The Foreign Corrupt Practices Act of 1977 Term Paper

Introduction

It is a fact beyond doubt that corruption is considered to be one of the most serious problem and hurdle to development in any economy in the world. For example, it is claimed that one of the reasons why the developing nations have economies that perform poorly is because of the high rate of corruption among the public officials. It is important to note that corruption is not the preserve of the public sector. Officials in the corporate sector have also been known to take and give bribes to influence decisions and get other favors.

In early religion and even in some modern religions, it is known that the gods are moved and appeased by gifts, and this is the idea behind sacrifices and offerings to these gods. From this perspective, it is easier to appreciate why corruption persists among the mortals. They love gifts as much as the gods.

It is erroneous to assume that corruption affects only the developing or third world countries. Developed nations such as the United States of America are in no way immune to this vice.

The existence of any form of crime in a country is evidenced by the existence of laws punishing the perpetrators of that offence. It is illogical to have laws that control a crime that is non-existence or which is not likely to occur in the society. The united states of America have enacted several laws that are aimed at curbing the practice of corruption. This is given the fact that the authorities have realized the fact that corruption, if not controlled, may affect the growth of this economy negatively.

One of such laws that have been enacted in this country and which is an effort to curb the practice of corruption is the Foreign Corrupt Practices Act of 1977 (herein referred to as FCPA). This paper is going to analyze several attributes of this federal law. Some of the aspects of this federal that will be addressed in this paper include a description of the legislation, including its history and current situation. The paper will also touch on the ethical issues revolving around the law. Additionally, the efficacy of the law, including an analysis of its success or lack of it thereof, will be addressed. The implementation of the law together with recommendation to increase its efficacy will also be included in this paper.

Foreign Corrupt Practices Act: An Overview

As indicated in this paper, the formulation and enactment of any law is precipitated by the presence or threat of occurrence of the crime that the law intends to control. The case of the Foreign Corrupt Practices Act of 1977 is no different. It was necessitated by the realization that foreign corruption was rife in the United States of America.

The U.S Securities and Exchange Commission (herein referred to as SEC) is an entity that was established by the enactment of the Securities Exchange Act of 1934 (Weiss 35). The agency is charged with the responsibility of regulating the American securities’ industry. This is achieved through the enforcement of the federal securities laws that have been enacted and continues to be refined by the authorities.

The Securities and Exchange Commission is one of the agencies that is credited with the formulation and enactment of the Foreign Corrupt Practices Act of 1977. According to the United States of America Department Of Justice, investigations that were conducted by this commission into the conduct of several companies in the united states of America created the impetus for the Foreign Corrupt Practices Act of 1977 (US Department of Justice 3). These investigations were carried out in the mid of the 1970s decade. More than 400 American entities that were investigated readily accepted that they have made dubious and un-procedural payments that can only be described as illegal (Seitzinger 4). The amount of these payments was in excess of 300 million American dollars, a significant amount by all standards.

The companies admitted to this misconduct perhaps because at the time, the practice was not considered to be a crime. One of the most astounding findings of these investigations is the fact that these payments were made to foreign entities. The authorities were well aware of the fact that corruption did exist locally, where American government officials and other parties engaged in the practice. However, the revelation of large scale illegal dealings involving foreign entities could have come as a shock to the authorities.

The amount of money that was paid by different companies was as diverse as the parties that received these payments. They ranged from officials of the foreign governments in the countries that the companies had interests in to civil groups in those countries (Seitzinger 4). Politicians and their political parties from these foreign countries were not left behind.

The reasons why these payments were made were also diverse, but the underlying motivation was to influence the decisions made by the bribed parties to favor the company’s interests in the country. For example, some companies claimed that they bribed foreign government officials so that they could be awarded tenders in the country. Such payments were aptly referred to as facilitating payments (Johnson 3). They were meant to facilitate the officials in making the favorable decisions as envisaged and agreed on by the companies.

A case in point and which was extensively cited in these investigations was Lockheed Company’s case. This aerospace company gave payments to officials of foreign governments and other parties in order to have their products favored over those of other companies (Krever 28). The tentacles of illegal payments went as far as to touch on the most senior of government officials in these countries. This is for example the case of what came to be known as the Bananagate scandal. This involved the bribing of a country’s president, in this case the president of the Honduras (Krever 28). The Chiquita Brands, the company that was involved in this corruption case, was petitioning this government official to arbitrarily lower the taxes so that the company can make bigger profits in this country (Krever 27).

It is against this backdrop that the Foreign Corrupt Practices Act of 1977 was formulated and enacted. The findings of the investigations by SEC prompted the legislators to come up with laws that will bring to halt these practices. The aim of this federal law was to criminalize the bribery of foreign officials by American companies as evidenced from the findings of the SEC investigations (Gantz 14). The congress was concerned that the bribery of foreign officials by the American companies may affect negatively the confidence that the public, locally and internationally, had on the integrity of businesses in this country. As such, the enactment of this act was aimed at restoring this confidence.

After the act was approved and passed by congress, it had to be signed by the president for it to become a law. This was done by Jimmy Carter, who was in office at the time, on 19^th December, 1977 (Gantz 15). Like other laws in the United States of America and other polities in the world, this federal law has been subjected to several amendments since it was legislated. The amendments are aimed at refining the provisions of any law and making it relevant in the society, given the changes that constantly take place in any society.

One of the major amendments that have been carried out on the Foreign Corrupt Practices Act of 1977 is by the International Anti-Bribery Act of 1998 (Krever 30). The latter was aimed at making sure that the United States of America adheres to the provisions of the Organization for Economic Co-operation and Development, provisions that noted that corruption was an impediment to international economic development (Johnson 5).

The Foreign Corrupt Practices Act has two major provisions that are the central pillars to its efficacy and operation. These are the anti-bribery and accounting provisions (Warin & Monahan 425). The former provision illegalizes the corrupt payment to a foreign official by a citizen of the United States of America. This is especially so when the payment is intended to make the official being corrupted obtain or retain business operations to the individual paying the bribe (Ben & Leo 12). This is what Crawford and Searcey (19) refer to as undue influence of the foreign official.

The second provision of the law- the accounting provisions- were meant to run in tandem with the provisions of the anti-bribery clause as discussed above. The issuers of securities in the United States of America are expected to adhere to the provisions of this particular clause. According to this provision, companies that are subject to the Foreign Corrupt Practices Act and subject to this clause in particular were expected to keep accounting books and records that are a true and accurate depiction of the transactions and operations of the company (Kim & Barone 124). The companies were also expected to implement internal accounting controls to make sure that the operations of the company were checked from within.

Ethical Considerations and Ethical Issues Addressed by the Foreign Corrupt Practices Act of 1977

Economic and other experts in the society are in agreement that corruption by officials in the government and in the corporate sector is an ethical practice. The practice is not only illegal, but, according to the moral purists in the society, it violates the provisions of ethical conduct in the society. The ethical standards may be entrenched in laws in some of the polities or they may be in form of tacit and unwritten agreements that govern the activities of parties in the society.

The unethical nature of corruption in the society is perhaps debatable, with stakeholders from various sectors of the society divided on the issue. However, the conceptualization of corruption as unethical by the Foreign Corrupt Practices Act of 1977 is not debatable. The two provisions of the act, as indicated above, clearly point to the fact that the authors of the act regarded corruption as an unethical conduct within the corporate and government circles. This sentiment is discernible from the provisions of this act, and this section will analyze this issue from the perspective of the two provisions.

The Anti-Bribery Provision

As earlier indicated, according to the Foreign Corrupt Practices Act of 1977, it is illegal for any citizen of the United States of America to bribe officials of foreign governments with the intention of obtaining or retaining business interests on the part of the American citizen (Weiss 34). The provisions of this act apply to what Gantz (15) refers to as the issuers and the domestic concerns. The former refers to the issuers of registered securities and who are expected by law to file returns with the securities exchange commission. The latter is defined by the act as an individual or company that is operating from the United States of America, or a company that has been formed under the laws of the country, regardless of whether its operations are based in the country or not (Gantz 15). Obviously, the payment of such bribes by these individuals or companies is unethical as far as this act is concerned.

The provisions of this act, the provisions prohibiting the payment of bribes, proscribe two forms of behavioral conduct in the country. One of them is the act of directly giving bribes by the company or the individual. The other one recognizes that a domestic concern as defined above is responsible for illegal payments that are made by intermediaries acting on their behalf.

Regarding the enforcement of this provision, it is important to note that the issuers and the domestic concerns are handled differently. Criminal and civil enforcement of the anti-bribery provision affecting the domestic concern is handled by the United States of America’s department of justice. On the other hand, the securities exchange commission is charged with the enforcement of the provision that touches on issuers, or companies that are operating in the country as far as the issuance of securities is concerned (Weiss 40).

An unethical conduct takes place when the individual or the company violates the provisions of this act. With respect to the anti-bribery provision, there are five elements that have to be met for a violation of the act to be considered as having taken place. These are as outlined below:

1. Who
2. Corrupt intent
3. Payment
4. Recipient
5. Business purpose

A brief analysis of each these elements follow:

Who

As indicated earlier in the paper, the provisions of the Foreign Corrupt Practices Act of 1977 apply to any business person or business entity that operates from the United States of America. These include employees of such entities or third parties authorized to act on behalf of those companies. However, it is important to note that a foreign subsidiary of an American company that has been incorporated under foreign laws is not subject to the provisions of this law. This is given the fact that an assumption is made to the effect that the corruption dealings of the company are subjected to the provisions of the laws under which it was incorporated. However, the American parent company is subject to the law and may be held responsible if it is proven that it has directed or abated the foreign incorporated subsidiary in corruption of foreign officials (Crawford & Searcey 20).

It is also important to note that American citizens that are employed by foreign companies that are operating within the United States of America are subject to the provisions of the Foreign Corrupt Practices Act of 1977. This is by virtue of them being American nationals, and as such, subject to the laws of the land. This is despite the fact that they may be acting at the behest of their foreign employers (Ben & Leo 12).

An unethical corrupt act is considered to have taken place if this element of “who” is met. This means that the provisions of the Foreign Corrupt Practices Act of 1977 are considered to have been violated if the party concerned is subject to this particular law. For example, a foreigner employed by a foreign subsidiary of an American company, a subsidiary that is incorporated under foreign laws, is not subject to the law even if they are proved to have engaged in the bribing of foreign officials. This is given that the actions of the foreigner are not sanctioned by the American parent company (Kim & Barone 125).

Corrupt Intent

Intent to commit crime is one of the basic elements that must be met for a violation of any law to be considered as having taken place. The same applies to the Foreign Corrupt Practices Act of 1977’s bribery provision.

For the violation of this act to have taken place, it must be proven that the individual or company that is making the payment or that have authorized the payment harbored a corrupt intent. This intent is by the virtue of the fact that the recipient of the payment is expected by the issuer to abuse their position of authority to direct business to the person or company that has made the payment.

It is pertinent to note at this juncture that the Foreign Corrupt Practices Act of 1977 does not necessarily call for the success of the corrupt payment as far as the intents of the act are concerned. An offer or promise to make such a payment is enough to prove that a violation of the act has taken place, given that the intent of the party making the payment is clear (Gantz 14).

Payment

The Foreign Corrupt Practices Act of 1977 illegalizes the actual payment, offer or promise to pay bribe to a foreign official. This includes the authorization or sanction of such a payment. It is important to note here that it is not only the payment of money that is considered as violation of the provisions of this act. Anything of value that is offered, promised or authorized to be offered comprises violation of this act. This is for example the offer of favors such as paid for holidays and gifts such as real estate. An unethical act of corruption is considered to have taken place if such an act is proved to have taken place (Weiss 35).

Recipient

Recipient is another important element that must be met for the violation of the anti-bribery act to have taken place. It is noted that the act applies only to illegal payments that are made to foreign entities. These foreign entities include foreign officials, political figures and entities and such others. A foreign official is conceptualized, for the purposes of this act, as an employee of a foreign government or any other entity in a foreign country. The definition also extends to include an individual who is acting in an official capacity in a foreign country.

As such, it is noted that an unethical violation of the act would have taken place if the person or entity that received the illegal payment is proved beyond doubt to be a foreign official or entity. For example, as much as an illegal payment made by a foreigner to an American official is considered to be a deed of corruption, it is not subject to the provisions of the Foreign Corrupt Practices Act of 1977. Such a corrupt deed falls under the auspices of a different provision (Weiss 36).

Business Purpose Test

For the violation of the provisions of the anti-bribery element of the act to be proved to have taken place, the intent of the illegal payments that are made should be business oriented. For example, the act provides that payments made to retain or direct new business to the party paying is illegal and corrupt. It is however important to note that as much as the payment of the bribe is required to be foreign in orientation, the business that is obtained or intended to be retained is not necessarily foreign in orientation. For example, the business does not need to be with a foreign government or arms of the government therein. For example, the bribing made to a foreign company operating in the United States of America to obtain business within the country is sufficient violation of the act. For example, it is illegal under this law for an American business to bribe a foreign company in the United States of America for it to provide raw material to this foreign entity (Krever 33).

Accounting and Record Keeping Provisions of the Foreign Corrupt Practices Act of 1977

As already made clear in this paper, this is the second provision of this act that renders it an anti-unethical halo. This provision especially applies to those companies that are publicly trading in the country, or those that issue securities to the public. These entities are required by this law to adopt an accounting system that is transparent and sufficient to check for any illegal dealings in the company. The assets and liabilities of the company must be clearly and accurately reflected in the accounts’ books, and they should not be misleading in any way.

The major objective of this provision is to avert misappropriation of funds in these public companies, misappropriations that may hurt the citizens and the economy in extension. The other objective of this provision is to avoid the mislabeling of payments that are made by the company. This is together with the general misrepresentation of the funds that are within the company.

As made obvious by this provision, it is not only illegal, but also unethical to misappropriate, misrepresent or mislabel the funds of a public company. It is this consideration that necessitated the formulation and inclusion of this provision in the Foreign Corrupt Practices Act of 1977.

The term “records” is exhaustively defined under this provision. It is conceptualized as any form of documentation that is business in nature. This is for example accounts and correspondence that is business oriented. This provision of the Foreign Corrupt Practices Act of 1977 is enforced by the SEC. As such, it is this commission that deals with any misrepresentation or misappropriation of funds in a public company (Johnston 3).

The punishment that is meted out to those who violate the accounting and record keeping provisions of this law is somehow similar to others accorded the violation of the security laws in the United States of America. One major difference with other violations is the fact that those who break this law are not accorded criminal penalties such as jail terms. Instead, the punishment includes monetary fines that are made to the company, and in extreme cases, may include the cancellation of operating licenses on the part of the violator.

Enforcement and Implementation of the Foreign Corrupt Practices Act of 1977: Success of Failure?

A lot have been said about the success or failure of the implementation and enforcement of this act. Some analysts are of the view that the implementation has been a success and have significantly cut down on foreign corruption in the country. However, others are of the view that the implementation of the laws have been a failure, and have affected the operations and business interests of the Americans negatively.

Whichever the case may be, this paper is going to address this issue from the perspective of one case study. This is a case where the Foreign Corrupt Practices Act of 1977 has been applied with varying rate of success. This is the Lockheed Company’s proposed acquisition of the Titan Corporation.

Lockheed Company’s Proposed Acquisition of Titan Corporation

In late 2003, Lockheed made public its intentions to acquire Titan Corporation. The latter is a defense contractor that operates from California. The acquisition was approximated to cost Lockheed 1.8 billion US Dollars. According to the agreement that was entered into by the two parties, the acquisition was to be finalized in six months (Warin & Monahan 434).

Investigations carried out revealed that titan corporation had violated the provisions of the Foreign Corrupt Practices Act of 1977 at some points in the past. This was especially made obvious when the SEC and the DOJ made investigations into the companies before the acquisition could be finalized (Warin & Monahan 426).

Given this realization, Lockheed came up with conditions that required to be met by titan for the acquisition to be finalized. One of the conditions required titan to acquire a written confirmation from the law enforcers to the effect that no claims will be pursued by the authorities as a result of the past misdeeds on the part of the titan corporation. Alternatively, Titan Corporation was to enter into a plea agreement with the authorities to finalize the sentencing procedure as a result of the investigation. The two companies then agreed that if the acquisition process will not have been finalized by mid June, 2004, either of the parties could withdraw from the process. After the elapse of the agreed time period, Lockheed did withdraw from the acquisition process, and as such, the envisaged acquisition was never to be (Warin & Monahan 427).

One year down the line, Titan Corporation pleaded guilty to two of the charges that had been preferred against the company. The company agreed to pay more than 28 million dollars as penalty to the offences (Warin & Monahan 430).

The significance of this case cannot escape the attention of the public. It is an indication to the fact that the Foreign Corrupt Practices Act of 1977 has had some instances of success. It is also an indication to the fact that the authorities charged with the implementation of the law (the department of justice and the securities exchange commission) are committed to the implementation of the law.

It is also important to note that the penalty that was imposed on this company for the violation of the law is the largest in the history of the Foreign Corrupt Practices Act of 1977 (Warin & Monahan 425). The authorities were perhaps intending to send a message to the American public to the effect that violation of these laws is taken seriously by the authorities.

Conclusion and Recommendations

This paper has made it clear that the government of the United States of America takes seriously any form of economic crime that poses a threat to the economy of the country. This is for example the crime of foreign corruption.

The Foreign Corrupt Practices Act of 1977 has experienced some degree of success as far as implementation and efficacy is concerned. This fact was made clear by the case study that was provided above. However, this paper gives recommendations that, if implemented, may increase the efficacy of this law. Following are the recommendations:

1. This law does not impose any legal duty on an American company to carry out due diligence regarding an envisaged acquisition, for example in the case of Lockheed provided above. Given the fact that the company that had made the acquisition stands to take responsibility of the offences that had been committed by the company acquired. As such, it should be made mandatory by this law for the companies to carry out due diligence before the acquisition
2. Titan corporation made a voluntary disclosure to the authorities regarding the investigations that were been conducted to its operations. However, it is obvious from the penalty that was imposed on the company that this did not mitigate the offence committed. To this end, it is recommended that voluntary disclosure be taken as a mitigating factor when it comes to meting out of penalties. This will encourage the companies to corporate with the authorities.

Works Cited

Ben, Rich R. and Leo, Janos. Skunk Works: A Personal Memoir of My Years at Lockheed. New York: Little Brown & Co., 1994.

Crawford, David and Searcey, Dionne. “U.S. Joins H-P Bribery Investigation”. The Wall Street Journal, 2010.

Gantz, David A. The Foreign Corrupt Practices Act: Professional and Ethical Challenges for Lawyers. Journal of International & Comparative Law, 97(1), 2007.

Johnson, Thomas O. International Law & Practice: Foreign Corrupt Practices Act. Web.

Kim, Suh K. and Barone, Sam. Is the Foreign Corrupt Practices Act of 1977 A Success or Failure? A Survey of Members of the Academy of International Business. Journal of International Business Studies, 2001.

Krever, Tor. Curbing Corruption? The Efficacy of the Foreign Corrupt Practices Act. Journal of International & Comparative Law, Fall 2007.

Seitzinger, Michael V. Foreign Corrupt Practices Act. CRS Report to Congress, 1999.

United States Department of Justice. Foreign Corrupt Practices Act. Web.

Warin, Joseph F. and Monahan, Jason A. Foreign Corrupt Practices Act Due Diligence and Voluntary Disclosure. Journal of Payment Systems Law, 2005.

Weiss, David C. The Foreign Corrupt Practices Act, SEC Disgorgement of Profits, and the Evolving International Bribery Regime: Weighing Proportionality, Retribution, and Deterrence. Michigan Journal of International Law, 47(1): 2009.