As global economies continue their recovery from the Great Recession, the business world is developing into more of an interrelated and interdependent global economy. The days of trying to survive on economic isolationism are no longer a viable option for most businesses. However, alongside the increases in cross-border business relationships and joint ventures comes a new business risk: exposure to new laws and regulations.
The main thrust of U.S. and international regulatory authorities is currently focused in the areas of anti-corruption and anti-bribery. In the U.S., the Foreign Corrupt Practices Act (FCPA) of 1977 is the main piece of legislation used to initiate corruption and bribery investigations of companies and businesses. In addition, the U.S. passed the Wall Street Reform and Consumer Protection Act (commonly referred to as the Dodd-Frank Act, or Dodd-Frank), another massive piece of legislation, which arms regulatory authorities in many areas including – the most used to date – whistleblower provisions. Another Dodd-Frank provision now on the radar is the conflict minerals provision. The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are the main enforcement agencies responsible for investigating and prosecuting suspected violators of Dodd-Frank.
In the United Kingdom, the UK Bribery Act (UKBA) was passed in July 2010. The main body for enforcement of UKBA is the Serious Fraud Office (SFO). In the last couple of years, many other large world economic powers have become more aggressive in implementing laws and regulations to combat corruption and bribery. Most recently, Brazil implemented the Clean Companies Act, effective January 1, 2014. In addition, other countries such as China, Russia and India and many European Union, Central and South American, and developing countries are implementing and enforcing new anti-corruption and anti-bribery laws and regulations.
There is no denying that all of these new laws and regulations, while intended to help fight global corruption, increase the risk of doing business in a global world. That’s because effective compliance is a daunting undertaking, and failure to comply is potentially very damaging. Many of the acts and regulations previously mentioned have a global reach. Companies and, in some cases, their executives can be held criminally liable for violations of these laws and regulations even if they occurred in a foreign country, in some cases without their knowledge. The SEC and DOJ are constantly looking for violators of the FCPA and targeting companies worldwide. The SFO is also reaching out globally and attaches to companies that may not be domiciled UK firms, but that are doing business with a UK-affiliated company. There are similar provisions in many of the other enforcing countries as well. Therefore, companies now have to assess their compliance risk exposure on a continual basis if they operate or do business globally.
Corruption and bribery generally involve two or more people entering into a secret agreement. The agreement can be to pay a financial inducement to a public official for securing favors in return. Under the FCPA it is referred to as “unlawful . . . payments to foreign government officials to assist in obtaining or retaining business. . . . This includes the willful use of the mail or any means or instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.”
Historically, the oil, gas and mining industries generally have faced more exposure to charges of foreign and domestic corruption and bribery, as many operations take place in high-risk foreign jurisdictions where, in order to secure mining or extraction rights, paying bribes to public officials or landowners has been a way to secure exclusivity and preferential treatment. Not surprisingly, this sector is the target of many corruption enforcement actions. However, according to a new global anti-corruption report by TRACE International, other industries such as retail, technology, pharmaceutical and entertainment are also the focus of such actions.
Along with the trend to clean up the global workplace, there is a lot of money to be made by regulators in enforcement of the regulations. As seen in a list of FCPA Enforcement Activity for fiscal 2013 and 2014 to date, from the SEC website at http://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml, in three months alone in 2014, the SEC was able to render fines totaling $492 million to settle matters from just two companies, as compared to $753 million for all of 2013.
The rest of the world is following suit, and their enforcement efforts are yielding large fines and in some cases jail time for corporate executives. A review of the UK SFO website at http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2013.aspx shows the current trends in enforcement and jail time meted out to violators by the UK SFO.
Recently, there have been many headlines about current enforcement actions by various countries. In China, GlaxoSmithKline is under investigation for allegedly using travel agents to bribe doctors, hospitals and government officials to sell more expensive drugs in the country. In Poland, the company is facing its second criminal investigation in less than a year over allegations that a number of its executives bribed doctors to promote certain drugs. This is just one example of the ripple effect of multinational enforcement of anti-corruption and anti-bribery regulations. In addition to actions against global organizations, enforcements are targeting executives, with chief compliance officers, CEOs and corporate agents in the crosshairs. One merely needs to create a Google Alert on “FCPA” or “Anti-Corruption” to see and be amazed with the number of daily hits concerning enforcement activity and prosecutions.
What is clear is that attention to global corruption and bribery continues to grow. As it does, government regulators will continue to evolve and implement rules and regulation in order to keep up with and combat the crimes while prosecuting violators. What does this mean for businesses? It’s clear that corrupt and fraudulent activity remains a significant issue for businesses worldwide, and, as a result, global regulators will keep up their enforcement and investigation actions. Therefore, businesses must strive to manage their risk and exposure by constantly reviewing and redesigning their systems and controls looking for weaknesses, with the ultimate goal of strengthening them to avoid noncompliance. In addition, organizations should develop and promote a culture of compliance that makes everyone a part of the global anti-corruption and anti-bribery team.
These types of efforts go a long way to minimizing organizational exposure and noncompliance risk. As ever-changing technological advances are used to manage businesses and provide anti-fraud and anti-corruption controls, organizations need to be aware that someone wanting to do harm will eventually attempt to circumvent the controls. This poses additional risk and threats to organizations subject to the growing global anti-corruption enforcement trend facing business. For now, all that can be done is for businesses to adapt to the current environment and be ready and flexible enough to adapt as the rules, regulations and risks change.
Hubert Klein is a Partner in the Litigation Services Group of EisnerAmper. With nearly 30 years of experience, Mr. Klein is frequently called upon as a technical resource in various litigation actions. He has consulted and provided services in matters including complex damages, business valuations, due diligence analysis, fraud investigations, matrimonial proceedings, lost profit calculations, shareholder disputes, insurance claims analysis, succession planning, and estate and gift planning. He is on the AICPA Forensic and Valuation Services Executive Committee and is also a Member of the Association of Certified Fraud Examiners. He is certified in Financial Forensics by the AICPA and is a Certified Fraud Examiner by the Association of Certified Fraud Examiners.