Walmart, the FCPA, and America’s Ability to Compete
The following post by Dante Disparte and Daniel Wagner is cross-published with The Huffington Post in June 2012. Disparte is the CEO of Risk Cooperative and a member of ASP’s Business Council for American Security (BCAS).
Walmart, the FCPA, and America’s Ability to Compete
Walmart’s alleged violation of the Foreign Corrupt Practices Act (FCPA) in Mexico raises the profile of the controversial law to a new level. Some U.S. businesses have long questioned whether the FCPA is an appropriate impediment to doing business abroad in a world where acceptable and widely practiced behavior is different in many countries. Walmart has become the new poster child for the issue, yet many would argue it was simply doing what most companies in Mexico do on a routine basis, without being punished. The line between what constitutes a bribe and a “grease payment” depends on the country, business culture, and context. For the U.S. government to attempt to apply America’s definition of what constitutes acceptable business behavior – in America – in a one-size-fits-all approach to doing business abroad makes little sense in a world where no single standard effectively applies — to anything, and it runs counter to the government’s stated objective of making American business more globally competitive.
Complying with regulatory changes — at home and in a host country — can be a major challenge. Among the regulatory challenges, the FCPA is well known to U.S. businesses, and those that do business with them, as an inevitable stumbling block when engaging in cross-border trade and investment with American companies. The FCPA addresses transparency issues related to securities trading and the more commonly known anti-bribery provisions, which make it unlawful for a U.S. person — and certain foreign issuers of securities — to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person.
While the act has been successful in helping to curb corruption and bribery, it has also served to place many U.S. businesses at a distinct comparative disadvantage in the global marketplace: The FCPA can make it more difficult for U.S. companies and individuals to be competitive internationally. While anti-corruption legislation has either been adopted, or is in the process of being adopted, in a number of other countries, many countries do not have such requirements, and in some countries, bribes are even tax deductible. It is important for U.S. companies or persons doing business abroad to understand the FCPA.
Bribery vs. Grease Payment
The Act draws a distinction between bribery and facilitation or grease payments, which may be permissible under the FCPA, but may still violate local laws. This can be problematic because the line between what constitutes bribery versus a grease payment is often unclear.
The FCPA generally prohibits U.S. or non-U.S. persons from offering, giving, paying, or promising to pay money or anything of value to any foreign government official, foreign political party, or candidate funds for the purpose of influencing them, gaining improper advantage, or retaining or directing business. Anything of value can mean: gifts, product discounts, meals, entertainment, travel expenses, company shares, or benefits extended to family members of foreign officials. The act defines corruption as an illegal or wrongful motive or purpose, intent to wrongfully influence a recipient, or a violation of local or international law. You can be held responsible if you had knowledge of wrongdoing, either as actual knowledge, conscious disregard, or willful ignorance. While proving you did not know of wrongdoing is burdensome, it generally can be done. The real challenge is in defining what constitutes facilitation payments — those gray areas that are difficult to navigate.
Facilitation payments can include gratuities given to government officials to perform “routine” actions that do not involve the exercise of discretion, as well as reasonable expenditures related directly to the performance of a contract with a foreign agency or government, the promotion of products or services, business relationships with foreign officials, and third-party relationships (i.e., with consultants, agents, distributors, or other parties acting on your behalf). It may also include service relationships (e.g., conducting clinical trials or research services for your company), charitable donations, and marketing and promotional practices, so U.S. businesses must be cognizant of the need to comply with FCPA almost at every turn.
The penalty for violating the FCPA can include civil or criminal fines of up to $2 million (or two times the gross gain to the organization), forfeiture of assets, and imprisonment and fines for individuals. Collateral penalties may include disbarment from government contracting or loss of export privileges.
Avoiding a Violation
Many U.S. investigations tend to take an industry focus (such as with oil and gas, medical device or pharmaceuticals, and telecommunications). Going forward, other industries are likely to be in the cross-hairs, such as airlines and financial services. As Walmart’s allegations highlight, retail firms, consumer electronics, and other industries whose businesses may have historically fallen under the ‘corruption radar,’ are now prone to greater scrutiny.
There is increased cross-communication by governments about violations, and prosecution of individuals remains an enforcement priority. The expectations of governments when evaluating compliance programs have risen. All businesses are required to keep detailed records that accurately reflect transactions.
Internal accounting procedures should ensure that accounts and financial records are accurate for external reporting purposes. Books must be audited at reasonable intervals. Failure to comply with local law can be perceived as an indication of corrupt intent, however, compliance with local law does not by itself ensure compliance with the FCPA. Lawyers familiar with FCPA compliance — both at home and abroad — are your best source for guidance here.
Unless a business is actually requested to produce such records for an audit or investigation, they will ordinarily simply be reviewed by corporate management. Under the Dodd-Frank whistleblower provisions (passed in 2011), fewer independent compliance monitors are being appointed. As a result, companies must self-assess and self-report, which increases corporate incentives to beef up their compliance and reporting capabilities. Civil litigation related to FCPA has become more routine, as are shareholder lawsuits, wrongful termination lawsuits, and lawsuits brought by government customers, all of which implies the need for companies to routinely update and monitor compliance. The best way to ensure that you are compliant is to consult regularly with an accountant or lawyer experienced in this area.
Furthermore, firms making cross-border investments for the first time — or managing existing international operations — need to buttress their compliance by aligning their vision, mission and corporate value systems to doing business abroad. The tangible manifestation of aligning staff to good standards of practice in corporate governance includes the dissemination of employee handbooks, codes of conduct, and formation and enforcement of corruption, bribery and fraud policies. Simply saying ‘zero-tolerance’ in many markets where bribery is as pervasive as taxation ignores the coercive and often extortionate forces U.S. firms endure in operating abroad.
The U.S. government can and does use FCPA accounting provisions to charge companies with activities that are not specifically addressed by FCPA anti-bribery provisions, such as commercial bribery and bribery of foreign officials without a specific U.S. link. This raises the question: What exactly constitutes a “foreign” official when state-owned or -controlled companies are at issue, and just what establishes territorial jurisdiction in the U.S.? The answers to these questions may be different in each instance. Further complicating the matter, it is often impossible to distinguish the closest proximate cause of an act of bribery and whether it is triggered by threats of coercion, extortion or other unfair practices experienced by U.S. firms overseas.
As some countries adopt laws intended to reduce or eliminate corruption and bribery in cross-border transactions, some are doing so in a more common sense manner that recognizes there are shades of grey. For example, in 2010 the UK adopted a modified version of the FCPA with the Bribery Act, which does not take such an absolutist line on what defines acceptable versus unacceptable behavior, and distinguishes between active and passive activities. While the FCPA has served a useful purpose, it remains stuck in another era. In today’s dynamic and ever-changing international business landscape, U.S. businesses would really benefit from a less absolutist approach to the subject. But until and unless the FCPA is modified to take these new realities into consideration, U.S. businesses have little choice but to beef up their compliance and monitoring capabilities, while enhancing their awareness and enforcement of codes of conduct.
U.S. businesses operate in a world where most of the places where they may wish to operate have a different standard vis-à-vis acceptable norms of facilitation, bribery and corruption. This begs the questions: 1) should U.S. businesses be put in a situation where they must in essence break U.S. law in order to operate effectively, and 2) does the U.S. government in essence put U.S. businesses in an inherently uncompetitive and disadvantageous position by insisting that they must at times be forced to break U.S. law in order to be competitive and operate effectively? To those companies which have been forced to make a decision between breaking U.S. law and operating their businesses competitively in other countries, the answer is obvious. It should also be obvious that the tide is swimming in another direction, and as the world becomes an ever more competitive place, U.S. businesses have become even more out of sync with national norms, and pay the price both at home and abroad.
Dante Disparte is the founder and CEO of Risk Cooperative, a strategy, risk and capital management firm focusing on mid-market opportunities, market expansion and equity investments on a global scale.
Prior to forming Risk Cooperative, Mr. Disparte served as the Managing Director of Clements Worldwide, a leading insurance brokerage with customers in more 170 countries. Mr. Disparte is a specialist in strategy and risk reduction through the design and delivery of comprehensive risk solutions of worldwide scope. He is credited with designing the world’s first card-based life insurance program for the United Nations, a plan that has placed more than a half billion USD of risk with the markets in more than 150 countries. This innovation was heralded as one of the top product innovations of 2011 by the MENA Insurance Review. Mr. Disparte serves as the Chairman of the board of the Harvard Business School Club of Washington, D.C., and on Harvard Business School’s global alumni board. He is a founding member of the Business Council for American Security and an advisory member with the American Security Project.
He was formerly the Managing Director of Land Rover’s operations in 32 Sub Saharan African markets and held numerous general management roles in Denmark, where he developed applied skills in social entrepreneurship. Mr. Disparte is credited with developing a humanitarian fleet management solution that is proven to reduce the economic, environmental and social impact of humanitarian operations. This body of work is profiled in a business case published by INSEAD’s Social Innovation Centre. He served on the board of directors of Kjaer Group A/S, one of the top 10 workplaces in Europe and the top workplace in Denmark for 4 years and currently serves on the board of Communities in Schools Nation’s Capital, where he chairs the fund development committee. He is conversant in 6 languages and has published numerous articles on the subject of risk, strategy and business effectiveness. A graduate of Harvard Business School’s Program for Leadership Development, Mr. Disparte holds a degree in International and Intercultural Studies from Goucher College and a MSc. in risk management from NYU’s Stern School of Business.
