Foreign Corrupt Practices Act (1977)

Aseries of corruption scandals in the early 1970s led to the Foreign Corrupt Practices Act of 1977 (FCPA) (P.L. 95-213 91 Stat. 1494), which prohibits bribery of foreign officials by American and certain other companies. The act has been controversial since its enactment, with some critics attacking it as ineffective and the American business community complaining that it places U.S. enterprises at a competitive disadvantage abroad. Since the late 1990s, however, it has become a model for international efforts to stamp out corruption and improve the business climate in the developing world.

Background

In the 1970s a complex of scandals collectively known as Watergate consumed both government and public attention. Misdeeds committed during the administration of President Richard M. Nixon prompted investigations, including scrutiny of the conduct of major American corporations with close ties to the administration. Investigators learned of hidden slush funds and substantial payments of bribes by over 400 U.S. companies to foreign officials or political parties to obtain major contracts or other advantages. Following extensive hearings, Congress enacted the FCPA in 1977. Significant amendments followed in 1988 and in 1998. The 1998 amendments incorporated technical changes required by the anticorruption treaty of the Organization of Economic Cooperation and Development (OECD) that went into effect in 1999.

In addition to the anticorruption fervor that swept the United States in the post-Watergate period, the major justification for enacting the FCPA was the belief that bribery is also an economic evil. In this view, bribery is a hidden cost of doing business, and the award of business for other than economic reasons distorts competition. Those most concerned about bribery believed that contracts should be awarded only on the basis of the merits of products and services as well as fully disclosed prices.

Major Provisions

There are three significant parts to the FCPA: prohibitions on activities, reporting requirements, and an exception for small "grease," or facilitating payments.

Prohibitions. The FCPA bars U.S. companies from "corruptly" offering, paying, promising to pay or authorizing the payment of money or other things of value to any foreign official in order to (1) influence any act or decision by the official, (2) persuade the official to do anything contrary to his or her duty, (3) secure any "improper advantage," or (4) induce the official to use his or her influence with a foreign government to influence its acts or decisions, in each case for the purpose of "obtaining or retaining business" or directing business to any person. A parallel section covers the same acts when made to political parties or candidates. Penalties include fines of up to $2 million against the company and up to $100,000 against officers or directors, as well as prison terms of up to five years. The U.S. Department of Justice generally is responsible for prosecuting violations of these provisions.

For a company to be found guilty of violating these prohibitions, there must be some sort of "quid pro quo"—some exchange of value for advantage. The "corrupt" requirement makes guilty intent an element of the crime. In short, it is very hard to violate the FCPA inadvertently.

The FCPA provides two primary defenses to an accusation of bribery: a company can claim (1) that the offending act was in fact legal under the written laws of the foreign country, or (2) that the act was a "reasonable and bona fide" expenditure directly related to promotional activities or to the execution or performance of a contract with a foreign government.

Reporting Requirements. The FCPA also has provisions requiring publicly held companies to fully record and report to investors and the Security and Exchange Commission (SEC) all expenditures made in violation of the prohibitions described above. In addition, such companies must have policies in place to ensure that all transactions comply with management's directions and are recorded in accordance with generally accepted accounting procedures. The SEC generally enforces these provisions. Civil liability to company shareholders is also possible. The penalty for violation of the reporting requirements is civil fines. There are no criminal penalties unless the violation was knowing or willing.

These requirements were a reaction to the revelations about secret slush funds maintained by companies involved in the bribery scandals, as well as bribes disguised to look like legitimate transactions. Given the intent requirement of the prohibitions described above, it is generally easier to prove misrepresentation in the financial statements than that an actual "quid pro quo" transaction has occurred. Put another way, these requirements provide a basis for prosecuting a wrongdoer even if the basic crime cannot be proved, much as the gangster Al Capone was finally jailed for tax evasion rather than for more blatant criminal activities like gang shootings.

"Grease" or Facilitating Payments. The 1988 amendments to the FCPA responded to businessmen's complaints that minor officials in many underdeveloped countries demanded small payments, known as "grease"—whether in the form of fees, tips, or gifts—for the provision of routine services such as the issuance of visas, licenses, and permits, as well as for speedy service. These payments, no matter how minor, were illegal under the FCPA as originally enacted. As a practical matter, American business interests were having trouble even getting into countries where petty corruption was common. Congress therefore loosened the FCPA slightly, to permit such payments for the provision or expedition of "routine government action," so long as the payments were not made for the purpose of influencing the award or retention of business.

Criticism

A major rationale for the FCPA was the notion that eliminating corruption would create a level playing field for free competition. American businessmen, though, complained bitterly that in fact the opposite was created: U.S. business was placed at a competitive disadvantage as only U.S. companies were barred from paying bribes, whereas no such restrictions were in place for companies from other countries. The result, these critics charged, is that major contracts went to foreign companies willing to engage in graft.

Other critics attacked the FCPA as being ineffective. They charged that open bribery is prohibited, whereas more sophisticated forms of exerting influence continue to be perfectly legal. For example, payments of charitable contributions or the tacking on of extraneous goods and services outside the economic scope of a contract often serve the same purpose of a corrupt appeal for business. Similarly, the defense of expenditures for bona fide promotional activities can easily be abused. In this cynical view, all the FCPA requires is that companies act in a more refined way than handing over a suitcase filled with cash.

The Oecd Antibribery Convention

The complaint that the FCPA created a competitive disadvantage for American businessmen was addressed through the adoption of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of the OECD, which went into effect on February 15, 1999.

This convention, ratified by thirty-four countries as of 2003, requires participating countries to make it a crime to offer, promise, or give a bribe to a foreign public official to obtain or retain international business deals, and is based in large part on the FCPA. A related text effectively puts an end to the practice according tax deductibility for bribe payments made to foreign officials—a practice that used to be accepted in many major trading countries, such as Germany.

Building on the OECD Convention, many programs for the provision of aid in the form of grants or loans from developed countries to the developing world insist that the latter put reforms in place to prevent corruption, so that the aid reaches its targets and goes to the purposes earmarked by the donors rather than into the pockets of corrupt officials. In this way, developed countries seek to further create a level playing field for open competition for international contracts in an increasingly globalized world.

Bibliography

Goldbarg, Andrea. "The Foreign Corrupt Practices Act and Structural Corruption." 18 Boston University International Law Journal 273 (fall 2000).

Johnson, J. Lee. "A Global Economy and the Foreign Corrupt Practices Act: Some Facts Worth Knowing." 63 Missouri Law Review 979 (fall 1998).

Internet Resource

Transparency International. Business Principles for Countering Bribery. .

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