White Collar Crimes & Foreign Corrupt Practices Act (FCPA)

Recent FCPA enforcement actions have involved disclosed /disguised travel, lodging, and entertainment provided to foreign officials, when they are more than reasonable

The term white collar-crime was coined first by Criminologist & Sociologist Edwin H. Sutherland. However, it was put in use in 1907, by E. A. Ross in the context of the businessmen who indulged in harmful act/s under the veil of respectability. Whenever we talk about white-collar crimes, we always remember and correlate it to FCPA, for obvious reason that the maximum voluntary disclosures are made or violations discovered are under FCPA.

FCPA & its applicability in India

FCPA was enacted in 1977, which makes it a first-of-its-kind anti-bribery legislation. There were many laws to curb bribery, in many countries, but the majority were restricted to specific section/sector of bribery. FCPA was the first act covering broad spectrum. It's a federal law, enforced by the U.S. Department of Justice (DOJ), which prohibits payments, gifts or even offers of "anything of value" to a "foreign official" for the purpose of influencing the official or otherwise "securing any improper advantage" in obtaining, retaining or directing business. The FCPA can apply to prohibited conduct anywhere in the world and extends to publicly-raded companies and their officers, directors, employees, stockholders, and agents. Agents can include third party agents, consultants, distributors, joint-venture partners, and others. The FCPA's extra territorial jurisdiction, makes it obligatory to take note. This is also validated by many examples in past, of sanctions and penalties imposed on the companies, for their operations outside US, including India.

The FCPA covers two aspects broadly - antibribery prohibitions and accounting requirements. The antibribery prohibitions doesn't need much explanation. The accounting requirements aspect is to prevent accounting practices designed to hide corrupt payments and ensure that shareholders have an accurate picture of a company's finances.

What is prohibited?

A violation of the FCPA consists of five "elements", as detailed below:

1. a payment, offer, authorisation, or promise to pay money or anything of value.

2. to a government official (including a party official or manager of a state-owned concern), or to any other person, knowing that the payment or promise will be passed on to a foreign official.

3. with a corrupt motive.

4. for the purpose of (a) influencing any act or decision, (b) inducing such person to do or omit any action in violation of his lawful duty, (c) securing an improper advantage, or (d) inducing such person to use his influence to affect an official act or decision

5. to assist in obtaining or retaining business for or with, or directing any business to, any person.

A covered individual or entity that violates the FCPA can be subject to criminal charges by the DOJ, which might lead to imprisonment or a fine, in addition to penalties by the SEC of up to $500,000 or the amount by which the entity profited from the offense.

The definitions of "payment" and "foreign official" are sufficiently broad to cover virtually any benefit conferred to someone in a position to affect a person's business dealings with a foreign government. Non-monetary benefits, including direct / disguised travel and entertainment, fall within the FCPA's definition. Under the terms of the FCPA, a bribe need not actually be paid to violate the law. Rather, the FCPA prohibits the offer, authorisation, or promise to make a corrupt payment in addition to the actual payment. The legislative history of the statute describes this as a "corrupt motive or purpose, an intent to wrongfully influence the recipient." The criminal prohibition against "corrupt" conduct requires a consciousness of wrongdoing. Innocent mistakes are not illegal under the FCPA, but there must be substance to prove the innocence or non-involvement. To constitute an FCPA violation, a payment must be intended to cause an official to take an action or make a decision that would benefit the payer's business interest. The business to be "obtain(ed) or retain(ed)" by the corrupt payment need not be with the government or a government-owned entity. Rather, the FCPA is violated if a corrupt payment is made to facilitate improperly the obtaining or retaining of business with a third party.

The FCPA also requires companies whose securities are listed in the U.S. to meet its accounting standards/guidelines. These standards operate in tandem with the anti-bribery provisions of the FCPA and require respective corporations to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls.

Grease payments, allowed?

The act draws distinction draws a distinction between bribery and "facilitation" or "grease payments", The primary distinction is that grease payments or facilitation payments are made to an official to expedite his performance of the routine duties he is already bound to perform. The exception focusses on the purpose of the payment rather than on its value. Certain payments or reimbursements relating to product promotion may also be permitted under the FCPA. However, grease payments, which may be permissible under the FCPA, may still violate local laws. The Prevention of Corruption Act, prohibits all kinds of undue/illegal payments. Similarly, cross-border corporations, who are supposed to comply with other countries laws - like UK Bribery Act, which doesn't permit these payments. Payments to foreign officials may be legal under the FCPA if the payments are permitted under the written laws of the host country.

Exceptions under FCPA?

Generally, there are three situations in which payments to foreign officials would not result in liability under the FCPA. One approach is to show that the challenged conduct falls within the so-called "routine. governmental action" exception to the FCPA. The other two situations involve invoking what are known as "affirmative defenses." An affirmative defense generally is an assertion of facts and arguments that, if true, will defeat the prosecution's claim, even if all the allegations made by the prosecution are true. There are two affirmative defenses under the FCPA. The two affirmative defenses are as follows:

There are two circumstances under which a payment, gift, offer, or promise of anything of value to a foreign official may qualify as an "affirmative defense" under the FCPA:

1. The Local Law defense: The payment, gift, offer, or promise of anything of value is lawful under the written laws and regulations of the foreign official's country; In relying on the local law of the foreign country as an affirmative defense for a payment, gift, offer, or promise of anything of value to a foreign official, the law or regulation being relied upon, at the time of the conduct, must be "written." Local practice, custom, or other unwritten policies do not qualify as an affirmative defense. This means that, if you are accused of bribing a foreign official, you would have an affirmative defense if you could show that the payment, gift, offer, or promise of anything of value to the foreign official was lawful under the written laws or regulations of that foreign official's country.

2. Reasonable & bona fide expenses: The payment, gift, offer, or promise of anything of value is a reasonable and bona fide expenditure, such as travel and lodging expenses, directly related to the promotion, demonstration, or explanation of products or services, or the execution or performance of a contract with a foreign government or agency thereof.

However, recent FCPA enforcement actions have involved disclosed / disguised travel, lodging, and entertainment provided to foreign officials, when they are more than reasonable. The obligation on the organisation, that incurs these types of expenses on behalf of foreign government officials must have the appropriate internal controls and compliance procedures in place to provide that these expenses satisfy the "reasonable" and "bona fide" criteria of this affirmative defense and are properly approved and documented in the issuer's books and records.

Summarising - If the FCPA is applicable, then avoiding or bypassing may be difficult and hence developing right culture, in combination with an effective internal controls, can prevent or mitigate the impact of violations, if any.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.