Foreign Corrupt Practices Act (FCPA): Background & History

By Julie S. Mendel, SILA-A, CDEi
Sep 29, 2020
foreign corrupt practices act: background & history

The Foreign Corrupt Practices Act of 1977 (FCPA) is a law enacted to prevent U.S. companies from disbursing bribes or any other improper payments to foreign public officials or public organizations. The FCPA was enacted as a result of revelations during the early 1970s of widespread bribery of foreign public officials by U.S. companies. The purpose of the FCPA was to remedy the problem and create a level playing field for American businesses by ending U.S. corruption abroad and restoring public confidence in the integrity of the marketplace.

The FCPA primarily consists of two provisions: an anti-bribery provision and an accounting provision, the latter of which is designed to prevent companies from hiding corrupt payments and to ensure the Securities and Exchange Commission (SEC) and shareholders have an accurate picture of the company’ finances.

This article is Part 1 of our series on the Foreign Corrupt Practices Act and focuses on the background, history, amendments, and changes to the FCPA. The FCPA's provisions are described in greater detail in Part 2 of our FCPA series. To learn more about the enforcement and penalties for the FCPA, see Part 3. For a summary of FCPA cases settled with the SEC, see Part 4.

Foreign Corrupt Practices Act (FCPA) Background & History

The payment of bribes to influence the acts or decisions of foreign officials, foreign political parties or candidates for foreign political office is unethical. It is counter to the moral expectations and values of the American Public. But not only is it unethical, it is bad business as well. It erodes public confidence in the integrity of the free market system. It short-circuits the marketplace by directing business to those companies too inefficient to compete in terms of price, quality or service, or too lazy to engage in honest salesmanship, or too intent upon unloading marginal products. In short, it rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business. Bribery of foreign officials by some American companies casts a shadow on all U.S. companies. United States House of Representatives, 1977

The problem of foreign bribery by American businesses was first revealed during investigations by the Watergate Special Prosecutor into illegal domestic campaign contributions. In 1974, during an SEC inquiry into these payments, the SEC discovered the contributions were made possible by falsified corporate financial records, as well as secret “slush funds” which companies had created in order to make corrupt payments not only to domestic politicians but also foreign public officials.

These companies came from a multitude of industries, with Congress noting those most typically involved being “drugs and health care; oil and gas production and services; food products; aerospace, airlines and air services; and chemicals.” Their hidden funds made these companies’ financial statements filed with the SEC inaccurate, and consequently the SEC initiated an enforcement and voluntary disclosure program.

From 1974 to 1976, the SEC continued its broad investigation and enforcement activities. Eventually more than 400 U.S. corporations — at least 117 of which were top Fortune 500 companies — admitted to bribing or giving other “questionable” payments to foreign public officials. These companies reported paying over $300 million in corporate funds (equivalent to over $1.2 billion today) to foreign government officials, politicians, and political parties.

It was unclear, however, what statutory authority the SEC had to conduct this enforcement. As a result, the SEC sent its report to Congress, and Congress began holding hearings on the question of improper and “questionable” payments by U.S. companies to foreign government officials. Ultimately a bill was drafted which Congress described as being “designed to prohibit the corrupt use of the mails or other means and instrumentalities of interstate commerce by U.S. corporations, directly or indirectly, to bribe foreign officials, foreign political parties, or candidates for foreign political office.”

Congress viewed passage of the Foreign Corrupt Practices Act (FCPA) as critical to amend the situation and halt corporate bribery, which they argued had tarnished the image of U.S. businesses and impaired public confidence in the integrity of the marketplace. Congress noted that corruption imposes enormous costs and leads to market inefficiencies and instability as well as sub-standard products.

The Foreign Corrupt Practices Act was signed into law by President Jimmy Carter on December 19, 1977.

Foreign Corrupt Practices Act (FCPA) Amendments & Changes

In response to numerous criticisms, Congress debated amending the FCPA for a number of years. Over a decade after the original bill’s passage, President Ronald Reagan signed into law the Omnibus Trade and Competitiveness Act of 1988, Title V of which is known as the Foreign Corrupt Practices Act Amendments of 1988.

The 1988 amendments made noteworthy changes to the original FCPA, one of the most significant being the addition of a “knowing” standard being required in order to determine the FCPA had been violated. The intention of this new standard was to encompass “conscious disregard” and “willful blindness.” It also provided certain defenses again violations: (1) the local law defense; and (2) the reasonable and bona fide promotional expense defense. These defenses will be discussed in more detail in a later article.

The amended FCPA also included a directive that the President should negotiate an international agreement with the Organisation for Economic Co-operation and Development (OECD) to prohibit bribery in international business transactions by many of the United States’ major trading partners. Subsequent negotiations culminated in the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions (Anti-Bribery Convention), which required participating parties to outlaw bribing foreign public officials.

In 1998, the FCPA was amended once again to implement the requirements of the Anti-Bribery Convention. These amendments expanded the FCPA’ scope to: (1) include payments made to secure “any improper advantage”; (2) reach certain foreign persons who commit an act in furtherance of a foreign bribe while in the United States; (3) cover public international organizations in the definition of “foreign official”; (4) add an alternative basis for jurisdiction based on nationality; and (5) apply criminal penalties to foreign nationals employed by or acting as agents of U.S. companies.

The Anti-Bribery Convention came into force on February 15, 1999, with the United States as a founding party.

Timeline of the Foreign Corrupt Practices Act of 1977 (FCPA), including the FCPA's Background, History, Amendments, and Changes

Foreign Corrupt Practices Act (FCPA) History & Amendments Resources

For more information on the background and history of the FCPA along with its later amendments, the following resources are available online:

Full Foreign Corrupt Practices Act (FCPA) Series

This article is Part 1 in a four-part series on the Foreign Corrupt Practices Act of 1977 (FCPA). For more information about the FCPA, see the full series:

Foreign Corrupt Practices Act (FCPA) Courses & Training

To learn more about compliance with the Foreign Corrupt Practices Act, WebCE offers the course Foreign Corrupt Practices Act: Avoiding Improper Payments, which is approved as continuing education (CE) credit for FINRA as well as CFP® certificants. To order this course and more, visit WebCE’ Firm Element course catalog by clicking the button below!

WebCE Firm Element Catalog