Doing Business Abroad: Illegal Payoffs Can Take a Toll

Bribery of government officials is widely viewed as a major problem that, left unchecked, can draw in large and small companies as they compete to win foreign jobs or get approval to enter a new market.

The Legal Elements of BriberyThe Foreign Corrupt Practices Act prohibits bribing foreign government officials to obtain or retain business. According to the Justice Department, violations of the law’s anti-bribery provisions involve five elements:1. Who. The provisions potentially apply to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. The law also potentially applies to those who order, authorize, or help someone violate or conspire to violate the law.2. Corrupt intent. The person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce a person to misuse an official position. The law does not, however, require that a corrupt act succeed in its purpose.3. Payment. The law bans paying, offering, promising or authorizing to pay money or anything of value.4. Recipient. The prohibition covers only corrupt payments to a foreign official, a foreign political party or party official, or any candidate for foreign political office, regardless of rank or position.5. Business Purpose Test. The law bans payments made to obtain or retain business, or direct business to any person.Click here for a more detailed explanation of the law.The Justice Department has a procedure under which you can get an opinion from the Office of the Attorney General on specific questions related to the law. For example, you could ask whether foreign officials include members of a royal family or executives of a state-owned business. Click here for details on obtaining these opinions.

The cost to a company of paying bribes to win business goes far beyond the payment itself. The fallout from such payments include:

  • Pushing the cost of doing business above market rates.
  • Adding uncertainty about a company’s ability to continue operating in the market. If corruption is discovered, a business could be barred from bidding for future government contracts.
  • Exposing an enterprise to extortion by the person who received the bribe, as well as others who may be aware of the corruption.

Bribery also brings the risk of criminal and civil charges, as well as severe penalties. For instance, under the Foreign Corrupt Practices Act, businesses can be fined as much as $2 million. Officers, directors, stockholders and employees can be fined as much as $100,000 and sentenced to up to five years in prison. Employers cannot pay fines for individuals.

In a civil case, companies and individuals acting for the business can be fined up to $10,000. The court can also impose an additional fine as high as $500,000, depending on the circumstances of the case.

The extreme costs of bribery are illustrated by one corruption case involving the German engineering conglomerate Siemens. The company admitted that it had made about
$1.9 billion in questionable payments around the globe to win business. Siemens ultimately agreed in 2008 to pay an estimated $1.6 billion fine to settle bribery allegations made by several countries, including the United States.

In March of 2010, Daimler agreed to pay $1.85 million in fines and penalties to settle charges that it paid officials in more than 20 countries to secure lucrative contracts, which violated of federal bribery laws.

Another example: The Securities and Exchange Commission filed charges in 2009, alleging that during a three-year period, certain subsidiaries from AGCO Corporation made $5.9 million in kickback payments in connection with their agricultural equipment sales to Iraq. The kickbacks were characterized as “after sales service fees,” according to the SEC, “but no bona fide services were performed.”

AGCO’s equipment sales were made under the United Nations Oil for Food Program, which required the Iraqi government to purchase goods through a UN escrow account. However, the kickbacks from AGCO’s subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at Jordanian banks.

Once corruption takes root in a company, it is difficult to eradicate, In fact, Siemens replaced about half of its top 100 executives after determining it was the only way to bring about change and banish corruption at the organization.

The best move is to ensure it doesn’t start. Doing business overseas can be profitable without corruption. To help minimize the potential for illegal business practices at your company, consider the following:

In the long term, the benefits of paying bribes can pale in comparison to the financial, legal and reputation costs a business can incur once corruption is exposed. With the right actions and proper guidance, your business can avoid these risks and still make a profit.

Contributing Advisors