drilling contractor Pride International, which has been investigating potential FCPA violations in some of its operations since 2006, has already spent more than $40 million on its investigation, according to the company’s chief compliance officer, Brady Long. Pride voluntarily disclosed its findings to the DoJ and the SEC and continues to cooperate with authorities as the investigation continues.
Know Who is Who
Long and others advise companies to take painstaking care to ensure they identify all of their potential FCPA risks. Long says that requires serious attention in five areas: your locations, the controls in place to prevent or detect problems, your business, your employees, and your vendors. In particular, Long and other compliance executives stress that companies must carefully vet any third-party consultants, vendors, or agents doing work on their behalf.
“That’s where the highest risk is in the FCPA arena,” said Scott MacKay, Lockheed Martin’s vice president and deputy general counsel. At Lockheed, the use of third parties, agents, or consultants is centrally controlled. “We don’t retain an agent unless it’s approved at the corporate level … and we have a whole variety of standard terms and conditions,” MacKay said.
Disbursements to consultants are also controlled centrally at Lockheed. “Nowhere will you get into trouble faster where money is going out the door that’s not controlled centrally,” MacKay said. “It runs the risk of money being paid contrary to the policy, but more importantly it makes it very difficult to establish proper financial internal controls to assure the enterprise is not violating the accounting provisions of the FCPA.”
“The reputational risks for companies have never been higher … The New York Times is running FCPA articles on the front page. ”
— Joshua Hochberg,
Even social programs, including corporate charitable donations, can pose FCPA risks, Long noted. And the age-old adage to “know thy customer” holds even greater weight for FCPA purposes, since in many countries (foremost in China with its many state-run companies), it can be nearly impossible to determine who is a government official and who is a business executive—assuming they’re even separate people in the first place.
In emerging market countries like Brazil, Russia, India, and China, strict laws coupled with lax enforcement can create major FCPA compliance headaches for companies, warned Rocco deGrasse, a principal of KPMG’s Forensic Advisory Services.
Companies frequently face situations where going along with business as usual in emerging markets would violate local laws that, while not enforced by the countries themselves, would cause companies to run afoul of FCPA provisions.
For example, deGrasse said, it’s not uncommon for a company’s perishable cargo to sit on a pier awaiting release by customs. The problem, he said, is that “no one is going to release it until you make a facilitating payment, but the country’s laws prohibit facilitating payments. Therefore, if you give it, you violate local laws and you don’t have protection under the FCPA’s facilitating payment exception.”
Not surprisingly, experts say that a strong compliance program is a company’s best defense. MacKay stressed that, for any compliance program to succeed, it must have support from the senior leadership, including the company’s board.
“If the senior leadership doesn’t walk the walk, I guarantee you that whatever binders you have on the shelf outlining a compliance program are going to be of little use,” he said. “Those of us who are down below working look up, and we know when leadership is committed and when they’re not. People will act in a way that follows what the leadership of a corporation does.”