What Is the Foreign Corrupt Practices Act?
The Foreign Corrupt Practices Act of 1977 was passed in response to scandals in the mid 1970s that exposed over 400 U.S. companies that had been making payments to foreign government officials to facilitate preferential treatment. One of the incidents that prompted the passage of the law was the Bananagate scandal of 1974. It was found that not only did the United Brands Company bribe government officials in Honduras to lower export taxes on bananas, but they also tried to convince the SEC that these bribes should remain secret.
The FCPA is found in the United States Code (15 USC §78dd-1 et seq.). Its requirements can be broken down into two basic categories:
First, according to the Department of Justice, is to "[prohibit] corrupt payments to foreign officials for the purpose of obtaining or keeping business." The definition of "foreign official" is interpreted rather broadly. Payment through an intermediary is also considered a violation of the FCPA if the payer knows that that money will ultimately be used to bribe a government official.
Second, is an accounting provision (as detailed in 15 USC § 78m), largely overseen by the SEC. This statute mandates that corporations keep accurate and complete records of all transactions. Low-level payments that do not confer special privileges and are "necessary to achieve ministerial action" are still permitted.
Who Enforces the FCPA?
The Department of Justice is responsible for enforcement of the law's criminal penalties. The Securities and Exchange Commission enforces the civil penalties. Private causes of action cannot be supported by the FCPA alone, but an FCPA violation can be part of a private lawsuit under another law such as Racketeer Influenced and Corrupt Organizations (RICO) Act.
Whistleblowers?
When the Dodd-Frank Act created its general whistleblower incentive program, the SEC adopted its own rules to incentivize disclosure of information leading to the discovery of fraudulent transactions involving public companies. Whistleblowers are entitled to 10-30% of the recovery in any resulting settlement or action borne of a successful enforcement based on the information. The reporting may be anonymous, but receipt of the reward requires disclosure of one's name to the SEC.
The reward provisions do not apply to those with a legal duty to report corrupt transaction or those convicted of a crime related to those transactions.
The information must also arise from a "voluntary submission" i.e. before the SEC contacts the prospective whistleblower. Second, the information must be based on "independent knowledge," not something that could be gleaned from publically available sources unless the whistleblower himself was the source for the public reports.
How Effective Is It?
Enforcement of the FCPA has increased dramatically in recent years. There were only two cases prosecuted in 2004; in 2010 the number jumped to 48.
The recent Wal-Mart scandal is a classic example of the type of corruption that the FCPA was meant to counteract. Back in 2005, it was discovered that Wal-Mart paid Mexican government officials more than $24 million. However, law enforcement officials were never notified and the story remained dormant until this past April when the New York Times wrote an important article about the scandal.
The article described how trusted agents would deliver "envelopes of cash" to any official who could have potentially hindered Wal-Mart's rapid growth in Mexico. These envelopes of cash are a classic example of the payments that would leave behind the vague records that send up a red flag to the DOJ and SEC regarding possible FCPA violations. The Times also noted that the company's records indicated $16 million dollars worth of "donations" and "contributions" to various Mexican municipal governments. While some of the payments were made to facilitate getting business licenses, they went far beyond the low level ministerial payments permitted by the FCPA.
Source:
Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle, by David Barstow, published at NYTimes.com, April 21, 2012.
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