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Avoid legal pitfalls when doing business abroad

Cuneyt Akay //August 26, 2013//

Avoid legal pitfalls when doing business abroad

Cuneyt Akay //August 26, 2013//

Could giving a government official a chocolate candy bar constitute a bribe? What about a cosmetic bag full of makeup or a designer handbag? According to the United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC) they very well might.

Some cases are more obvious than others, for instance, when Siemens was accused of violating the Foreign Corrupt Practices Act (FCPA) by conducting an alleged decade-long bribery scheme that involved thousands of corrupt payments totaling around $1.4 billion to foreign officials to obtain government contracts. In that case, the record $1.6 billion combined settlement Siemens paid to the DOJ, SEC and German authorities may not come as such a surprise.

However, other cases are not as obvious. Recently, an upscale American lifestyle company and fashion retailer learned this lesson the hard way. The company paid the U.S. government over $1.5 million because employees for the famous designer gave Argentinean officials perfume, clothing and purses valued between $400-$1,400 each. According to the DOJ and SEC, the “gifts” made by a broker on behalf of the company to customs officials in Argentina used to expedite paperwork for the clearance of goods amounted to bribery.

As the DOJ and SEC recently stated in FCPA guidelines, the law “does not contain a minimum threshold amount for corrupt gifts or payments” if given with the “intent to improperly influence” a foreign official.

What is the Foreign Corrupt Practices Act?

In 1977, in the wake of the Watergate scandal, Congress enacted the FCPA to address the problem of bribery of foreign officials by U.S. companies. The FCPA consists of both anti-bribery provisions and accounting provisions.

The anti-bribery provisions prohibit making, offering or promising anything of value to a foreign official to secure business or obtain an improper business advantage. Simply put, U.S. companies can’t directly or indirectly give foreign officials gifts or money to obtain business.

The accounting provisions require companies to maintain accurate books and records and require the implementation of internal financial controls.

Enforcement of the FCPA was virtually non-existent until the mid-2000s, when the DOJ and SEC started to impose ever-increasing fines for bribery violations. The agencies continue to make FCPA enforcement a priority across the globe, investigating companies in a wide-ranging number of industries, collecting billions of dollars in penalties and sending corporate executives to prison.

Steps towards FCPA compliance

The FCPA poses risks to anyone doing business overseas. Far-flung sales associates can get companies in trouble, and it isn’t always clear where to draw the line between bribery and ordinary gifts or courtesies, such as paying for a cup of coffee. A few cases end up in headline news and may eventually wind up in court, but most cases settle beforehand. Penalties can be in the multimillion-dollar range, and internal investigations are outrageously expensive, along with the associated cost of legal counsel. In addition, officers, directors, employees, agents and shareholders can also face criminal penalties, including fines and imprisonment.

Prior to opening an investigation, the DOJ and SEC consider how far an organization has gone to insure proper reporting and compliance procedures. According to the government’s FCPA guidelines, internal controls should aim to prevent payments of bribes concealed as legitimate payments. For instance, the DOJ looks severely at companies that mischaracterize bribes as commissions, consulting fees, sales and marketing expenses, scientific studies, travel and entertainment expenses, rebates or discounts, service fees, supplier/vendor payments, write-offs and “customs intervention” payments.

Tips for Complying with the FCPA

Many times companies fail to adhere to the FCPA because they don’t have an overall plan in place to deal with issues that arise from doing business overseas, rather than an outright willingness to bribe or deceive.

Gifts often form the basis for FCPA enforcement actions. Companies can take steps towards FCPA compliance by implementing procedures for gift giving to foreign officials. Gifts should be nominal in value, given openly and transparently, properly accounted for in the company’s books and records, provided only to reflect esteem or gratitude, and permissible under local law.

The DOJ and SEC look favorably upon companies that make sincere and documented attempts to comply with FCPA. Companies should implement well-designed compliance programs and apply them in good faith.

Ultimately, companies facing FCPA investigations are judged on whether the compliance program works. Companies doing business abroad should evaluate their compliance programs and follow these initial steps to comply with the FCPA:

1. Understand what the company is doing internationally, especially where the company’s business touches foreign governments;
2. Determine what processes are in place to help employees comply with the FCPA in foreign countries where the business operates;
3. Develop procedures for evaluating and controlling gift-giving, entertainment expenses and charitable contributions;
4. Establish a proactive training program to ensure employees understand the company’s policies and compliance procedures;
5. Set up internal controls that detect bribes; and
6. Implement a process for remedial action, as needed, including internal investigations, disciplinary actions and termination of third-party intermediaries involved in illicit conduct.

Pursuing FCPA violations is becoming a bigger priority for the U.S. government. Whether being accused of systematically bribing foreign officials with large cash payments in various countries over decades or providing perfume to a few customs agents in Buenos Aires, the recent FCPA compliance woes of U.S. companies should serve as a wake-up call for all U.S. businesses operating in foreign countries.