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Why you can't afford to ignore anti-corruption legislation

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16th Apr 2009
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Mark E. Thompson and Zachary J. Harmon of law firm King & Spalding explain why firms should take anti-corruption compliance seriously when it comes to investment decisions.

Despite the global economic crisis, it is very important that international companies continue to pay particularly close attention to their anti-corruption compliance programmes and practices. In fact, as companies struggle to remain profitable, it is even more critical to ensure that employees are not tempted to engage in illegal practices while pursuing short term revenue. Even highly regarded companies with strong compliance cultures are at risk of employees breaking the law. The disclosure in February by Morgan Stanley that it had uncovered actions by an employee in a real estate subsidiary in China that appear to have violated the US Foreign Corrupt Practices Act (FCPA) should put every company on alert as to the potential risks of operating internationally, particularly in countries where corruption is perceived as widespread.

Key facets of FCPA
The FCPA prohibits the promise, authorisation, payment or offer of money or anything of value, directly or indirectly, to any non-US governmental official for the purpose of corruptly influencing an official or securing any improper advantage, in order to obtain or retain business. Broadly speaking, the FCPA covers citizens, nationals and residents of the US; companies or entities based in the US; officers, directors, employees, agents or stockholders of US companies; US investors in a non-US entity; and non-US companies and nationals (non-US persons) that commit an act in furtherance of bribery of a foreign official ‘while in the territory of the United States’.

Accordingly, and as a practical matter, FCPA risks clearly are not limited to US companies. Non-US persons can be exposed to liability through, for example, US citizens who are on boards of international companies, international subsidiaries of US parent companies and non-US persons engaging in FCPA violations while in the territory of the United States. In short, the US government is taking a very expansive view of jurisdiction under the FCPA. The US government recently demonstrated this aggressive strategy when in February two Britons were indicted in the US and subsequently arrested in England for FCPA violations for allegedly bribing Nigerian officials to win contracts for the Bonny Island gas production plant. They reportedly face up to 55 years in prison.

The road ahead
While the US has historically taken the lead on anti-corruption matters, it is not the only country currently enforcing anti-corruption laws. The international community is increasingly taking anti-corruption very seriously and anti-corruption laws similar to the FCPA are being enacted and enforced through, for example, the European Union’s Convention on the Protection of Communities’ Financial Interests, the Organization of American States’ Inter-American Convention Against Corruption and the OECD Convention. International cooperation and parallel investigations are on the rise and even countries previously perceived to have minimal enforcement, for example India, are stepping up anti-corruption prosecutions.

During the Clinton and Bush administration, FCPA enforcement emerged as a top priority for the US Department of Justice (DOJ) and the Securities and Exchange Commission. In fact, the head of the FBI’s public corruption unit noted in 2006 that FCPA enforcement follows only counterterrorism and counterintelligence efforts among federal law enforcement priorities. There is no indication that the US focus on FCPA enforcement will diminish during the Obama administration.

If anything, FCPA prosecutions are on the rise. DOJ prosecutions between 2001 and 2006 were over four times the number from the preceding five years. In part, this rise in FCPA prosecutions may stem from incentives offered to companies for disclosing FCPA issues. Currently, there is a long queue of companies that have self-disclosed potential FCPA violations and are awaiting their opportunity to resolve these issues with the authorities. While there is some debate about the relative benefits to companies of self-disclosing FCPA issues, there are many indications that self-disclosure translates to more lenient treatment by US authorities. Certainly the US FCPA enforcement community asserts that this is the case, and there are trends and anecdotes to support this assertion.

Moreover, the ramifications of FCPA problems continue to expand. First, the US authorities increasingly expect more from companies conducting FCPA internal investigations. These higher expectations result in much higher investigative costs. The Wall Street Journal reported that Siemens paid over $850 million in fees and expenses to investigate its own conduct before resolving a variety of FCPA issues in December 2008. Second, sanctions such as disgorgement of profits obtained as a result of FCPA violations and the requirement of an independent monitor (at the company’s expense) for several years are increasingly common in FCPA cases.

Want to know more? Read more on AccountingWEB.co.uk's sister site Finance Week.
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