Which of the following was a criticism of the foreign corrupt practices act?

For the first 40-plus years of their existence, the federal securities laws did not require or prohibit specific managerial practices in the operation of business, other than a business in one of a handful of closely regulated industries. But with the passage of the Foreign Corrupt Practices Act of 1977, the SEC is equipped to tighten the noose of responsibilities and liabilities on corporate directors, officers, and managers. In this article, the author explains the provisions of the new act, as well as what the SEC’s enforcement staff is likely to assert they mean.

The responsibilities—and corresponding liabilities—of corporate officers, directors, and managers under the federal securities laws were greatly increased by the passage of the Foreign Corrupt Practices Act of 1977. The lack of attention by businessmen to the new law may be because of its title, which incorrectly implies that it deals only with improper business practices overseas.

While the law does prohibit bribing foreign officials and politicians, not all of the practices dealt with are “corrupt,” nor are all of them foreign. Indeed, the most important provisions of the act are those equally applicable to the domestic operations of all companies that report to the SEC.

Like the antifraud sections of the securities laws, the act is short and deceptively straightforward. The key provision is one that simply states that every reporting company shall:

“…make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”

It is only when one considers the probable applications and consequences of the new law in light of past SEC enforcement policies and practices that one begins to understand why certain commentators in the legal and accounting professions have viewed the act as the most significant expansion of the securities laws since their passage in the New Deal era.

This article will explain not merely the core of the act—what it says and the penumbra around it—but also what the SEC is likely to assert it means. The courts may not in all cases agree with the expansive reading of the act by the SEC’s enforcement staff, but management and the board of directors can choose their course more sensibly if they understand just how broadly the act could be applied.

Antecedents of the Act

Management’s performance of its disclosure obligations has always been judged by the standard of “materiality,” whether the disclosure was to prospective buyers or sellers of securities, or to stockholders in exercising their right to vote, or to the marketplace in general in the context of reporting on the current condition of the company. When the SEC or the courts have been called on to determine if a specific disclosure by a company was adequate, they have not looked to see whether every last, conceivable bit of information was disclosed but whether there was either a misstatement of a material fact or an omission of a material fact.

Until fairly recently, “material” was understood to mean financially important in terms of the actual investment or voting decision at issue. Nothing in the rules set forth a bottom figure for materiality, but two principles were generally understood to apply. First is the legal principle that the law is not concerned with trifling amounts. Second is the financial principle of proportionality—that is, what is material to a small company is not necessarily material to a large company.

In a 1964 decision, In re Franchard Corp., the commission ruled that the “integrity” of management “is always a material factor.” However, despite the commission’s seeming emphasis in Franchard on managerial integrity as a disclosure concept apart from financial materiality, in subsequent cases involving managerial wrongdoing the commission continued to justify its sanctions by reference to the economic losses suffered by the company.

Investigatory findings: Required disclosures concerning managerial integrity might still be limited to a few matters, such as prior employment, criminal convictions, and material transactions with the company, were it not for the findings of the Watergate Special Prosecution Force.

When the can of worms labeled “Watergate” was fully opened, it revealed to the SEC that a surprising number of publicly owned companies were engaging in a wide variety of illegal or questionably illegal practices. Underlying all such illegal activities was what the SEC termed the most “devastating” factor to emerge from its investigations: “the fact that, and the extent to which, some companies have falsified entries in their own books and records.”

Of course, the SEC had no legal authority to prosecute directly the various illegal activites of companies registered with it, nor could it even prosecute them for the false and incomplete books and records that made those activities possible. What the SEC could, and did, do was to investigate and act against companies for their failure to disclose their unlawful transactions.

In some cases, the amounts of money involved were clearly material either in absolute or proportional terms. In other cases, the enforcement staff of the SEC took the position that financial materiality was irrelevant; regardless of the dollar amounts involved, the transactions were material to the appraisal of managerial integrity, which in turn was material to investors and stockholders.

Using such reasoning, backed by the actual or implied threat of withholding clearance of securities registration statements and proxy material, the SEC forced a considerable number of the nation’s largest companies to spend anywhere from tens of thousands of dollars to more than a million dollars investigating their own past activities, and then to report the results in SEC filings. As one would expect, such reports were often followed closely by stockholder lawsuits.

Despite the success of its imaginative and zealous enforcement program dealing with the violations uncovered by the many investigations, the SEC was forced to recognize that far too many companies (a) had ignored the disclosure provisions of the federal securities laws, or (b) had interpreted them to mandate the disclosure of illegal acts only if they involved material amounts of money.

To shore up the existing laws, the SEC sponsored legislative proposals, which became the record-keeping and internal controls sections of the Foreign Corrupt Practices Act of 1977. As I will show, these sections of the act were also designed to assist in the enforcement of other sections prohibiting political bribery overseas.

Record-Keeping Provision

On its face, the first intrusion of the act into the realm of managerial practices—the record-keeping requirements noted at the outset—appears only to require management to do that which would be dictated by ordinary business prudence, namely, keep books, records, and accounts that are accurate and fair. Realizing that accuracy and fairness, like beauty, lie in the eyes of the beholder and that the beholder in this case would be the SEC, both the accountants and lawyers attacked the draft legislation.

The accountants sought to delete the word accurately as it applied to record keeping, on the ground that it “connotes a concept of exactitude that is simply not attainable.” The lawyers decreed the lack of a materiality standard and expressed fears of serious practical problems for businesses if they had to expand the documentation used in internal accounting.

Congress refused to make the standard of accuracy dependent on the materiality of a transaction, accepting the SEC’s position that “…to require a lesser standard in defining the obligation to keep books and records could lead to the argument that falsifications or omissions below a certain dollar amount may be tolerated.” Congress did, however, adopt a qualification to the requirement of accuracy and fairness in that the books, records, and accounts need only be made “in reasonable detail.”

The SEC supported this qualification because it was not attempting to establish, in this manner, more demanding standards of accounting precision, nor did it wish to swamp businesses with requirements for greater documentation of ordinary course-of-business transactions. Moreover, the SEC was not trying to obtain additional enforcement leverage against companies having a bona fide dispute over accounting treatment with their auditors.

Rather, the SEC was concerned with enacting a measure that would attack the three basic record-keeping problems uncovered by the improper payments investigations.

1. Records that simply failed to record improper transactions at all.

2. Records that were falsified to disguise aspects of improper transactions otherwise recorded correctly.

3. Records that correctly set forth the quantitative aspects of transactions but failed to record the “qualitative” aspects of those transactions which would have revealed their illegality or impropriety—such as the true purpose of particular payments to agents, distributors, or customers.

Questions of compliance: Certainly, no company will find it difficult to comply with the record-keeping provision of the act insofar as it prohibits the deliberate failure to record transactions or the falsification of business records. Questions of compliance may, however, arise in relation to the requirement, which the SEC could in some situations read into the act, of qualitative notations in what have traditionally been quantitative records.

To resolve such questions with confidence, it will be necessary to focus on the types of transactions that have caused problems in the past and that the SEC will insist be accurately and fairly documented in the future:

• Political contributions, whether lawful or not.

• Payoffs to government officials.

• Commercial bribes or kickbacks.

• Rebates to customers that are illegal or questionably illegal.

• Violations of laws regulating alcohol, tobacco, drugs, narcotics, or firearms.

• Violations of customs or currency control laws.

• Violations of other laws or regulations.

• Self-dealing by insiders or their affiliates.

• Transactions where the primary purpose appears to be the manipulation of sales, earnings, or other financial data.

Special transactions: In many situations where management might misuse corporate assets such as aircraft, boats, cars, and apartments, the company will already be keeping records for tax purposes. However, cases may arise where the records now kept fail to reveal the involvement of management or its affiliates.

For example, records of transactions between a company and a customer or supplier may fail to reflect the ownership of the customer or supplier by a company insider. Such records may be considered not to accurately and fairly reflect the transactions and dispositions of the assets of the issuer. To be on the safe side, a company should have written conflict-of-interest policies, which do not merely prohibit or limit certain activities but also demand the recording of such conflicts of interest as do exist.

With regard to the manipulation of financial data, it can be expected that the SEC will be particularly interested in having the records reflect all facts concerning special transactions and special adjustments at the end of a fiscal quarter. Special transactions would obviously include acquisitions and dispositions of assets and the booking of items significantly in advance of when they would customarily be booked. Special adjustments would include adjustments significantly out of line with those made in prior quarters and those apparently made primarily to “manage” earnings.

It is beyond the scope of this article to prescribe the form and content of adequate documentation for special transactions; that is a job for experienced counsel working with independent auditors and must be performed with reference to the particular operations of each company.

What is essential, in any case, is that the documentation not only correctly record the financial facts of the transacton itself but that it also record such other information as may be necessary to call a reviewer’s attention to any possible illegality or impropriety.

To put the matter baldly, if a company is buying its business by commercial bribery, the SEC may take the position that its records are not accurate and fair unless it has labeled such disbursements as “bribes to secure business.”

No doubt it will strike the reader as ridiculous to expect a corporate manager to make a self-incriminatory record, which will be picked up by the auditors, passed along to counsel, and disclosed to the SEC, resulting in his being punished. But what are the other choices now for a manager who is under pressure to engage in an illegal activity? If he does not resist the pressure, he must fail to comply with the act’s record-keeping requirements.

In such an instance, when the situation comes to light—and experience has shown that many such situations are eventually uncovered—the SEC will be able to bring an open-and-shut case against the company and the manager under the act, instead of having to proceed against them under the disclosure provisions of the securities laws, which would allow them to raise defenses such as the lack of materiality of the nondisclosed activity.

(Violations of the record-keeping provisions of the act can be punished by imprisonment for up to five years and a fine of up to $10,000.)

As can be seen from the foregoing, the act will materially strengthen the effect of the disclosure provisions of the federal securities laws, even if the SEC confines its enforcement actions, as I expect it will, to those cases involving either a material amount of money or significant managerial illegalities. It will also enable the SEC to step into situations where—because of inadequate systems, personnel, or equipment—the accounting process has broken down and the company’s records are out of date and chaotic.

A question may arise whether a particular company’s books are not accurate because bookkeeping or inventorying procedures have been deferred to the end of a fiscal quarter, or even to the end of a fiscal year. The legislative history of the act makes it clear that there was no intent on the part of Congress to interfere with whatever accounting methods might now be considered “accepted,” and the internal accounting controls mandated by the act only require that inventory counts be made at “reasonable intervals.”

On the one hand, because the practice of taking physical inventories on an annual basis is the accepted one in many industries, it would seem that the SEC could not charge a company in such an industry with keeping inaccurate books by failing to maintain perpetual inventory records.

On the other hand, companies that let slide the posting of transactions to their general ledger and journals or that fail to reconcile bank statements until the auditors arrive at year-end are likely targets for SEC action under the new record-keeping provision.

Records of foreign subsidiaries: Another point worth considering about the record-keeping provision of the act is whether it applies only to the parent company (the issuer), as appears from the letter of the law, or whether it applies also to subsidiaries of a U.S. parent. It cannot be expected that the SEC will allow the law to be evaded through the device of subsidiary corporations, especially when Congress gave some indication of intending to cover them too. The position of the SEC can be anticipated with regard to the reach of the act in certain situations.

First, where the books and records of a subsidiary are materially deficient in a financial sense, the books and records of the parent company may well be inaccurate insofar as they reflect consolidating entries (or pick up an equity interest in a nonconsolidated subsidiary.) In such cases, the SEC could choose to bring an enforcement action against the parent company under the act’s record-keeping provision.

Second, where management of the parent company is engaged in corrupt or improper practices through a subsidiary whose books and records are deficient, the obvious remedy would be to bring an action against the parent company under the disclosure provisions of the federal securities laws.

Third, where the management of the parent company knew, or had reason to know, that the subsidiary was engaging in foreign corrupt practices, which the act would prohibit if done by the parent, the SEC might charge the parent with failing to disclose the practices.

In short, the only safe way for management to proceed is to assume that the act applies fully to all subsidiaries, including foreign ones.

Internal Controls Provision

The second intrusion of the act into managerial practices is its requirement that every SEC-reporting company shall devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:

• Transactions are executed in accordance with management’s general or specific authorization.

• Transactions are recorded as necessary to (a) permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (b) maintain accountability for assets.

• Access to assets is permitted only in accordance with management’s general or specific authorization.

• The recorded accountability for assets is compared with the existing assets at reasonable intervals, and appropriate action is taken with respect to any differences.

Like the record-keeping provision of the act, the internal controls provision is not limited to material transactions or to those above a specific dollar amount.

However, in this case, the legislative history makes it very clear that Congress expected management to estimate and evaluate the cost/benefit relationships of the steps to be taken to fulfill its responsibilities and to reject controls that could not be justified economically. Among the factors that Congress expected management to consider were the size of the business, diversity of operations, degree of centralization of financial and operating management, and the amount of contact by top management with day-to-day operations.

In determining whether to institute an internal accounting control over an operation or type of transaction, management should also consider the unfortunate fact that its determination will come up for judgment only where the control has proved to be inadequate and a loss has occurred.

It is self-evident that a company might be held to have violated the act by failing to provide any system of accounting controls for a particular activity, such as the transfer of funds outside the country or the making of political contributions.

What may not be so evident is that the SEC may well take the position that the only appropriate control over certain activities is the establishment of an audit committee of the board of directors. Thus the failure of a company to institute such a committee, composed of outside directors, would constitute a violation of the act. The SEC has issued so many pronouncements calling for the establishment of audit committees that any board which fails to heed the calls had better be prepared to justify its action in court.

In most cases, the alleged violation of the act will be the creation or maintenance of an inadequate control system. The test for determining if a given system complied with the act will be whether the system in fact was “sufficient to provide reasonable assurances” that the specified objectives of the statute would be met.

It is likely that the SEC will not seek relief against a company for violating the internal controls provision of the act unless the company lacked or “failed to maintain” (i.e, permitted the evasion of) an internal accounting control relating to a material item or activity. Because the concept of materiality embraces both financial importance and managerial integrity, it can be expected that the SEC will act against a company that fails to control such sensitive matters as the use by insiders of corporate assets—whether or not the amounts of money involved are significant.

Indeed, since a violation of the internal controls provision could be expected to lead to, or be accompanied by, a violation of the record-keeping provision of the act, one should anticipate that the SEC would be most vigilant concerning internal controls in exactly those situatons, listed previously, that require a company to pay special attention to record keeping.

A special word is in order with respect to the requirement in the act that “appropriate action [be] taken with respect to any differences” when “the recorded accountability for assets is compared with the existing assets at reasonable intervals.” If a management is prudent, it will take steps to clean up, and, in some cases, book reserves, on a quarterly basis for such items as inventory shortages, uncomfirmable receivables, and bank account reconciliaton differences, rather than do little and say nothing on the assumption that everything will work out in the year-end audit.

Auditors’ comment letter: A special word is also called for concerning the annual comment letter customarily addressed to a company by its outside auditors, reviewing deficiencies in the company’s system of internal controls. The key question asked—but never answered—about the internal controls provision at the congressional hearings was whether the letter would itself be proof that a company’s controls were inadequate.

Obviously, if such a letter disclosed a serious lack of internal controls, and management took no action (or clearly inadequate action) in response, it could be expected that the SEC would attempt to use the letter in an enforcement action, to show both the objective fact of a lack of adequate controls and the subjective fact of management’s “willfulness” in violating the law after it had been warned.

Consequently, it would seem imperative that all communications from a company’s independent accountants purporting to cover its system of internal accounting controls (or the accuracy, fairness, or adequacy of its books, records, and accounts) be reviewed promptly by the company’s top executive management, by counsel, by the internal auditors, and by the audit committee of the board.

Also, all of such persons should review management’s written response to the auditors’ comments and should monitor compliance with corrective measures. If it is decided that a change proposed by the auditors should not be effected, a record should be prepared, justifying the inaction (presumably on a cost/benefit basis).

Prohibited Foreign Activity

The sections of the act specifically dealing with “foreign corrupt practices” are quite limited in scope, but it is important that businessmen understand them because violation can result in a company being fined up to $1 million.

The activity prohibited by the act has five separate facets or parts: (1) the use of an instrumentality of interstate commerce (such as the telephone or the mails) in furtherance of, (2) a payment, or even an offer to pay, “anything of value,” directly or indirectly, (3) to any foreign official with discretionary authority or to any foreign politcal party or foreign political candidate, (4) if the purpose of the payment is the “corrupt” one of getting the recipient to act (or to refrain from acting), (5) in such a way as to assist the company in obtaining or retaining business for or with or directing business to any person.

Unlike the sections of the act dealing with record-keeping and internal controls, the prohibitory sections apply not only to companies registered with SEC but also to all “domestic concerns” not subject to SEC jurisdiction.

“Facilitating” payments: Congress clearly did not want to forbid small payments—frequently called “grease” or “facilitating” payments—to minor foreign officials to get them to perform customary services that they might refuse to do in the absence of such payments. However, Congress did not provide any set minimum figure below which payments were not prohibited.

In fact, the chairman of the House subcommittce handling the legislation stated, “I can conceive of situations which involve $100 that would be clearly corrupt, whereas a situation which may involve as much as $500 may not be.”

Moreover, Congress did not define grease payments in terms of their purpose. Rather, it defined them in terms of their recipients, by narrowly drawing the definiton of “foreign officials” who are prohibited from receiving payments. The statute provides that the term foreign official does not include any government employee whose duties are “essentally ministerial or clerical.” A peculiar result of the statutory language is that there is no prohibition against paying substantial sums to minor officials, so long as their duties are ministerial or clerical.

Of course, the legislative history of the act does not indicate that it was expected that grease payments would amount to an appreciable sum. Thus it seems likely that the greater the amount of the grease payment, the greater the chance that the enforcement authorities would believe it was intended to influence official action improperly.

Corrupt purpose of payment: Assuming that the recipient of a payment or an offer of payment falls within one of the three prohibited categories (foreign officials, foreign politcal candidates, and foreign political parties), the “purpose” of the payment must be considered. In order for the payment to be illegal under the act, an instrument of interstate commerce must be used in the United States “corruptly” in furtherance of the payment “for purposes of” influencing the recipient’s official actions or getting him to use his influence with his government “in order to assist” the company in a specified way.

As explained in the legislative history of the act, “the word ‘corruptly’ is used in order to make clear that the offer, payment, promise, or gift must be intended to induce the recipient to misuse his official position in order to wrongfully direct business to the payor or his client, or to obtain preferential legislation or regulation. The word ‘corruptly’ connotes an evil motive or purpose. It does not require that the act be fully consummated, or succeed in producing the desired outcome.”

Moreover, there is no requirement that the offer or payment violate the law of the host country in order for it to be “corrupt.”

Various examples were given, during the legislative hearings on the draft legislation, of activities that Congress wished to outlaw. One was paying a foreign official not to apply his country’s laws and regulations. Another was paying a foreign official to obtain a contract. Similarly barred would be providing extensive entertainment and high-priced gifts (such as a fur coat) to an official who had influence with a government purchasing agent.

However, Congress apparently did not want to preclude sending a bottle of champagne or conducting a party for “a rather reluctant official at some level who will not pass on…applications and bids to governmental officials.”

An attempt was made by the House subcommittee’s chairman to draw a distinction between prohibited bribes and permitted payments to foreign officials to facilitate a transaction:

“I think what we are really trying to get at is the question of what constitutes a mere greasing operation, a mere facilitation of the normal processes of the other government, and what constitutes a pressure or a bribe to influence a decision corruptly.”

As noted, minor foreign functionaries were excluded from the act’s definition of foreign officials precisely because grease payments to them would otherwise have been prohibited. By his line of reasoning, the congressman apparently provided a loophole allowing grease payments to be made to true foreign officials also. That is, because a facilitating payment to a foreign official is intended merely to move a matter toward an eventual act or decision, it does not have the forbidden purpose of “inducing such foreign official to use his influence with a foreign government…to affect or influence any act or decision of such government.”

The legislative understanding concerning facilitating payments probably offers a company the greatest protecton in the area of business entertainment, where reasonable hospitality and even small gifts would not be questioned if customary in a particular country to move matters along. Naturally, the higher the recipient’s position and/or the more lavish the hospitality, the more likely it would be that the situation would attract attention and that the U.S. enforcement officials would believe that something more than mere facilitation was involved.

While a company would be successful in defending against a charge that it made an illegal bribe if the government could not prove a corrupt purpose for the payment, the company still would be guilty of violating the act unless it accurately accounted for the payment. The use of the record-keeping provision of the act in this manner as a backstop to the antibribery provisions was suggested by SEC Chairman Harold M. Williams during the congressional hearings.

Defense of extortion: One potential problem in complying with the act, which was discussed in the congressional hearings, is that of an extortionate demand for payments. The Senate committee attempted to resolve the problem by stating:

“The defense that the payment was demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract would not suffice since at some point the U.S. company would make a conscious decision whether or not to pay a bribe. That the payment may have been first proposed by the recipient rather than the U.S. company does not alter the corrupt purpose on the part of the person paying the bribe. On the other hand, true extortion situations would not be covered by this provision since a payment to an official to keep an oil rig from being dynamited should not be held to be made with the requisite corrupt purposes.”

The foregoing example of a threat to dynamite an oil rig and another example given by the Senate committee of a threat to put a corporation’s warehouses “to the torch” both involve physical violence against existing facilities or personnel.

While the committee’s statements provide guidance for a company facing a terroristic demand by a foreign official, such a threat would be relatively unlikely. No guidance is provided for the reasonably foreseeable threats of unfairly favoring a competitor, or of enacting unfavorable legislation, or of expropriating the company’s property through official government processes.

There was some testimony at the congressional hearings, by persons with diplomatic service, that it is the obligation of the U.S. government to support American businesses abroad if they are threatened by extortion. A company subject to extortion by a foreign official should at least consider discussing the matter with the local U.S. embassy.

This approach would serve two purposes. First, it might result in a diplomatic protest, which would remove the threat. Second, if a payment was deemed necessary in light of irremediable corruption in the foreign government, it would help the company to document the bona fide nature of the threat, and thus avoid later prosecution.

Suspect payments: An even more significant problem for companies attempting to obey the act stems from the fact that it prohibits political bribery overseas indirectly as well as directly. It does this by making it illegal to use an instrumentality of interstate commerce corruptly in furtherance of an offer, payment, and so forth to any person while “knowing or having reason to know” that all or any portion of such money will be offered or given to any prohibited recipient.

Presumably, in many cases it will not be clear that the payor actually knew that the money was to be passed on. Thus the prosecution will turn on the issue of whether the payor had reason to know that fact. There is no passage in a congressional report, or even in the hearings, explaining just what Congress intended by the phrase “having reason to know.”

However, businessmen should keep in mind the pronouncement of former SEC Chairman Hills, “You do not have the right to close your eyes when you drop off a large payment.”

It is clear that companies act at their peril if they attempt to evade the law by making payments to third parties under circumstances which suggest that the monies are to be passed on to prohibited recipients. Such circumstances would obviously include the making of payments to an “agent” who did not perform any apparent service, or whose payment was grossly disproportionate to the value of any services which he could render legitimately.

Thus, if the direct recipient of a substantial payment was a government employee who actually or purportedly was not a foreign official because his duties were primarily ministerial or clerical, it could be inferred from the size of the payment that he did in fact have significant discretionary authority or that he was expected to pass the payment to an official who did.

Subsidiary actions: Another cause for concern by management is the act’s lack of clarity about whether its prohibitions apply equally to foreign subsidiares of U.S. companies. By their terms, neither the prohibitions applicable to companies registered with the SEC, nor those applicable to domestic concerns (which are defined to include natural persons), purport to cover foreign subsidiaries of U.S. companies. But great caution is required in analyzing certain factual situations.

From the law’s legislative history, the following conclusions can be drawn about the applicability of the law to acts committed by foreign subsidiaries.

First, if the U.S. parent company deliberately uses the foreign subsidiary as its agent or intermediary in bribing a foreign official, it would clearly be committing a crime. Such a “use” of a foreign subsidiary probably would be found:

• If the transaction had been for the benefit of the parent company rather than the subsidiary—for example, if a small, foreign sales subsidiary paid a large bribe to secure an order for the parent company to supply aircraft to the foreign government.

• If the funds for the payment could be traced to the parent (or to another subsidiary of the parent).

• If the persons involved in making, or possibly even approving, the payment were officers or directors of the parent company—who might be assumed to be acting for the parent—rather than persons directly employed by the subsidiary.

Second, if the foreign bribe is (a) solely the action of local management of the foreign subsidiary, (b) intended to benefit only the subsidiary, (c) made without the involvement of the U.S. parent, and (d) made without the knowledge of the U.S. parent, the latter company has not violated the bribery prohibition.

Third, if the foreign bribe is (a) solely the action of local management of the foreign subsidiary, (b) intended to benefit only the subsidiary, and (c) made without the involvement of the U.S. parent, but (d) made with the parent’s knowledge (and hence tacit approval), it is doubtful that the parent is guilty of violating the bribery prohibition, because of the lack of use of an instrumentality of interstate commerce “corruptly in furtherance of” the bribe.

But, as noted earlier, in such a case the parent might be prosecuted for allowing the payment to be made, unless the payment was disclosed by the parent as a matter reflecting on the integrity of its own management.

Particularly because a company could be charged with having violated the act by reason of activities of a foreign subsidiary, management may be interested in whether it could defend by protesting that the acts were unauthorized by corporate authority.

Although the legislative history does not guide management in supervising employees, it can be assumed that a company would be found lacking in supervision (and thus liable for an employee’s actions) if (a) it did not adopt a “code of conduct” which gave reasonable guidance as to the law and the company’s policies concerning such sensitive matters as payments prohibited by the act, and (b) it did not adopt procedures to monitor compliance with such code.

Enforcement & Penalties

Although the act has been in effect for only a little more than a year, the SEC has already filed charges against companies for violating it. Not only the companies have been named, but also all executives alleged to have been involved, including the chief executive officer of each company.

An executive who willfully violates any provision of the act can be imprisoned for up to five years and fined up to $10,000. As used in the statute, the term “willfully” does not mean what it seems to, and it offers no comfort to a defendant except the assurance that he will not be sent to jail for a merely negligent error of omission or commission.

For example, in order to convict him of a record-keeping violation, the government would only have to show that the records were not accurate because of some deliberate action or inaction on his part. The government would not have to prove that he intended to violate the law, or even that he knew about it. Moreover, it will be difficult for an executive to claim ignorance of the law in an attempt to mitigate his penalty, because the SEC has issued an accounting release specifically putting registered companies, accountants, and attorneys on notice of the provisions of the act.

Even if a manager who violates the act is not fined or imprisoned, he and his company are almost certain to draw an injunction by a federal court against further violations. Disobedience of the injunction can be punished as contempt of court, by a jail sentence, without any right on the part of the defendant to a trial by jury.

Foreseeing that there would always be a few managers who would risk violating the act if the potential rewards were great enough, Congress prescribed a special penalty for foreign bribery prohibited by the act: an unprecedented maximum fine of $1 million on the company involved. It seems reasonable to assume that the actual amount of the fine in a given case will depend primarily on two actors: the amount of profit earned by the company as a result of its illegal conduct, and the degree to which that conduct was participated in or condoned by top management.

The executives most vulnerable in the case of a record-keeping or internal controls deficiency will be the financial vice president, controller, treasurer, tax director, and internal auditor. Those officials, plus executives in the areas of foreign sales and operations, will be vulnerable in a foreign bribery case. In all such cases, the chief executive officer and chief operating officer can expect their own conduct and knowledge to be investigated.

Finally, based on past enforcement investigations in which the SEC has reviewed the performance of the board of directors, it is to be expected that the directors of a company—especially those serving on the audit committee—will bear a share of the blame and liability arising out of violations of the act by their company. Having pushed so hard for the general establishment of audit committees, the SEC will not be hesitant in seeing that they are active in reviewing management’s compliance with the record-keeping, internal controls, and antibribery provisions of the Foreign Corrupt Practices Act of 1977.

In the last analysis, management itself will be better protected by choosing for the audit committee those directors who will most independently and energetically perform their jobs as corporate watchdogs.

Why is FCPA criticized?

Which of the following would be a violation of the Foreign Corrupt Practices Act?

Which of the following is true about the Foreign Corrupt Practices Act?

Which of the following is a provision of the Foreign Corrupt Practices Act?