Export Task Force
July 10, L981
FOREIGN CORRUPT PRACTICES ACT OF 1977
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HISTORY
The primary impetus for enactment of the Foreign Corrupt Practices Act (FCPA)
irose from disclosures of widespread corporate bribery. Beginning in 1973, as a
tesult of the work of the Office of the Watergate Special Prosecutor, the Securities
ind Exchange Commission (SEC) became aware of a pattern of conduct involving the
use of corporate funds for illegal domestic political contributions. Because these
.ictivities often involved matters of significance to public investors, the nondisclosure of which entailed violations of the federal securities laws, the Commission
urged Congress to act to stop these violations. Subsequent Commission investigations
and enforcement actions revealed that instances of undisclosed questionable or
illegal corporate payments - both domestic and foreign - were widespread (indeed,
uiore than 400 companies disclosed questionable payments), that they represented a
serious breach in the system of corporate disclosure administered by the Commission
and that such payments threatened public confidence in the integrity of the system
of capital formation, which rests on a foundation of full and fair disclosure of
corporate business and financial transactions.
THE ACT
The principal purpose of the legislation, the prevention of corporate bribery
>f foreign government officials, is intended to be implemented by three basic
provisions of .the Act:
(1) Books and records. This provision would prohibit the "disguising" of
questionable payments made to persons overseas, and would prohibit so called secret
slush funds, that is, "inaccurate books, off-the-books accounts and related practices."
(2) Internal accounting control. This section requires the maintenance of an
internal accounting control system to reasonably assure that transactions of the firm
are executed, and access to the firm's assets is permitted, only in accordance with
management's authorization, and to assure that transactions are recorded and identified,
(3) Criminalization of foreign bribery. In addition to prohibiting such bribes
directly by a.firm, the Act also prohibits the payment of money to any person by a
firm when the firm knew or had reason to know that the payment, or part of that
payment, was to be used to bribe a foreign official for his influence in obtaining
or retaining business.
The legislative history of the Act states specifically that the Act was not
intended to cover "grease payments" to foreign officials, that is, "payments for
expediting shipments through customs or placing a transatlantic call, securing
required permits, or obtaining adequate police protection, transactions which may
involve even the proper performance of duties." Also, the legislative history
suggests that certain extortions of moneys by foreign officials may be used as a
defense against bribery charges by a firm when the destruction of life or property
is threatened.
Punishment could include a prison sentence of up to five years and fines of
as much as $10,000 for individuals and $1 million for corporations. The Foreign
Corrupt Practices Act was signed into law on December 19, 1977 by President Jimmy
Carter.
PROBLEMS
"~"
(1)T What constitutes a bribe? As Business International editor, Sandraw Feustel
stated, "When the brother of a Gulf sheik demands a large commission before he okays
a contract, does that constitute extortion? Does a duck a 1'orange at Maxim's tempt
a government official to sign on the dotted line, and will a new gold watch at today's
prices persuade a sluggish bureaucrat to cut that extra length of red tape?" The
answer is unclear. Lockheed no longer picks up even the hotel bills for customers
visiting its California headquarters for contract talks because it fears possible
prosecution.
(2) Problems of dual SEC-Justice enforcement jurisdiction. Philip Heyman, thenAssistant Attorney General, said, "The major American corporations which are issuers
(and therefore under the jurisdiction of the SEC) will have to rely on the advice of
private counsel regarding the possibility of SEC civil enforcement action . . . The SEC
is not bound by our review decisions, and could initiate an investigation and file a
civil injunctive action even after a Justice Department review letter stating the
Department has no intention of seeking a criminal enforcement action."
(3) The competitive disadvantage of U.S. firms. Sir Frederick Catherwood, a
former chairman of the British Overseas Trade Board, asks, "Can you make illegal in your
country something which is only nominally illegal - but not enforced - in another
country? The U.S. has said more or less, 'Yes, we can.' and the other countries have
said, 'No, we can't."1
In the less-developed countries the stylized arrangements for giving and taking
payments are often perfectly normal and legal under local law and custom. A confidential
West German memorandum by the Federal Office for Foreign Trade Information advises
companies to be prepared in difficult deals to pay out as much as 20 percent of the
contract price to corrupt foreign officials. Italy passed a law in 1980 stating that
payments to foreign officials to get business are perfectly legal for Italian companies.
The attitude is similar for leading Asian exporting countries. Many U.S. companies are
losing business because they are hamstrung by U.S. laws to compete on this type of
international level in countries where bribery is an accepted practice. Said one top
business official about operating in Indonesia, "Whoever gets the contract there must
pay for it, whether you call it a bribe, commission or consulting fee. That's the
fact of life in Indonesia, has been and always will be."
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That's not to say that the U.S. should condone bribery, but should reach some
kind of international agreement in this area. An informal poll of more than a dozen
British and European trade officials indicated a nearly unanimous opinion that the
U.S. has lost overseas business because of the restrictions and ambiguity of the 1977 law.
(A) "The Accountants' Full Employment Act of 1977". The Act has forced companies
not only to beef up their internal auditing staffs but to check and double-check the
propriety of even the most inconsequential payments. For example, in Xerox's Cairo
office, local staffers had to get permission from a senior corporate officer in the U.S.
before they could pay $8 a month in tips to Egyptian telex and telephone repairmen.
The Act also forces all domestic businesses to comply with accounting provisions
regardless of whether they are doing business abroad. A recently released GAO study
found that over 55 percent of the firms polled said they believe their efforts to
comply with the Act's accounting provisions have cost more than .the benefits received.
(5) Knowing and having reason to know. In interviews and in written submissions
to various Federal agencies, businessmen say the greatest problem posed by the law is
the ban on payments made to any person "while knowing or having reason to know" that
the money would ultimately be paid to a foreign official. Companies are sometimes
forced to rely on commission agents and it is difficult to determine whether their
services are legitimate and yet companies are criminally liable if it turns out their
services are not legitimate.
CHAFES - RINALDO BILL (S. 708 and HR 2530)
"Under this proposal bribery of foreign officials would still be illegal, and both
criminal and civil penalties, as defined under current law, would be applicable.
The
bill attempts to clear up the existing ambiguities.
(1) Definition of bribery. A bribe is defined as a payment made to influence
or induce the foreign official to act "in violation of the recepient's legal duty as
a
public servant." It excludes payments which are customary in the country where the
payment is made and purpose of which is to secure the prompt performance by such
foreign offical of his official duties. The presentation of customary gifts and the
payment of routine business hospitality and marketing expenses would be excluded. The
U.S. law would not be violated if the applicable foreign law permits the conduct in
question.
(2) Dual SEC-Justice enforcement jurisdiction. Jurisdiction for enforcement of
the antibribery provisions would rest with the Justice Department. The SEC would
continue to enforce the record-keeping and internal accounting controls and any
securities laws which may apply to failure to disclose foreign bribery.
(3) An international agreement. The bill expresses the sense of Congress that
the President should pursue negotiation of treaties establishing standards of conduc
t
for international business practices and creating a process for resolving problems
and conflicts associated with such practices so that competitive disadvantages agains
t
U.S. businessmen would be minimized.
(4) The accounting provision. Accounting provisions of the law would be in
conformance with Generally Accepted Accounting Principles (GAAP) instead of the ambigu
ous
and overly detailed standard that now exists. The new standard would be subject to
cost/benefit criteria. Where an issuer holds 50 percent or less of a domestic or
foreign firm, the issuer need only make a good faith effort to influence such firm to
comply with the accounting provisions of the Act. A materiality standard would be
included.
(5) Knowing or having reason to know. Violation of the recordkeeping and
accounting controls provision would occur only if it was knowing and willful.
In addition, the name of the Act would be changed to the Business Accounting
and Foreign Trade Simplification Act to make clear that certain provisions apply to
companies that have no foreign activities and to purely domestic transactions.
The Act would be the sole criminal or civil provision for legal action with
respect to alleged foreign bribes, thus excluding firms from possible charges of
wire and mail fraud.
The present tax code would be amended to allow companies to deduct all foreign
expenses not in specific violation of the Act, thus putting the U.S. on equal
footing with our competitors.
The Justice Department would form an interagency task force to issue guidelines
"when necessary or appropriate" describing "specific types of conduct associated with
common types of export sales arrangements and business contracts which constitute
compliance with the antibribery provisions." The task force would also be allowed to
issue "general precautionary procedures which domestic concerns may use on a voluntary
basis to ensure compliance and to create a rebuttable presumption of compliance."
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ji_.S. TRADE REPRESENTATIVE BILL BROCK - testifying before the Senate Banking Committee
Brock argues that this international bribery law is much more stringent than our
domestic laws: "It should be noted that we have ho similar 'reason to know* standard
of responsibility in our domestic bribery laws. If we deem this standard of responsibility
inappropriate in our domestic law, it is far more inappropriate when extended
internationally, to many different cultural and social structures ... We suggest that
the language on bribery in this legislation be brought into closer conformity with that
found in the U.S. criminal code."
(1) Definition of bribery. The Administration accepts the language of the ChafeeRinaldo bill with a few formal changes to bring it into conformity with similar domestic
laws.
(2) Dual SEC-Justice jurisdiction. The Administration opposes the continuation
of the accounting and recordkeeping provisions, and thus, under their plan, jurisdictional
problems would not exist.
(3) International agreement. "Bribery, regardless of whether it is made by a U.S.
firm or by any other Western country, has the same national security and foreign relations
implications for the U.S. . . . There is little difference in terms of U.S. national
security interests whether a friendly foreign government falls at the hands of a bribe
by an American firm or a foreign firm." The Administration endorses the Idea of an
international agreement.
(4) Accounting principles. To violate the FCPA one need only to err In keeping
company books in the detail to which the SEC deems necessary. The American Bar Association,
American Institute of Certified Public Accountants and the SEC disagree considerably as to
a firm's responsibility under the accounting provisions of the law.
The Administration proposes to drop the recordkeeping provisions stating that the
provisions are highly inflationary and cause "U.S. companies to develop expensive new
accounting systems and to utilize costly accountants and auditors with no assurance
from the SEC that such systems meet SEC requirements . . . Pervasive federal rules on
accounting practices have not been deemed necessary for the enforcement of domest
bribery laws or other criminal laws prohibiting misuse of corporate assets." In ic
conjunction with this change, the Administration suggests that language be added, to the
bill to provide that any attempts to conceal misappropriation of assets to make
prohibited payments be made a criminal offense.
The GAO study found that the majority of companies surveyed stated that compliance
with the accounting provisions of the FCPA had increased their accounting and auditing
costs by 11 to 35 percent, an additional 22 percent of the companies surveyed believe
the increase to be more than 35 percent.
(5) Reason to know. Under current law, the U.S. businessperson is left confused
as to what sort of circumstances may someday be sufficient evidence to show he had
reason to know of possible wrongdoing. We have no such clause in our domestic laws.
The Chafee-Rinaldo bill substitutes the requirement of "direction or authorization" of
an illicit payment as a basis for liability, a substitution the Administration accepts.
Brock emphasizes that the FCPA as amended will continue to make it unlawful for any
U.S. company to bribe a foreign official for the purpose of influencing any act or
decision of that official or inducing the official to misuse his legal duty In order to
obtain, retain, direct or maintain business, but with these amendments much of the "gray"
matter is defined. The U.S. is still against bribery even if it means losing exports.
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JOHN S.R. SHAD, CHAIRMAN OF THE SEC - testifying before the
Sena
"The Commission recognizes that the Foreign Corrupt Practicete Banking Committee
s Act has spawned unintended
difficulties for American commerce abroad and uncertainties
concerning compliance with
accounting provisions."
(1) Definition of bribery. Shad makes no comment on this.
(2) Dual*SEC-Justice jurisdiction. The SEC would not oppose
giving the Justice
Department sole jurisdiction in enforcing antibribery violatio
ns. In instances where
foreign bribery involves a failure to disclose information whic
the Commission would retain its authority to take appropriate h is material to investors,
action under the federal
securities laws.
(3) International agreement. No comment on thi$.
(4) Accounting provisions. The SEC would not object to repe
al of the accounting
provisions as it "already has adequate statutory authority to
file inaccurate financial statements." However, Shad continue sanction issuers which
provisions were not intended exclusively to curb foreign brib s, "the accounting
number of serious questionable payments which led to enactmenery. Rather, the large
as symptomatic of a threat to the disclosure system which thet of the FCPA were viewed
Commission administers.
For this reason, the Commission believes that the substance
should be retained, but appropriately refined to remove ambi of the accounting provisions
guities and unnecessary burdens."
SEC would amend the bill to allow corporate management greater
latitude in determining cost-effectiveness of internal controls; would define
a prudent man would be likely to Consider the matter importan "materiality" to mean what
own property; would hold a corporation liable to violations t in the management of his
over 50 percent of the voting stock; and would encourage corpof a subsidiary if it held
than 50 percent* to act in good faith to influence subsidiary orations which own less
to comply with .accounting
provisions.
(5) Reason to know. Shad proposed that an officer or director
of the issuer be
responsible for an employee's failure to comply only if the
offi
cer knew of or recklessly
disregarded the violation or if the issuer lacked a cost-eff
ecti
ve internal control system
and failed to take appropriate corrective or remedial action
when the violation came to
the attention of the officer or director.
Shad also agreed with Chafee that the information given to the
Commission pursuant
to inquiry or investigation should be exempt from the Freedom
clear up the misconception that a firm may be found in violatioof Information Act. To
n of the FCPA simply by
an accounting error in their books, Shad amends the bill to
read that firm would "be found
in violation only for knowingly or recklessly falsifying or
causing to be falsified any
books.
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OPPOSITION TO THE CHAFEE-RINALDO BILL
SENATOR WILLIAM PROXMIRE believes that the bill goes too far in liberalizing
bribery and the Act's accounting provisions. Recently he conceded for the first time
though that SEC proposals to clarify the accounting provisions are acceptable. In an
article in the Washington Post (June 1, 1981) Proxmire notes that in every industry
where bribes were paid, other competing firms had been able to operate successfully
without paying bribes.
In regard to keeping accurate records: "This 'paper trail 1 is essential to prevent
the use of slush funds to pay bribes . . . the actual bribe is paid, in most cases, by
foreign agents in foreign countries outside our reach unless a 'paper trail' is required."
In regard to sole Justice enforcement jurisdiction of antibribery violations: "(The
SEC) has the expertise, the constant and knowledgeable familiarity with the multinational
corporations, essential for effective administration of the FCPA."
In regard to the definition of bribery: The legalization of grease payments
"subsumes the whole law".
KARIN M LISSAKERS of the Carnegie Endowment for International Peace wrote in
an article in the New York Times (June 18, 1981), "the damage to the United States'
foreign policy interests from permitting these corrupt practices to continue far outweighed any short-term gains in exports and overseas investment opportunities" in 1977
and this same arguement holds true today.
PHILIP HEYMAN, Carter's Assistant Attorney General,writes in an article in the
Washington Post (May 21, 1981) that compromising the FCPA will "likely result in
damaging our foreign relations by branding buying countries tolerant of corruption and
competitors corrupt." He believes that the bill's attempt to free companies from
liability unless it authorizes the bribe frees them from "their normal responsibility
for acts their employees take on their behalf."
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