Issue 2 - April 2010
Understanding the Foreign Corruption Dragnet - continued
Develop an Awareness and Basic Understanding of the FCPA
Board members should be aware that the statute, and foreign counterparts, exist and prohibit a far broader set of activities and conduct than it might initially appear. Proscribed actions go well beyond a simple payment of cash to a government official in exchange for the awarding of a contract. What many companies consider standard sales and marketing practices, for example, might violate the FCPA, especially in countries where the customer is a government agency, state-owned business, or nationalized industry. Similarly, board members and executives must understand their liability for FCPA violations that occur across the entire organization. Although board members and executives don’t need to be well versed in the intricacies and nuances of the FCPA, they should have a thorough understanding given the international regulatory environment. (See sidebar, “How well do you know the FCPA?”.)
Understand Which Parts of Your Organization Are at Greater Risk
This means determining which parts of the company have greater exposure to foreign governments. Anticorruption enforcement activities, by definition, focus on the parts of a company that interact with governments or government officials. Accordingly, board members should identify the company’s core businesses or business segments for which governments, government agencies, or state-owned companies make up a significant percentage of the customer base. Moreover, heavily regulated businesses or those that routinely have substantial “touches” with foreign government officials are inherently riskier and more susceptible to corrupt activity by virtue of their more extensive foreign government contact. Board members would be wise to identify the principal points of intersection between their company and foreign officials.
Certain industries have been singled out for FCPA investigation: oil and gas, pharmaceuticals and medical supplies. Companies that aren’t part of these industries shouldn’t consider themselves absolved from regulatory scrutiny. Indeed, any international business – such as multinational construction companies, real estate investment firms, or defense contractors – that shares key characteristics of the oil and gas or medical-device industries may be targeted in the future, and those companies should be more vigilant, particularly regarding partners, competitors, and third-party representatives.
Moreover, traditional multinational corporations aren’t the only organizations at risk. Large private equity firms might be exposed to increased risk by virtue of their portfolio of a diverse, international set of companies. Some private equity firms are highly decentralized, so the parent has less insight about the portfolio company’s daily operations and conduct. However, the parent has FCPA exposure because it’s legally liable for its operating companies. Given the enforcement climate, the deep pockets of private equity firms may present an attractive target for government regulators.
Understand Which Nations Are High Risk
Executives must be aware that the government officials of some countries have the reputation for accepting bribes as a matter of course to conduct business. Rightly or not, certain countries are commonly deemed to be “high-risk” jurisdictions – those more susceptible to corrupt business practices and the bribery of government officials. Countries that control the largest petroleum reserves, for instance, have been hot spots for foreign bribes. Similarly, in countries with state-run healthcare industries, the business contacts are often direct representatives of the national governments, making them likely targets for corrupt businesses.
Transparency International (TI), a nongovernmental organization, helps to promote awareness about global corruption. As part of its efforts, TI publishes an annual Corruption Perceptions Index that ranks the corruption levels of 180 countries. As the map opposite illustrates, certain countries in each region have gained a reputation for corporate bribery, so board members and senior executives of companies that do business in these places should be on alert.
Examine Company History and Any Previous Allegations
Board members – especially new ones – need to determine whether their company has ever faced significant allegations of overseas commercial bribery, regardless of whether a regulator has been involved.
Moreover, if the company had previously been the subject of an investigation related to the bribery of government officials, find out the underlying issues as well as the result or resolution. Since rooting out corruption in a multinational corporation requires a prolonged effort, violations that have occurred in the past can often indicate other problem areas.
Verify That the Company Has Appropriate Compliance Mechanisms in Place
Executives and board members at global companies with far-flung operations face the daunting task of being responsible – and potentially liable – for the actions of employees around the world. To address this challenge, an organization needs to adopt compliance mechanisms to ensure business conduct consistent with the FCPA, as well as the FCPA equivalents and local anticorruption laws of other countries in which the company has significant operations. Board members should be satisfied that a robust compliance program exists.
In general, CEOs and boards should verify that their company’s anticorruption compliance program is global, consistent, and effectively communicated. Where appropriate, the program should be customized to account for cultural differences and local anticorruption laws.
Board members should also ask whether the company is performing periodic risk assessments of its larger operations in high-risk jurisdictions. These assessments typically involve internal auditors or outside professionals interviewing key personnel in foreign operations, reviewing contracts and other relevant documents, and conducting transactional testing of certain accounts that are more susceptible to corrupt activity. Transaction types that should be tested for indicators of corrupt payment include:
- payments to agents/distributors;
- travel and entertainment expense reimbursement;
- petty cash;
- taxes;
- other expense accounts, such as gifts, political contributions, charitable contributions, seminars and trade shows, educational grants;
- free products; and
- after-the-fact credit memos.
Boards must also ensure their organization has the necessary personnel to address the issue. In many companies, the general counsel or chief financial officer oversees compliance activities. However, given the time required to monitor global operations effectively, and the stakes, larger corporations should have a dedicated global chief compliance officer.
Ensure Robust Due Diligence in Acquisitions of Overseas Businesses
It’s possible to literally “buy” a significant – and costly – FCPA problem, and a number of companies have inadvertently done so. As the global economy recovers and international M&A becomes more active, board members need to make sure their company is conducting robust due diligence on international companies in high-risk industries or countries.
This effort is twofold. First, companies should conduct external due diligence, focusing on the reputation of the target company, its principals and primary agents; understanding any history of improper business practices; and examining relationships with foreign government officials. Second, potential investors or acquirers should analyze the target company’s internal books and records, to identify any red flags for corruption, such as:
- customers that include government entities, such as state-owned companies;
- involvement in any joint ventures with government entities;
- details on the government approvals and licenses a company requires to operate;
- customs requirements in foreign countries; and
- relationships with third-party agents or consultants who interact with foreign officials on the company’s behalf.
Since a company can be liable for the FCPA violations of an acquired company or even a joint venture, companies should rigorously follow a standardized due diligence protocol and procedure for evaluating international growth opportunities.
Promote a Company Culture to Combat Overseas Corruption
The degree to which senior management is truly committed to conducting business honestly sets the tone for the entire organization. A board member can discern how much an organization values ethical conduct by probing, in an appropriate fashion, the views of senior management on the issue.
Companies that actively address global corruption use a wide range of measures to raise awareness among their employees. Encouraging a culture of transparency and vigilance – through a robust FCPA compliance and training program, staff handbooks, and annual training sessions, for instance – will help an organization avoid disregarding issues that could have serious repercussions down the line. If a company has significant operations in high-risk jurisdictions, such training should be done in person. As part of the hiring process, prospective employees should be screened for any relationships to government officials.
Successfully Navigating a Government Investigation
Should a company find itself the target of a government investigation related to overseas business corruption, CEOs and boards need to be aware of their options. By working with FCPA experts, companies can identify the best path forward. Although managing through a government investigation is complex and has many elements, board members and senior executives should engage in several ways:
Take Allegations Seriously
Companies can’t afford to dismiss internal reports of improprieties. Instead, upon the first indication of corruption, executives should dedicate the necessary energy and resources to understand the potential violations, conduct a preliminary and proportionate inquiry, and remediate corrupt activity if it is found to exist.
Assemble an Outside Team of Advisors
In the face of a credible allegation, a company should consider retaining an experienced team that might include legal counsel, a forensic accounting and investigative firm, and communications specialists with expertise in issues management. The board or audit committee should consider counsel and consultants that are independent from the company. It’s important that the forensic accounting and investigative consultant be multidisciplinary, experienced in FCPA and international investigations, and have capabilities across international jurisdictions. Many multinational companies have vetted and retained anticorruption counsel and advisors in high-risk foreign jurisdictions or regions to work proactively on compliance matters, but also in case credible bribery allegations surface. Even if a team of advisors does not need to be fully activated, it’s prudent to have them assembled and prepared.
Conduct a Parallel Investigation
If a government investigation does occur, the company and the board will want to do what they can to understand activity that might pose a problem. While conducting a parallel investigation is appropriate, it should proceed in a way that is not viewed as an act of obstruction by the government. The company must also preserve the evidence – whether witness statements, email and other electronic evidence, or physical documents.
Weigh Up the Benefits of Self-Disclosure
If the company finds that corrupt activity has occurred, one of the key issues is whether to disclose information voluntarily to government authorities. Executives should begin to consider self-disclosure if a preliminary internal investigation uncovers a reasonable basis that the allegations of corruption have merit. The firm’s professional advisors will help the board weigh the pros and cons of disclosing to the government.
While such action is appropriate in many instances, it’s not always required or justified. If a company decides to disclose, however, it must be forthcoming about the violations it has uncovered. Moreover, while self-disclosure can offer a valuable opportunity to negotiate with the government and set parameters for the investigation, the scope of the government investigation is ultimately beyond the company’s control.
Understand Non Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs)
If the government is inclined to pursue charges, the case may be resolved through an NPA or DPA. An NPA is a contract between the DOJ and a company stipulating that if the company fulfills certain requirements, the government won’t file criminal charges. In a DPA, the government files charges that are then withdrawn once certain conditions are met over a three- to five-year period. Both agreements create incentives for companies to cooperate with government authorities and implement reforms to prevent misconduct. By entering into either agreement, a company can avoid being convicted of a criminal offense. In both an NPA and a DPA, fines are assessed, and often a monitor is assigned to assure compliance with the terms of the agreement. While many aspects of NPAs and DPAs are unappealing, they may be better than having the lasting stain of a criminal violation on the company’s record.
These steps represent a starting point for board members and senior executives as they review their company’s anticorruption efforts. As recent prosecutions have shown, government authorities expect executives and board members to take an active role to ensure compliance. Ignorance of a violation at a subsidiary will not absolve a company – or its leaders – from substantial fines and further compliance measures.
By understanding the full reach of FCPA enforcement actions, board members can protect their company against the effects of overseas business corruption and put their company in the most advantageous position should a government investigation ensue.