The FCPA

Fraud is a global problem with no geographic boundaries. While there are many differences in laws and practices from country to country, the biggest challenge to becoming a true citizen of the world is understanding, and appreciating, cultural differences. Students are encouraged to study abroad during their college years to develop global perspectives. Studying the U.S. Foreign Corrupt Practices Act (FCPA) and its effect on business helps students and faculty develop global points of view.

The U.S. Securities and Exchange Commission (SEC) enforces the FCPA, which prohibits the bribing of foreign officials for the purposes of obtaining government contracts and other business. With FCPA violations continuing to be a hot topic for the SEC, it’s a good time to discuss the act and its implications in more detail with students.

In 2016, we saw 26 SEC enforcement actions related to FCPA violations — the largest number ever in one year. Five enforcement actions had been resolved this year so far.

When we study these FCPA cases we learn more about the act’s application. The cases also:

• Provide opportunities to introduce the ambiguity of real-life situations.
• Help develop professional judgment.
• Emphasize the need for frameworks to analyze situations.
• Document the processes used to reach conclusions.

FCPA’s background

During the Watergate investigation in the early 1970s, a number of U.S. corporations and their executives were convicted of making illegal contributions to American politicians. SEC Enforcement Director Stanley Sporkin and his staff were curious about how the corporations recorded the payments in their financial records, according to From Watergate to Today, How FCPA Became So Feared, by Joe Palazzolo, The Wall Street Journal, Oct. 2, 2012. They uncovered evidence of payments to foreign officials to secure contracts; more than 400 companies admitted to making more than $300 million in payments for questionable purposes.

The SEC worked closely with the U.S. Senate Committee on Banking, Housing and Urban Affairs on legislation to make bribery outside the U.S. illegal. The agency and committee were concerned about enforcing anti-bribery laws. So they proposed — and included in the final legislation — requirements that companies keep adequate books and records and maintain strong internal controls, according to the Wall Street Journal article.

In 1977, the FCPA was signed into law. The act was amended in 1988 and again in 1998. The amendments refined the original act and expanded the coverage of the act to certain foreign companies and foreign nationals.

Main provisions

A Resource Guide to the U.S. Foreign Corrupt Practices Act, prepared by the Criminal Division of the U.S. Department of Justice (DOJ) and the Enforcement Division of the SEC, provides background information on the act and detailed discussions of its provisions and enforcement actions. Included examples illustrate the application of different aspects of the law and its enforcement.

The FCPA consists of two main areas of provisions: anti-bribery and accounting. The anti-bribery provisions prohibit bribery of foreign officials. The offer of a bribe — not just the acceptance of one — is a violation of the FCPA. This provision applies not only to public companies (called “issuers” in the act) and their officers, employees or directors acting on their behalf, but also to domestic concerns and individuals.

The accounting provisions require issuers to maintain adequate books and records and sufficient internal controls that will provide reasonable assurance that they’re generating accurate financial information.

Companies trying to abide by the FCPA often have to deal with the ambiguity of deciding exactly who are “foreign officials.” The FCPA defines a foreign official as:

Any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.

The traditional government employee is clearly covered. However, “instrumentality” leaves open to interpretation the reach of the act in many areas of the world. The SEC and the DOJ have been successful in expanding the definition to include state-owned or state-controlled entities. However, when companies are intending to expand internationally or enter a new foreign market, it’s increasingly important for them to know what these entities are in that locale. Companies should seek knowledgeable counsel.

Why study the FCPA?

The globalization of businesses, large and small, isn’t without risk. FCPA compliance is part of the regulatory climate. Non-compliance can be expensive and damage a company’s reputation. The impact on audit risk in financial statements is another concern. Two reports that support the need for education in this area are the 2016 ACFE Report to the Nations on Occupational Fraud and Abuse and Ernst & Young’s (EY) Corporate misconduct - individual consequences: 14th Global Fraud Survey 2016.

The 2016 ACFE Report to the Nations includes corruption as one of the three major areas of occupational fraud and abuse. Of course, this category isn’t limited to FCPA violations. But this category ranks first in the number of cases reported in several areas of the world.

According to the results of EY’s survey, based on responses of 2,825 senior executives in 62 countries, 51 percent of the respondents in emerging markets feel that bribery and corruption occur widely in their country.

I found the answers to two questions to the EY survey respondents particularly interesting. “Which, if any, of the following do you feel can be justified if they help a business survive an economic downturn?” (See Figure 1 below.) A significant minority of executives (36 percent) could justify inappropriate conduct if it helped the business survive and prevent economic downturn. Drilling down further (see Figure 2 below), CFOs and finance teams can rationalize actions that help their companies meet financial targets. With the subjective nature of many accounting issues, these findings are cause for concern.

Figure 2: Same question from Figure 1 but drilling down further.

Classroom application

We can use case studies, readings and enforcement actions to engage students while encouraging them to think globally. I used a case, “Fighting International Fraud with the FCPA,” by Priscilla Burnaby, Susan Hass and Brigitte W. Muehlmann, to familiarize students with the basic provisions of the FCPA and its ambiguities. (See Journal of Forensic & Investigative Accounting, Volume 7, Issue 1, January-June 2015.

This case also provides learning objectives including identifying approaches to ensure organizational compliance with laws and regulations, examining why codes of conduct are difficult to enforce in a global business environment, and how to avoid conflicts of interest.

Global company executives must show strong leadership in helping their people adhere to the FCPA, organizational values and codes of conduct especially when faced with legal ambiguities.

The case I studied includes a short survey listing a series of situations that an employee might encounter while working for a large division of a diversified multinational company. Students put themselves in the shoes of a senior decision-maker and decide whether to approve or disapprove the request — firmly or hesitantly.

My students completed the survey before class using Google Forms. Everyone in the class saw the pie-chart results displayed on the screen. Our great class discussion included such topics as how the decisions were made, additional information that would be helpful and the importance of knowing the context or intent.

Here are two examples of situations presented in the FCPA survey from the Journal of Forensic & Investigative Accounting case history:

A physician considering purchasing diagnostic equipment for his hospital laboratory would like to go for training in Florida and afterwards visit a major Orlando theme park with his family.

A government official responsible for awarding a $1.9 million contract for an upcoming construction project makes this statement: “Before we reach our decision, we would like a chance to look at your factories in the U.S. Can you fly our committee to the U.S. for a tour?”

The initial diversity of opinion in my class was surprising. Many of the students correctly identified the major concern in the scenarios, but they were reluctant to take strong positions. After our discussion, students had a much better appreciation for the issues that companies must address in their international operations.

As a follow-up to the class discussion, teams of students chose recent FCPA cases to research and present back to the class. The choices ranged from JP Morgan Chase to Anheuser-Busch InBev. Learning by doing was a great success. The presentations led to discussions of several questions:

• Do codes of methods matter?
• How do you deal with policies that companies don’t follow?
• How much does training impact behavior?
• Do companies take FCPA regulations seriously?
• What effect did FCPA investigations have on the career of CEOs?
• Did the punishment fit the crime?

The SEC website contains a section dedicated to FCPA enforcement actions. Bribery and Corruption Casebook: The View from Under the Table, edited by Dr. Joseph T. Wells, CFE, CPA, founder and Chairman of the ACFE, and Laura Hymes, CFE, contains short cases reported by practicing CFEs that are great for classroom discussions.

These are just a few suggestions to get started. Turn your students loose and see what strategies they come up with to enhance the FCPA!

Click here for more resources.

Patricia A. Johnson, MBA, CFE, CPA, is the program coordinator of the Master’s in Science in Forensic Accounting program at Canisius College in Buffalo, New York. She’s chair of the ACFE Higher Education Advisory Committee. Her email address is: johnsonp@canisius.edu.

Resources

The FCPA blog is a great resource for information on prosecutions, legislation, jobs in the field and other relevant information. Here from the blog is the most recent list of top 10 FCPA enforcement actions of all time (as of Dec. 29, 2016):

1. Siemens (Germany): $800 million in 2008.
2. Alstom (France): $772 million in 2014.
3. KBR/Halliburton (USA): $579 million in 2009.
4. Teva Pharmaceutical (Israel): $519 million in 2016.
5. Odebrecht/Braskem (Brazil): $419.8 million in 2016.
6. Och-Ziff (USA): $412 million in 2016.
7. BAE (UK): $400 million in 2010.
8. Total SA (France) $398 million in 2013.
9. VimpelCom (Holland) $397.6 million in 2016.
10. Alcoa (U.S.) $384 million in 2014.

Four cases from 2016 made the top 10 list. Another great class assignment with a global perspective is for the students to compare and contrast details of the enforcement actions using the parameters of geography, type of violation, level of employee involved and factors affecting the size of the fine.