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Foreign Corrupt Practices Act Compliance Guidebook: Protecting Your Organization from Bribery and Corruption

Foreign Corrupt Practices Act Compliance Guidebook: Protecting Your Organization from Bribery and Corruption

by Martin T. Biegelman

ISBN: 9780470527931

Publisher Wiley

Published in Business & Investing/International

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Chapter One

Bribery, Corruption, and the Foreign Corrupt Practices Act

In the movie Syriana-a politically charged story of greed, self-interest, betrayal, and corruption in the oil and gas industry-one of the characters angrily learns he is under investigation by the U.S. Department of Justice (DOJ) for bribery to obtain drilling rights in Kazakhstan. "Corruption charges! Corruption? Corruption is government intrusion into market efficiencies in the form of regulations.... We have laws against it precisely so we can get away with it. Corruption is our protection. Corruption keeps us safe and warm. Corruption is why you and I are prancing around in here instead of fighting over scraps of meat out in the streets. Corruption is why we win." These contemptuous comments are what one would expect from people who have been caught up in bribery probes and prosecutions under the Foreign Corrupt Practices Act (FCPA).

The FCPA has long been an available weapon in the arsenal of federal prosecutors in the United States. Yet, the specter of the FCPA was one infrequently seen, so much so that companies and their employees came to believe they had nothing to fear. But how the times have changed. Now, the mere utterance of the acronym FCPA is enough to instill deep concern, and even fear, in corporate suites throughout the world. The FCPA is the U.S. law that makes bribery of foreign officials to obtain or retain business and the failure to maintain accurate books and records, as well as related internal controls, a very serious crime. The Act's provisions significantly impact business organizations through criminal and civil prosecutions and the collateral damage that comes with government enforcement of anti-corruption laws.

If there is a recent case that exemplifies the strong stance that government authorities are taking in pursuing FCPA violations, it is the prosecution of Control Components, Inc. (CCI). CCI is a California corporation that designs and manufactures control valves for the nuclear, oil and gas, and power generation industries throughout the world. Between 1998 and 2007, CCI, through its officers, employees, and agents, made more than 200 corrupt payments to employees of state-owned enterprises and private companies in 36 countries. These countries included China, Korea, Malaysia, and the United Arab Emirates. The bribes totaled $6.85 million and earned CCI $46.5 million in net profits.

Prosecutors used a variety of tactics to unravel the pervasive conspiracy, a move that is indicative of the new approach to fighting FCPA violations. Both the corporation and individuals were prosecuted. In fact, the eight CCI defendants is the single largest number of individual defendants in an FCPA case. There was cross-border law enforcement cooperation resulting in the prosecution of a UK official implicated in the bribery probe. Both government corruption and private company bribery were charged in this case. The Travel Act was used to charge commercial bribery. The Travel Act prohibits using interstate or foreign commerce to promote unlawful activity including bribery and corruption in violation of state law.

These tactics are part of the government's focused attack on FCPA violations. This strategy has had a visible impact on corporations. The $25 million fine against Lockheed Martin in 1994 held the record for many years until Titan Corporation paid $28.5 million in 2005. The $44 million fine levied against Baker Hughes in April 2007 was the largest ever at the time. That was eclipsed by the Siemens penalty. In December 2008, Siemens paid the largest fine ever handed down to settle the biggest FCPA case in the history of the statute. Siemens voluntarily paid $1.7 billion in fines, penalties, and disgorgement of profits to U.S. and German authorities. Of the $800 million to U.S. government authorities, $450 million was a fine and $350 million was in disgorgement of profits. In early 2009, Halliburton settled a bribery probe with a $559 million fine.

It seems inevitable that another case will come along soon with yet another record-high fine. The penalties for FCPA violations have sky-rocketed of late, a trend expected to continue. Investigating and prosecuting corruption and bribery cases have become "a significant priority in recent years," according to Mark E. Mendelsohn, the DOJ's chief prosecutor for international bribery.

GLOBAL CRACKDOWN

Like at no other time before, there is a growing global crackdown on corruption. The United States has been joined by other countries in this fight. There have been more investigations and prosecutions of both businesses and their employees than at any time in the past 30 years. "Crimes of official corruption threaten the integrity of the global marketplace and undermine the rule of law in the host countries," said Lori Weinstein, the Justice Department prosecutor who oversaw the Siemens case.

Corruption and bribery are insidious elements of the dark side of business. Illegal payments by public and private corporations to foreign government officials to induce business dealings have long been an unscrupulous practice. These bribes, in the form of cash and a host of other means including gifts and gratuities, trips and entertainment, charitable contributions, forgiveness of debt, and more, are illegal and have been outlawed by the United States for many years. A rash of business corruption cases in the 1970s and a Congressional focus resulted in the enactment of the FCPA in 1977.

The FCPA prohibits individuals and companies from "corruptly making use of the mails or any means or instrumentality of interstate commerce in furtherance of an offer, promise, authorization, or payment of money or anything of value to a foreign official for the purpose of obtaining or retaining business for, or directing business to any person, or securing any improper advantage." The FCPA also requires "issuers not only to refrain from making corrupt payments to foreign government officials, but also to implement policies and practices that reduce the risk that employees and agents will engage in bribery." The books and records provision of the FCPA requires certain corporations to create and maintain books, records, and accounts that fairly and accurately reflect company transactions. The knowing falsification of company records is also prohibited. Penalties include both civil and criminal sanctions against the company and culpable employees.

The Sarbanes-Oxley Act (SOX) was not the first federal law to require strict internal controls within publicly traded U.S. companies to prevent fraud. The FCPA mandated that corporate records contain accurate statements concerning the true purpose of all payments made by the company long before SOX was ever envisioned. Since the passage of SOX, there has been a renewed focus on investigations and prosecutions involving FCPA violations. Thus, compliance with the provisions of the FCPA is more important than ever.

Since the enactment of the FCPA, Nigeria has had the most prosecutions by country. Nigeria is followed by Iraq, China, Indonesia, India, Azerbaijan, Canada, Costa Rica, Rwanda, Egypt, Kazakhstan, and South Korea in number of cases. Countries in every region of the world have seen FCPA enforcement. By far, Asia has seen more cases than any other region with Africa a distant second.

What is not commonly known is that the FCPA was initially referred to as the "Lockheed Law," since the law was enacted as a result of the involvement of numerous corporations, including Lockheed, in making financial payments to foreign government officials in return for government contracts. As detailed later in this chapter, the Lockheed of the 1970s regularly paid bribes to foreign officials. The surprising disclosures of the size and scope of their payments in countries throughout the world did as much as anything to ensure that legislation such as the FCPA would become law.

DEVASTATING COST OF CORRUPTION

The sad fact is that corruption is pervasive and entrenched on a global scale. A culture of corruption is still embraced as a way of doing business in many parts of the world. "Each year one trillion U.S. dollars is lost in bribes and other forms of corruption around the world," said Alan Boeckmann, Chairman of the Board and Chief Executive Officer of Fluor Corporation. "Consider this: the trillion dollars lost each year to bribes could feed up to 400 million starving people for the next 27 years." These impactful words reinforce the devastating cost of corruption and bribery on a global scale.

Corruption often occurs in the worst possible locales. They include developing and emerging countries and regions that suffer the most from corruption's evil consequences. Corruption fuels poverty, hunger, disease, illiteracy, contempt, and disillusion. It drains the funds necessary for the very programs that people in developing countries most need. Corrupt government officials in countries with rich natural resources such as oil, timber, and minerals "accumulate enormous personal wealth, taking millions in bribes from corporations looking to secure lucrative contracts" while the very poor live in abject poverty. The resulting bribes and graft destroy honest government and business. The corruption ultimately turns the populace to distrust, ambivalence, acceptance, and ultimately, participation.

Corruption can only exist and flourish if it is tolerated. Businesses and governments need to step forward and fight corruption and bribery. This can only be done if people refuse to participate in corrupt activities. People have to take responsibility. The corruption chain can be broken if even one participant says no. Law enforcement does not have the ability to investigate every corrupt act or wrongdoer. "The answer to corruption is not necessarily at the end of handcuffs," says career federal prosecutor Patrick Fitzgerald. "People can't do this stuff without someone else knowing about it. The metric of whether or not you're doing a good job is not whether or not you get indicted." Fitzgerald should know. His high-profile cases have included the World Trade Center bombings, the conviction of former vice-presidential advisor I. Lewis "Scooter" Libby, and the indictment of Illinois Governor Rod Blagojevich on numerous corruption charges.

President Obama tackled the issue of corruption in a speech he gave in Kenya in August 2008, aptly describing it as a worldwide problem.

Corruption is not a new problem. It's not just a Kenyan problem, or an African problem. It's a human problem, and it has existed in some form in almost every society. My own city of Chicago has been the home of some of the most corrupt local politics in American history, from patronage machines to questionable elections. In just the last year, our own U.S. Congress has seen a representative resign after taking bribes, and several others fall under investigation for using their public office for private gain.

It is painfully obvious that corruption stifles development-it siphons off scarce resources that could improve infrastructure, bolster education systems, and strengthen public health. It stacks the deck so high against entrepreneurs that they cannot get their job-creating ideas off the ground.

And corruption also erodes the state from the inside out, sickening the justice system until there is no justice to be found, poisoning the police forces until their presence becomes a source of insecurity rather than comfort.

Corruption has a way of magnifying the very worst twists of fate. It makes it impossible to respond effectively to crises-whether it's the HIV/AIDS pandemic or malaria or crippling drought.

Of course, in the end, one of the strongest weapons your country has against corruption is the ability of you, the people, to stand up and speak out about the injustices you see. The Kenyan people are the ultimate guardians against abuses.

President Obama summed up his speech quite well by reinforcing the need for good people to stand up against corruption. Prosecutions can do only so much in preventing corrupt behavior. Law enforcement cannot arrest every bribe giver or recipient. Individuals and business organizations need to step up in stopping corruption. "The accomplice to the crime of corruption is frequently our own indifference," as former New York City Commissioner of Consumer Affairs Bess Myerson once said. Yet, until this dream becomes a reality, the threat of business disruption, incarceration, and massive fines for violations of the FCPA and related criminal statutes will have to do.

GOVERNMENT'S COMMITMENT TO FCPA ENFORCEMENT

The DOJ and the Securities and Exchange Commission (SEC) are committed to holding individuals and organizations accountable for FCPA violations. One area of focus is whether internal control processes are designed but not implemented. Siemens had detailed anti-corruption policies and procedures but they were ineffective as they were ignored. The SEC considers this a core area for compliance and investigative attention. It is often said that the only thing worse than not having a compliance program, is having one that is simply a "paper program" and not followed. The DOJ has often commented on the risk of having a paper program and how that will play a significant role in determining whether the organization will be prosecuted for criminal violations.

The U.S. government has expanded their investigative approach to FCPA cases. While they still use self-disclosures of FCPA violations as a starting point, they have now embraced self-sourcing of cases. Self-sourcing is the proactive initiation of a new investigation using leads from an ongoing or recently concluded investigation. For example, when a corruption issue is discovered in a particular industry, the DOJ and SEC will start looking at other companies in that industry for similar violations. If a corporation has an FCPA issue, the investigators will look at their competitors as well. If one telecom company has corruption and bribery violations in China, it is reasonable to assume that the other telecom companies operating there may face similar issues.

This scrutiny of like companies will bear results for the government. An organization that self-discloses a violation will most likely tell the government about similar activities of their competitors. In fact, sources have advised that 60 percent of the FBI's current caseload is from self-sourcing. The SEC is also receiving information on violators from companies all too willing to tattle to potentially gain a competitive advantage. In addition, companies in trouble are readily sharing with the government any knowledge they may have of similar activity by their competitors.

FBI's Laser Focus on Anti-Corruption

In February 2008, the FBI created its International Corruption Unit based in the Washington, DC Field Office. Corruption is the number one target for the FBI's criminal program and there is zero tolerance for it. The unit's purpose is program oversight of corruption, bribery, and fraud investigations. There is a focus on FCPA, fraud, and corruption associated with the wars in Iraq and Afghanistan, defense contracting and procurement investigations, and antitrust cases. The unit has oversight of all FCPA investigations that the Bureau conducts.

The FBI has seen a significant growth in corruption cases in recent years. One estimate is at least a 300 percent increase since 2007. There are a number of factors contributing to this increase. Some of the reasons for increased cases include self-reporting of violations, cooperating defendants, whistleblowers, and competitors providing information. Disclosures have come from FBI investigations, disgruntled employees, foreign-based employees who have witnessed bribery, and corporate filings. There are other reasons. The FBI is providing better training to its agents on FCPA red flags. The many investigations of the past few years provided subject matter expertise to these investigators and they are sharing that thought leadership with others.

(Continues...)

Excerpted from "Foreign Corrupt Practices Act Compliance Guidebook: Protecting Your Organization from Bribery and Corruption" by Martin T. Biegelman. Copyright © 0 by Martin T. Biegelman. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.
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