by Benjamin Norris

With U.S. global supply chains presently expanding their reach to an unprecedented scope and range, adherence to the growing list of security and compliance initiatives stipulated by an ever increasing number of government agencies has created the need to invest in self policing. Two 21st century hot button issues, terrorism and corporate accounting fraud, intersect their way into global supply chain issues. There are many parallels between these issues, the challenges they present, and the means to create a proactive check and balance system to protect the supply chain from internal and external forces. With all of these new challenges, however, one cannot forget to incorporate pre-existing laws into a preventative 21st century supply chain compliance action plan. One law that must make its way into the foreground of such a plan is the Foreign Corrupt Practice Act of 1977 (FCPA).

The original purpose of the FCPA was to assign monetary penalties to U.S. companies and individuals found guilty of bribery. This act specifically targets unlawful payments to foreign government officials, politicians, or political parties for the sole purpose of obtaining and/or maintaining business. The Department of Justice has been the agency responsible for the enforcement of the FCPA and, along with the Securities and Exchange Commission, has fined numerous corporations and individuals excessive monetary penalties for their infractions. With Sarbanes-Oxley regulations fully imbedded into the fabric of the corporate American consciousness and Homeland Security mandates to safeguard U.S. interests against terrorism just on the horizon, FCPA regulations may be taking a backseat on a list of priorities for exporters. However, not taking the proper precautions to mitigate the potential risk of exposure to FCPA violations may cause considerable problems for U.S. companies as their growth in the overseas market continues.

Violating these laws often results in stiff fines along with possible prison time. Some corporations have found this out the hard way. 2005 saw the most severe penalties and fines ever handed down by the DOJ and SEC for FCPA violations. The Titan Corporation agreed to pay a record $28.5 million in fines. Their lack of supervision and control of its 120 agents working in 60 countries led to an intensive government investigation followed by the landmark monetary penalty. American Rice, Inc. President Douglas A. Murphy was sentenced to 63 months in prison while Vice President David G. Kay was sentenced to 37 months. These were the longest prison terms assigned to anyone found in violation of the FCPA laws.

Other firms have been able to mitigate their penalties through voluntary disclosure. In January 2005, as a result of violating FCPA laws, biotechnology giant Monsanto headquartered in St. Louis, paid a $1 million fine to the DOJ and a $500,000 fine to the SEC. These penalties represent mitigated amounts due to Monsanto’s prompt reporting of the discovery of misconduct and their subsequent cooperation with the investigation pertaining to the actions of their affiliate in Indonesia. In December 2004 and February 2005, GE InVision, a subsidiary of General Electric, settled its cases with the DOJ and SEC. The FCPA violations cost the company a combined total of just under $2 million.

A U.S. company conducting business in a foreign country must ensure that none of its employees, subsidiaries, agents, or hired contractors violates FCPA laws. Investing in setting up a monitoring system that performs thorough screenings of all entities conducting business on behalf of the U.S. company is highly recommended. The internal policing of this issue must begin with identifying problematic persons or entities wanting to represent the company in a foreign market. Refusal to submit written compliance to FCPA guidelines, failing to maintain sufficient books or records, requesting payments for an undisclosed third party, or having any relationship with a member of a political party should serve as red flags to exporters. Maintaining an “out of sight, out of mind” mentality or pleading ignorance to situations occurring beyond a self-perceived arms length will not navigate one through the stormy seas of a FCPA investigation. The concepts of maintaining self-awareness and establishing internal controls repeat themselves over and over again throughout sections of the Sarbanes-Oxley law. Applying these principles to a standard operating procedure in order to prevent FCPA violations is a worthy exercise to undertake.

Establishing criteria for self-policing the supply chain in order to expose potential FCPA issues can start by requiring that all contracts include concise FCPA compliance language. Companies should insist that all payments be made via check or wire transfer while steering clear of any party insisting on using off shore accounts. Another safeguard that can be applied is to ensure that all applicants for foreign office positions undergo thorough background checks confirming they do not hold any public office and do not have close ties to a foreign government.

Awareness of corporate responsibilities has become paramount in today’s post 9/11, Sarbanes-Oxley world. The government has stepped up its vigilance in protecting both the homeland as well as public confidence in the American business system. U.S. exporters must take the necessary precautions to guard their supply chains from activities that not only pose risks to The United States, but that also jeopardizes the sanctity of their company. By taking a proactive and organized approach, a corporation can build a system of checks and balances to simultaneously mitigate risks in areas of security, compliance, and accounting. Maintaining high compliance and security standards within a global supply chain best prepares an organization to not only deal with new 21st century government initiatives, but also safeguards itself against FCPA infractions and other laws from yesteryear.

Globalization has expanded the number of executives and venues that companies are engaged in. They travel all over the world. They are making deals. They commit on part of the company. They are involved in millions of dollars in negotiations and contracts.

And the “web” they cast is getting larger and more complicated as foreign sales and sourcing continues.

The time is now for Corporate America to make sure that their executives are aware of the FCPA and are in strict adherence.

We recommend the following:

1. Corporations initiate FCPA guidelines in their Sarbanes-Oxley and/or Supply Chain Compliance guidelines.

2. Executives receive awareness training and develop SOPs for dealing with potential FCPA scenarios that they may become part of.

3. Very specific SOPs be developed and incorporated into all operating guidelines that assure compliance.

4. Internal communications from senior management with non-tolerant and strict penalty guidelines.

5. Annual audits by outside consultants, law firms and specialists to analyze potential FCPA violations.

6. Establish internal resources and “call centers” in the event an executive needs assistance in how to deal with a potential FCPA violation or potential problem situation, without the threat of “back-lash”.

7. Identify “high risk” situations, countries, customers, etc, that may fall free to a FCPA violation … and proactively mitigate these “hot spots”.

8. Work with internal risk management to determine insurance options and alternative loss control procedures.

Those companies that are proactive in FCPA management will be the ones that avoid the pitfalls and enjoy more successful international trade, freer of government scrutiny and interference

Author: Benjamin Norris, Senior Compliance Consultant at American River International in New York. He can be reached at 631- 396-6829 or www.bnorris@worldest.com.

American River International for 25 years has specialized in assisting companies with managing the risks of their Global Supply Chains.