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ForeignCorrupt Practices Act
The ForeignCorrupt Practices Act was formulated in 1977 in response to the highnumber of improper payments and corrupt practices occurring inforeign countries. The Act proceeded the Watergate Scandal in theearly 1970s (Shaw 790). Government officials found evidence thatimplicated many American companies in corruption. In particular,these companies advanced illegal payments to political parties andgovernment officials in foreign lands. The discovery sparked publicoutrage. Consequently, the US Congress was prompted to passlegislation that would hinder such activity. At the time of itsadoption, the US was fighting a lone war against corruption. In manyother countries, corruption was simply a standard business practice(Mooney 28). The wisdom of enacting such laws became evident whencountries began experiencing the ills of corruption.
The FCPA has haddifferent effects on the performance of foreign subsidiaries ofAmerican companies. The conventional view cites the moral bankruptcyof making illegal payments. Therefore, ethical considerationsvalidate the formulation and implementation of the FCPA (Fritzsche).The United States’ reputation as a self-regulatory and moralcountry suffered due to these scandals. Consequently, the law had tobe formed so as to prevent further damage to the country’s image.For example, as many as 400 American companies participated inirregularities and questionable payments (Weismann 617). The law wasalso enacted to regulate the market by providing fair opportunitiesfor business competition (Weismann 650). Nevertheless, the FCPA haspresented plenty of disadvantages to American foreign companies.
Foreigncompetitors do not have to abide by any moral restrictions andobligations. Subsequently, they have a competitive advantage in manyoverseas markets. In this manner, American businesses are hinderedfrom competing on level ground. Also, “grease payments” areconsidered as necessary so as to smooth over business transactions.It is also necessary to make particular payments so as to expeditecertain deals (Cuervo-Cazurra 640). Besides, many Americancorporations are unsure of the requirements imposed upon byaccounting provisions. In this regard, companies are unaware of thestipulated amount of discovery. Consequently, American companiesspend inordinate sums of money as they seek to fulfill therequirements. This also puts them at a disadvantage relative to localcompetitors.
Therefore, theFCPA has an adverse impact on both the performance and profitabilityof American subsidiaries. The Act has a set of guidelines thatmaintains internal checks and balances. Control systems are needed todiscover kickbacks, bribes, and other subtle forms of illegalpayments (Weiss). The FCPA also seeks to enhance the dependabilityand accuracy of submitted financial statements. These statements mustconform to the characteristics of Generally Accepted AccountingPrinciples (Weismann 659). The provisions of the FCPA are enforced bythe Securities and Exchange Commission and the Department of Justice(Shaw 790). The FCPA is captured by two provisions, namely,bookkeeping and anti-bribery.
Bookkeepingprovisions are intended to ensure that all the records and books ofcompanies reflect all transactions. The recordings have to beaccurate and in harmony with accounting principles. The Securitiesand Exchange Commission exercises jurisdiction over bookkeeping. Onthe other hand, anti-bribery provisions warn companies to desist frombribing politicians or government officials in foreign countries.This Act discourages the payment of additional fees for the purposeof expediting business transactions (Shaw 791). The Department ofJustice is concerned with ensuring that no business gains acompetitive advantage by unscrupulous means.
The provisionsof this law may seem straightforward. Nevertheless, the Americangovernment chooses to interpret the laws within the accepted bounds.For example, any employee or business partner that receives moneyfrom the foreign subsidiary is considered as a foreign official. Asa result, the FCPA creates a scenario where companies have severalinteractions and transactions under scrutiny by the officials.Therefore, American businesses that have foreign subsidiaries need totake protective measures to safeguard against potential violations ofthe FCPA (Weismann 645). In this regard, a company needs to assessrisks and define procedures and policies. It is also important totrain employees to be adept at the set accounting standards. Americancompanies also need to conduct regular audits to ensure that theirpractice meets all the criteria as stipulated by the FCPA.
Anotherimportant area concerns information technology and documentation.Taking these steps has an additional cost factor involved.Ultimately, this handicaps American companies by putting theirsubsidiaries at a massive disadvantage. The competitive nature ofbusiness places a premium on cost-saving measures. The company thatsaves more has greater flexibility in commodity pricing since they donot need to set extremely high prices so as to break even. Consumerswill always flock towards the businesses that offer competitiveprices for goods and services. Therefore, American subsidiaries facea monumental battle in trying to acquire decent market share.
The enactment ofthe Sarbanes-Oxley Act in the early 2000s gave more potency to theFCPA since it focused on financial transparency and accountability(Bostrom). The government prosecuted less than 20 countries in thetwo decades after the enactment of the FCPA. However, over 50companies came under increased scrutiny in the ten years afterSarbanes-Oxley (Bostrom). Besides, the American government hasaugmented agent and prosecutorial resources from the FBI and the DOJrespectively in handling FCPA cases. The detrimental effects of theFCPA on American business can be seen in the sharp decline in totalUS exports as from 2000 (Bostrom). Concerning local GDP, Americanfirms have been estimated to experience 30% decline in business owingto the FCPA.
Foreignsubsidiaries have suffered in various ways. For example, they havedeclined in the measure of foreign direct investments contributed tothe country. It is necessary for local businesses to pay bribes so asto run a profitable business. This is especially the case whereeither the local authorities lack integrity, or the laws haveambiguous implications open to misinterpretation. Consequently, theFCPA has deterred American companies from conducting business incountries often touted as corrupt (Shaw 791). US firms viewed suchcountries as too risky since the costs associated with FCPAcompliance would not yield comparable benefits in revenues (Shaw793). In some cases, this has excluded American companies from makingheadway into lucrative markets. Foreign subsidiaries have adoptedingenious tactics in an endeavor to downplay the effect ofanti-bribery legislation. For example, American companies have beenforced to forego financial contributions at the expense of hiringlabor. This seeks to reduce the capital-to-labor ratio and make themmore compliant with FCPA regulations (Shaw 792). This also placesAmerican companies at a disadvantage since they have to operate withlower capital than local businesses in the same industry.
Indeed, the FCPApresents many disadvantages to foreign subsidiaries of American firmssince local firms have no obligations to comply with the law. Theprofit and capital levels are reduced. Consequently, the companieshave diminished market share and may suffer losses in abiding bybookkeeping and anti-bribery provisions of the FCPA (Weismann 660).
Bostrom, Robert E. "Corporate Governance: Developments And BestPractices One Year After Sarbanes-Oxley." LexisNexis Academic.LexisNexis, Oct. 2003. Web. 29 March 2016.
Cuervo-Cazurra, Alvaro. "The Effectiveness of Laws AgainstBribery Abroad." Journal of International Business Studies39 (2008): 634-51. Print.
Fritzsche, David J. Business Ethics: A Global & ManagerialPerspective. Boston: McGraw-Hill/Irwin, 2005.
Mooney, Elizabeth V. "Bribery Norm in Foreign Markets PosesLegal Challenge for U.S. Firms." Radio Communication Report(1998): 26-28. Lexis Nexus. Web. 29 March 2016.
Shaw, Bill. "Foreign Corrupt Practices Act: A Legal and **MoralAnalysis." Journal of Business Ethics 7 (1988): 789-95.
Weismann, Miriam F. "The Foreign Corrupt Practices Act: TheFailure of the Self-Regulatory Model of Corporate Governance in theGlobal Business Environment." Journal of Business Ethics88.4 (2009): 615-661.
Weiss, Joseph W. Business Ethics: A Stake and Issues ManagementApproach. 4th ed. Mason, OH: Thomson South-Western, 2006.