NEW YORK-Gaining overseas business contracts while also obeying U.S. laws against bribery of foreign government and corporate officials remains a significant challenge for American businesses.
In the “danger zone” for increased scrutiny by federal regulators are American companies that have foreign subsidiaries and operations, said David Stulb, a partner of Arthur Andersen L.L.P., New York, in a recent presentation about the Foreign Corrupt Practices Act.
Also targeted for increased federal oversight are “companies that rely on government contracts (including) telecommunications (companies), especially in regions that are being heavily privatized” like countries in the former Soviet Union, China, India and South America, he said.
“U.S. companies have had a very difficult time following the Act [while] remaining competitive,” Stulb said at a meeting sponsored by Strang Hayes Consulting Inc., New York, an investigative management firm headed by a former U.S. Drug Enforcement Administration agent.
Stulb termed “naive” the original 1977 version of the Foreign Corrupt Practices Act because it failed to acknowledge adequately and account for the widespread phenomenon of bribery in both developed and developing nations.
The law was amended twice, in 1988 as part of the Omnibus Trade Act, and again in 1994.
The problem of foreign corrupt practices has become more pronounced during the past five years as “U.S. registrants and issuers have entered new markets, many in Europe and Asia where bribery is used as a means of doing business,” Stulb said.
“The [Organization of Economic Cooperation and Development] has been fairly active in the last year, mainly due to (former Commerce Secretary) Mickey Kantor, in trying to make U.S. companies more competitive in countries where bribery is a way of doing business.”
In late November, largely due to efforts that Kantor led, all 29 OECD members and five non-member nations signed a “Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.”
The convention “essentially resounds the maxim that bribery is bad business that is bad for business,” Stulb said.
It represents a major step forward, particularly with respect to countries like Germany, Italy and the Netherlands, whose tax codes encourage bribery by allowing companies deductions for such expenses, he said.
The next big issue, whose resolution is widely hoped for within a year, is to develop an enforcement mechanism for the Convention. The World Court or other international institution could agree to accept this role, Stulb said.
“The realities, unfortunately, are that Asian and European companies are looking more at competitiveness in developing markets, at gaining market share,” Stulb said.
As a defensive measure, Stulb added that he is aware “of instances where U.S. companies conduct their own due diligence (because) they know they are at competitive disadvantage, and complain to the U.S. government.”
However, whether concrete action occurs to stop unfair tactics employing bribery “depends on the U.S. relationship with the other country,” he said.
Over the past several years since the Foreign Corrupt Practices Act was last amended, large accounting firms like Andersen have worked with companies to “proactively develop an appropriate internal control structure to comply with [the law’s] accounting provisions,” Stulb said.
Education, training and, above all, support for employees who are citizens of a foreign country in which the company is doing business, can serve as one of the key elements of an effective internal compliance program. Often, the philosophy behind bribery prohibitions isn’t part of their national culture. Moreover, corrupt government officials often subject such personnel to extreme pressure, even as the company he or she works for is “trying to establish profitability,” Stulb said.
The law also requires that companies implement procedures to deal with non-compliance. If the federal government discovers a problem that a company hasn’t taken steps to rectify, “it will take action,” Stulb said.
Fines on individuals and companies start at $10,000 and can go as high as $2 million. The U.S. Department of Justice and the Securities and Exchange Commission instituted only 20 anti-bribery investigations during the first decade of the act. “Now, rarely a week goes by when the media isn’t reporting about a U.S. registrant being investigated by U.S. or local authorities,” Stulb said.
Federal authorities often find out about suspicious activities from whistle blowers, who are protected under federal law, Stulb said. Other tip-offs include “a massive sales contract in which the U.S. government is aware of local conditions … or there’s a local operation with a $2 million contract and a $10 million budget … or payments are made to a consultant in one country but are directed to a bank in another jurisdiction.”
Within the framework of the law, some forms of bribery are considered more serious than others. The Omnibus Trade Act does permit some forms of transaction bribes, also called “grease payments,” which companies use to expedite performance of a routine governmental function, like processing of papers or hooking up water and power services.
However, sorting out what is a permissible grease payment “is a very gray area, the most difficult for lawyers and/or accountants to opine on,” Stulb said.
Much clearer, he said, is the law’s outright prohibition against a “variance bribe” or an “outright purchase.” The former is used “to secure the suspension of a legal norm,” as in paying off a government official so a company won’t be charged with violating local law. Outright purchase involves “payment of a gift to a government official to obtain a government contract.”
Despite the difficulty of compliance, Stulb said, “I’m not sure any (company) has taken advantage of the Department of Justice’s voluntary review of hypotheticals (companies can) present to see it they’re a violation of the law. I believe DOJ has 30 days to respond.
“DOJ doesn’t provide statistics about how many companies call its hot line, but I suspect that few do.”
