Foreign Corrupt Practices Act in Business - Essay Example

 FCPA Paper For the last century the US government has made efforts to curtail and eliminate corrupt business practices. The anti-trust legislation of the early 20th century was one of the first serious attempts at reducing domestic corruption. The Securities Exchange Act of 1934, mail and wire fraud legislation, and Internal Revenue codes have all been designed to reduce the opportunity for a business to gain an unfair competitive advantage. With the age of the multi-national corporation and globalization, foreign corruption has become a bigger issue. The Foreign Corrupt Practices Act was designed to target US companies that were bribing foreign officials to gain a competitive advantage and using accounting practices that would hide their activity. While the Act was initially seen as being bad for US business abroad, the long-term effects have been for the benefit of US companies both domestically and internationally. The Foreign Corrupt Practices Act (FCPA) of 1977 was implemented to further restrain the practices of American business in the areas of using undue influence in international business. According to the Congressional Research Service the FCPA was, "...enacted principally to prevent corporate bribery of foreign officials" (Seitzinger). Before the Act was passed, there were cases of corporations using secret funds to influence and bribe foreign officials. The government contended that these illegal payments, "...affected adversely American foreign policy, damaged abroad the image of American democracy, and impaired public confidence in the financial integrity of American corporations" (Seitzinger). The FCPA also reasserted the ideals of fair trade and anti-trust policies by curtailing the unfair practices that might place a corporation in an unfairly advantageous position over a competitor through a corrupt practice. While these business practices had been outlawed by the array of previous legislative acts, the FCPA codified and focused the illegal activity under one act. The FCPA of 1977, and the amendments of 1988 and 1998, specifically prohibits the bribery of any foreign official and making false or misleading entries into a company's financial records. Prior to the FCPA, companies would use slush funds to make payments to foreign officials to gain a business advantage. Often these payments would be incorrectly described in their accounting practices (Johnson). In addition the FCPA also expanded the definition of 'foreign official' to include not only highly placed government officials but also private persons who may have a function similar to a government employee. This could include contractors working on government contracts or doing business with a foreign government. The FCPA further outlawed the practice of influencing regulatory policies and the obtaining of permits or licenses through fraud and bribery. The FCPA also further defined and prohibited the practice of "willful blindness" where a company pays money and does not make an inquiry that any reasonable person would make as to the use of said money (Johnson). The FCPA does not differentiate between a bribe that succeeds and an offer that fails or is declined. The Act defines corruption as the intent to unfairly influence. There are two sections that define the enforcement of the FCPA. There is the criminal provision that is enforced by the US Department of Justice and the civil portion that is enforced by the Securities and Exchange Commission (SEC) ("Foreign Corrupt Practices"). The SEC also has responsibility to monitor and enforce the accounting standards set forth in the Act. The criminal fines for violation can be quite extensive. The corporation can be fined up to $2 million, while individual violators can face fines of up to $100,000 and be sentenced to 5 years in prison (Shaheen and Geren, 3). Shaheen and Geren further note that the corporation is banned from reimbursing the fines and penalties levied against an individual violation. The fines that can be levied by the SEC for violations of bookkeeping and accounting violations can be as high as $5 million for individual violators and $25 million dollars for a corporation (Shaheen and Geren, 3). In addition, companies face sanctions against doing business with the government, loss of export licenses, and individuals face disbarrment from the securities business. The level of these penalties has shown the will of the government to take the issue of corruption seriously. To illustrate the level of the government's commitment to reducing corrupt business practices it's helpful to examine a recent case. According to Shaheen and Geren, in March 2005 a sales agent of The Titan Corporation was found guilty of making payments in excess of $2 million dollars to influence a presidential election in Benin. The goal of the bribery was to gain favorable influence in the installation of a wireless telephone network. Titan was fined for felony bribery as well as false tax reporting. The fines totaled $28.4 million, the largest settlement to date (Shaheen and Geren, 4). In addition, Lockheed Martin Corporation dropped an impending merger with Titan out of fear of bad publicity and negative public scrutiny. The restrictions that the FCPA places on American corporations have no doubt resulted in a reduced level of foreign business. Often, corrupt business practices are the traditional mode of doing business in some foreign countries. This had originally placed American businesses at a distinct disadvantage. Surveys conducted in 1979 and again in 1981 found that over 60% of the major US multinational corporations felt that the FCPA would result in a "significant loss of business from US companies to foreign competitors" (Kim and Barone, 125). The 1981 study by Kim and Barone also concluded that the FCPA would cost US corporations in excess of 1 billion dollars a year in foreign sales and would also contribute negatively to the US balance of payments. Though the FCPA has resulted in decreased international business for US corporations, it has had a positive long-term impact. Corrupt business practice is a worldwide problem and can not be solved by the US acting alone. However, the FCPA has increased confidence in US corporations both at home and abroad. It has been a vital piece of legislation that was enacted at a time when domestic confidence and trust in US corporations was waning. It has served to restore a perception of social responsibility to US business practices. In addition, the FCPA sparked international movement towards global cooperation to eliminate corruption around the world. According to Bandolino and Luna there have been several initiatives guided by the UN and other international organizations designed to fight corruption. In the last decade 130 countries have been engaged in the UN Convention Against Corruption and, "...international anticorruption agreements have served to heighten political commitments to fight corruption and have identified fundamental international norms and practices for addressing corruption" (Bandolino and Luna). The initial loss of international sales has been offset by a renewed confidence in American business and the perception that the US is a moral leader in the fight against worldwide corrupt practices. In conclusion, fighting corruption in business has been a hallmark of American capitalism for the last century. Corporations that span the globe and do business worldwide have also come under the scrutiny of the law. The FCPA has been a milestone in the effort to assure competitive practices around the world. It has been the genesis of a global movement toward agreements in the business community on fair practices and standardized accounting procedures. The recent levels of penalties enacted by the Department of Justice and the SEC against violators has shown the seriousness that the government places on this issue. As more countries subscribe to international agreements against corruption, the US is seen as the moral leader. This has enhanced the US corporation's ability to do business globally as well as projecting a more positive image to the domestic public. The FCPA was an act that was passed in a timely manner with forethought and prudent judgment. The initial loss of US sales has been far outweighed by the long-term positive effects of the FCPA. Works Cited Bandolino, John, and David Luna. "Addressing Corruption Through International Treaties and Commitments." e-Journal USA . 21 June 2007 . "Foreign Corrupt Practices Act Antibribery Provisions." US Government Advisory. Business Information Service for the Newly Independent States. 21 June 2007 . Johnson, O T. "International Law & Practice: Foreign Corrupt Practices Act." American Bar Association. Jan. 1996. American Bar Association. 21 June 2007 . Kim, Suk H., and Sam Barone. "Is the Foreign Corrupt Practices Act of 1977 a Success or Failure? A Survey of Members of the Academy of International Business." Journal of International Business Studies 12.3 (1981): 123-26. JSTOR. 21 June 2007. Seitzinger, Michael V. "Foreign Corrupt Practices Act." CRS Report to Congress. 3 Mar. 1999. Congressional Research Service. 21 June 2007 . Shaheen, Frederick F., and Natalia W. Geren. "Foreign Corrupt Practices Act Enforcement Trends." Briefing Papers (2005): 1-16. 21 June 2007 . Read More