The Foreign Corrupt Practices Act (FCPA) is a U.S. law that was enacted in 1977 in response to the Watergate scandal. It is designed to prevent U.S. companies and individuals from engaging in bribery of foreign officials in order to obtain or retain business. The FCPA has a broad scope of definitions, which has created a potential list of companies subject to the U.S. Securities and Exchange Commission (SEC), including subsidiaries, officers, directors, employees, and agents worldwide. Violating this law has serious consequences, and the SEC has increased its sanctions under FCPA compliance in recent years. In this blog, we will examine the history, purpose, important parts, and penalties associated with the FCPA, including the concept of disgorgement and how penalty amounts are calculated.
Scope of FCPA
The scope of FCPA is quite broad, and it applies to all companies that are either publicly traded in the US or do business within the US borders. FCPA defines a "domestic concern" as any US citizen or business entity, and a "foreign concern" as any non-US citizen or business entity. Thus, FCPA's reach is international, and any company with US operations, regardless of where the alleged bribery occurred, is subject to FCPA's jurisdiction.
The FCPA creates a potential list of companies subject to SEC, including subsidiaries, officers, directors, employees, and agents worldwide. These potential persons are prohibited from giving or receiving bribes, gifts, or "anything of value" to public officials. Anything of value can include cash, gifts, services, travel expenses, or any other benefit that could influence or reward the recipient.
The FCPA's broad definition of "anything of value" ensures that even seemingly innocent gifts or gratuities that could be construed as bribery are prohibited. FCPA applies not only to cash payments but also to indirect payments made through intermediaries, such as consultants, agents, or distributors, to avoid detection. The FCPA also covers bribes paid to foreign political parties, party officials, or candidates for political office.
FCPA's primary objective is to promote transparency and ethical business practices by preventing corruption and bribery in international business transactions. The law aims to prevent companies from using bribery as a means of gaining an unfair competitive advantage in foreign markets. In recent years, the SEC has been increasingly aggressive in its enforcement of FCPA, imposing significant fines and penalties on companies that violate the law.
History and Purpose of FCPA
The FCPA was enacted in 1977 in response to the revelations of widespread bribery and corruption by US companies in foreign countries. Specifically, the Watergate scandal of the early 1970s and subsequent investigations into corporate bribery practices led to the passage of the FCPA. The FCPA aims to prevent corruption and bribery of foreign officials and promote transparency in business transactions. Since its enactment, the SEC has been actively enforcing the FCPA, significantly increasing sanctions and penalties. Between 2004 and 2014, the SEC imposed over $7 billion in criminal sanctions on 116 companies for FCPA violations, highlighting the seriousness of noncompliance. The FCPA has also been amended in recent years to clarify its provisions further and increase enforcement efforts.
Important Parts and Penalties
Violating this law has serious consequences because the SEC may prosecute the individuals and companies involved. Also, there is one more compensation type which is called disgorgement. In this section, we will examine the concept of "disgorgement", which has an important place with the sanctions applied and demands the return of the profits taken from the corruption transaction. Disgorgement requires that profits from corrupt practices be returned to the US treasury. Disgorgement can be compared to the concepts of unjust enrichment and the return of illicit goods with their similarities. This concept was introduced in the Securities Exchange Act 1934 and was applied by the SEC with the aim of recovering unfair gains in irregularities. The SEC was first established in 2004 by ABB Ltd. requested the return of unfair profits based on FCPA law in the investigation of that company. According to FATF data, Siemens refunded 350 million dollars while Och-Ziff refunded 199 million dollars of their profit as a disgorgement.
Calculating Penalty Amount
Calculating the penalty amount for FCPA violations is a complex process that takes into account several factors. These factors include the company's previous criminal history, the nature and location of the abuses, the duration and impact of the abuse on investors, the detection method and the entity that reported it, the time taken to put effective control in place after the fraud has occurred, and whether the company has fully cooperated with regulatory authorities. These questions are used to determine the severity of the violation and the amount of the penalty that will be imposed on the company. In general, penalties for FCPA violations can be severe and can include significant fines, disgorgement of profits, and even criminal charges against individuals involved in the violation. It is therefore essential for companies to ensure that they have robust compliance programs in place to prevent FCPA violations and to respond quickly and appropriately if such violations occur.
