7 Reasons to Sweat FCPA Enforcement - yes, even your company

Ed Marsh | Aug 11, 2014

It's not just global behemoths any more

export_sales_and_fcpa_enforcement

If you've heard of the FCPA (Foreign Corrupt Practices Act), and perhaps researched it a bit, you're in a minority of US business leaders - even among those that export. You're probably generally aware of the high profile actions against Siemens and the investigation of Wal-Mart.  But you probably haven't dug much deeper.

As experts have been predicting, though, greater SEC activity (FCPA was traditionally enforced by the DoJ but is now aggressively leveraged by securities regulators as well) has somewhat changed the landscape.

Recently a $2,000,000 fine was levied on Smith & Wesson for a transaction in which a local rep provided just over $10,000 in free product and cash to secure a deal in Pakistan on which S&W earned just over $100,000. 

One could argue that there is political motivation (around firearms manufacturing) which added zeal to this prosecution, and privately held companies could take solace in the fact that they wouldn't face compound scrutiny from the SEC in addition to the DoJ.  But to do so, even for privately held SMBs, would be to 'whistle past the graveyard.'

Unrecognized exposure

Because most businesses are generally unfamiliar with the FCPA, perhaps assuming it's not pertinent to their activities because naturally they don't condone corruption, there are areas of unmitigated risk which represent both short and long-term exposure...for every business with international sales.

  1. Personal criminal liability of officers and directors - You're on the hook.  And what makes it worse is that typically D&O insurance policies exclude FCPA defense.  At typical white collar defense rates, even an investigation is likely to cost you $50K at a minimum, and defense against an enforcement action far more.
  2. Liability for actions of others - It's not just what you and your employees do.  So keeping your staff on a short leash and conveying a clear intracompany philosophy of zero tolerance for corruption isn't adequate.  If your distributor or rep undertakes corrupt practices on your behalf, even without your knowledge or agreement, and even if entirely routine and common in their market, you have liability.
  3. Customs clearance - It's not just the Boeings of the world selling to foreign governments that need to worry.  In fact a HUGE percentage (some estimate 80%) of enforcement actions originate in customs shenanigans.  If you sell internationally, your products clear customs - and in many places customs inspectors are underpaid and there's almost a formally codified system of capricious enforcement and bribes.
  4. Distressing your company valuation - Seems like a long way off that you might entertain sale of your business.  But your actions today, in your effort to grow global sales, could impinge on your planned liquidity event.  The US Chamber has long advocated for some clarification of inherited liability.  Ben DiPietro (@BenDiPietro1) of WSJ RiskJournal recently reported on comments by Mayer Brown attorney Laurence Urgenson: 
    "The first thing his firm does when it looks at a potential deal is to ask whether the acquiring company is buying itself an FCPA problem. Even if there is no FCPA issue, there may be practices at the target company that raise red flags and will require fixing."
    And further, your compliance may become a gateway component of due diligence among potential private equity investors/acquirers
  5. Advisors bear risk as well - If you serve on another company's board, or recruit folks to serve on yours, there is likely unrecognized FCPA exposure inherent in that role as well - even for PE managers sitting on the boards of portfolio companies.
    "Another area of concern is the increasing focus on private equity companies and their deals, particularly by U.S. regulators, Mr. Urgenson said. While private equity firms have generally flown under the radar with respect to FCPA, and may not even be subject to rules covering the keeping of books and records and the implementation of internal controls, there remain ways under which PE firms can be subject to FCPA enforcement, he said. 

    A firm looking to invest in a company with problems needs to uncover their full extent. FCPA exposure may affect the target company’s financial statements, which could include profits from illicit activities, Mr. Urgenson said. There also is risk for individual investors who are asked to serve on boards, and could expose themselves to FCPA risk by doing so, he said. 

    'The risk from FCPA to individuals turns on their knowledge and participation, and is not driven by their percentage of ownership.,” Mr. Urgenson said. “If you are going to get involved in a business and learn things and participate in decisions, you could obtain liability. Whereas, if you stand on the sides as a passive investor you won’t.'"
  6. Reasonable compliance defense - You won't get much defense traction from having periodically mentioned the importance of compliance to employees.  In fact there is no formally recognized compliance defense (something that many, including@FCPAProfessor Mike Koehler, strongly support.)  But in practice certain reasonable and prudent steps applied consistently across employees, contractors and partners, can substantially mitigate a company's risk.  And they're often not consistently applied in most companies.
  7. You're a revenue opportunity - Whether local police have ticket quotas or not, there's no doubt that financially strapped communities value permitting fees and traffic citation fines as revenue.  And the US success in collecting FCPA enforcement penalties has been so noteworthy that some predict other countries will emulate the program not, cynically, to impact corruption as much as to raise revenue.

Stay domestic?

So what's the upshot?  Simply cower within the US borders and eschew the dynamic opportunities of global markets?  That's one approach.  But remember you face similar expansive risk with employment law domestically, for instance, and you've figured out how to mitigate that.

Alternatively you could endeavor to really understand the landscape of FCPA enforcement and develop and implement consistently applied best practices across your global business activities.  Doing so will substantially reduce the potential for a violation, and in the event of a rogue employee or rep violating the FCPA you'll have a framework for handling the violation and a strong case to argue against an enforcement action.

But first you have to understand what you face.  Do you?

Wondering what other poorly understood risks or missed opportunities might exist in your global business program?  Check out our free eBook...and consider the value of an experienced export consultant!

Click me

image - phoenix-bailbonds 

Evolutionary Marketing & New Markets Blog