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Eish Taneja highlights some basics about the US FCPA that Indian CAs need to be aware of

US FCPA: Impact on CFOs and

Finance heads The long arm of the FCPA can reach any US entity or persons belonging to these entities which are operating in any part of the world, including India

the spate of corruption scams involving the government, whether it is the 2-G case or the one involving the Com-monwealth Games, or the

Adarsh Society scam, has created concern within the community of Chartered Accountants (CAs). They will be impacted by the scams as they are called upon to play their roles as auditors, CFOs, or controllers, in not just domestic organisations but also US-based companies operating in In-dia. The latter concern is reinforced by the recent bribery case against former Siemens’ officials, involving former officials of two former Argentine ad-ministrations, under the US Foreign

Corrupt Practices Act (FCPA), 1977. The long arm of the FCPA can reach

any US entity or persons belonging to these entities operating in any part of the world, including India. This article highlights some basics about the US FCPA, which CAs need be aware of, to stay compliant.

importance of the US FCPaIn the USA, the Obama Admin-

istration has set a goal of doubling US exports in the next five years, so compliance with the FCPA, 1977 - which impacts every US company that does business outside the USA - will become important to many small and mid-size US companies. The US gov-ernment has stated that its citizens will not believe that the FCPA has teeth,

until they see business people going to jail, and it has taken action to this end. Half the total FCPA cases recently have been against individual com-pany managers and employ-ees, with 52 individual busi-ness people being indicted, sentenced, or convicted and awaiting sentencing, for FCPA violations in 2010. Notable among them, is the FCPA case against seven former Siemens executives, including two for-mer CFOs, filed by the SEC in December 2011. This became the first FCPA charge to be filed against a board member of a Fortune Global 500 com-pany, in a decade-long bribery case involving a USD 1 billion contract to produce national identity cards for Argentine citizens. Noting that the Sie-mens executives had allegedly approved up to USD 100 mil-lion in illegal bribes to top of-

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There is a law, namely, the FCPA which is part of the legal environment for international businesses, and compliance is not optional

ficials of two Argentine governments, between 1996-2007, SEC Enforcement Director, Robert Khuzami said in a conference call in December 2011, “Our investigation reveals that there were a few lines the executives were willing to cross, to win the contract.”

This establishes that the long arm of the FCPA can reach US citizens, including companies and business persons operating from anywhere in the world, including India. The FCPA has two provisions - anti-bribery and accounting. Under the first, it is a crime for any US individual, business entity, or employee of a US business entity, to offer or provide, directly or through a third party, anything of value to a foreign government of-ficial, with corrupt intent to influence an award or continuation of business, or to gain an unfair advantage. The second makes it illegal for a company that reports to the SEC to have false or inaccurate books or records, or to fail to maintain a system of internal ac-counting controls. Usually, the known standard of intent and knowledge in anti-bribery cases is minimal, and in-ferred from the bribery act itself. On the other hand, accounting cases are booked as civil actions, and the SEC’s burden of proof is the preponderance of evidence. The government does not normally lose an FCPA case.

Detailed below are a few basics about the FCPA which all legal and CA departments, specifically CAs who deal with US-based companies, need to be aware of.

a few FCPa basicsCorruption in international busi-

ness is common and frequently ignoredMany in the US business commu-

nity believe and have been frequently quoted to say, "Everyone knows that a company cannot do business in (Mexico, China, India, or Russia - pick a country) without paying bribes. It is considered normal behaviour to do so. It is crazy to have a US law that makes paying bribes in foreign countries illegal in the USA." There is a law, namely, the FCPA which is part of the legal environment for international businesses, and compliance is not optional because American manage-

ments have a low opinion of foreign government officials.

Investigation, prosecution, and punishment under the FCPA is com-mon

In recent years, a high percentage of the total fines imposed by the US Department of Justice have been in FCPA cases.

Total penalties imposed by DOJ / SEC for FCPA violations

2008 $893M

2009 $622M

2010 $1.8B

2011 $161M (first quarter)

Understand the company’s risk of being involved in an international bribery case

Companies must assess the risk of FCPA violations, to their international businesses. The FCPA’s definition of ‘Government Official’ is extremely broad and includes even low-level employees of government-owned companies. It is important to under-stand every way in which the business has contact with government custom-ers or government employees in the country or countries that they have operations in.

Some countries expose US compa-nies to very high risk of corruption. For example, China, Brazil, India and Mexico are well known corruption risks. But they pale in comparison to the pervasive illegal activity in countries such as Russia, Vietnam,

Nigeria, and Pakistan.

Transparency International Corruption Perception

Index-2010

Ranks Country Score

1 Singapore 9.3

1 New Zeeland 9.3

1 Denmark 9.3

4 Sweden 9.2

8 Australia 8.7

20 United Kingdom 7.6

22 United States 7.1

87 India 3.3

91 Sri lanka 3.2

98 Mexico 3.1

143 Pakistan 2.3

178 Somalia 1.1

Companies can also hire consul-tants or outside firms to do their risk assessment. They need to understand their specific risks, to be able to spend their scarce compliance resources in a cost effective manner. For most companies, 80 per cent of the FCPA risk comes from less than 20 per cent of the business.

Need a standalone international anti-corruption compliance policy, and an executive who is accountable for the ‘Tone at the Top’

A company that has overseas operations must enact a standalone FCPA compliance policy, and not as a mere mention in a few paragraphs about international corruption, buried in the general Standards of Business Conduct.

In addition, a member of its se-nior management team must be designated as responsible for FCPA compliance, and be accountable for the programme.

Train the board, management, employees and third parties who dis-tribute the products

If a company has a constrained budget, the least it can do is to sensi-tise board members, managers, and employees of the risk that corrup-

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on THe Jobtion poses to the organisation. Most top management personnel have no on-ground experience of their inter-national business, and those who have, may not be aware of FCPA compliance.

The training should familiarise managers and employees with the actual corruption risks in the industry, the overseas locations where the com-pany has its business, and its business model. However, major US and mul-tinational companies often have weak FCPA compliance programmes and do not vet, or train their third parties.

Know all the third parties the company uses in business operations outside the USA, and conduct due diligence

In FCPA jargon, an ‘intermedi-ary’ is a third party which assists the company in some aspect of its foreign business. The government assumes that a company using third parties has conducted reasonable due diligence and background investigations on the intermediaries, and determined that these induldge in no corrupt practices. It is important to understand who the

intermediaries are; how many are there; what purpose do they serve for the company; and who is the company official entrusted to enter into a con-tract with them.

Establish internal controls over company expenditures and assets

Many US companies may be inad-

equately informed about the provi-sions of the FCPA, and their existing processes will not be tuned to FCPA issues. Greater caution is advised es-pecially on the following issues:a) There is no concept of materiality

in the FCPA - Companies have been prosecuted for very small bribes; for keeping inaccurate books and records; or failure to set up systems and controls – all these have arguably, little or no monetary value. The FCPA is a criminal stat-ute, and criminal activity by em-ployees that impact the company, should always be seen as material.

b) The company may have fine GAAP accounting and still fail to detect bribery, or false, or inac-curate records. Companies hire the brightest people, and they engage in corruption, kickbacks, and create false transactions. Employees in the finance department too, may be involved in corrupt schemes - they know how the company makes and keeps records, and how it audits them. So they can keep the books looking clean and hide evidence of corruption.

It is important to understand every way in which the business has contact with government customers or government employees in the country or countries that they have operations in

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have individual liability for an FCPA violation, if the company fails to establish adequate record-keeping and a system of controls. One example of this is the 2009 Nature’s Sunshine Products’ case in which both a CFO and COO were charged for FCPA viola-tions as ‘control persons’, and had ‘paid fines’. (SEC v. Nature's Sunshine Products, Inc., Douglas Faggioli and Craig D. Huff, Case No. 09CV672).

Do not permit facilitating pay-ments

Amazingly, the FCPA contains an exception for ‘facilitating payments’ of small bribes to secure the perfor-mance of routine government action. Many companies have, on their own, established a policy against paying facilitating payments. Their reasons are the following:a) Facilitating payments are actually

bribes and are always illegal in the country where the employees pay them.

b) The definition of a facilitating pay-ment under the FCPA is technical. It will be a folly to delegate the deci-sion on whether a specific payment is a facilitating payment, or a bribe, to the sales people on the ground.

c) Facilitating payments are transac-tions and have to be recorded accu-rately in the company's books and records, that is, as, “A facilitating payment of $ ‘X’, to government of-ficial ‘Y’, of country ‘Z’, to provide (a specific service).” A company is required to create an accurate financial record, and this record then serves as written proof that the company has intentionally violated the law of the country where it made the payment. This is a Catch 22 situation for the company, where it diligently records an ‘accurate violation’.

Plan for the likelihood that the company will have to conduct high-quality, international, internal in-vestigations

It is very likely that the company will not be comfortable trusting any-

one in the local country management, and will not want to let on that it has suspicions of a specific nature before it actually begins investigations into a corruption charge. However, even if local managers are not involved, they may not appreciate the danger to the US parent company, and try to conduct their own amateur investiga-tion. Or, they may simply call a meet-ing of their managers and ask them to explain the evnt under suspicion. By doing either of these, they will alert the perpetrators who will then pro-ceed to destroy all evidence, fabricate documents, or align stories so as to present a clean picture. By the time the actual professional investigation is conducted, it will take much longer as it will be more difficult, and it will be expensive. Finally, if the company has no experience conducting interna-tional internal investigations, it must engage experienced counsel.

Include clear FCPA terms in every international contract

This is an inexpensive exercise and reinforces the message that the company will not tolerate corruption by both its foreign partners and its own sales staff. The contracts should specifically mention the importance of FCPA compliance, and require the partners to represent that they know the elements of the law and they will comply with it. It should also have a clearly worded audit clause that requires the partner to provide docu-ments and assistance in an investiga-tion. Finally, it must have the ability to terminate its contract if the partner is in violation of the FCPA.

FCPA compliance terms are non-negotiable, so if a potential partner refuses to execute the contract, unless the company removes the anti-cor-ruption clause, it should find another partner.

Conclusion For CFOs it is mandatory to get

the company’s FCPA compliance programme in place. The FCPA is not mysterious, but the biggest failure of US business mangers and in-house counsel is to focus on what needs to be done and to dedicate the necessary resources to protect the company. From the government’s point of view, a US company doing business outside the US, is obligated to conduct its busi-ness in compliance with the law. The DOJ and SEC have stated the required elements of a reasonable compliance programme and they expect every company to establish and run it. This can also be a business opportunity for CAs to create the programmes and the check-lists for the US-based organisa-tions, and to test them as well. If the company is unwilling to put in place an adequate FCPA compliance pro-gramme, it is strongly recommended that it refrain from doing business in high-risk environments. For instance, if it believes that it cannot do busi-ness in Russia, China, and Argentina, without paying bribes, and it cannot expend resources to put in place a robust FCPA compliance programme, why would it allow itself to do busi-ness in those countries? Apart from the danger to itself, it may face personal responsibility as a control entity, and be subject to prosecution for failure to put in place a controls system.

Finally, CAs have to prepare for the time when India too has its own FCPA, just like when the Securities and Exchange Board of India (SEBI) introduced Clause 49, following the introduction of the Sarbanes Oxley (SOX) Act in the US. We must prepare

in advance!

Amazingly, the FCPA contains an exception for ‘facilitating payments’ of small bribes to secure the performance of routine government action

Eish Taneja, Associate Director, Assurance ASA & Associates, chartered

accountants (Murali Associates merged with ASA) www.asa.in A member firm of NIS Global

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