Expert answer:Violation of the Foreign Corrupt Practices Act
Solved by verified expert:Read the case study and answer the question belowQ2. Check for more recent situations where companies have been accused of violating the Foreign Corrupt Practices Act. Why do you think these companies chose to engage in bribery?
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CASE 18
Managing the Risks of Global Bribery in Business*
Bribery is one of the most pervasive forms of corruption in global business. In the United States, the
United Kingdom, and many other countries, bribery in business is illegal, par- ticularly when it involves the
bribing of foreign officials. Unfortunately, bribery plagues even the most well-respected organizations.
Corporations past and present have witnessed or participated in this illegal practice. Multinational
organizations face the added challenge of having to monitor their subsidiaries in various countries, including
some where bribes are expected as part of the normal course of business. IBM, for instance, paid fines of $10
million to settle claims it paid officials in China and Korea with gifts and other bribes to secure contracts. With
fines often reaching into the millions, it is essential for companies to have systems in place to prevent this form
of misconduct.
Bribery is defined as the offering of payments or other incentives to gain illicit advan- tages. In
business, bribery can be used to influence an organization or individual to pro- vide preferential treatment.
Although bribery occurs on a widespread level, it is far from harmless; rather, it interrupts the competitive
process between organizations. Many cul- tures, including the United States and the United Kingdom, consider
bribery to be an unfair way of conducting business. For years corporations have adopted anti-bribery and anticorruption policies in their organizations. However, these efforts mean little if they are not enforced.
The form and frequency of bribery vary depending on the culture. In some cultures, bribery is a
common way of doing business. Many cultures, including the United States, allow companies to provide
hospitality or small gifts to those with whom they wish to do business. In fact, in Japan it is often considered
rude not to bring a gift. One challenge for many companies is how to determine what constitutes a gift or an
act of hospitality and what can be construed as a bribe. Giving a potential client a mug with the company logo
on it is likely to be seen as a form of hospitality because it is so small in value it will not likely influence the
client’s business decision. An all-expenses paid trip to the Bahamas is another question entirely. However,
other items are not as easily defined. For instance, is a bottle of wine a gift or a bribe? What if the wine costs
$20? How about if it costs $175? The distinc- tion between gifts and bribes can be a gray area. It is the firm’s
responsibility to be aware of the bribery laws within each country it operates in and conduct business
accordingly.
Even if the business has operations in a country where bribery is acceptable, anti- bribery laws
sometimes reach across borders. For example, the U.S. Foreign Corrupt Prac- tices Act and the United
Kingdom Bribery Act prohibit companies with operations in the United States or the United Kingdom,
respectively, from bribing foreign officials anywhere. Another important measure for combating international
bribery is the OECD Anti-Brib- ery Convention, meant to criminalize international bribery of foreign public
officials. All 34 OECD member nations and 7 nonmember nations are subject to this convention, although
some countries are more proactive in enforcement than others. Even countries where bribery is commonplace
have passed bribery laws and are prosecuting individuals or companies for acts of bribery. For example, China
recently amended its criminal code to allow prosecution of companies that offer bribes to foreign officials over
$31,640 (RMB 200,000). Brazil also recently passed its own corporate bribery law, making companies civilly
liable for bribing government or foreign officials. The new Brazilian law is actually much stricter in some
ways than its U.S. and U.K. counterparts, although how effectively it will be enforced remains to be seen.
However, simply knowing the relevant bribery laws is only one step toward combating this practice.
Unfortunately, the distinction between a gift and a bribe continues to remain ambiguous, and even the most
wide-sweeping anti-bribery laws are not always clear on this issue. To eliminate this uncertainty for
employees, generally accepted practices regard- ing bribery should be located in the company’s code of
conduct as well as communicated to all employees. By implementing a code of conduct with clear distinctions
between bribery and gifts or entertainment, a company can set a proper precedent that bribery will not be
tolerated.
This case analysis examines two of the major laws that impact the use of bribery on a global scale: the
Federal Corrupt Practices Act of the United States and the Bribery Act of the United Kingdom. While there are
many other global bribery laws, these are the most-well-recognized anti-bribery laws in the world. We begin
by examining the backgrounds of these two laws and then discuss the rules and regulations of each. The case
explains why these laws were enacted and who is subject to their standards. The analysis also provides specific
examples of bribery and its consequences. Finally, we offer an overview of how bribery negatively impacts
national institutions, including political, social, and economic.
BACKGROUND OF THE UNITED STATES FOREIGN CORRUPT PRACTICES
ACT
The Foreign Corrupt Practices Act of 1977 (FCPA) was developed after a number of scan- dals shook
the nation. The Watergate scandal brought corruption under greater scrutiny. After Watergate, the U.S.
Securities and Exchange Commission began investigating more than 400 U.S. companies, including long-term
bribery at Lockheed Martin, and discovered many had made questionable and illegal payments to foreign
officials in excess of $300 million. Their findings proved the necessity for regulation, which resulted in the
creation of the FCPA.
The FCPA makes it illegal for individuals or entities to make payments to foreign government
officials to assist in securing or retaining business. The FCPA does, however, allow for small payments to
expedite routine transactions, known as facilitation payments, which are arguably necessary to conduct
business in some countries. These facilitation payments are meant to speed up routine transactions and
convince public officials to per- form their functions, but are in no way intended to convince government
officials to pro- vide preferential treatment to a firm. While there is no set amount separating a bribe from a
facilitation payment, gifts under $100 are generally deemed to be acceptable. However, as mentioned earlier,
distinguishing between gifts and bribes can be difficult. Under the FCPA, a bribe can be anything of
significant value, including money, gifts, travel, or vari- ous types of entertainment. Forms of bribery vary
from company to company; one orga- nization may view anything less than $100 as acceptable, while another
company may see anything more than $10 as a bribe. To avoid discrepancies, it is necessary for companies to
include their standards on gifts and entertainment in their codes of conduct.
Any company with operations in the United States is subject to the FCPA over its entire business. The
FCPA always applied to companies listed on the U.S. Stock Exchange, and in 1998 the law began applying to
foreign companies as well. The FCPA was designed to encourage proper business transactions conducted by
companies and individuals. Ulti- mately, Congress enacted the FCPA to bring a halt to the bribery of foreign
officials and attempt to build and restore public confidence in the integrity of the American business system.
With the development of the FCPA, the implications and consequences for bribes changed.
Punishment for violating the FCPA varies from case to case. However, penalties generally include up to five
years in prison and fines of up to $250,000 for individuals. For business entities, fines can reach $2 million.
Also, company executives who know about bribery but do not report it can face prison time.
Bribing government officials comes in many forms. In 2014 HP paid $108 million to settle allegations
that it had bribed foreign officials in Mexico, Poland, and Russia. In 2012 Eli Lilly was charged with issuing
improper payments to foreign government offi- cials in order to conduct business in Poland, China, Russia,
and Brazil. Additionally, in 2012 the Securities and Exchange Commission found Tyco International guilty of
arrang- ing improper payments to foreign officials in more than 12 countries. While most of these incidents
involve gifts or money, other incidents of bribery under the FCPA have included improper travel, contributions
to the public official’s favorite charity, and even providing excessive tax breaks. The greatest considerations
for whether a gift constitutes a bribe are whether it seeks to sway the public official’s opinion to favor the
bribing company and whether the bribe was willful and intentional. Intent is essential in establishing liability.
UNITED KINGDOM BRIBERY ACT
The first law dealing with bribery in the United Kingdom was passed in 1889. The law, called the
Public Bodies Corrupt Practices Act, outlawed the bribery of any official working under the capacity of a
public body. The act was followed by the Prevention of Corruption Acts in 1906 and 1916. However, as the
United Kingdom became more globalized, these acts were regarded as unsuitable for complying with
international anti-corruption agree- ments. Pressure increased to reform these laws. In 2008 a working party for
the Organisa- tion for Economic Co-operation and Development (OECD) insisted on new regulation. In 2009 a
bribery bill was introduced, and eventually became the Bribery Act of 2010. It took effect in 2011. While
many herald the Bribery Act as taking a strong stance against bribery and corruption, others believe the law
may actually be too harsh. Concern that items tradi- tionally seen as gifts could now be perceived as bribes
have prompted many companies to update their anti-corruption policies and codes of conduct.
The Bribery Act includes provisions against all forms of bribery. The Act states the two general
offenses as, first, the offering, promising, or giving of a bribe to any government official, and second, the
acceptance or request for a bribe by any government official. The Bribery Act places liability on organizations
for not detecting bribery in their operations and failing to adopt adequate procedures to detect bribes. This part
of the Act is unusual because it is a “strict liability” offense, meaning the organization’s intent is irrelevant; if
it fails to adequately detect bribery for whatever reason, even if it acted in good faith, it is liable. The Bribery
Act extends to companies within the United Kingdom operating abroad and to companies present in the United
Kingdom. In other words, any company with oper- ations in the United Kingdom is subject to this law. While
penalties vary, violating the Bribery Act can carry a maximum of 10 years in prison, unlimited fines, and the
possibility of the confiscation of property.
While the FCPA and the Bribery Act are similar in many ways, there are significant differences
between the two. The Bribery Act is generally believed to be more encompass- ing than the FCPA. While the
FCPA allows for facilitation payments, recognizing in some countries that it might be hard for businesses to
get routine transactions done in a timely manner without them, the Bribery Act leaves no room for these
payments. After facing pressure from small- and mid-sized businesses, the U.K. government has agreed to
review and potentially lessen the restrictions against facilitation payments. For now facilitation payments
remain illegal under the Act, but there have been very few investigations into facilitation payments, which
suggests possible leniency in practice. Because of the new law, global organizations such as Hewlett-Packard
began updating their codes of conduct to provide additional guidance on bribery.
Additionally, while the FCPA is specifically concerned with bribing foreign or gov- ernment officials,
the Bribery Act also makes it illegal to pay bribes to private and public officials or enterprises. This means a
person who offers a bribe could be liable under the Bribery Act even if the bribe was not to a foreign official.
Another difference is liability. Under the FCPA a company only has strict liability for bribery as it relates to
accounting provisions for public companies. However, the Bribery Act applies strict liability to any
commercial firm that does not have “adequate controls” for preventing bribery.
Some companies worry the Bribery Act will make it too hard to conduct business. The strict liability
offense made firms particularly worried they could be held liable for bribery even if the majority of the
company was not aware bribery was taking place. However, like the FCPA, penalties under the Bribery Act
might be reduced if the company is found to have adequate controls against corruption and a proactive
corporate culture supporting ethical conduct. Companies must also report bribery to the proper authorities the
moment the bribery is discovered. While neither law states a firm will not be prosecuted because it reported
bribery, active cooperation may significantly reduce the severity of penal- ties imposed, and officials can
examine the firm to see if it adopted a proactive approach toward combating bribery. How a prosecution would
impact the public interest is also con- sidered when deciding on potential penalties for bribery violations.
Finally, while there are no clear rules distinguishing gifts given as an act of hospitality from bribes, the Serious Fraud Office of the United Kingdom has stated it will not pursue reasonable gifts of hospitality.
PENALTIES UNDER THE FCPA AND THE U.K. BRIBERY ACT
The following section provides examples of companies or individuals found to be in viola- tion of
bribery laws. Table 1 provides a brief summary of additional companies fined under the FCPA. While many
firms have been fined under the FCPA, the relative newness of the Bribery Act means that as yet there have
been few prosecutions. However, the prosecutions that have occurred demonstrate the Serious Fraud Office in
the United Kingdom takes the topic of bribery seriously.
TABLE 1 Companies Accused of Violating the FCPA
Firm
Accusation
Avon
Bribed foreign officials in Asia
Johnson & Johnson
Bribed doctors in Europe and offered kickbacks in Iraq
IBM
Bribed officials in South Korea with cash and gifts
Walmart
Bribed Mexican officials to win zoning permits
HP
Bribed officials in Mexico, Russia, and Poland
Pfizer
It is important for companies to carefully monitor their own practices and also those of their
subsidiaries. In August 2012 the SEC charged Pfizer Inc. with violating the FCPA when its subsidiaries
allegedly bribed doctors and other health care professionals employed by foreign governments to win business.
The SEC charges stated that employees from Pfiz- er’s subsidiaries in countries including Russia, China, the
Czech Republic, and Italy made improper payments to foreign public officials in exchange for regulatory
approvals and increased sales. Pfizer was charged with attempting to cover up these bribes through illegal
accounting measures by recording these transactions as promotional activities, marketing, and other deceptive
entries.
Ultimately, Pfizer was charged with two criminal counts: conspiracy to violate the FCPA, and a
violation of the FCPA’s anti-bribery provisions. However, the prosecutors agreed to defer prosecution and
drop the charges if, after two years, Pfizer continued to take steps to correct and prevent such actions from
reoccurring. Such remedial actions included proactively enforcing an anti-corruption program and appointing a
senior exec- utive to serve as chief compliance and risk officer. Furthermore, Pfizer was required to appoint
compliance heads for each of its business units as well as develop an executive compliance committee. To
settle the case, Pfizer and two subsidiaries agreed to pay $60.2 million. Ultimately, while Pfizer maintains that
top leaders were unaware of the bribery, the action taken against the company shows it is still considered to be
responsible.
In many cases the FCPA has resulted in significant penalties for foreign companies. An example of
this is the company Siemens Aktiengesellschaft, a German company and global multinational in electronics
and electrical engineering. Because Siemens’s American Depositary Receipts (ADRs) are traded on the New
York Stock Exchange, the company is subject to the FCPA even though it is a foreign firm.
In 2008 the U.S. Department of Justice alleged Siemens engaged in a global pat- tern of bribery and
made thousands of payments to foreign government officials total- ing more than $1.4 billion. The
investigation suggested these practices were covered up and supported by inadequate internal controls. Several
senior executives were involved in or had knowledge about the bribery. By the time of the ruling, these
dishonest practices had resulted in a strong negative impact on the company’s corporate culture, since many
employees at different levels of the firm appeared to have knowledge of the bribery.
In 2008 Siemens pleaded guilty to violating both the Anti-Bribery and Company Records and Internal
Control provisions of the FCPA. Siemens agreed to pay a fine of more than $800 million for violating the
FCPA, as well as a fine in Munich, Germany for the board’s failure to assume its proper supervisory
responsibilities in the case. At the time of the judgment, this was an unprecedented case because of the
geographic reach and scale of the bribery. Siemens is an example of the global reach of the FCPA. Currently
there are several hundred non-U.S. companies with shares traded on the U.S. stock exchange that are subject to
the FCPA.
Bribery is such a routine component of business transactions in some parts of the world that it is often
overlooked as a practice capable of causing far-reaching damage. In reality, bribery has the potential to inflict
social adversity on a variety of stakeholders. Transparent business transactions deter this deceitful behavior
while encouraging fair and ethical market competition. The risks of global bribery are prevalent to everyone in
the marketplace where it is used.
Ralph Lauren: Value of Cooperation with the FCPA
While corporations may take steps to avoid corruption and bribery, in a multinational and
multicultural business environment, corrupt practices can still occur. As a result, how cor- porations respond to
discovered problems has significant financial and reputational reper- cussions. This can best be seen in the case
of Ralph Lauren Corporation, a designer and marketer of apparel, accessories, home furnishings, and
fragrances. During an effort to improve its worldwide internal controls and compliance efforts in 2010, Ralph
Lauren dis- covered its Argentine subsidiary paid bribes to government officials to improperly secure the
importation of their products in Argentina. These bribes totaled $593,000 paid out over four years. Within two
weeks of uncovering the illegal actions, Ralph Lauren reported these findings to the SEC and cooperated with
the subsequent bribery probe.
In 2013 the SEC entered into a non-prosecution agreement (NPA) with Ralph Lauren, the first NPA
the SEC had ever entered into for violations of the FCPA. The SEC stated it would not charge Ralph Lauren
with violating the FCPA because of the company’s prompt response, thoroughness of its investigation, and
cooperation with authorities. In return, Ralph Lauren agreed to pay more than $700,000 in illicit profits and
interest earned from the bribes that the subsidiary paid out over the four-year period. However, this …
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