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Robust Compliance Systems Needed to Combat Violations of the Foreign Corrupt Practices Act

Bribery Payments Illustrate the Failure of Ethical Leadership at Alstom and Avon

Violations of the Foreign Corrupt Practices Act (FCPA) seem to be occurring at a more rapid rate than at any time since the 1970s when bribery by companies such as Lockheed led to the passage of the Act by Congress to stem the tide of bribing foreign officials by U.S. companies to gain business overseas. In the debate surrounding Congressional passage of the FCPA, the discussion focused around whether U.S. multinationals should be held to ethical standards in the U.S. when operating overseas, which prohibits bribery, or to those of the country in which the entity operates. In other words, is the old adage true today as in years past: “When in Rome, do as the Romans do?”

Congress eventually decided the FCPA would permit relatively small amounts of “grease payments,” referred to as facilitating payments in the Law, but would prohibit outright bribery. Of course, the devil is in the details and the line drawn between these two types of payments can get blurred.

The anti-bribery provisions of the FCPA 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. On December 22, 2014, French company Alstom pled guilty and agreed to pay $772 million to resolve foreign bribery charges. An interesting aspect of the Alstom case is it reflects a ramped-up effort by U.S. authorities to stem the tide of overseas bribery by investigating foreign companies that have a subsidiary located within the U.S., as is the case with Alstom.

The settlement with the U.S. Justice Department (DOJ) points out that from at least 2000 to 2011, Alstom paid tens of millions of dollars in bribes to win $4 billion in projects from state-owned companies in Indonesia, Egypt, Saudi Arabia, the Bahamas, and Taiwan. The company earned about $300 million in profits from the scheme. The British Serious Frauds Office also found that the French company paid around $8.5 million over a six-year period to win transport contracts in India, Poland, and Tunisia.

Alstom attempted to conceal the bribes by retaining consultants who actually acted as conduits for the payments to government officials, according to the DOJ. Alstom falsified books and records to hide the payments and referred internally to the consultants using codes names such as “Mr. Geneva,” “Quiet Man,” and “Old Friend,” according to the government.

In the U.S., Alstom pleaded guilty to two charges, one for violating bribery laws by falsifying records and the other for failing to have adequate controls. Several countries have opened probes into Alstom since 2004, when auditors for the Swiss Federal Banking Commission unearthed documents showing possible corrupt payments. Since then, the company has paid more than $53 million over claims its employees bribed officials in at least five countries.

Cases enforcing the FCPA have drawn attention in recent years for the magnitude of corporate penalties they command. Among the largest U.S. penalties for foreign bribery are KBR Inc.’s $579 million settlement in 2009 and Alcoa Inc.’s $384 million penalty earlier this year. Those cases included criminal and SEC penalties. In addition to the $450 million Siemens paid to the DOJ, it paid an additional $350 million to the U.S. Securities and Exchange Commission. Alstom isn’t subject to SEC scrutiny because its shares don’t trade in the U.S.

In a high-profile case that was settled in May of 2014, cosmetics giant Avon announced it will pay $135 million to resolve criminal charges resulting from violations of the books and records and internal control provisions of the FCPA in connection with its China operations. The Avon case involves certain travel, entertainment, gifts and other expenses that were improperly incurred in connection with the company's China operations through the use of third-party vendors and consultants

These examples of FCPA violations all have one common element – the failure of compliance systems. U.S. companies should have in place a robust compliance system that includes strong internal controls to help prevent and detect illegal payments backed by a strong system of corporate governance. However, regardless of existing systems nothing can replace the importance of setting an ethical tone at the top by the CEO, CFO, COO, and other top managers who should make it clear by word and deed that the company will not stand for any violations of any law and will hold all employees personally responsible for adhering to ethical standards. Violators should be dealt with swiftly and a message sent that the company will not tolerate such behavior.

Unfortunately, companies such as Alstom and Avon failed to establish an ethical direction for its employees and the result was an embarrassing event that brings into question the effectiveness of the leadership in both companies. Both companies need to learn the lesson that was first espoused by management guru Warren Bennis years ago: “Managers are people who do things right and leaders are people who do the right thing.”

Blog posted by Dr. Steven Mintz, aka Ethics Sage, on December 30, 2014. Dr. Mintz is a professor in the Orfalea College of Business at Cal Poly San Luis Obispo. Professor Mintz also blogs at: