US Steps Up Foreign Anti-Graft Scrutiny

19 July, 2011

State-owned companies in emerging markets are facing greater scrutiny in the US as the Department of Justice and Securities and Exchange Commission step up enforcement of the foreign corrupt practices act, regulators and executives say.

Executives at state-owned companies are considered government officials under the US anti-bribery act, making improper payments or gifts to them illegal. This provision is having an especially broad impact on regions such as Asia, South America and Africa where there is deep state involvement in the economy.

The number of FCPA cases brought in the last three years is three times greater than the total in the prior 20 years, officials say. Brian Whisler of the Washington office of the Baker & McKenzie law firm said there were 388 enforcement actions in the so-called Bric countries of Brazil, Russia, China and India.

In addition, Mr Whisler said 150 companies are the object of open investigations into potential FCPA violations.

The more rigorous enforcement comes as western companies expand their operations in emerging markets, where officials are often poorly paid and gift giving is part of the culture.

“The issues go to the heart of how politicians maintain and fund their power,” said Arthur Mitchell, a lawyer with White & Case in Tokyo. “In many cases, you are attacking a political problem in a legal way.”

In the past, large multinationals have generally been the object of heightened scrutiny. However, investors such as the big international private equity firms have also become more aware that they are potentially on the hook for the actions of the companies in which they have stakes, whether they have control or not.

Officials enforcing the FCPA have been conducting broad sweeps that target heavily regulated industries such as drugs and medical devices. These sweeps assume that if one company in an industry is engaging in improper conduct, the chances are high that others are as well.

In April, Johnson & Johnson paid more than $70m in fines as it settled charges with the SEC that it violated the act by bribing doctors and paying kickbacks to obtain business. In its most recent quarterly filing, Merck has disclosed that it faces an FCPA investigation by the SEC, as well.

In May, California-based SciClone Pharmaceuticals said an internal committee found it lacked controls to ensure that third-party gifts, travel and entertainment in China complied with the law.

At the same time, other countries are adopting stiffer anti-corruption statutes. A new UK statute goes into effect July 1, which will make commercial as well as government bribery a crime.

“Other countries are adopting these measures,” said Asheesh Goel, at Ropes & Gray in Chicago. “The US has become more aggressive. Other countries see how lucrative FCPA has been. It has become a worldwide issue.”

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US Steps Up Foreign Anti-Graft Scrutiny

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