Q. This is the law Wal Mart is accused of breaking and which could lead to big fines… tell us about it.
A. The Foreign Corrupt Practices Act is very far reaching, and prevents US companies from several kinds of activities that basically boil down to bribing local officials.
Q. Well, that doesn’t seem so controversial.
A. Not on the surface. But the harsh reality is that in very many developing countries, corruption is incredibly common. So, as awful as it sounds, it can be pretty hard to get necessary operating licenses, etc., if you’re not willing to play the local game. That’s what Wallmex allegedly did, but, to be fair, the pressure on companies operating in some of these places really is intense.
Q. So where did these rules come from?
A. Back in the 70s, an SEC investigation indicated that hundred of US companies, including Boeing, admitted to making questionable payments. My favorite one was the Bannagate scandal, in which Chiquita bribed the president of Hondurus to lower taxes.
Q. So what’s permitted, and what’s illegal?
A. “Routine payments to speed up approval processes — called “grease payments” are OK; but big payments to change the rules in your favor or not. You can imagine how big a gray zone that creates. But the really tricky issue is that companies are not supposed to do business with local companies that have been engaging in corrupt practices. Good luck figuring that out.
Q. And what about investors?
A. Sometimes, especially in private placement deals, you’ll see an opportunity to invest directly in a foreign operation or real estate deal with local operators. Often, the returns can look really promising. But you do have to consider FCPA risk. And one way to think about it is: the more directly the government is involved in providing a license for restricted industries, like mining, or banking or gaming, the more you want to ask how exactly the local operator got those valuable rights.
Q. By the way, what are the potential penalties for FCPA violations?
A. Normally, they’re fines that can run into the millions, and even jail is possible.