Industry Insights

This is the era of the global economy. Services supplied through foreign affiliates in the U.S. grew from $63 billion in 1987 to $727 billion in 2008, while services supplied by foreign affiliates of U.S. companies grew from $87 billion in 1987 to $1.1 trillion in 2008, according to the U.S. Department of Commerce’s Bureau of Economic Analysis. But these numbers simply tell us what we already know:  The business world is smaller and more interdependent as our ability to buy and sell in global markets increases. Operating in the global economy brings many complexities, such as increased political unrest, exchange rate risks and regulatory compliance issues.

One area of regulatory compliance in the spotlight is the Foreign Corrupt Practices Act (FCPA). This act prohibits individuals or organizations from offering, promising, making or authorizing payments of “anything of value,” directly or indirectly, to a foreign official, political party, political candidate or employee of a public international organization in order to obtain or maintain business or any other improper advantage, i.e., influence a decision, induce or stop an act in violation of a lawful duty or influence a decision of a government or instrumentality.

FCPA defines stiff fines and penalties for individuals and organizations:

• Individuals – Up to $250,000 and five years in prison for each violation
• Organizations – Up to $2 million plus civil penalties for each violation

This law was passed in 1977, so why all the attention now? Regulation is ineffective without strong enforcement, and there has—until recently—been little to no enforcement by the U.S. Department of Justice (DOJ) or U.S. Securities & Exchange Commission (SEC). In 2000, no fines were paid for FCPA violations. However, this is no longer the case; fine totals are now significant. In 2008, $87 million in fines related to FCPA violations were paid to the DOJ and SEC. In 2009, the amount was $627 million, and in 2010, the amount is a whopping $1.2 billion for just 16 infractions.

In addition to the FCPA, there are international conventions on bribery as well as anti-bribery laws in numerous countries. The most notable example is the United Kingdom law that took effect this year and is more far-reaching than FCPA. The U.K. law goes beyond requiring a company to have an adequate compliance program and requires companies to audit their agents (vendors, joint venture partners, etc.) for adequate compliance programs.

The United States Attorneys’ Manual cites “the existence and effectiveness of the corporation’s pre-existing compliance program” as a key factor in influencing prosecution of organizations. So what is DOJ looking for in an FCPA compliance program?

Having an FCPA policy and instructing employees to obey the law is not enough. DOJ requires a “culture of compliance” and monitoring program. The FCPA compliance program should include:

1. Risk Assessment – Identify and monitor compliance risks in your business in the areas of geographic risk, transaction risk, partner risk and contract risk.
2. Management’s Compliance Commitment – Management should deliver to employees and transaction partners a clear, consistent message.
3. Due Diligence – Know who you do business with and to whom you release funds.
4. Clear, Practical and Understandable Policies and Procedures – Have procedures and internal controls in place to monitor compliance and detect potential violations.
5. Effective Implementation – This goes beyond paper compliance to include embedding compliance into your current processes and controls.
6. Monitoring and Review – Document the effectiveness of your procedures and controls and re-evaluate the changing business environment to work toward proper coverage.

If you are doing business with foreign entities operating in the U.S., or if you buy or sell goods and services overseas, implementing an effective FCPA compliance program can protect your business from significant fines, brand or reputational damage and the distraction and cost of an investigation.

For more information, contact your BKD advisor.