Ready to pay your FCPA penalty?

1) WPP plc – Pays 19 million for violation of FCPA rules in its Indian subsidiary.  2) Cadbury Ltd – Slapped with a 13 million penalty for breaking FCPA rules in its Indian divisions. 3) Beam Suntory Inc – Shells out 8 million for its Indian division which made illicit payments. 4) Oracle – Pays 2 million for disregarding FCPA protocols in India. 5) Your company – Pays?

All the four companies named above have a net worth of billions, and even with such staggering market capitals, they could not bury their misdeeds deep enough from the SEC or DOJ, who eventually pieced together the FCPA violations these companies committed to having an edge over its business rivals in India. 

If you thought you could get away with a “small” or “one-time” bribe in return for meeting the deadlines you or your supervisor has set, and hide it in your quarterly report, think again. 

At this point, you are probably going to say HEY! What is this FCPA that you are scaring me about and how do I even know if it applies to me? 

That’s a good question since a lot of companies are not even aware of its existence, applicability, or benefit, let’s take a brief look at what it is and why you could potentially be the next offender.

What is FCPA? 

FCPA stands for Foreign Corrupt Practice Act which is a criminal statute devised back in 1977 to outlaw companies from paying bribes to foreign officials of the state or entities with the motive of obtaining or retaining business. 

The government authorities that enforce the FCPA compliance and investigate possible violations are the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) of the U.S. 

The FCPA applies to any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, to do or omit to do any act in violation of his or her lawful duty or to secure any improper advantage to assist in obtaining or retaining business for or with, or directing business to, any person.

The FCPA Act for the common man can be broadly summed up in two provisions. 1) It is mandatory to maintain accurate books and records of all internal controls.  2) The absolute prohibition on any U.S. persons, issuers of securities, or other entities from offering payment to state authorities of other nations to have any business advantage or possibly to retain transactions with the offerer.  

How does being FCPA compliant help me? 

1) FCPA laws promote ethical work culture.  2) Reduces liability exposure for a company.  3) Helps bring down internal business costs due to corruption.  4) Avoid massive penalties.  5) Develop significant financial and reputational advantage in the global market.

Myth vs Fact – 

If you are thinking oh! I see these laws are in connection to the U.S, hence they have nothing to do with me. Wrong! as per the FCPA act it can be applied to 1) any U.S citizen,  2) against any foreign subsidiaries of any U.S companies regardless of their geographic location,  3) against any foreign company that has a U.S subsidiary or has a business in the U.S,  4) against any company that routes its transactions through the U.S. banking system.  5) against any foreign citizen working for any of the entities as mentioned above.

It can happen to any of us – 

Commissions, consulting fees, documentation charges, out-of-pocket expenses, etc are simple and often used to disguise bribes in its many avatars. Misreporting of large payments or extensive erroneous recording of small payments is the oldest trick in “cooking the book”.

Take the case of Siemens which is a German company, yet they had to pay a settlement fee of $800 million to the DOJ. 

The incident took place in Argentina where non-American employees of the company were offering bribes to Argentine state officials. Now since Siemens has securities that are actively traded in the U.S, the DOJ upon receiving a tip about the bribe brought in enforcement actions against Siemens and several criminal cases against eight of its former employees engaged in such corrupt practices. As it happens to be, those eight employees were non-Americans as well.

Dr. Reddys? that diagnostic lab your doctor asked you to get your cholesterol levels checked from remember? Well, this might be news to some of you but they have an American Depositary Receipt (ADRs) listed on the New York Stock Exchange and are titled as an “issuer” as per the FCPA Act (1977). 

In simple words, Dr. Reddys has a class of securities that could be traded on the U.S. exchange thereby bringing it under the FCPA’s jurisdiction for the reasons mentioned above. On 27 July 2021, anonymous complaints were brought to the notice that various healthcare providers were catered with unethical payments by or on behalf of Dr.

Reddys in Ukraine and several other countries. The SEC has already demanded the production of numerous regulatory and bookkeeping records which is to be followed by various legal scrutinies, investigations, and thousands of dollars in legal costs. Moreover, a blade hangs over their head of a possible penalty that can potentially run into millions if found guilty. 

*Pro-tip – Try remembering this acronym GMET. This stands for giving and receiving; G – Gifts, M – Meals, E – Entertainment, T – Travel. They are very basic ways a bribe is usually offered.

Are you in the bullseye?  Now the next step in this problem is to understand if FCPA applies to you. To understand that, take the following action. Are you managing a U.S. subsidiary company?  Does your company have a subsidiary in the U.S.? Does your company actively employ U.S. citizens? If the answer is a yes for the above questions, you are under the purview of the FCPA. One can also take this alternate test to understand if their company is an “issuer” as per the Act.Is it listed on a national securities exchange in the United States (either stock or American Depository Receipts);The company’s stock trades in the over-the-counter market in the United States and the company is required to file SEC reports.In case you are not sure of the above, check the SEC’s website to see if your company’s name is in the list of entities who file SEC reports.   

Impact of economic crisis – 

The recent times have been hard for all businesses trying to cope with lockdowns, restrictions on movements, etc. Companies dealing with essential goods and services such as pharma, healthcare sectors, and e-commerce have been working throughout the pandemic to ensure that society can sustain and live well. However, one must remember that business disruption or working for essential services does not make the organization immune from the risks of exposure to bribery and corruption. With major roadblocks and red tapes all over, this will by its nature create a highly competitive environment where committing FCPA violations will be extremely lucrative. Since the pandemic, there has been a drastic change in the business protocols and conditions, leading to a sudden increase in interactions with government officials to clarify the functioning orders. An organization can find itself seeking urgent approvals or permits for the movement of materials or seeking clarification related to the permitted attendance of its workforce or regarding the new import rules for goods. Throw in the necessary Covid protocols that need to be followed along with inspection of the premises, and we have a complex situation that may threaten to dislodge a stable organization. However, this is an acid test that companies must pass and not cut the budget on the FCPA compliance programs, thereby developing a strong internal control program and avoiding a gradual decline towards unethical culture.    

The 3 step plan – 

Step 1: Assessment – Every nation and its markets have unique properties, which brings along with it a set of challenges that has to be overcome to expand business there. 

Conducting an assessment on the sector of engagement and understanding its related risks is the foundation of a successful compliance program. 

Step 2: Detect and Prevent –  At the very outset, it is crucial to have a robust compliance program. When deciding on enforcement actions, the DOJ and SEC pay special attention to the corporate compliance programs put in place. To develop better programs one can read the 2020 DOJ guidelines which are used to guide U.S. federal prosecutors on how they should evaluate compliance programs of companies when deciding on charges. A central pillar to this program would be Anti-corruption and Bribery training followed by a strict screening of recruits for business expansion. 

Step 3: Remedy – 

Nonetheless how airtight a compliance program is, it is impractical to believe that it will always shield the company from any conflict with the FCPA or subsequent violations. Thus to further reduce any vulnerability, a company can – 

1. Voluntarily profess to the regulating authority and provide full cooperation. 
2. Bring forth appropriate rectifying measures promptly and consistently.  

Build sans the bribes – 

Considering you are operating in an environment that ranks 85th in the world corruption index for 2021, factor in FCPA, and the deck is no doubt stacked against you. But this is where you have to hold your calm and plan, consider prior investment in resources and understand to the minute detail what the specific state regulators require of you to navigate any pitfall. Therefore developing a stellar corporate compliance body is essential. There are five crucial components in this. 

1. Leadership.
2. Risk Assessment. 
3. Code of Conduct.
4. Regular training. 
5. Supervision. 

To be clear one must assimilate all these factors to considerably bring down the risk quotient of a company. Until the pandemic lasts and even in a post-pandemic era, it will constantly challenge the organization’s leadership and senior management on their decision-making skills related to scenarios of ethics versus profits and effective anti-bribery and anti-compliance status without the fear of any retaliation. 

Rainmaker modules on FCPA training are developed with extensive legal counsel advice. This dramatically helps mitigate corruption risk faced by organizations, helps file your quarterly compliance reports and develops a positive, and efficient work culture thus helping you to avoid.

References – 

1. https://www.sec.gov/enforce/sec-enforcement-actions-fcpa-cases
2. https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act
3. https://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf

Author: Sagnik Mukherjee Editor: Sumali Nagarajan

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