What is the Foreign Corrupt Practices Act?
Foreign Corrupt Practices Act (FCPA) is a law made in the United States which provides provisions to stop the business persons from making payments in the form of bribes to the officials of a foreign government with the intent to secure business through such dealing.
FCPA was enacted in 1977 and further requires the entities to maintain sufficient books of accounts along with an assurance of internal controls. Such controls will provide reasonable assurance about the execution of transactions in a lawful manner, assessment of assets and accounting done through authorisation from the management.
Purpose
- The Act does not want the publicly traded companiesPublicly Traded CompaniesPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market.read more, to acquire or retain any business through the payment of illegal finance (i.e. bribes). It intends such corporate players to gain the contracts only on their competitive spirit and merit.
- Bribing disrupts the fair economic environment in the country. Justified chance of each competitive person, is unserved.
- The act was made applicable to all persons in the US along with those issuers of securities who belong to foreign countries. Through a gap of one year from its enactment in 1977, the applicability of the provisions of the act was extended to cover foreign firms as well as people who make such payments within the US.
- The act mandates the companies to maintain transparent records.
Requirements of Foreign Corrupt Practices Act
- The meaning of the term “foreign officials” is wide in the Foreign Corrupt Practices Act. Normally any act is made applicable to residents of the country. However, FCPA applies to foreign firms as well. The act considers the minister of finance as a foreign official. It also considers the professional doctors working in a government-owned hospital, as a foreign official. The act does not stop it. It further includes the employees of any international organisation to be considered in the wide definition of foreign officials.
- The Act does not consider materialityMaterialityIn any financial accounting statements, there are some transactions that are too small to be recognized and such transactions might not have any impact on the analysis of the financial statement by an external observer; removal of such irrelevant information to keep the financial statement crisp and consolidated is called as the concept of materiality.read more. Thus, the quantum of the amount is not important but the intent of bribery is considered important for the applicability of the act.
- The Act requires the listed corporate entities to maintain transparent books of accounts. The Act further mandates the said corporate entities to get internal auditInternal AuditInternal audit refers to the inspection conducted to assess and enhance the company's risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit.read more conducted on a periodical basis. Thus, many companies are ensuring due diligence compliance at their end to provide assurance of fair dealings with foreign officials. Many companies have an FCPA Compliance Program in place, which summaries all the dealings.
- The Act makes a clear distinction as to what is called “bribery” and “facilitation”. Facilitation is also known as “grease payment”. Grease payments are made to let the official expedite the compliance of his duties.
- The Act also prohibits reimbursements in relation to the promotion of a product.
- In case of acquisition of a foreign company by a US Company, the said US Company is liable to any offence conducted by the foreign company before such acquisitionAcquisitionAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. read more.
Provisions of the Foreign Corrupt Practices Act
FCPA has two main provisions –
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#1 – Anti-bribery
This provision provides a ban/prohibition on payment of bribes to foreign officials in the form of money or any monetary value or anything of value, with the intent of acquiring a business or retaining an existing business.
#2 – Provision Related to Accounting & Controls
This provision requires the corporate players to maintain appropriate & adequate “books and records”. These words have been defined under the act with sufficient care. This provision further requires the corporate players to maintain internal controls over the financial records.
Violating the Foreign Corrupt Practices Act
Violation of the Foreign Corrupt Practices Act has serious repercussions on the persons involved in the payment of bribes or any other provision of the act.
- Individuals involved in the case may be charged with imprisonment up to 5 years in respect of each violation in the nature of anti-bribery provisions. Such individuals may be imprisoned for up to 20 years in case the violation is proven to be a willful act. Further, the said individual is fined up to $ 1 lac for the involvement in the violation.
- Companies are corporate persons with a corporate veil. Companies are artificial persons & cannot be imprisoned. Hence, to make the punishment in line with punishments imposed on the individuals, the companies are fined up to $ 2 Million for each violation.
- Every act may specify the increasing quantum of penalties to be imposed. The FCPA has a provision which states that the said fine may be increased up to $25 million in case of corporate persons and up to $5 million in case of individuals involved in the case. Such penalties may be small in quantum for a corporate entity flourished with cash reserves. For such a situation, the Alternative Fines Act comes into play which doubles the penalty amount in case of criminal fines. However, proving the act of bribery as a criminal act is the task of lawyers of Government.
- The FCPA is so strict that it restricts the companies to pay fines for its officers, employees, directors, agent, etc. Thus, the act requires them to pay from their pocket. Further, the individuals, as well as corporations, have proven to be guilty under this act may be debarred from certain benefits available normally under any government scheme. Such benefits may be obtaining export licenses, participation in federal programs, operating under the securities law board, etc.
- Violation under FCPA may be considered as civil or criminal action under the RICO Act (i.e. Racketeer Influenced and Corrupt Organisations Act).
Applicability
Applicability confirms the extent of the act to different persons. The Foreign Corrupt Practices Act applies to as follows:
- In respect of anti-bribery provisions, the Act applies to:
- Individuals i.e. Citizens & Residents of the United States of America.
- Companies which are incorporated in the US.
- Companies which have a principal place of business in the US.
- Companies which are listed in the US Stock Exchange.
- A foreign person who may cause commitment of such activities in the nature of the corrupt payment.
- In respect of accounting provisionsAccounting ProvisionsThe provision in accounting refers to an amount or obligation set aside by the business for present and future commitments. Provisions are estimates of future related probable losses from past and present events calculated by following predefined regulatory guidelines by banks and financial institutions.read more, the Act applies only to the corporate entities which are listed on the US stock exchange.
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