Doing Business Abroad: Illegal Payoffs Can Take a Toll

Posted on Friday, June 29, 2018

Bribery of government officials is widely viewed as a major problem that, left unchecked, can draw in large and small companies as they compete to win foreign jobs or get approval to enter a new market.

The Legal Elements of Bribery

Foreign Corrupt Practices Act prohibits bribing foreign government officials to obtain or retain business. According to the Justice Department, violations of the law's antibribery provisions involve five elements:

1. Who -- The provisions potentially apply to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. The law also potentially applies to those who order, authorize or help someone violate or conspire to violate the law.

2. Corrupt intent -- The person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce a person to misuse an official position. The law does not, however, require that a corrupt act succeed in its purpose.

3. Payment -- The law bans paying, offering, promising or authorizing to pay money or anything of value.

4. Recipient -- The prohibition covers only corrupt payments to a foreign official, a foreign political party or party official or any candidate for foreign political office, regardless of rank or position.

5. Business Purpose Test -- The law bans payments made to obtain or retain business, or direct business to any person.

The Justice Department has a procedure under which you can get an opinion from the Office of the Attorney General on specific questions related to the law. For example, you could ask whether foreign officials include members of a royal family or executives of a state-owned business.

The Law in Action

The bribery case of Robert Richard King, a large investor in Owl Securities and Investments, Ltd., illustrates how the elements of the law apply.

King was convicted in a bribery case of violating the Foreign Corrupt Practices Act. He was sentenced to thirty months in prison and fined $60,000. King appealed and lost.

The case involved an FBI investigation of a planned $1 million payment to senior Costa Rican officials and political parties to obtain land concessions needed for a port development project.

The original indictment noted that King was a "stockholder acting on behalf" of the company.

The appeals court stated that tape recordings produced as evidence in the trial showed King's "knowing participation in, approval of and subsequent actions in furtherance of the conspiracy to offer the bribe." (U.S. v. Robert Richard King, U.S. Court of Appeals, 8th Circuit, 03-1112)

The cost to a company of paying bribes to win business goes far beyond the payment itself. The fallout from such payments include:

Pushing the cost of doing business above market rates.
Damaging a company's reputation.
Adding uncertainty about a company's ability to continue operating in the market. If corruption is discovered, a business could be barred from bidding for future government contracts.
Exposing a company to extortion by the person who received the bribe, as well as others who may be aware of the corruption.

Bribery also brings the risk of criminal and civil charges, as well as severe penalties. For instance, under the Foreign Corrupt Practices Act, businesses can be fined as much as $2 million. Officers, directors, stockholders and employees can be fined as much as $100,000 and sentenced to up to five years in prison. Employers cannot pay fines for individuals.

In a civil case, companies and individuals acting for the business can be fined up to $10,000. The court can also impose an additional fine as high as $500,000, depending on the circumstances of the case.

The extreme costs of bribery are illustrated by one corruption case involving the German engineering conglomerate Siemens. The company admitted that it had made about $1.9 billion in questionable payments around the globe to win business. Siemens ultimately agreed in 2008 to pay an estimated $1.6 billion fine to settle bribery allegations made by several countries, including the United States.

Another example: The Securities and Exchange Commission filed charges in 2009, alleging that during a three-year period, certain subsidiaries from AGCO Corporation made $5.9 million in kickback payments in connection with their agricultural equipment sales to Iraq. The kickbacks were characterized as "after sales service fees," according to the SEC, "but no bona fide services were performed."

AGCO's equipment sales were made under the United Nations Oil for Food Program, which required the Iraqi government to purchase goods through a UN escrow account. However, the kickbacks from AGCO's subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at Jordanian banks.

Once corruption takes root in a company, it is difficult to eradicate, In fact, Siemens replaced about half of its top 100 executives after determining it was the only way to bring about change and banish corruption at the organization.

The best move is to ensure it doesn't start. Doing business overseas can be profitable without corruption. To help minimize the potential for illegal business practices at your enterprise, consider the following:

Consult with your attorneys and accountants before entering a new market. They can provide your business with information on the types of corruption that are most prevalent in the market and give you advice on how to avoid them.

Contact your attorney for help understanding the Foreign Corrupt Practices Act. The law applies to both public and private companies and is the primary tool the federal government uses to fight corruption by U.S. businesses. See the right-hand box for the basics of the law and an example of how the statute was applied in one bribery case.

Write a clear and concise code of conduct for your business that includes anti-corruption provisions. Distribute the policy to every employee, supplier and contractor. Have them acknowledge that they have read and understood it. The best practice is to require them to take an annual, comprehensive test on the policy.

Focus on education. All training should include anti-corruption education. For example, when training managers who oversee foreign sales, hold extensive discussions on how to avoid corruption and to recognize its warning signs. Management should "trust but verify" if the company wins a seemingly unattainable contract in a foreign market.

Invest in oversight. Enlisting your attorneys and accountants to fight corruption sends a clear signal to employees, regulators and others that your business has a zero-tolerance policy on corruption. Oversight can be part of a regular audit and can include checking e-mails (without violating employees' rights) and interviewing personnel, suppliers and contractors about their compliance with your company's code of conduct. Auditors may also examine cash payments and look for such inconsistencies such as a vendor receiving $10,000 when past payments ranged between $1,000 and $3,000.

In the long term, the benefits of paying bribes can pale in comparison to the financial, legal and reputation costs a business can incur once corruption is exposed. With the right actions and proper guidance, your business can avoid these risks and still make a profit.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.