The Foreign Corrupt Practices Act: Bribery, Corruption, Recordkeeping and More

Indiana Lawyer
April 21, 1993
Dale Stackhouse

One often hears American executives that are involved in international trade bragging about the terrific agents and sales representatives they know that have "great contacts" abroad. Many of these executives recognize that gift-giving is an important (and sometimes essential) part of doing business in some foreign cultures, and allow or instruct their agents and sales representatives to behave accordingly. What some of these business people do not realize is that United States law prohibits bribery of government officials in foreign countries, and that if the gift-giving results in a bribe, their "great contacts" can land them in jail.

In 1977, Congress passed The Foreign Corrupt Practices Act (the "Act") to address what was perceived as open and flagrant participation in the corruption of foreign governments by United States multinational corporations. This law makes it a violation of United States law to bribe a foreign government official in order to obtain or maintain business over which that foreign official has authority, and requires all publicly traded companies (whether or not they are involved in international trade) to keep records that are detailed enough to allow someone reviewing the records to determine whether a violation of the Act has occurred.

The United States is unique in having this kind of law, and unfortunately, in many countries where corruption is prevalent, the Act has made it difficult for United States companies to compete. In fact, some executives have reportedly complained that many of the activities that the Act prohibits as "corrupt practices" are, in some countries, standard operating procedure.

What Kind of Payments Does the Foreign Corrupt Practices Act Prohibit?

The bribery provisions of the Act specifically prohibit payments to foreign government officials that are made in an attempt to gain or maintain business with that government. A payment or gift to a foreign corporation or to a corporate officer that is not a government official is not precluded by the Act. Likewise, token gifts to officials who have no control over whether business will be awarded or maintained do not violate the Act. Bribery by any other name, however, is still bribery, and the fact that a foreign ministry official serves as your "agent" and receives a "commission" for helping you obtain a government contract does not immunize you from the Act's criminal sanctions. In fact, in one case, an American corporation was investigated for helping a foreign ministry official arrange for his daughter's schooling in the United States. While this situation was ultimately resolved in favor of the corporation, it demonstrates that the Department of Justice, which enforces the bribery provisions of the Act, is quite serious about monitoring gifts and favors of all types.

The Act provides American businesses with some degree of latitude in situations where payments to foreign government officials do not violate local law, even if the payment results in maintaining or obtaining business. The Act also allows facilitating or expediting payments (also known as "grease payments") the purpose of which is to expedite or to secure the performance of a routine governmental action. Acceptable payments might include, for example, payments made to speed up the issuance of permits or licenses, process paperwork, or just get vegetables off the dock and on their way to market. Congress's explanation for this exception to the general antibribery provisions of the Act is the fact that while grease payments are, technically, bribes, they are distinguishable from (and, apparently, less offensive than) bribes used to obtain or maintain business, since they merely facilitate performance of duties that the recipients are already obligated to perform.

Although application of the Act depends on the individual facts and circumstances of each particular case, there are some "red flag" concepts which should alert you to the need to proceed with caution if you are doing business abroad. For example, does the country in which you are doing business have a pervasive corruption problem? Are you paying a commission which significantly exceeds market rates? Is payment of a commission being made indirectly through a third party or third country? Caution is advisable whenever a foreign government official is concerned, because the Act makes it clear that a United States corporation cannot shield itself from liability under the Act by purposefully remaining ignorant of the actions of its agents and representatives.

As of October 1, 1992, those who have questions about whether their proposed activities violate the bribery provisions of the Act can write to the Department of Justice and request an opinion from the Attorney General. This new procedure should eliminate some of the uncertainty associated with the Act for those who choose to take advantage of the new procedure, although the Department of Justice has stated that opinions will not constitute binding precedent in other cases.

Accounting Rules Which Apply to all Publicly Held Companies

While the bribery provisions are perhaps the most well-known provisions of the Act, a lesser-known, but equally important, aspect of the Act is the Act's accounting standards, which are enforced by the Securities and Exchange Commission ("SEC"). The accounting rules, which were designed to make the enforcement of the bribery provisions possible, are written quite broadly, and they apply to many companies that are not involved in international transactions of any kind.

The recordkeeping provisions of the Act require all publicly-held companies to keep records that clearly indicate how their assets are used. The Act is intended to eliminate vaguely labeled accounting entries, such as "slush funds," which investigators found were often used to disguise bribery payments. Any accounting system which fails to clearly indicate how money is disposed of, however, is a violation of the Act, and the SEC has, in fact, used the Act in several cases to prosecute wrongdoers who have not engaged in bribery of foreign officials, but whose actions technically violate the Act's accounting requirements (much like the federal government has used tax laws to prosecute organized crime figures whose "real" crimes cannot be proven). In a celebrated case involving Hugh Hefner of Playboy fame, for example, the SEC alleged that Playboy did not properly account for officers' perquisites. Nothing in the Playboy case involved foreign government officials or bribery. In other cases in which bribery has not been an issue, the Act claims have almost always been part of a longer list of miscellaneous other offenses.

The point is that the Act contains a number of traps for the unwary. The fact that some of an American company's foreign competitors are bribing a foreign official and getting away with it does not mean that the American company can do the same without fear of legal consequences. In addition, deceptive -- or even sloppy -- accounting practices by publicly held companies can result in legal problems for American corporations even if they are not involved in bribery or international trade at all. Awareness of the Act's existence, as well as its purposes and the manner in which it has been used, can go a long way toward avoiding potential problems.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.