Tweet

FOREIGN CORRUPTION PRACTICE ACT FCPA USA

Written by: Kaviraj Singh

Article Overview: This article aims at dealing with the applicability of Foreign Corrupt Practices Act in the foreign investment scenario in Asia. I will further concentrate on the nature of compliances that a corporate ought to observe, be it under FCPA or under the domestic laws of a particular country, and the reason and wisdom to do so. All around the world, in every country, the goal of business is not to serve the public; it is to make money. When that drive for profit produces corrupt behaviour and erupts in major scandals, it can have a demoralizing effect. The early twenty first century scandals in America over revelation of business fraud followed by indictments and punishment included corporations such as WorldCom, Qwest, Tyco, Adelphia Communications, ImClone and Global Crossing.

FOREIGN CORRUPTION PRACTICE ACT FCPA USA

This article aims at dealing with the applicability of Foreign Corrupt Practices Act in the foreign investment scenario in Asia. I will further concentrate on the nature of compliances that a corporate ought to observe, be it under FCPA or under the domestic laws of a particular country, and the reason and wisdom to do so. All around the world, in every country, the goal of business is not to serve the public; it is to make money. When that drive for profit produces corrupt behaviour and erupts in major scandals, it can have a demoralizing effect. The early twenty first century scandals in America over revelation of business fraud followed by indictments and punishment included corporations such as WorldCom, Qwest, Tyco, Adelphia Communications, ImClone and Global Crossing. In 2000, Enron's reported revenues made it the seventh largest company in America. Questionable methods and strategy and misrepresentations to the public of their financial status were used to expand this natural gas pipeline company. It exploded in growth until 2001, when the Securities and Exchange Commission (SEC) investigated and Enron admitted that it had been overstating earnings by nearly $600 million since 1997.

The American response to the corporate scandals and corporate failures of the past had been to pass laws that addressed the problems and that strengthened regulations. The FCPA emerged from SEC investigations in the mid-1970's that led to over 400 US companies admitting having made questionable or illegal payments to foreign governments and officials. The Act was enacted to bring a halt to the bribery of foreign officials and to restore public confidence.

Asia has forever been a lucrative market for the traders from the western hemisphere. With the attractive opportunities that the Asian markets had to offer, came the urge to resort to any and every means to get that opportunity, and thereafter maximizing the profits.

The dynamics of the Asian markets has been consistently dependant on the kind of government that was in rule at ay given time. Thus, whilst countries like Singapore, Taiwan and South Korea followed an aggressive open market theory, socialist and communist countries like India and Vietnam respectively followed a more closed market model. Numerous levels of centralized control existed, for example in India, the 'License Raj', in an effort to regulate wanton profiteering by the market, and to ensure equal distribution of the market produce, and equal opportunities for all.

However, the markets have opened up, development has kick-started and one of the major sources which are driving the development streak is foreign investment.

It has been suggested that corruption has to be examined from two perspectives - arbitrariness and pervasiveness. Arbitrariness is the degree of ambiguity associated with the likelihood of gaining favourable treatments in corrupt practices, whereas pervasiveness is the average likelihood of encountering bribery request in business interactions. More firms would bribe when the pervasiveness would be high, while fewer firms would bribe when arbitrariness would be high. The more visible the bribery, the easier it would be for entities to decide whether bribery would be a feasible option, and whether they wish to indulge in it. Past research shows that corruption is undesirable and costly for the society. Credibility of rules leads to economic growth. Again, research has shown, and interestingly so, that engaging in corrupt practices and behaviours may bring immediate benefits, and that companies that pay bribes are four times likely to get the deals than those firms that do not bribe, and therefore, given this statistics, rampant corruption is not surprising at all. That recently various governments are trying to pull up their socks and tightening the regulatory and penal provisions to as to reduce, if not eradicate corruption, and to clean up the system, is but a welcome move.

Among other things, it must be understood that corruption also affects competition in an extremely detrimental manner, which in turn, and more often than not, affects quality. Ever since FCPA has been enacted, US companies have come under heavy regulatory scanner, and there are numerous instances where the companies had to pay an amount which far surpasses the benefits that they accrued by indulging into corrupt practices, which also included several prosecution of the directors. In its wake, many large companies now, as a policy, prefer not to indulge in corrupt practices, or follow a strict discipline of disclosures so as to avoid any regulatory liabilities. Since such a practice are not followed by many entities, corruption affects competition, which in turn compromises on the quality of the end-product since that is not taken into consideration while awarding a contract to a party which is resorting to corrupt means. Now, in developing economies like Asia, where every penny counts, compromises on quality, which in effect reduces the longevity of the subject matter of the contracts, which in turn reduces the cost-benefit ratio that a developing economy might be looking at. In the final analysis, the society at large suffers. Thus, from a broader sociological perspective, statutes like the FCPA are indeed the call of the hour, and compliance is indeed a must.

However, researchers have always found Asia, or rather to be precise, oriental societies, to be a puzzle, since traditionally economic development in these countries have gone hand-in-hand with bribery and corruption. Usually, pervasiveness of corruption has always been high in the more traditional set-ups, like India, where it is a given fact that a bribe has to be paid. For example, as our distinguished speaker from Japan shall further elaborate, certain traditional practice makes pervasiveness in corruption a standard practice of operation, so much so that within the local enforcement framework, it attains the rule of the norm, and loses its dubious character. Amakudari is a practice whereby senior Japanese government officials take high profile jobs once they retire. Obviously the potential of giving rise to grave incidents of conflict of interest, but legally per se, there are no violations upfront, since the employment contract is executed after such official retires. Strange!

However, newer economies, like Singapore, have taken the exactly opposite view, and are highly intolerant towards bribery and corrupt practices. In other words, while pervasiveness deals with the probabilities of incidences of corruption, arbitrariness deals with the probabilities of a positive result accruing from corruption. Whenever comparative studies of corruption in Asian countries have been conducted, the situation has been examined from the permutation and combination of the degree of arbitrariness and pervasiveness prevalent in such countries. I found it a convenient methodology, and would like to introduce it before the panel proceeds with its order of business.

A study of arbitrariness-pervasiveness degree as prevalent in each country would indeed shed some light as to the comparative positions which exist in these countries relation to corruption, and would give us an idea as to the degree of self-regulation that would be required to be maintained by entities to escape the FCPA punishment.

As per statistics, China is high in pervasiveness, but low in arbitrariness. Singapore and Japan are said to be low in pervasiveness and arbitrariness. India is reported to be high in both pervasiveness and arbitrariness, whereas a country like Malaysia is low in pervasiveness but high in arbitrariness.

It has been proposed that if the arbitrariness is low, chances of getting the service, as acquired through corrupt routes, would have a higher probability of being provided, whereas in case of countries with a high degree of arbitrariness, then even if bribes are meted out, chances of getting the desired result would be low. On the other hand, if a company is expected to dole out a bribe (high pervasiveness), then the decision of the company to bribe or not would rest on the degree of prevalent arbitrariness.

It might be very difficult for a company to operate on practical terms in an environment where both pervasiveness and arbitrariness are high. However, given the susceptibility of companies to indulge into corruption, they need to be all the more cautious while conforming to the requirements of FCPA.

However, it is indeed interesting to note however, that while certain countries like China and Vietnam indeed suffer from comparatively high degrees of pervasiveness and arbitrariness, they also receive high volumes of foreign investment. This is despite the trend that if levels of corruption are high in a particular country, any entity looking at creating inroads into a country through investments would find it a difficult task to factor in the extra financial liability it would have to bear to manage the bribes, which would increase its costs. Therefore, it is but a logical conclusion that it is easier for entities to invest in a country with lower corruption levels, i.e. having low degrees of pervasiveness and arbitrariness, as compared to countries having high levels of corruption. However, as mentioned before, exceptions like China, India and Vietnam do exist. The answer lies in decentralization and reducing the levels of arbitrariness.

The U.S. authorities have shown an increased willingness to cooperate with foreign governments in joint investigations, even where the target companies are already the subject of law enforcement investigation or sanction in their home country. The FCPA issues can be a major sticking point in negotiations with the acquiring party, often causing delay of the deal or a change in the price terms.

Another important factor for the surge in FCPA actions is The Thompson Memo, which identifies considerations that will be taken into account in deciding whether or not to prosecute a corporation. A corporation may avoid prosecution altogether if, among other things, the corporation has self-reported and cooperated fully with the authorities. Companies are now choosing to voluntarily disclose FCPA violations in an attempt to receive favourable treatment and to mitigate what might otherwise be harsher penalties. Also, the U.S. authorities have shown an increased willingness to cooperate with foreign governments in joint investigations, even where the target companies are already the subject of law enforcement investigation or sanction in their home country. The most prominent example of this latter phenomenon is the case involving Siemens. Another example is the investigation of BAE Systems. As our distinguished speaker from India shall elaborate, letters of rogatory have been oft issued by the courts of India and US to each other, by way of which FBI and CBI have been cooperating, and have been exchanging information frequently so as to enlarge the trap laid for offending companies in India. The results have been quite heartening, and my prediction is that such a cooperation model shall be replicated between other countries, sooner rather than later.

The situation in India is what I am aware of the most. With the advent of globalization and open market policies, the licensing regime which is the fossilized remnant of the socialist era is well on its way out. Major policy revamps have ensured that the wide discretionary powers otherwise previously enjoyed by the public officials. Most of the sought after investment routes have been made automatic, i.e. application of discretion by administrative authorities have been done away with, and various guidelines have been promulgated which lay down the process which the public officials are to follow while formulating a decision, thereby curtailing their discretion even further. However, due to the traditional acceptance of the concept of offering bribe (bakshish system for example), which is more of a show of gratitude than paying for service, and with the low per capita income of such government officials, it is difficult for strict black and white enforcement through law. However, with the awareness being created about the negative effects of corruption on the society and development as such, sensitization against corrupt practices is happening in the country. Self-regulation by the companies has already started so as to exhibit a clean image, and even the government is taking efforts to streamline process-lines so as to project an investor-friendly image. In the process, the government is also looking at aggressive implementation of existing laws so as to ensure that the word of law proves to be an effective deterrent to corruption-prone entities. So a lot of change is expected to take place in this regard, be it judicially, socially, economically or from a legislation point of view.

Increased financial penalties are just one of the many reasons why FCPA enforcement continues to garner attention in 2009. Recent FCPA enforcement actions, settlements, and investigations of large multinational corporations and their executives reflect the changing enforcement environment for multinational corporations.

Harvard Business School in a recent study has found that "ethics-based" companies increased their net income 756 percent - versus just 1 percent for companies who put profit first. Principled economic behaviour is a long-term investment in the security of nations. The world cannot afford economic misconduct.

Example - on February 11, 2009, Kellogg, Brown and Root LLC, a global engineering and construction firm based in Houston, Texas, and its corporate parent, KBR, Inc. pleaded guilty to a five-count Criminal Information alleging violations of the FCPA and will pay a US$402 million criminal fine and US$177 million in disgorgement. The combined US$579 million penalty against KBR is the second-largest combined penalty ever paid to resolve an FCPA investigation and is the largest-ever paid by a US company. The magnitude of the proposed penalty is a stark reminder to businesses of the potential costs of failing to manage FCPA risk or to adequately oversee the actions of subsidiaries.

The current economic downturn and the accompanying uncertainties about job security may increase the usual pressures on managers to "make their numbers." These pressures may tempt those responsible for foreign sales and deals to operate close to the line, or even cross the line, in their efforts to secure new business.

In this climate, risks under the FCPA are heightened, as some enforcement officials have already publicly noted. Corporate management, audit committees, compliance professionals, and others may worry that in the mind of an anxious manager on the other side of the world, the lure of new business may outweigh the risks inherent in an improper payment or inducement to a foreign official.

The same economic pressures, however, may also limit dollars and resources available for FCPA compliance. This twin set of pressures is causing corporations to ask themselves how they can stretch their compliance dollars and make them as cost-effective as possible.

Given the fact that all of us hail from diversified cultural milieu, it is important that all of us understand the similarities and differences between the local laws and FCPA, which does remain a foreign law, but aimed at something quite noble.

Related Articles
  SMEs - the impact of corruption has deep roots
  SMEs - should despots and dictators be given a free pass
  Opportunities and Challenges in International Franchising - Foreign Franchises Trying to Move into the U.S.
  Investing In A Weak Dollar
  Do MNEs Train More than Domestic Firms?

Article Tags: asia, corruption practice, fcpa, foreign investment, investment scenario, kaviraj, practice act



Related Forum Posts


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Ten Twitter Tips For Work-at-Home Moms

Stress: What Causes It and How To Deal With It

••••••>SEO Tip Of The Day: HTML Validation

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.