Deloitte’s fourth version of its ‘Look before you leap’ survey on global risk includes much more focus on the Foreign Corrupt Practices Act (FCPA), due in part to increased enforcement of the regulation over the past decade.
The regulation has been on the books for significantly longer – it was enacted in 1977 to make it unlawful to make payments to foreign government officials in order to obtain business – but given increased international trade and commerce over the last 30 years and, more cynically, the profitability enforcement has garnered for the government, Deloitte’s new focus makes perfect sense.
Almost two thirds (63 percent) of respondents, who included corporate executives, investment bankers, private equity executives and hedge fund managers, say the FCPA and anti-corruption legislation have led to aborted or renegotiated deals such as M&A, joint ventures and distributor relationships.
As the trend toward increased enforcement is expected to continue, insiders say it behooves US businesses to implement compliance programs, keep careful records and thoroughly train their employees if they want to remain competitive on the global stage. And even though anti-corruption legal experts agree the FCPA may hinder US competitiveness in certain respects, they also say it may point to the need for an international set of anti-corruption standards.
An age-old problem
As Rod Heard, a partner at law firm Barnes & Thornburg, puts it: ‘Bribery has been around since the Bible, and probably before.’ Enforcement of a law that seeks to prevent this age-old problem has been more prevalent over the past decade for a number of reasons. For one, US companies engage in much more international trade and commerce than they did in 1977.
‘American and European businesses have moved aggressively to markets that are cost-effective,’ says David Krakoff, partner with law firm BuckleySandler, which has a government enforcement white-collar practice. ‘It’s an opportunity to build the same goods at a cheaper price, but those countries – India, China, Central and South America, and Africa – have different business traditions.’
There are also many more anti-corruption regulations on the books, drawing more attention to the issue. The UK enacted its Bribery Act in 2010 to ‘respond more effectively to bribery at home or abroad,’ according to the Ministry of Justice. There’s also the Dodd-Frank Wall Street Reform and Consumer Protection Act, which encourages whistleblowers to come forward; the Organization for Economic Cooperation and Development’s Convention on Combating Bribery, which, like the FCPA, establishes legally binding standards to criminalize bribery of foreign public officials; and, to a degree, Sarbanes-Oxley, which was enacted in 2002 as a reaction to corporate accounting scandals. ‘In corporate America, we started to see a lot of voluntary disclosures around 2001 in an effort to prevent another Enron,’ Krakoff recalls.
According to Shan Nair, co-founder and CEO of Nair & Co, which provides human resources, finance, tax, compliance and legal services for companies with overseas operations, September 11 also had an impact on the enforcement of the FCPA. ‘The sensitivity of governments to corruption-type issues greatly increased afterward,’ Nair says. ‘The thinking was that a lot of money that these terrorists accessed was basically siphoned through money laundering.’
It’s also, quite simply, lucrative for the government. The uptick in disclosures means more work for the Department of Justice (DoJ) and the SEC. ‘You have to think of the SEC and the DoJ as businesses,’ Krakoff asserts. ‘They are looking for growth areas, too.’
Heavy penalties
FCPA judgments, like Siemens’ $1.6 billion penalty in 2008, can be costly – and because the penalties are so severe, companies often feel the need to settle even if the allegations don’t have merit. So says Matt Reinhard, a member of Miller & Chevalier, who focuses his practice on white-collar crime, internal investigations and complex civil litigation.
‘Because the figures get so big so fast, companies really don’t have much of a choice but to settle,’ Reinhard explains. ‘There’s very little judicial checking; they’re collecting tremendous penalties and, frankly, they’re raising a lot of money for the Treasury.’
The survey results from Deloitte reflect the impact that increased enforcement has had on US businesses. The head of the Deloitte department that conducted the study says concern over integrity is a theme throughout; in addition to the nearly two thirds of respondents who say they renegotiated or terminated deals, 85 percent say their concern over integrity and reputational risk has risen significantly or somewhat over the last year. ‘I think that’s very significant because it shows the importance of conducting background investigations,’ Schmidt says.
What’s more, one in five respondents identify lack of transparency or unusual payment structures in contracts as the primary reason for a terminated deal or a renegotiation, and 18 percent renegotiated or pulled out of deals due to concerns about the target’s use of agents, consultants, distributors or third parties.
Sixty-one percent say their companies have pulled the plug due to information identified about the target company or its principals during compliance and due diligence; 60 percent have adjusted deal pricing; and 62 percent point to issues related to potential violations of economic and trade sanctions.
And yet, says Schmidt, most respondents indicate that they conduct background checks and believe these checks are effective, and a whopping 89 percent say they feel good about their due diligence procedures.
Measuring corruption
According to Transparency International’s 2010 Corruption Perceptions Index, which measures perceived levels of public sector corruption in 178 countries, bribery is most prevalent in Somalia, Myanmar, Afghanistan and Iraq. The index also rates numerous countries in South America, Africa and Asia as corrupt.
Even though legal experts are reluctant to speak directly about their clients, there are plenty of anecdotal cases of businesses that have stopped or amended business plans because of the FCPA and their dealings abroad. Nair says his company has uncovered numerous low-level corruption events. ‘We had a client with a sales guy in eastern Europe who paid a bribe to a Bulgarian distributor to get a contract and then tried to expense the bribe,’ he recalls. ‘And he said it quite innocently: This is a bribe. The whistle was blown, they fired the guy and we cancelled the contract.’
Krakoff says that a few years ago he represented the Dow Chemical Company in an FCPA matter that was resolved with the SEC, and he currently has another client in an FCPA case as well. ‘Most of my other clients have not hit the radar screen and have been able to resolve matters short of prosecution,’ he notes.
Reinhard, too, says he has had situations in which issues were discovered, but he managed to remediate them and the transactions went forward.
The enforcement actions provide lessons for US companies that want to continue working abroad and not run into trouble with the FCPA. According to Schmidt, the survey demonstrates the importance of implementing an effective FCPA compliance strategy and continuously monitoring for violations. It is crucial to investigate immediately when red flags or allegations arise, she says.
‘I think it’s also important to make sure you train your employees, your business partners and other third parties in your supply chain as to what the FCPA means, that you have a code of conduct around the FCPA, and that you provide clear instructions about what people should do if they suspect an FCPA violation has occurred,’ Schmidt continues. ‘And I think it’s very important to understand where the risks are in your organization in terms of corruption, so you need to analyze your business operations for government touch points because these present the greatest risk of corruption from an FCPA perspective.’
Avoiding the pitfalls
Heard notes that the FCPA obliges public companies to maintain records so all payments are transparent. Reinhard points out that third-party relationships are always a huge risk factor, and that when considering a deal, companies therefore need to conduct thorough due diligence to ensure the target doesn’t have any lurking violations. ‘An acquiring company that buys a target company that has violated the FCPA could be inheriting a massive liability,’ he says. ‘You have to go out and look at these things.’
Heard recommends companies implement an ombudsman.
‘One of the rather novel suggestions that would work well with the FCPA is for firms to set up an ombudsman or whistleblower so that any questions that anyone has about payments or other activities could be directed there, with an initial promise of anonymity, as an outlet for trying to stem these things,’ he says.
Reinhard further cautions that it may not always be the best idea to simply walk away from a deal, describing this as a possible ‘kneejerk reaction’ that may not always be prudent. ‘Sometimes the problem is so big and so material that it guts the value of the transaction,’ he explains. ‘I think cases like these are rarer than people believe, however, and if you have good counsel and you are smart and savvy, you can generally salvage a lot of those transactions.’
Matt Morley, partner at K&L Gates and co-head of the firm’s FCPA group, notes that the FCPA was unpopular with US businesses when it was first enacted because businesses felt they were at a disadvantage in competing against companies in other countries. Nair says this highlights the need for an international agreement on anti-corruption standards.
‘Obviously, if US businesses are bidding for a contract and have a competitor that is incorporated in a country where they don’t care about corruption and that operates in a country where there already is corruption, the US business is going to be at a significant disadvantage,’ he says.
