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Brush up on your anti-corruption controls 

By Ken Tysiac 
November 15 2012

A new, detailed description of what constitutes corruption can help company executives shape their controls and remain compliant when doing business in foreign markets.

Globalisation and the movement of business activities to emerging markets has led to increased focus from officials in many nations on preventing bribery and corruption.

One example of that increased focus is stepped-up enforcement of the US Foreign Corrupt Practices Act (FCPA) by regulators such as the US Department of Justice (DOJ) and US Securities and Exchange Commission (SEC). The law’s anti-bribery provisions apply to all US persons, certain foreign issuers of securities, and foreign firms or persons who cause corrupt payments to occur in the United States.

The two US government agencies have released a 120-page guide providing a detailed analysis of the agencies’ approach to enforcement of the FCPA, which is designed to prevent bribery and corruption of foreign officials by companies seeking to gain a competitive business advantage.

The FCPA was enacted in 1977, and enforcement by the DOJ and SEC has been stepped up in recent years as business has become more global.

In every full year since 2007, the SEC has announced FCPA enforcement actions against at least ten companies, according to a list provided on its website. Enforcement actions were much less frequent before 2001. In 2010, the SEC created a special unit to enhance FCPA enforcement.

“The fight against corruption is a law enforcement priority of the United States,” Assistant Attorney General Lanny Breuer of the DOJ’s Criminal Division said in a news release. “Our FCPA enforcement is critical to protecting the integrity of markets for American companies doing business abroad, and we will continue to make clear that bribing foreign officials is not an acceptable shortcut.”

The US is not alone in the attention it is paying to bribery and corruption. The UK Bribery Act 2010 set rules for offences covering the offering or payment of a bribe as well as the accepting or receiving of a bribe.

The UK law also expanded the scope of regulation to include commercial bribery in addition to bribery of government officials. China’s anti-corruption laws were amended in 2011, and India’s government has proposed toughening its anti-bribery laws to prevent corruption in the private sector.

The DOJ and SEC’s release is designed to aid businesses practising in foreign markets.

The US Chamber of Commerce, a business advocacy group that has pushed for more clarity on FCPA enforcement, called the new guidance “an important step forward.” Harold Kim, executive vice president of the US Chamber’s Institute for Legal Reform, said that, previously, a lack of clarity of interpretation of the FCPA has led to overcompliance by US companies.

Kim said US companies have pulled out of deals in foreign countries because of the lack of certainty about the FCPA. He said it is helpful to have one unified, detailed document containing specific hypotheticals and examples of why the DOJ or SEC declined to prosecute certain companies. But the US Chamber still has concerns.

“While it’s a helpful document, it’s nonbinding,” Kim said. “It says so in the disclaimer. And it can’t provide the kind of certainty that actual legislation or a statutory change would make. It’s not as though you can base a motion to dismiss on what’s said in the guidance.”

The guide contains a chapter that describes the FCPA’s accounting provisions, and defines who is considered a foreign official and the difference between proper and improper gifts.

“This guide will protect investors by assisting businesses in preventing such unlawful behaviour, thus avoiding FCPA violations in the first place, which is in the interest of law enforcement and business alike,” Robert Khuzami, director of the SEC’s Division of Enforcement, said in a news release.

Accounting guidance

In one chapter, the guide explains that the FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting.

The “books and records” provision requires companies to keep records that accurately and fairly reflect transactions and dispositions of assets. The “internal controls” provision requires companies to maintain internal accounting controls that will ensure management’s control, authority and responsibility over the firm’s assets.

According to the guide, a company’s internal controls and compliance programme should be tailored to its specific circumstances with regard to operational realities and risks such as:

  • How products or services get to market.

  • The nature of the workforce.

  • The degree of regulation.

  • The extent of government interaction.

  • The degree to which the company operates in countries where there is a high risk of corruption.

The guide says there is no one-size-fits-all FCPA compliance programme, but describes aspects of compliance programmes that the DOJ and SEC assess during investigations. These include:

  • Commitment from senior management and a clearly articulated policy against corruption.

  • A code of conduct and compliance policies and procedures that are clear, concise and accessible to all employees and those conducting business on the company’s behalf.

  • Oversight and implementation by senior personnel with the proper authority, autonomy from management and resources to be effective.

  • Effective due diligence, assessment and analysis of the risks a particular company faces.

  • Periodic training on policies and procedures for directors, officers, relevant employees, agents and business partners.

  • Incentives for ethics and compliance leadership, and proper disciplinary procedures.

  • Due diligence with regard to third-party agents, consultants and distributors.

  • Mechanisms for confidential reporting by employees, and efficient, reliable internal investigations.

  • Periodic testing and review.

In addition, the guide says the FCPA applies to corrupt payments to any officer or employee of a foreign government, and those acting on the foreign government’s behalf. This definition of a foreign official means corrupt payments to low-ranking employees – as well as high-level officials – are prohibited.

Although payments to foreign officials are banned, payments to foreign governments are not prohibited, according to the guide. But the guide says companies considering payments to foreign governments should take steps to ensure that no funds are used for corrupt purposes.

Only payments intended to influence a foreign official to use his or her position to assist in obtaining or retaining business are covered by the FCPA, the guide says. Payments of travel and entertainment expenses do not necessarily violate the FCPA, the guide says, but the DOJ and SEC have brought cases where these types of expenditures were believed to be corrupt.

In the foreword to the guide, Breuer and Khuzami state that law-abiding companies are put at a competitive disadvantage when business is won or lost based on how much a company is willing to pay in bribes.

“Investors must have faith that the economic performance of public companies reflects lawful considerations of markets, price and product,” Khuzami said in a news release, “rather than a mirage resulting from bribery and corruption.”

Paul Pelletier, a former prosecutor for the DOJ who now practices in the FCPA group at international law firm Mintz Levin, said the new guidance should be helpful for companies and demonstrates the circumstances in which the DOJ and SEC are likely to prosecute.

“They’re there to prosecute cases where companies have bad compliance programmes, bad tone at the top, or payments are being made with an absolutely, positively corrupt intent,” Pelletier said.

Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.

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