Tag Archives: FCPA

Nothing To See Here, Move Al… Wait!

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JPMorgan Chase has been in the news quite a bit lately. Just last week, two employees were charged in connection with the adventures of the London Whale (though the indicted former coworkers may be seeing him as more of a rat than a whale right now). On Sunday, I opened the paper to read about a bribery investigation that the SEC has launched. As I have discussed before, bribery of foreign public officials by US companies is illegal and it appears that the SEC is looking into whether this has happened with JPMorgan’s China business.

JPMorgan hired the children of officials of state-controlled companies. Hiring someone, even if their parents have very important jobs, is not wrong in and of itself. However, if it is found that these children were hired, not on the strength of their qualifications but, so that JPMorgan could get business with the companies that their parents worked at then JPMorgan may very well find itself in trouble. That JPMorgan hired these children and then received lucrative contracts from the companies where the fathers of these new employees were high-ranking officials raises red flags, so it is no surprise that the SEC is investigating the matter.

You can see here that bribery of government officials comes in various forms and is not always as straightforward as a bunch of cash in an envelope, slipped over to a congressman. Any actions taken to influence officials and gain unfair advantages in business dealings is likely to be considered a bribe. What has happened here as well is that the definition of a government official is not just a political government representative. In the case of nations, such as China, where a lot of large enterprises are state-controlled, officials at these enterprises are seen as government officials. This means that, where JPMorgan may have hired the child of a private enterprise and received lucrative deals without the SEC batting an eyelid, because the entities in question are governmental enterprises, the rules are different.

It is important to note a few things:

  • That the SEC is investigating this matter does not imply that these children were not qualified for the jobs that they held. In fact, this may not matter. If they were hired in order to get cushy deals that JPMorgan may not have received otherwise, then JPMorgan may face FCPA violation charges.
  • Right now the investigation is merely that – an investigation. The SEC has not accused JPMorgan of wrongdoing. What has happened is that they have noticed red flags – the hiring followed by the lucrative deals – and they are looking into this matter to ensure that laws were not broken.
  • That the SEC is investigating this matter is the way it should be. When red flags are raised, one should look into the matter and even if it is found that nothing of concern happened, it was not a wasted effort.  The knowledge that red flags will be investigated serves as a deterrent for some who consider breaking the law.

Some may be rolling their eyes about this story. The offspring of the very privileged – high ranking corporate officials or famous people – probably get hired because of who their parents are all the time. It’s like that person in the grocery story taking their very-full-of-way-more-than-10-items shopping cart into the express checkout lane. It’s not right but it doesn’t appear that it will ever stop. However, the story here is in the nuance –

  • We are dealing with state-controlled enterprises, not private companies here.
  • Because they are state-controlled, officials at these enterprises are considered public officials
  • Therefore, the FCPA makes it illegal for companies to give favors to these de facto public officials in exchange for sweet deals.

In the past, the Justice Department has not been aggressive about investigating these cases but things may be changing. So we shall just watch this case and see how JPMorgan fares and if hiring practices will become a focus of the SEC. Just because everyone is doing it, it doesn’t make it okay and, if it is illegal, you may just turn out to be the unlucky one the law decides to come after. Remember that when you have your cart with 20 items and you think about using the “10 Items or Less” lane.

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All Over This One

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In the United States, bribery of a public official is illegal. Public officials, on a state, local or national level, tend to hold a lot of power. It would not be right to allow those among us with deep pockets to use the contents of said pockets to get unfair benefits, such as no-bid contracts, tax breaks and “get out of jail free” passes. In 1977, the Foreign Corrupt Practices Act (FCPA) made it illegal for U.S. persons, companies and their subsidiaries to bribe foreign government officials. The FCPA was further amended in 1998 to apply to foreign people and companies whose payments pass through the United States. The FCPA also applies if a foreign party authorizes a bribe via an email that is stored on a server in the United States. It is a far-reaching law with two main provisions – an anti-bribery provision that is generally enforced by the U.S. Department of Justice (DOJ) and accounting and record-keeping provision that is generally enforced by the Securities and Exchange Commission (SEC).

A huge incentive to not violate the FCPA is the severity of the punishment. The criminal and civil fines for violating the FCPA apply to companies and individuals alike. Companies can be fined up to a maximum of twice the benefits sought by the bribe. For individuals, fines can be up to $5 million and 20 years in jail. Fines and jail time can apply for either the corrupt payment or violation of the books and records provision. In addition to the fines, companies may also receive sanctions such as the loss of export licenses and disqualification from U.S. government contracting. For example, in 2008, Siemens was fined more than $1.3 billion by the DOJ, the SEC and German regulators and, more recently, Walmart is under investigation for bribery of officials in Mexico, China and elsewhere.

To avoid the fines and jail time, individuals and firms must comply with both provisions of the FCPA. The first, bribery, seems straightforward but I shall go over it so we are clear.

  1. Do not make payments to public officials in order to get special favors. An officer at state-owned entity is also considered a public official. It is safest, and ethical, to not pay bribes to anyone. However, be mindful of the fact that bribes of public officials will get you into the most trouble.
  2. If you invite public officials on a trip to show off your business or to a conference, do not throw in extras, such as a trip to Disneyland for their family. Keep it all above-board and about business.
  3. “Gifts” such as watches that costs thousands of dollars or a suitcase of cash are taboo.
  4. Payments related to the political campaigns of foreign governments are also not allowed.

The accounting provisions are where the forensic accountant is very active, working for both the companies and for the DOJ and SEC. Corporations covered by the FCPA are required to make and maintain books and records that accurately and fairly reflect their transactions and to devise and keep a sufficient system of internal controls. This is so that government agencies inspecting the books and records of the corporation will be able to easily see that the corporation is in compliance with the anti-bribery laws. The controls are so that the employees of the corporation do have the opportunity to commit fraud or bribery. When companies and individuals are paying bribes to public officials, it is highly likely that they will try to hide these transactions in their ledgers so they are not immediately identifiable as illegal transactions.

Companies with international operations will often have a department that review the books and internal control systems to ensure that they are complying with FCPA provisions. From time to time, the company may call in a forensic accountant to perform an internal investigation. This may happen either because the company suspects that untoward behavior has occurred or as a periodic review of their books and systems.

The DOJ and SEC will also employ the services of forensic accountants when they investigate companies and individuals that they suspect of violating the FCPA. When cases like this happen, there will be forensic accountants working for both the government agencies and the entity being investigated. In addition to discovering whether or not bribery has occurred, the company and the government agencies seek to determine the extent of the violations and determine the value of the gains realized and, therefore, the fines and other penalties to be levied by the government and avoided by the corporation. These investigations can be very extensive and span several continents, depending on the size and reach of the corporation. Financial forensic experts are instrumental and very involved in these investigations, tracing payments and working diligently to find what the corporation has tried to hide both on and off its books.

Often, an element of a FCPA settlement is the appointment of a multi-year monitor. This happens after the investigation and is an area where forensic accountants can use their expertise to examine the company’s control environment and record-keeping and assess the progress the company has made toward compliance with the law.

In recent years, the DOJ and the SEC have become very aggressive about enforcing the FCPA. In addition to this, other nations have enacted their own anti-bribery laws; the U.K. Bribery Act of 2010 has been in force since July 2011 and criminalizes bribe payments to private individuals as well as government officials. Also, there is more and more international cooperation in the investigation and enforcement of this law. Through it all, the work and expertise of financial forensic experts are extensive and vital. A lot of big firm lawyers think of the FCPA when they think of forensic accountants. It is indeed one of the many places you will find the financial forensic expert.

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