Monday, February 25, 2013

Brief Overview of the FCPA

In November 2012, the criminal division of the Department of Justice and the Enforcement Division of the Securities and Exchange Commission published A Resource Guide to the U.S. Foreign Corrupt Practice Act.  The Foreign Corrupt Practices Act (the “Act” or the “FCPA”) is a U.S.-based law that restricts U.S. Companies and entities under various circumstances from engaging in bribery of foreign officials to gain a business advantage.  The USDOJ and the SEC share enforcement of the Act and any person or business engaging in business overseas needs to be mindful of these provisions, as even innocuous commercial practice could get caught up in the Act’s restrictions.  The Guide is intended to assist companies in their compliance with the salient provisions of the Act.

Originally enacted in 1977, and amended over the last 35 years to create affirmative defenses, expand the definition of foreign officials and to comply with  the Anti-Bribery Convention, the FCPA contains both anti-bribery and accounting provisions intended to reduce or eliminate corrupt payments to foreign officials.  Violations could lead to fines, imprisonment or disgorgement of revenues.  Below are some general requirements of the FCPA.  We will tackle specific issues under the FCPA in later releases.

The anti-bribery provisions of the Act prohibit (i) U.S. persons and businesses, (ii) U.S. and foreign public companies listed on stock exchanges in the United States or which are required to file periodic reports with the Securities and Exchange Commission, and (iii) certain foreign persons and businesses acting on United States soil from making corrupt payments or other bribes to foreign officials to obtain or retain business.The purpose of the FCPA was to eliminate unseemly advantages that some U.S. companies (and others acting on U.S. soil) had, which reduced competition in many marketplaces.

The accounting provisions further seeks to eliminate bribery by requiring the persons and business subject to the Act to make and keep accurate books and records and to devise and maintain an adequate system of internal accounting controls. By creating controls and systems that all companies had to abide by, irregularities that would trigger FCPA audit could be easily identified.  The accounting provisions also prohibit individuals and businesses from knowingly falsifying books and records or knowingly circumventing or failing to implement a system of internal controls.  The playing field was leveled.

Bribery and corrupt payments can take many forms.  It can include the intent to make a corrupt payment (and not necessarily the execution of the said corrupt payment). It can also include items of nominal value in the U.S. if it has significant value in the country the payment is made.  Further, a corrupt payment can be found even if the identity of the recipient is unknown.

The accounting provisions of the Act consist of two components.   The books and records provision of the Act require issuers to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer’s transactions and dispositions of an issu­er’s assets.  This is borne out of the fact that corrupt payments are often mischaracterized as consulting fees, royalties, reimbursement of expenses or rebates.    The internal controls provi­sion of the FCPA, requires issuers to create and maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the issuer’s assets in such a way that accurate reporting of financial information is made.  An issuer is any entity that has its shares traded over a U.S. stock exchange or is otherwise required to report under the Securities Exchange Act, as amended and interestingly enough many of the reporting requirements for financial information of issuers have broader requirements under the Securities Exchange Act and the Sarbanes-Oxley Act.

For more information, the following websites offer a plethora of information that will help your business in complying with and reporting issues related to the FCPA

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