Foreign Corrupt Practices Act (FCPA): Provisions

by Julie S. Mendel, SILA-A, CDEi | Oct 27, 2020
Foreign Corrupt Practices Act (FCPA) Provisions: Anti-Bribery Provisions & Accounting Provisions

The Foreign Corrupt Practices Act of 1977 (FCPA) was enacted in 1977 after revelations 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 the corruption and restoring public confidence in the integrity of the marketplace.

When the bill was passed, Congress noted in its report that the law was specifically “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.”

This article is Part 2 in a series on the Foreign Corrupt Practices Act. To learn more about the background and history of the Foreign Corrupt Practices Act, see Part 1 of this series. To learn more about the enforcement and penalties of the Foreign Corrupt Practices Act, see Part 3 of this series.

Foreign Corrupt Practices Act (FCPA) Provisions

Corporate bribery is bad business. In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet. Corporate bribery of foreign officials takes place primarily to assist corporations in gaining business. Thus foreign corporate bribery affects the very stability of overseas business. Foreign corporate bribes also affect our domestic competitive climate when domestic firms engage in such practices as a substitute for healthy competition for foreign business. United States Senate, 1977

The Foreign Corrupt Practices Act (FCPA) primarily consists of two provisions: (1) the anti-bribery provision, which generally prohibits the bribing of foreign public officials; and (2) the accounting (or “books and records, and internal controls”) provision, which requires publicly traded companies to maintain accurate records and have a system of internal controls sufficient to provide reasonable assurances that transactions are executed and assets are accounted for in accordance with management’s authorization and recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles (known as “GAAP”).

The provisions of the FCPA can be applied anywhere in the world, and in certain circumstances, even where there is no U.S. territorial connection. The SEC has clarified the law’s prohibitions extend to publicly traded companies (“issuers”) and their officers, directors, employees, agents, and stockholders, noting that agents can include third party agents, consultants, distributors, joint-venture partners, and others.

FCPA Anti-Bribery Provisions

The FCPA’s anti-bribery provisions generally forbid any payment, offer, promise, or authorization to pay anything of value to any foreign official, foreign politician, or foreign political party with the intent to influence any decision that may result in obtaining or retaining business.

The SEC has clarified that the phrase “anything of value” in the statute is not limited to money and may include things like computer equipment, medical supplies, vehicles, etc. Furthermore, the SEC interprets the term “foreign official” in the statute broadly, stating that it can include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or anyone acting on behalf of such government or department.” As an example, it would include foreign military officers, ministry-level officials, and any other officers and employees of a government-controlled entity.

The FCPA also prohibits indirect bribes, defined as a payment made to anyone while “knowing” that person will use some or all of the payment to bribe a foreign official. Later amendments to the FCPA provided for an exception and two circumstances which qualify as “affirmative defenses” under the FCPA, details of which are provided below.

The purpose of the payment must also be considered. In order for the payment to be considered illegal under the act, the payment must be made “corruptly”. As Congress explained in 1977 when the Act was adopted, the FCPA “does not require that the act [of bribery be] fully consummated or succeed in producing the desired outcome.” They continued:

The word ‘corruptly’ is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position in order to wrongfully direct business to the payor or his client, or to obtain preferential legislation or a favorable regulation. The word ‘corruptly’ connotes an evil motive or purpose, an intent to wrongfully influence the recipient. (S. Rep. No. 95-114)

As Congress explained, the corrupt act does not need to have succeeded nor been completed. As long as corrupt intent is present, merely promising, offering, or planning a corrupt payment is unethical and a violation of the law.

The “Routine Governmental Action” Exception (“Grease” Payments)

The FCPA does not apply to so-called “grease” payments, meaning any “facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official” (15 U.S.C. §§ 78dd-1(b)(1)).

Routine governmental action encompasses ordinary and common actions performed by a government official, including but not limited to:

  • obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country
  • processing governmental papers, such as visas and work orders
  • providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country
  • providing telephone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration

Routine governmental action does not include any decision by a foreign official about whether to award new business or to continue business with a company, nor any action taken by a foreign official involved in the decision-making process that encourages a decision to award new business or continue business with a company.

The Two Affirmative Defenses under the FCPA

The FCPA provides two circumstances where a payment or promise of value to a foreign public official may qualify as an “affirmative defense”:

The “local law” defense, under which the defendant must establish that “the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country” (15 U.S.C. §§ 78dd-1(c)(1)).

The reasonable and bona fide expenditures defense, under which the defendant must show that the “the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate” and that the payment was directly related to either “the promotion, demonstration, or explanation of products or services” or “the execution or performance of a contract with a foreign government or agency thereof” (15 U.S.C. §§ 78dd-1(c)(2)).

The SEC has clarified that when relying on the local law defense, the law or regulation the defendant is relying upon must have been a “written” law at the time of the relevant conduct. Local practices, customs, and other unwritten policies do not qualify for the local law affirmative defense. When Congress created the local law defense in 1988, they sought “to make clear that the absence of written laws in a foreign official’s country would not by itself be sufficient to satisfy this defense” (H.R. Rep. 100-85 [1987]). Thus, the fact that bribes may not be prosecuted under local law is insufficient to establish the defense.

Additionally, to satisfy that a payment is a reasonable and bona fide expenditure, issuers must have the appropriate internal controls and compliance procedures in place and show that the expenses are properly documented in the issuer’s books and records.

FCPA Accounting Provisions

The accounting provision of the FCPA has two requirements regarding (1) books and records; and (2) internal controls.

The first part of the provision — “books and records” — requires companies to keep books, records, and accounts, which must accurately and fairly reflect the transactions and dispositions of the company’s assets in reasonable detail. Enforcement of the books and records provision has typically involved company’s either misreporting large bribe payments or widespread inaccurate recording of smaller payments made as part of a systemic pattern of bribery.

The second part of the provision — “internal controls” — requires a company to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:

  • transactions are executed in accordance with management’s authorization
  • transactions are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets
  • access to assets is limited to management’s authorization; and
  • the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences

The provision does not require companies to implement a specific set of controls. Instead, the internal controls provision allows business’ flexibility in developing and maintaining an appropriate system of controls best suited for their company’s needs. However, the SEC has stated that an effective compliance program is a critical component of an issuer’s internal control.

Full Foreign Corrupt Practices Act (FCPA) Series

This article is Part 2 in a four-part series on the Foreign Corrupt Practices Act of 1977 (FCPA). For more information about the FCPA, see the the full series:

Foreign Corrupt Practices Act (FCPA) 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’s Firm Element course catalog by clicking the button below!

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