The impact of the law on corrupt practices abroad on boards of directors

“Tone at the top” now includes the guarantee that business transactions are ethical and bribe-free.

The impact of the Foreign Corrupt Practices Act (FCPA) on companies and their boards of directors has been huge and widespread, and not just on US-based companies. Companies around the world have changed their business practices to avoid violating the FCPA and being trapped in law enforcement by the Securities and Exchange Commission (SEC) or the Department of Justice (DOJ).

An SEC investigation in the early 1970s found that more than 400 U.S. companies admitted to making questionable payments totaling more than $ 300 million to officials of foreign governments, foreign political parties, or foreign politicians (often candidates for election). It was not illegal at the time, so the legislature decided to make it illegal.

Basically, the FCPA prohibits individuals and entities from bribing officials of foreign governments anywhere in the world for the benefit of their own business interests. A bribe is defined as something “of value” and therefore is not limited to cash payments or other financial transfers. Originally enacted in 1977, the FCPA was amended in 1998 to also apply to foreign natural or legal persons who, directly or through third parties, facilitate or make fraudulent payments in the United States.

It is important to note that any domestic or foreign company that has a class of securities registered, or is required to file reports, under the Securities and Exchange Act of 1934 is subject to the application of the FCPA. The SEC and DOJ have made it clear that they intend to prosecute individuals, and the personal involvement of directors in overseeing a company’s compliance program has increased dramatically. It is not acceptable for a board to simply rely on management’s assurances that the appropriate anti-corruption policies and procedures are in place. The effectiveness of a company’s measures should be tested and verified by the board on an ongoing basis, and this should be documented.

“Bananagate” and black boxes

A prominent example of the conduct that stimulated the FCPA was known as “Bananagate”. In 1974, the country of Honduras passed a law that doubled the tax on banana exports. Chiquita, then known as United Brands Company, sourced nearly a quarter of its bananas from Honduras. The following year, the company’s chief executive officer, Eli Black, committed suicide by jumping from the 44th floor of what was then known as the Pan Am Building in New York City. A government investigation into his death revealed that his company paid a bribe of $ 2.5 million to the President of Honduras, depositing the funds in a Swiss bank account. After the bribe was paid, the tax on banana exports was halved. While it was not illegal for American companies to bribe foreign officials, it was illegal to hide such bribes from shareholders.

It became apparent that many companies were using secret slush funds to make political contributions, and these were largely not reflected or reported in their files with the SEC. There were concerns on Capitol Hill that this level of foreign bribery would negatively impact America’s image abroad and not align with the country’s foreign policy framework. The FCPA was enacted by Congress in part to restore public confidence in the integrity of doing business in the United States.

It is perhaps ironic that some of the oldest and most important enforcement actions under the FCPA have targeted foreign companies (e.g. Siemens, Alstom, VimpelCom), while the “Top 10” list of financial sanctions now includes only one US company, Goldman Sachs, which paid $ 3.3 billion in penalties to resolve FCPA charges against Malaysia’s sovereign wealth fund in 2020. In total, the US government imposed financial penalties of more than $ 20 billion since the legislation came into force in 1977.

Compliance starts at the top

From a board’s perspective, FCPA compliance starts at the top. Directors should foster and encourage a culture with high ethical standards and should create and follow company policies and procedures to ensure compliance with all applicable laws, including the FCPA. What does this mean in practice? This means, for example, that directors should check whether the CEO’s routine communications to employees regularly highlight the company’s standards of ethical conduct. It also means directors need to set an example in their own personal conduct and encourage CEOs and senior executives to do the same.

Here is a good example. Several years ago, a high profile CEO traveled on a business jet to a country where government corruption is quite common. During landing, a part of the aircraft malfunctioned and a spare had to be shipped. When the CEO was ready to leave two days later, it became evident that the spare part had been withheld by customs authorities. It was communicated to the flight crew that payment in cash would result in the immediate release of the room. Upon learning of this, the CEO immediately made arrangements to depart on a commercial flight, much to the inconvenience of his schedule. Although never shared publicly, this story has been widely shared within the company and has had a positive effect on its culture.

But there is much more that the board needs to do and that every director needs to do. It is essential that boards of directors remain fully informed of all developments that may affect FCPA compliance. This includes personnel movements in international operations and foreign affiliates, merger and acquisition activities, changes in local laws or regulations and potential issues that may have arisen in the industry recently. Directors need to be genuinely interested in understanding how the company’s compliance program works in practice, what the weaknesses are, and what management is doing to address them. In companies active in high-risk sectors (e.g. oil and gas, mining) or having operations in high-risk countries, anti-corruption policies and procedures should be reviewed and discussed regularly and certainly not just once a year.

Company directors should lead the way by personally attending FCPA training sessions, learning outside of the boardroom, and demonstrating their deep commitment to a proactive culture of compliance.

Execution measures

For nearly two decades after its enactment in 1977, the new law was applied only sporadically, and the United States was the only one to attempt to exemplify strong core ethical values ​​in international trade relations. In 1994, the Organization for Economic Co-operation and Development (OECD) agreed to take “concrete measures … to combat the bribery of foreign public officials”, and in 1997, the Convention on Combating Bribery of foreign public officials in international business transactions has been completed. The UK passed its even broader Corruption Act in 2010.

While the enforcement of the FCPA has increased dramatically over the past 20 years, with many significant cases receiving wide public attention, it is difficult to say for sure that corruption has in fact been reduced. Part of the reason is that corruption is notoriously difficult to measure. One of the most comprehensive studies (by Grant Nicholas Margeson at the University of Texas at Austin in 2014) examining in depth the impact of FCPA enforcement measures in Mexico, Venezuela, Thailand, Nigeria, Kazakhstan, Indonesia, India and China, Brazil and Argentina “were unable to find that FCPA enforcement measures reduced levels of corruption in targeted countries.”

However, the “success” of a law can be boiled down to its definition of success. There is no doubt that the FCPA has had a significant – and positive – impact on the conduct of international businesses and discouraged unethical behavior in many companies, while raising awareness among boards of directors around the world. the responsibility to prevent and monitor illegal behavior.

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