Foreign Corrupt Practices Act: History, Impact & Enforcement

Introduction to the FCPA and Its Origins

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).

Anti-Bribery Provisions and Legal Standards

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.