The U.S. antiboycott provisions of the Export Administration Act prohibits U.S. firms from participating in foreign boycotts or embargoes not authorized by the U.S. government. Even though this law was primarily aimed at the Arab boycott against Israel, it prevents U.S. firms from being used to implement foreign policies of other nations that are inconsistent with or contrary to U.S. policy. The law requires companies to report boycott-related requests by other nations and imposes a range of sanctions in the event of violations. In July 2011, for example, Smith International Inc. of Houston, Texas, agreed to pay a $20,500 civil penalty to settle charges that it had violated the antiboycott provisions of the EAR. BIS alleged that during the period 2006-2008, the company violated the EAR in connection with transactions involving the sale of goods and services to Libya and the United Arab Republic. BIS charged that the firm violated the EAR by (a) its failure to report its receipt of nine requests to engage in a restrictive trade practice or boycott; (b) its agreement to refuse to do business with another person pursuant to a request from a boycotting country; (c) its furnishing of prohibited information in a statement certifying that no materials were of Israeli origin nor had Israeli content.
Scope of Coverage
Who Is Covered by the Laws?
The sources of U.S. antiboycott regulations can be found in the Export Administration Act (EAA) and its implementing regulation, the Export Administration Regulations (EAR), and in the Internal Revenue Code. The EAR applies to all “U.S. persons” (individuals and companies located in the United States). It also covers foreign subsidiaries that are controlled by a U.S. company through ownership or management. In such cases, the foreign affiliate is subject to the antiboycott laws and the U.S. parent will be held responsible for any noncompliance. The regulations cover the activities of individuals or companies related to the sale, purchase or transfer of goods or services within the United States or between the United States and a foreign country. This includes U.S. exports, imports, financing, forwarding, and shipping and certain other transactions that may take place outside the United States. To trigger the application of the antiboycott laws, the activity must involve U.S. commerce with foreign countries (EAR, part 760).
What Do the Laws Prohibit?
The laws cover several types of actions:
Refusals to do business: The law prohibits any U.S. person from refusing to do business (expressly or implicitly) with any person pursuant to a request from, agreement with, or requirement of a boycotting country. The use of a designated list of persons also constitutes a refusal to do business prohibited under the act.
Discriminatory Actions: The statute prohibits any U.S. person from discriminating against an individual (who is a U.S. person) on the basis of race, religion, gender, or national origin. It also prohibits similar action against a U.S. corporation on the basis of the race or religion of the owner, officer, director, or employee. Such prohibitions apply when the action is taken in order to comply with or to support an unsanctioned foreign boycott.
Furnishing information to a boycotting country: The statute prohibits the furnishing of information about any business relationship with or in a boycotted country or with blacklisted firms or persons. It also prohibits the actual furnishing of or agreements to furnish information about the race, religion, sex, or national origin of another U.S. person or any U.S. person’s association with any charitable organization that supports the boycotted country.
Implementing letters of credit with prohibited conditions or requirements: The statute also prohibits any U.S. person from implementing a letter of credit that contains a condition or requirement from a boycotting country. This includes issuing, honoring, paying, or confirming a letter of credit. The prohibition applies when a beneficiary is a U.S. person and the transaction involves the export of U.S. goods (i.e., shipment of U.S.-origin goods or goods from the United States).
Some exceptions to the prohibitions include the following:
- Compliance with import requirements of a boycotting country
- Compliance with unilateral and specific selections by buyers in a boycotting country
- Compliance with a boycotting country’s requirements regarding shipment and transshipment of exports
■ Compliance with immigration, passport, visa, employment, and local requirements of a boycotting country.
The regulations require U.S. persons to report quarterly to the U.S. Department of Commerce any requests they have received to take any action to comply with, further, or support an unsanctioned foreign boycott. The U.S. Treasury also requires taxpayers to report activities in or with a boycotting country and any requests to participate in a foreign boycott (see International Perspective 15.7).
Penalties for Noncompliance
The law provides both criminal and civil penalties for violations of the antiboycott statute. On the criminal side, a person who knowingly violates the regulations is subject to a fine of up to $50,000 or five times the value of the exports involved, whichever is greater. It may also include imprisonment of up to five years. In cases in which the violator has knowledge that the items will be used for the benefit of countries or persons to which exports are restricted for national security or foreign policy purposes, the criminal penalty varies. For individuals, a fine up to $250,000 and/or a prison term of up to ten years may be imposed. For firms, the penalty for each violation can be $1 million or up to five times the value of the exports involved, whichever is greater. Administrative or civil penalties may include any or all of the following: revocation of export licenses, denial of export privileges, exclusion from practice, and imposition of fines of up to $11,000 per violation or $100,000 if the violation involves
items controlled for national security reasons. The Treasury Department may also deny all or part of the foreign tax benefits.
Foreign Corrupt Practices
The Foreign Corrupt Practices Act (FCPA) of 1977 was enacted as a public response to the Watergate scandal of the early 1970s and to revelations of widespread bribery of foreign officials by U.S. companies. In the 1970s, Securities and Exchange Commission (SEC) investigations revealed that more than 400 U.S. companies admitted making illegal payments in excess of $300 million to foreign government officials. Recent FCPA enforcement and compliance actions also show that substantial payments were made by companies such as Siemens AG ($1.6 billion), Halliburton ($579 million), and Wilbros Group ($32 million) to foreign officials to obtain government contracts (Bixby, 2010-2011). The overriding public concern was that this practice could tarnish the reputation of the United States in the world and was not in the best interest of U.S. corporations.
The legislation represents an attempt to enforce morality and ethics in the conduct of international business transactions. It was intended to halt corrupt business practices in order to create a level playing field for honest businesses and to restore public confidence in the integrity of the marketplace. The FCPA was enacted as an amendment to the Securities and Exchange Act of 1934. It was later amended in 1988, as part of the Omnibus Trade and Competitiveness Act. In 1998, the FCPA was again amended to conform to the requirements of the OECD convention on combating bribery of foreign public officials in international business transactions. The OECD Anti-Bribery Convention came into force in February 1999 with the United States as a founding member.
The principal objectives of the legislation are to:
- Prohibit the bribery of foreign officials by U.S. individuals and corporations to obtain or retain a business.
- Establish standards for maintaining corporate records and internal accounting control objectives.
The antibribery provision applies to all publicly held corporations registered with the SEC and all domestic concerns. The 1998 amendments expanded the application of the antibribery provisions to cover “any person” who commits bribery on U.S. territory regardless of whether the accused is a resident or does business in the United States. In addition, individual corporate employees can be prosecuted even if the corporation is found not guilty of violating the FCPA (Gleich and Woodward, 2005). The accounting standards and objectives apply only to SEC registrants or those that are required to file reports with the SEC.
The accounting provisions of the FCPA are intended to prevent companies from escaping detection by maintaining dubious accounts or slush funds. It requires any corporation that has certain classes of shares with the SEC to (1) make and keep accurate books and accounts that fairly reflect the transactions, and (2) maintain a system of internal accounting controls in order to prevent the unauthorized use of corporate assets and transactions and to ensure the accuracy of corporate records.
Scope of Coverage
Who Is Subject to the FCPA?
- A U.S. issuer, domestic concern or any person including officers, directors, employees, agents or shareholders acting on behalf of the issuer, domestic concern or person.
- Issuers and domestic concerns may also be held liable for any act in furtherance of a corrupt payment taken outside the U.S. A foreign company or person is now subject to the FCPA if causes, directly or through agents any act in furtherance of a corrupt payment to take place within the U.S.
- S. parent corporations may be held liable for the acts of foreign subsidiaries
The antibribery provisions apply to all publicly held corporations registered with the Securities and Exchange Commission (issuers of stock in controlling corporations) and other domestic concerns. Domestic concerns are broadly defined to include all U.S. citizens and residents as well as any entity whose principal place of business is in the United States or incorporated under the laws of the United States (Atkinson and Tillen, 2005).
A U.S. parent company may be liable for corrupt payments by its foreign subsidiary if the U.S. parent company knew of or participated in the subsidiary’s corrupt action or took no measures to discourage such payments. DPC-Diagnostics Ltd. of Tianjin, China, a wholly owned subsidiary of a California company that produces medical equipment, agreed to pay $4.8 million for violations of the FCPA in 2005. The firm admitted to paying $1.6 million in bribes to physicians and lab personnel in China to obtain business there. The guilty plea was based on the theory that the firm was an agent of the American company (Bixby, 2011).
The FCPA also applies to certain foreign nationals or entities (not issuers or domestic concerns) if they engage directly or through an agent in making or facilitating corrupt payments while in the United States.
The 1998 amendments to the FCPA established jurisdiction on the basis of the nationality principle (U.S. persons are liable even if the actions took place outside U.S. territory) and removed the requirement that there be a use of interstate commerce for acts in furtherance of a corrupt payment to a foreign official by U.S. companies or persons that took place wholly outside the United States.
- Publicly-held entities (issuers) that either have securities registered with the SEC or are required to file reports with the SEC.
The FCPA accounting provisions apply to any issuer whose securities trade on national securities exchange in the United States, including foreign issuers with exchange-traded American depository receipts. They also apply to companies whose stock trades in the over-the-counter market in the United States and that file periodic reports with the SEC. A California company paid more than $2 million in civil and criminal penalty when its two joint-venture partners paid more than $400,000 in bribes to obtain a business in China. The illicit payments were recorded on the books as “business fees” or “travel and
entertainment expenses.” The California company failed to provide adequate internal controls. Companies (including subsidiaries of issuers) and individuals may face civil liability for aiding and abetting an issuer’s violation of the accounting provisions. This includes managers of subsidiaries who approve certain payments and who should have known that these payments were improperly recorded or otherwise circumvent internal controls.
Criminal liability can be imposed on companies and individuals for knowingly failing to comply with the FCPA’s internal control provisions. As with the FCPA’s antibribery provisions, individuals are subject to the FCPA’s criminal penalties for violations of the accounting provisions only if they acted “willfully.” For example, a French company was criminally charged with failure to implement internal controls and failure to keep accurate books and records.
What Is Covered by the FCPA?
The antibribery provision of the FCPA prohibits American businesses from using interstate commerce to pay off foreign officials to obtain or retain a business. The term “interstate commerce” also includes the intrastate use of any interstate means of communication or any other interstate instrumentality. Placing a telephone call or sending e-mail or a fax from, to, or through the United States involves interstate commerce, as does sending a wire transfer from or to a U.S. bank or otherwise using U.S. banks or traveling across state borders (or to or from the United States (U.S. Department of Justice and SEC, 2012).
Payments to any foreign official to obtain the performance of routine governmental action are explicitly exempted. The 1988 amendments to the FCPA changed the knowledge requirement and the definition of grease payments, added certain defenses to charges of bribery under the statute, increased penalties, and authorized the president to negotiate an international agreement prohibiting bribery.
The knowledge requirement: The 1977 act prohibited any payments if the payor knows or has reason to know that the funds will be used to bribe foreign officials. It was believed that a broad application of the “reason to know” standard would put many multinational companies at risk of liability for the actions of their sales agents who engage in bribery without their approval. Such a standard would also invite unwarranted scrutiny of distributors or sales agents in countries that are considered to be corrupt. Given such legitimate business concerns, the “reason to know” standard was removed from the act and objective criteria established with respect to such conduct. This new standard is narrower and holds businesses liable only if they are substantially certain that the illicit payments are to occur or that such a circumstance exists (Hall, 1994). Requisite knowledge requires that a person be aware of a high probability of the existence of such a circumstance (unless the person believes that such a circumstance does not exist). FCPA imposes liability not only on those with actual knowledge of wrongdoing but also on those who purposely avoid actual knowledge (i.e., who exhibit willful blindness or deliberate ignorance to avoid responsibility).
Affirmative defenses against charges of bribery: The FCPA antibribery provisions contain two affirmative defenses (the defendant bears the burden of proving them). Payments are not considered corrupt if:
- They are lawful under the laws of the foreign country. To avoid prosecution, the conduct prohibited under the FCPA must be lawful under written local law. An exception under the law of Azerbaijan, for example, relieving bribe payors who voluntarily disclose bribe payments to the authorities of criminal liability does not make the bribes legal.
- The money was spent as part of demonstrating a product or performing a contractual obligation. The FCPA allows companies to claim reasonable and bona fide travel and lodging expenses to foreign officials for training and for visits to company facilities as well as for product demonstration and promotional activities.
Exemption of facilitating or expediting payments: A narrow exception is made for “facilitating or expediting payments” made in furtherance of routine governmental action. This includes processing visas or work orders, provision of police protection or mail service, and supplying of utilities such as power or water. Paying a local official a small amount to have the power turned on at a factory may be considered a facilitating payment, while paying an inspector to ignore the necessary permits to operate the factory would be considered a bribe. For example, an Oklahoma-based firm violated the FCPA when its subsidiary paid Argentine customs officials $166,000 to secure clearance for equipment that lacked requisite certifications or could not be imported under local law and to pay a lower-than-applicable duty rate.
Increased penalties: The maximum fine for a corporation was increased from $1 million to $2 million. For individuals, the maximum fine was increased from $10,000 to $250,000. Individuals and corporate employees were made criminally liable even when the corporation is not in contravention of the FCPA.
Authorization to negotiate an international agreement: The act authorizes the U.S. president to negotiate an international agreement with countries that are members of the OECD to prohibit bribery.
Enforcement and Penalties
Enforcement of the FCPA is the joint responsibility of the SEC and the Department of Justice. The Department of Justice has authority for civil enforcement of violations by domestic concerns with respect to the antibribery provisions. It also has exclusive jurisdiction over criminal prosecution in relation to the accounting as well as antibribery provisions of the statute. The SEC has similar authority for civil enforcement of violations of the anti -bribery and accounting provisions.
Criminal penalties may reach up to $2 million for public corporations and domestic concerns and $250,000 and/or a maximum of five years for officers, directors, or employees who commit willful violations of the antibribery provisions. With regard to civil penalties, a maximum of $10,000 may be levied against any company, employee, officer, or director. Injunctive relief is also available to forestall a violation. Enforcement agencies are also increasingly seeking disgorgement of company profits on “tainted contracts” secured through improper payments to foreign officials. Violations of the accounting provisions can result in a fine of $25 million for companies. Culpable individuals can be subject to a criminal fine up to $5 million as well as imprisonment for up to twenty years. Such penalties may also include termination of government licenses and debarment from government contracting programs.
Since the introduction of the FCPA, several U.S. companies have been investigated for bribing foreign officials to obtain contracts. Over the past few years, some companies were indicted and fined for bribing foreign officials in order to use their influence to secure government contracts. Here are some examples:
- In 2008, Siemens AG (Argentina), producer of power and electrical equipment, was charged with violation of the FCPA. It pleaded guilty to conspiring to violate the FC- PA’s books and records provisions and paid criminal fines of $450 million on top of $350 million disgorgement of ill-gotten profits. German authorities also collected additional penalties.
- In 2012, Smith & Nephew acknowledged responsibility for the actions of its affiliates, employees, and agents who made various improper payments to publicly employed health care providers in Greece from 1998 until 2008 to secure lucrative business. Smith & Nephew, a Delaware corporation, is headquartered in Memphis, Tennessee, and is a wholly owned subsidiary of Smith & Nephew PLC, an English company traded on the New York Stock Exchange. The company manufactures and sells medical devices worldwide. In total, from 1998 to 2008, Smith & Nephew and its affiliates and employees authorized the payment of approximately $9.4 million to the distributor’s shell companies, some or all of which was passed on to physicians to corruptly induce them to purchase medical devices manufactured by Smith & Nephew. As part of the agreement, Smith & Nephew agreed to pay a $16.8 million penalty and is required to implement rigorous internal controls, cooperate fully with the department, and retain a compliance monitor for eighteen months.
FCPA enforcement against foreign firms with no operations or personnel in the United States has raised concerns about the extraterritorial application of U.S. laws and its infringement upon the sovereignty of other nations (McDonald, Yoshino, and Carr, 2010).
U.S. companies could seek an advisory opinion from the Department of Justice on whether a particular transaction would violate the FCPA. Any opinion by the DOJ that sanctions a proposed transaction would create a presumption of legality.
Measures for Compliance with the FCPA
Implementing due diligence procedures: Internal procedures should be developed to evaluate and select foreign partners and agents. Once an appointment has been made consistent with the internal procedures, a written agreement is needed to govern the relationship between the parties. Such an agreement should generally state that the agent/partner has no authority to bind the exporter and that the agreement is valid provided that the foreign agent/partner complies with the FCPA and the foreign country’s laws. It should also stipulate that the agent/partner is not an employee, officer, or representative of any government agency. The exporter should be promptly notified of any changes in representation (see International Perspective 15.8).
Seeking an advisory opinion from the government: The U.S. Department of Justice provides advisory opinions on the legitimacy of a proposed transaction. Other federal agencies also provide advisory opinions.
Adopting internal measures and controls: Internal procedures should also be established to guide employees. Such programs include descriptions of policies for employees, agents, or
joint-venture partners for reporting and investigations, procedures for seeking the opinion of counsel, and training programs for officers and employees.
International efforts to control corruption: Among the international efforts to reduce bribery and other corrupt acts are these:
- The OECD Antibribery Recommendation, 1994
- The OECD Convention on Combating Bribery, 1997
- The ICC Rules of Conduct to Combat Extortion and Bribery, 1977 (revised in 1996)
- The United Nations Convention Against Corruption, 2003
- The Inter-American Convention Against Corruption, 1996
- Transparency International (TI), which has as its mission to enhance public transparency and accountability in international business transactions and in the administration of public procurement.
Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.