10 Common Misconceptions that Increase the Likelihood of FCPA Violations

Although The Foreign Corrupt Practices Act (FCPA) was passed in 1977, numerous companies still routinely violate the FCPA. Walmart, our country’s leading retailer, is currently being investigated for possible FCPA violations regarding its Mexico operations. According to a New York Times report, Walmart allegedly paid more than $24 million in Mexico by handing out envelopes of cash to mayors, city council members, urban planners and bureaucrats who issue permits in order to secure business.

You may recall back in 2008, Siemens AG resolved the largest ever FCPA violation case by paying $800 million as a result of bribing Argentinian government officials. On December 13, 2011, the U.S. Department of Justice indicted 8 former senior executives and agents of Siemens AG for bribing Argentinian government officials for a $1 billion dollar contract for the production of national identification cards. As we can see from these brief examples, FCPA violations can be extremely costly to an organization.

The government has decided to take a renewed interest in FCPA violations and it is key that organizations doing business abroad must be aware of some of these misconceptions of what the FCPA means.

What is the FCPA? The Foreign Corrupt Practices Act of 1977, was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Since 1977, the anti-bribery provisions of the FCPA have applied to all U.S. persons and certain foreign issuers of securities.

With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.

We have adapted the following list of FCPA misconceptions from research conducted by the accounting industry to assist you with your review of your internal business practices.

• “Based on our company profile, we don’t have any FCPA risks”.
• “We are a private company, so we don’t have to be concerned with the FCPA.”
•  “Our employees know our position on ethics because our policies spell it out.”
•  “As long as employees and agents have certified that they have not paid bribes, we have done enough.”
•  “These are challenging economic times. We need to make cutbacks in FCPA compliance, just as we have in all other areas of the business.”
•  “Our global whistleblower hotline is effective because no violations have been reported to date.”
•  “Since we don’t have a controlling interest in our overseas business partnership, we have no need or authority to extend our compliance program and policies.”
•  “We will determine how to address an FCPA violation once a violation is identified.”
•  “Every business unit and sales office undergoes the same FCPA compliance testing, regardless of the type of business and location.”
•  “Common practice in our industry is to pay for airfare and lodging for foreign officials to attend conferences or trade shows.”

As this list indicates, failure to pay attention to potential FCPA violations can be an extremely costly decision to any organization. In order to avoid these issues, appropriate FCPA preparedness is essential. In a recent poll of 1,220 financial services professionals conducted by a Big 4 accounting firms indicated that 31% of the respondents were unaware if their organization even performed due diligence on third-party business partners. Don’t let FCPA violations surprise your organization. Be proactive and plan for the future.

BE SURE TO LISTEN TO YOUR WHISTLEBLOWERS

According to recent survey by the accounting industry, nearly two-thirds of a sample including 1,400 executives anticipate a rise in various kinds of fraud in 2012. This is an alarming statistic. Research conducted by the Association of Certified Fraud Examiners (ACFE) reveals that most of today’s tips come from employees, therefore, it is extremely important to understand and support internal whistle-blowers. Not surprisingly, a 2008 biennial report by PricewaterhouseCoopers showed that tipsters uncovered 43% of the white-collar crimes committed at more than 5,400 companies worldwide. Network, a Norcoss, Georgia firm that monitors whistle-blower hotlines reports a significant increase in fraud-related calls.

Whistle-blowers are vital to your organization, therefore it is important to establish an environment where they feel supported and feel comfortable bringing forth potential issues. Due to the passage of the Dodd-Frank Act, corporate whistle-blowers are able to receive a financial bounty for recovering internal fraud. This concept of financial bounties is not new. Whistle-blowers were given status in a Civil War-era law that offered rewards to individuals who turned in a corrupt contractor. Although the 2002 passage of the Sarbanes Oxley Act provided whistleblower protection, the passage of the 2010 Dodd-Frank Act financially incentivized whistle-blowers’ actions.

Listening to those internal whistle-blowers can be a critical step for today’s organizations. Offering internal employee training on how to report fraud could be extremely beneficial. For example, teaching employees how to identify and report fraud and abuse can be critical. Research by the Ethics Resource Center states that if employee knew how to report wrongdoing, they would be more likely to report alleged misconduct.

Additionally, establishing a ‘tone-at-the-top’ is key, but paying attention to the ‘tone-at-the-middle’ is also critical. When you think about the organizational structure of most companies, middle management has to deliver the results and often has the ability to set a tone that can be slightly different from the tone-at-the-top. It is important to monitor a company’s internal tone at both the senior and mid-management levels.

THE FACE OF A FRAUDSTER

Research has shown that the following attributes are the common characteristics of the profile of a fraud taken from recent research:

• Age: Typically between 36 and 45
• Gender: Typically men; women more likely involved in the Americas and Asia in comparison to Europe and the Middle East.
• Function: Finance Function or Finance-related
• Tenure: 10 years or more with the company
• Collusion: Very common, but hard to prevent

Recent research from the accounting industry also indicated that 50% (up from 21% in 2007) of the cases reported in the study had a prior red flag that was not acted upon. This is an indication that companies are failing to read and act quickly on fraud warning signs.

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