This paper examines the Foreign Corrupt Practices Act (FCPA) of 1977, tracing its origins in the Watergate scandal and the Securities and Exchange Commission's investigations into illegal corporate payments to foreign government officials. The paper outlines the FCPA's anti-bribery and accounting provisions, the knowledge standards required for liability, and the penalties faced by violating individuals and corporations. It surveys landmark enforcement cases—including Siemens, Daimler, Halliburton/KBR, and several others—to illustrate the law's real-world impact on international business. The paper also considers the FCPA's 1998 amendments, its relationship to the OECD Anti-Bribery Convention, and the broader globalization of anti-corruption enforcement across countries such as Germany, France, Japan, the United Kingdom, and Canada.
The corporate payments problem was discovered in the mid-1970s through a combination of work by the Watergate Special Prosecutor's office, related inquiries by the Securities and Exchange Commission (SEC), and the Multinational Corporations Subcommittee chaired by Senator Frank Church. In 1975, within four months, the Church Committee held separate hearings on Gulf Oil, Mobil Oil, Northrop, and Lockheed (Koehler). Each of these corporations became the principal subject of allegations concerning questionable payments made either directly or indirectly to foreign government officials or foreign political parties for business purposes. For example, Gulf Oil's case primarily involved contributions to political campaigns of the President of the Republic of Korea. Northrop was mainly involved in making payments to a general in Saudi Arabia. Exxon and Mobil Oil were each principally involved in contributions to political parties in Italy. Lockheed's case mainly involved payments made to Japanese Prime Minister Tanaka, Prince Bernhard (the Inspector General of the Dutch Armed Forces and husband of Queen Juliana of the Netherlands), and Italian political parties.
Corruption is a pressing issue for international businesses operating in every part of the world. It is especially common among corporations that operate in developing nations with unstable political environments (Tan, 2012). Over 400 companies admitted that they made illegal payments to foreign government officials or U.S. politicians. Such steps were typically taken to enable companies to benefit from foreign government policies or to ensure that government functionaries discharged their duties in a favorable manner.
The Foreign Corrupt Practices Act (FCPA) was the first effort by any country to specifically criminalize the practice of bribing foreign officials. The statute arose in the context of the Watergate scandal, which in 1974 led to the resignation of President Richard Nixon and subsequently eroded public trust in government (History of the Foreign Corrupt Practices Act). In 1976, following prosecutions for the unlawful use of corporate funds that grew out of Watergate, the U.S. Securities and Exchange Commission (SEC)—which is responsible for regulating the United States securities industry—issued a report on Illegal and Questionable Corporate Payment Practices. In that report, the SEC concluded that the bribery of foreign officials by U.S. corporations was widespread enough to be treated as a matter of serious concern. The SEC's investigation found that several hundred U.S. companies had made illegal and fraudulent foreign cash remittances totaling hundreds of millions of dollars.
This background inspired the U.S. Banking Committee to pursue reliable anti-bribery legislation. The committee's report concluded that corporate bribery is fundamentally destructive: in a free-market system, the sale of products should be regulated solely by price, service, and quality. The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. § 78dd-1, et seq. ("FCPA"), was enacted to make it illegal for certain classes of individuals and corporate entities to make payments to foreign government officials in order to obtain or retain business (History of the Foreign Corrupt Practices Act).
The FCPA's anti-bribery provisions prohibit using the mail or any other instrumentality of interstate commerce in a corruptly willful manner to further any offer, promise, payment, or authorization of payment of money or other items of value to any person, with knowledge that all or part of such money or value will be offered, promised, or given—directly or indirectly—to any foreign official in order to: influence that official's acts or decisions in their official capacity; induce the official to act or fail to act in violation of their lawful duty; or secure any improper advantage, with the aim of assisting any individual in obtaining or retaining business with or for any person.
From 1977, the FCPA's anti-bribery provisions applied to all U.S. nationals and certain foreign security issuers. Following the enactment of amendments in 1988, the provisions now also apply to foreign businesses and individuals who directly or indirectly cause a prohibited payment to occur within U.S. territory (History of the Foreign Corrupt Practices Act). The FCPA similarly requires firms whose securities are listed in the United States to comply with its accounting provisions. See 15 U.S.C. § 78m. These accounting provisions were designed to work in conjunction with the anti-bribery provisions and require covered corporations to: (a) keep books and records that fairly and accurately reflect the transactions of the corporation; and (b) devise and maintain an adequate system of internal accounting controls.
Three distinct knowledge standards appear in the statute's anti-bribery provisions:
1) All violations must be corrupt in nature;
2) To impose criminal penalties on an individual, that individual must have acted willfully; and
3) Where liability is premised on a payment to a third party, that payment must have been made with knowledge that the money or other item of value would be passed in whole or in part to a foreign government official (Burns, et al.).
Of these three, only the third—knowledge that a third-party payment will be channeled to a foreign official—is clearly defined in the statute. "Willfully" and "corruptly" are not expressly defined. The statute provides that a person acts with knowledge of a circumstance, conduct, or result if: (a) the person is aware that they are engaging in such conduct, that the circumstance exists, or that the result is virtually certain to occur; or (b) the person has a firm belief in the existence of the circumstance or a high probability that the result will occur. Knowledge of a circumstance is established when an individual is aware of its high probability of existence, unless that individual affirmatively believes it does not exist.
Under the FCPA, an individual or organization may be held liable for engaging in illegal trade practices if (Tan, 2012):
— There is a payment, offer, promise to pay, or authorization of a cash payment or other item of value;
— To a foreign official, foreign political candidate, or political party, or to any other person with knowledge that the gift or payment will be passed to a foreign official;
— With corrupt intent;
— For the purpose of: influencing any act or decision of that party; inducing the party to act or fail to act in violation of their lawful duty; securing an improper advantage; or influencing the party to use their influence with a foreign government; and
— In order to assist in obtaining or retaining business for, or directing business to, any person.
— The provision covers any employee or officer of a foreign government or government agency, or of an international organization with public status.
Any business dealings with such parties that involve providing unlawful nonmonetary benefits may attract FCPA sanctions. Importantly, a person can be held liable even when no corrupt act is ultimately executed (Tan, 2012), because a promise or offer of a gift is itself rendered illegal by the statute. Under the FCPA, the concept of "obtaining or retaining business" extends beyond merely awarding or renewing a contract; however, the business obtained must have some connection to the foreign government.
In practice, organizations frequently spend several million dollars conducting internal investigations for possible FCPA violations before turning the results over to the government in hopes of receiving reduced penalties or none at all. The total of $456 million spent by Gulf Oil, Mobil Oil, Northrop, and Lockheed was largely paid to law firms and other experts engaged to carry out these investigations and to strengthen the companies' internal anti-bribery controls. The law that emerged from the Watergate scandal has since become significant business for legal practitioners who enter company operations in response to investigations by the SEC and the Justice Department—or as a means of avoiding them (Palazzolo, 2012). The result is a small industry of professional investigators and white-collar law firms specializing in criminal law. According to legal recruiter Dan Binstock of Garrisson & Sisson Inc. in Washington, it is "among the very few crown-jewel practices right now." Records indicate that some FCPA lawyers earned more than one million dollars per year in compensation, with a select few earning more than two million dollars.
Under the FCPA, it is illegal to give money or any kind of gift to a foreign government official or their employees for the purpose of gaining a business advantage. This law applies to any company listed on U.S. stock exchanges or any U.S.-based company. The United States is one of several dozen nations—including Russia and China—that ban overseas bribery; however, the United States has recorded far more enforcement actions than any other country. The SEC and the Justice Department have investigated firms operating in both the developed and developing world.
The U.S. government has also formed coalitions with foreign anticorruption authorities—including those in the United Kingdom—to accelerate investigations (Palazzolo, 2012). According to FCPA advocates, this process has led firms to tighten controls over their overseas subsidiaries, which is expected to yield long-term benefits for their operations and for the integrity of global commerce.
FCPA investigations have led the government to settle with numerous companies. Among the largest settlements was that involving Siemens AG—$800 million—for remitting payments to foreign governments in its bid to win contracts. Several other firms have also been investigated, including News Corp., the publisher of the Wall Street Journal. The U.S. Justice Department asked News Corp. to supply information on payments possibly made by its U.K. tabloid newspapers to British police officers, according to persons familiar with the matter. A News Corp. spokesperson declined to comment.
The potential penalties for violating FCPA provisions can be severe. Individuals who violate the anti-bribery provisions may face up to five years' imprisonment per count, criminal fines of up to $100,000 per violation, and civil penalties of up to $10,000 per violation. A person who willfully violates the books and records provisions may face a fine of up to $5 million, a prison term of up to 20 years, and civil penalties of up to $100,000.
Under Office of Management and Budget guidelines, an individual or company that violates the FCPA may be barred from doing business with the federal government—even an indictment is sufficient to attract a suspension of the right to engage in government business transactions. Over the past five years, a dramatic increase in FCPA enforcement actions has been recorded by the Justice Department and the SEC, leading to more prosecutions of individuals and foreign entities engaged in corrupt practices (Harris, 2011). FCPA investigations frequently give rise to related criminal charges, including mail and wire fraud, money laundering, export control violations, terrorism financing, and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO).
As an illustration of the degree of corporate liability under FCPA law, consider the case of Germany's Daimler AG. In March 2010, the SEC settled an FCPA enforcement action against Daimler for engaging in a systematic and recurrent pattern of bribing foreign government officials to secure business deals in Africa, Asia, the Middle East, and Eastern Europe. The bribery scheme was so pervasive that it extended beyond the sales organization into the finance, legal, and internal audit departments, which were sanctioned or directly involved in unlawful conduct. Daimler agreed to pay $91.4 million in disgorgement to settle the SEC's charges and an additional $93.6 million in criminal fines to resolve separate criminal proceedings brought by the Justice Department.
President Clinton signed a key FCPA amendment in 1998, following the December 17, 1997 OECD Convention. The principal expansions included a clause prohibiting payments made to gain any type of improper advantage—going beyond the prior language, which only banned companies from influencing acts or inducing violations of legal duties to obtain or retain business. The amendment also extended the FCPA's reach beyond use of the mail and interstate commerce to any conduct that furthers an improper payment, even outside U.S. borders (Harris, 2011). The FCPA now extends to any foreign government official or any business that carries out activities violating the act while within U.S. territory (Simpson). The penalty provisions currently apply to every foreign national employed by a U.S. company or acting as a foreign agent for a U.S. company. The 1998 amendment also added officials of public international organizations (such as the Red Cross and the United Nations) to the definition of foreign government officials subject to the statute.
A review of U.S. export data as a percentage of global exports over forty years reveals an irregular trend. Prior to 2000, the total U.S. export market share consistently remained below 12%. From 2000 onward, several recessionary episodes were witnessed—beginning with the dot-com bubble burst early in the decade and concluding with the subprime mortgage crisis that began in 2007 and developed into a global recession (Harris, 2011). Several factors may have contributed to the erosion of the United States' share of world exports, and some researchers have drawn direct links to the 1977 passage of the FCPA. A 2007 study concluded, however, that both the OECD convention and the FCPA had a positive effect on international bribery by reducing its frequency.
According to Cuervo-Cazurra, a multilateral effort to eliminate bribery from business transactions involving government agents and companies was the most adequate solution for creating a competitive and fair business environment. Anti-bribery legislation not only increases the cost of participating in illegal payments but also reduces the supply of corruption. Sustained international collaboration is therefore a vital step toward eliminating bribery from business transactions.
"Siemens, Daimler, Halliburton, Avon, and other cases"
"OECD convention and G-7 country comparisons"
The countries that accepted and signed the OECD rule or any other such anti-bribery law have proven that companies will be required to adhere to and display the highest standards of corporate governance and business practices (Harris, 2011). The FCPA's success calls for a global consensus on clearer rules and an ethical framework governing the activities of companies. It will require sustained efforts at all levels—among both private and public officials—to promote healthy business practices in all countries.
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