The Executive's Guide To FCPA Compliance For Supply Chain Management

The Executive’s Guide To FCPA Compliance For Supply Chain Management

FCPA Compliance for Executives

About this Guide

If your company is joining the global marketplace, understanding how the Foreign Corrupt Practices Act (FCPA) combats bribes and defines compliance, is required reading. The executive’s guide to FCPA explains:

Combating corrupt business practices
Origins of the FCPA
Who enforces the FCPA
How compliance is investigated
What penalties you can face on a personal level and a corporate one
What consequences businesses have faced
What the FCPA covers regarding the supply chain
Mitigating exposure to corrupt business practices

Combating Corrupt Business Practices

Despite numerous government efforts to combat such corruption, bribery and influence peddling are entrenched aspects of doing business in many emerging markets.

With fierce global competition, it may be tempting to consider bribes a “cost of doing business,” or look the other way when your business partners pay up. However, that attitude will cost you – a lot.

Both U.S. and most European countries have enacted compliance regulations that impose severe criminal and financial penalties on companies that engage in corrupt practices. The negative publicity generated by such charges also impacts stock prices and the company’s reputations.

Origin of the Foreign Corrupt Practices Act

In 1977, the United States became the first county to outlaw bribery of foreign officials when Congress passed the US Foreign Corrupt Practices Act (FCPA).

Here’s the gist:

“The FCPA makes it illegal for any company or person in the U.S. to bribe or even offer to bribe a foreign official with anything of value to gain or retain business. The law also gives the Justice Department the ability to prosecute a company — domestic or foreign — that uses the U.S. financial system in any way in furtherance of a bribe, even if the infraction takes place entirely outside of territorial U.S. The law targets only those who give bribes, not the foreign officials who take them.”

The FCPA legislation followed the Watergate scandal. The Securities and Exchange Commission (SEC) found that more than 400 U.S. companies had secured business by paying millions in bribes to foreign government officials.

Bribery and Corruption

In addition, many companies also maintained secret “slush funds.” They used the money to make illegal campaign contributions to U.S. candidates and pay bribes to corrupt foreign officials. The companies falsified their corporate financial records to hide the bribes and contributions. Public (and competitor) outrage led to Congressional action.

Two Methods of Investigation & Enforcement

The Department of Justice (DOJ) and the Securities & Exchange Commission (SEC) are the two agencies that enforce the FCPA. Each has jurisdiction over specific types of violations.

DOJ: Enforces the civil and criminal provisions of the anti-bribery statutes and willful violations of the accounting provisions
SEC: Brings civil charges for violations of the anti-bribery and accounting provisions

The agencies often work closely together so that violators face both criminal charges and civil penalties. For example, in 2012 Tyco International paid $27 million in fines to the DOJ and SEC to settle bribery charges against some of its foreign subsidiaries. Half went to the DOJ for criminal penalties and half to the SEC for accounting violations designed to hide the illegal payments.

In the Tyco case, the company self-reported when it discovered the subsidiaries’ violations after an internal audit. Transparency often helps mitigate fines and prosecutions.

Federal Agencies Monitor FCPA Compliance

The key phrase in the Watergate investigation was “follow the money.” That’s generally how FCPA violators are caught. Basically, the FCPA prohibits two activities: bribing foreign officials to gain a business advantage and failing to maintain complete and accurate records.

Now, no company is going to include a “Bribery & Corruption Expenses” section in their annual report, so violators have to hide the expenses somewhere using accounting tricks. When they do, the feds are waiting.

Both the SEC and DOJ maintain robust auditing and monitoring programs that ensure compliance. The DOJ investigations may also include assistance from the FBI, Department of Homeland Security, and Internal Revenue Service, and U.S. attorney offices. The SEC focuses on accurate accounting and financial reporting.

Both agencies also rely on tips from company insiders, a.k.a. whistleblowers. In 2011, Congress established the whistleblower program to offer incentives for employees to report federal securities laws violations. Since the law’s inception, the SEC has awarded more than $300 million in whistleblower awards.

Violators Face Multitude of Penalties

The potential penalties are sobering:

Anti-bribery penalties: Up to $100,000 for individuals and $2 million for companies.
Accounting and record-keeping penalties: Up to $5 million for individuals and up to $25 million for companies
Prison sentences: 5 to 20 years

Business Bribery Penalty

Additional penalties include SEC-imposed fines of up to $10,000 per violation and numerous other penalties, including:

Asset forfeiture
Injunctions
Revocation of import/export privileges
Inability to do business with the government
Loss of investor funding

It can get even worse once the news gets out. Angry shareholders are not afraid to sue.

The Brazilian firm, Petrobras, which was recently involved in a massive bribery scandal, paid the U.S. government $853 million in fines. The company also agreed to settle a shareholder lawsuit for $2.95 billion.

In 2015, the SEC fined Avon $135 million after it bribed Chinese officials to obtain a direct selling license. The total cost to the company was more than $300 million in legal and related costs, including $62 million to settle a shareholder lawsuit.

Then there’s the PR fallout, as consumers boycott companies and shareholders sell, sell, sell. The Economist magazine reported on a study of how “deepwater” incidents (PR crises) affected companies’ financial health:

“…Schumpeter has looked at eight of the most notable corporate crises since 2010, including those at Uber and Wells Fargo. The evidence shows that these episodes were deeply injurious to the companies’ financial health, with the median firm losing 30% of its value since its crisis, when compared with a basket of its peers.”

FCPA Regulations Cover the Entire Supply Chain

President Harry Truman famously had a desk plate that read “The buck stops here,” meaning that the president makes the decisions and has ultimate responsibility. That’s true for both politics and business. If you accept the title, you take the responsibility that goes with it – including the legal responsibility.

Your company may have stringent internal controls and audit procedures, but what about your business partners? Your logistics providers? Your accounting and tax document providers? Your export/import partners? If just one of them is dirty, your company may have to manage a financial, legal and PR mess.

Of course, it seems like an almost impossible task to police service providers across the globe, particularly if you’re running a small- or medium-sized company. International expansion may not seem worth it if you have to manage the FCPA compliance and risk on your own.

That’s where Flash Global can help. Our global network of employees and partner companies is experienced in maintaining documentation and monitoring FCPA compliance in far-flung global supply chains to allow clients to go global.

Using a Qualified Partner to Help Mitigate FCPA Compliance Risks

Working with a logistics partner committed to ensuring FCPA compliance can reduce risks of exposure. Flash Global has developed a multi-pronged global compliance program that focuses on FCPA compliance and export management processes and regulations.

Employee Training & Testing: All Flash Global employees, partners, and contractors complete a rigorous FCPA compliance training course every year. All participants must pass a test after training and complete a questionnaire where they verify that they understand Flash Global’s Anti-Corruption Policy and complied with it during the previous year.
External Partner Verification: Flash partners must submit to an in-depth audit by a team of FCPA/export management forensic and legal experts. This includes background checks on top company officials, an audit of a minimum of 3 years of financial records and interviews with company personnel.
Ongoing Audits: Flash conducts ongoing internal audits of network partners. We bring in external consultants every two years to conduct a comprehensive internal audit to identify any potential compliance gaps or issues.
Record-keeping & Documentation: We maintain copies of all documents, communication, testing/training materials, and anything associated with compliance. Our internal finance department enforces a zero-tolerance policy regarding undisclosed or unrecorded partner assets.

We can help your company succeed because we only deal with the best, most reputable service providers. A transparent, knowledgeable supply chain management partner can help you mitigate risk and maximize profits. Connect with us to learn more.