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Corporate Crime and Abuse

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Ways to Crack Down on Corporate Crime:

Fix the Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (15 U.S.C.S. §§ 78dd-1, 78dd-2, and 78dd-3) prohibits payments to foreign officials to "obtain or retain business." But ambiguities in the law have allowed defendants to claim an exemption for payments that don't expressly "assist such issuer in obtaining or retaining business," including payments to reduce customs duties or tax obligations.

The FCPA already includes specific exceptions to liability for "routine governmental actions," including actions related to the provision of certain services (e.g. phone, power, water), government papers such as visas, and permits and licenses. The onus should thus be placed upon corporations to prove that their actions fall under the intended exceptions, rather than the government.

But in a case involving officials from American Rice, Inc. (U.S. vs. David Kay and Douglas Murphy, Criminal Action # H-01-914, U.S. District Court For the Southern District of Texas, Houston Division; April, 2002) the court ruled that the plain language of the statute did not cover improper payments to reduce customs duties and sales taxes, and that the legislative history of the Act evidenced no clear Congressional intent to prohibit such practices.

Recent disclosures of bribery by U.S. corporations suggest how important this loophole may be. Halliburton, for example reported in May that "one of our foreign subsidiaries operating in Nigeria made improper payments of approximately $2.4 million to an entity owned by a Nigerian national who held himself out as a tax consultant when in fact he was an employee of a local tax authority. The payments were made to obtain favorable tax treatment ..."

Fortunately, this gaping loophole in the FCPA can be easily fixed.

A Forgotten Ripple in the Corporate Crime Wave?

In addition to loopholes in the law, there is evidence of weak enforcement by the SEC and Department of Justice. Last March, for example, the Senate Finance Committee reported that the two agencies "failed to act" on "serious allegations" of bribery associated with an Enron power project in Guatemala that were raised by an IRS audit team, which dropped the evidence directly into their laps.

There are serious obstacles to successfully prosecuting corporate crimes when they occur overseas. Witnesses are difficult to procure and bribery cases often involve a complicated layering of offshore subsidiaries and secret bank accounts. The agencies are given few incentives to pursue such cases because the government generally sees its role as aiding U.S. business, not tarnishing its image abroad. An SEC that's notoriously overworked and under-resourced isn't likely to prioritize such cases, especially when the docket is full of all kinds of accounting fraud.

Yet a worrisome pattern of overseas bribery cases involving U.S. companies, many of them also involved in accounting fraud, has emerged in recent years. Companies that reportedly have been involved in overseas corruption cases include Xerox (India), Tyco (Venezuela), Accenture (Middle East), IBM (South Korea), and Enron (where allegations extend around the world, including the UK, India, Ghana, Colombia, Bolivia, Panama, Nigeria and the Dominican Republic).

What began as a ripple could turn out to be another serious corporate crime wave, and high-profile cases like the recent revelations about Halliburton could do much damage to the reputation of U.S. businesses if the response is not swift and serious.

Related Links:

Department of Justice FCPA Page
Senate Finance Committee Report on Investigation of Enron Guatemala Case
Public Services International Research Unit

Halliburton Case:
"French Judge Probes Unit of Halliburton" (Washington Post, 1/21/04)

Other Cases:
Baker Hughes(9/01)

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