FOREIGN CORRUPT PRACTICES

ACT

52nd FAFP Batch, Mumbai

Prepared by: CA Pranay Punamiya
Membership No. 168440
March 19, 2016
 Introduction & Background
• Act legislated in 1977 in the United States of America

• First act in the world at that time to make accountable

the actions of business entities in foreign countries

• “Watergate Scandal” led to resignation of US President

Nixon in 1974

• Scandal highlighted illegal political contributions made by US

companies to domestic and foreign officials

• Gross financial misstatements of these political contributions in the

books and records of the companies

• The mounting pressure on the legislators to take steps to dissuade such

actions in the future led to the enactment of the FCPA.
 Role of Securities & Exchange Commission (SEC)
• SEC submitted a report titled “Questionable & Illegal Corporate
payments & practices” to the Senate

• It was an extensive study of the disclosures made by 95 U.S.

companies alleged for corruption & bribery

• Said report then became the backbone of the legislation that was to come.

• Highlighted the tarnishing image of U.S. Companies in the global world.

• Key observations made in the report:

• Falsification of records & books was known to corporate employees & often to top
management, but is hidden from outside directors & auditors.

• Revenues (Sales) secured through such corrupt practices ranges from 20 to over
100 times the amount of bribes paid

• Atleast 48% of the companies had atleast one member of the corporate
management who had knowledge of, approved of or participated in such
payments.
 Bird’s Eye View of the FCPA
FCPA

Books of Prohibited Exception

Accounts & Foreign Penalti
Internal &
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Trade
Practices Defenses es

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• This is a broad view of the act.

• Mainly deals with two issues:
• Maintaining proper books and records & internal controls
• Prohibiting certain trade practices in foreign countries.
• Further, there is one Exception and two Affirmative defenses. These are trade
practices which are legal and not prohibited.
• This act applies to three categories of entities: Issuers, Domestic Concern & Any
other person.
 Key Provisions of the FCPA (1)
• The act applies to:
• Issuers (Companies that are listed in U.S.)
• Other Domestic entities of the U.S.
• Any other person (irrespective of nationality) if
committing such acts in the U.S. territory

• Analysis:
• Acts of foreign companies whose securities or ADR’s are listed in U.S.
(Infosys, ICICI, HDFC, Wipro, Tata Motors) are liable and their actions all
over the world have to be compliant with the act
• Practices of foreign subsidiaries of U.S. companies in such foreign
countries also have to be compliant with the act (Coca Cole, Cisco,
Citigroup, Pfizer, Microsoft)
• In M&A, if the acquired company was liable to comply with the act, then
the acquiring company will be liable for the past actions of the former.
• If any person of a company commits a prohibited practice while in the
U.S. territory then such person along with its company/ organization will
also be prosecuted and penalised.
Continued…
 Key Provisions of the FCPA (2)
• Books of Accounts & Internal Controls:
• Make proper books, records & Accounts with
reasonable accuracy to fairly reflect the transaction
• Devise & maintain a system of internal control to
provide assurance that:
• Transactions are executed in accordance
with management’s general or specific authorization
• Financial statements are prepared in conformity with GAAP

• Analysis:
• All bribery and corrupt payments are either omitted or concealed in the
financial statements.
• This provision ensures that such misstatements are also prohibited.
• It also makes the management liable by mentioning that transactions
should concur with the management’s authorization.
• It makes difficult for the management to deny the knowledge or approval
of the actions of its employees.
Continued…
 Key Provisions of the FCPA (3)
• Prohibited Foreign Trade Practices:
The act of offering, paying or promising to pay any
money, gift or anything of value to any:
• Foreign official
• Foreign political party or official
• Other person knowing that such money will be paid to any of the above
for the purposes of:
• Influencing any act or decision
• Do or omit any act in violation of the lawful duty
• Securing an improper advantage
• Influence the foreign government for any favorable act or decision of such
foreign government

• Analysis:
• Foreign officials include officials of Public International Organization (WTO,
IMF) and government companies (ONGC, BSNL)
• Payment made to consultants for set up or obtaining businesses in a country
knowingly that such payments will be used for bribery is also prohibited

Continued…
 Key Provisions of the FCPA (4)
• Exception & Affirmative Defenses:
• Payment made for Routine Government
Action (Exception)
• Such payment to officials is legal in that country
(Defense)
• Reasonable payments for demonstration & promotion of products (Defense)

Routine Government Actions are acts of:

• Obtaining permits or licenses
• Processing government papers such as visas
• Providing police protection, mail delivery, inspection of goods
• Providing services like phone, power, water, transport
• Similar nature

• Analysis:
• The acts that give an improper advantage to the company are prohibited and not
the payments for routine government actions
• Obtain or retain businesses from government or make changes in law that lead
to such discriminatory advantages are the focus of the act
 Penalties
Violation Natural Person Entity
(Juridical Person
Prohibited Foreign Fine upto $100,000 Fine upto $2,000,000 (2
Trade Practices Or jail upto 5 years million)
Or both
Willful Violation; Fine upto $5,000,000 Fine upto $25,000,000
False & Misleading (5 million) (25 million)
Statement Or jail upto 20 years
Or both

Analysis:
• False & misleading statements includes Financial
Statement frauds and lack of internal controls that lead to
such misleading statements
• Also misleading statements made to the outside auditors
or government officials is included.
• The penalty is for EACH act of violation. Hence, the actual amount of
penalty in a case is always much higher than these amounts.
 Select Cases of FCPA Violations
Company Country & Year Violations Penalty Amount

Oracle India (2012) Subsidiary-Unauthorized payments to $2 million

phony vendors

Diageo India, Thailand, South Subsidiary-Payments to seek favorable $16 million

Korea (2011) sales and tax benefits to officials ($2.7mn)

Qualcomm China (2016) Parent Co.-Hiring relatives of Chinese govt. $7.5 million
officials & gifts to officials of govt. owned
telecom co.

Avon Chine (2014) Gifts to govt. officials to secure business of $135 million
Products $8 million

Goodyear Kenya, Angola (2015) Subsidiary-Bribery payments of $3.2 $16 million

Tire& Rubber million to govt. officials. Falsely recorded
as business expenses

Hitachi South Africa (2015) Payment to political party to secure $19 million
contracts. Said payments shown as
dividends & consultancy fees

Hewlett Several Countries (2014) Improper payments to government officials $108 million
Packard to obtain or retain lucrative public
contracts
 Role & Scope of Forensic Accountant
• Qualities essential to a FCPA audit that a Forensic accountant possesses:
• Eye for small details
• Inquisitiveness
• Skepticism
• Blood hound attitude
• Knowledge of FCPA

• Scope of FCPA in India:

• Mergers and acquisitions due diligence
• FCPA audit of U.S. subsidiary companies (Coca Cola)
• FCPA audit of Indian companies listed in U.S. (Infosys)
• FCPA audit of subsidiaries of U.S. listed companies (Accenture)
• List will expand with increased investment opportunities in India
• India still ranks 76th on world corruption index

• Conclusion
FCPA is a very robust act which needs a thorough study and understanding. The
act affects a growing number of business setup in India. In order to avoid the high penal
costs it is better to be compliant with the act. FCPA is surely a very good area for practice
and scope but which shall require an intense study of a whole new subject.
THANK YOU!