Legal Definitions - Foreign Corrupt Practices Act (FCPA)

The Foreign Corrupt Practices Act (FCPA) is a United States law that makes it illegal for U.S. citizens, companies, and certain foreign entities to bribe foreign government officials to obtain or retain business. It also requires companies whose stock is publicly traded in the U.S. to maintain accurate financial records and strong internal accounting controls to prevent and detect such bribery.

The FCPA has two main parts:

• Anti-Bribery Provisions: These provisions prohibit offering, promising, or giving "anything of value" to a foreign official, political party, or candidate with the intent to influence an official act, decision, or secure an improper advantage to obtain or keep business. This includes direct payments, as well as indirect payments made through third parties. The law applies broadly to actions taken by U.S. companies and individuals anywhere in the world, and even to foreign companies or individuals if their actions touch U.S. territory, such as by using U.S. banks or communication systems. There is a narrow exception for "facilitating payments" made to expedite routine governmental actions, like processing visas or obtaining permits, but not to influence the outcome of a decision.
• Accounting Provisions: These provisions apply to companies that have their securities listed on U.S. stock exchanges. They require these companies to keep accurate books and records that fairly reflect their transactions and to establish and maintain a system of internal accounting controls. The goal is to prevent companies from hiding illicit payments by mislabeling them in their financial statements and to ensure that assets are used only as authorized by management.

Violations of the FCPA can lead to severe penalties, including substantial fines for companies and individuals, as well as imprisonment for individuals.

Here are some examples illustrating how the FCPA applies:

• Example 1: Securing a Government Contract
  A U.S.-based engineering firm, "Global Builders Inc.," is bidding on a major infrastructure project in a developing country. To ensure they win the contract, a senior executive at Global Builders authorizes a payment of $500,000 to a shell company owned by the Minister of Public Works in that country. The payment is disguised as a "consulting fee" in Global Builders' internal records. This action directly violates the FCPA's anti-bribery provisions because a U.S. company executive offered something of value (the payment) to a foreign official to gain a business advantage. The mislabeling of the payment also violates the accounting provisions.

• Example 2: Payments Through a Third-Party Agent
  "Tech Solutions Corp.," a U.S. software company, hires a local sales agent in a Southeast Asian nation to help them secure a lucrative software license agreement with a government agency. The sales agent informs Tech Solutions' regional manager that a "special commission" will be needed to "grease the wheels" with key officials. Although the regional manager doesn't explicitly approve a bribe, they approve the inflated commission knowing or strongly suspecting that part of it will be used for illicit payments. This scenario illustrates a violation of the FCPA's anti-bribery provisions, as companies can be held liable for bribes paid by third parties acting on their behalf, especially if they had knowledge or deliberately ignored red flags.

• Example 3: Inaccurate Record-Keeping
  "PharmaGlobal Inc.," a U.S. pharmaceutical company publicly traded on the New York Stock Exchange, operates a subsidiary in a European country. To expedite the approval of a new drug, the subsidiary makes several small, unrecorded cash payments to low-level health ministry officials. These payments are not properly documented in PharmaGlobal's consolidated financial statements, and the company's internal controls fail to detect these unauthorized expenditures. Even if the intent to bribe is difficult to prove for each small payment, PharmaGlobal would be in violation of the FCPA's accounting provisions for failing to maintain accurate books and records and for not having adequate internal controls to prevent such unauthorized payments.