One Man’s Facilitation Payment Is Another Man’s Bribe

Although a somewhat tired cliché, “think globally and act locally” is a vital tenet that manufacturers, resellers and distributors using, or involved in, a channel sales model should understand with regard to the way they manage their financial record keeping in today’s economy.

Any modern channel-focused company of substance is potentially juggling compliance with both local and “long-arm” laws. Catalysed by the UK’s Bribery Act 2010, international bribery laws have made it onto the radar screens of general managers, financial controllers, and owners across the UK channel.

But many appear to have forgotten (if they ever realised in the first place) that anti-bribery legislation demands accurate and transparent record-keeping, and state of the art financial controls.

US rules to follow

It’s worth remembering that channel-based businesses with any dealings in, or through, the US are invariably subject to the US Foreign Corrupt Practices Act 1977 (FCPA). The FCPA prohibits bribery of foreign public officials – and this means officials outside the US: local state laws do the job of prohibiting bribery of US officials.

US companies are increasingly endeavouring to reduce FCPA liability by imposing compliance commitments on their suppliers and business partners. Even small UK-based suppliers dealing with international businesses may soon be asked to confirm they are fully FCPA-compliant.

The anti-bribery provisions of the FCPA, which are criminal provisions policed by the US Department of Justice (DoJ), apply to all companies and individuals having a business presence in the US, but this is long-arm legislation and can catch companies with a link as tenuous as a single transaction denominated in US dollars.

The record-keeping and internal control requirements of the FCPA apply only to ‘issuers’, which are companies with their shares traded on US exchanges, or those which for some other reason are required to submit periodic reports to the Securities and Exchange Commission (SEC).

The accounting provisions also apply to directors, employees, agents, and shareholders of issuers who might be responsible for improper accounting, or circumventing controls.

The accounting provisions are in two parts. Under the FCPA, issuers must:

• make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer [15 USC §§ 78m (b)(2)(A)]
• devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed in line with management’s authorisation, and that the company has accurate books and records and GAAP-compliant financial statements [15 USC §§ 78m (b)(2)(B)].

It is important to appreciate that the accounting provisions do not relate just to foreign corrupt payments: they relate to all payments to all recipients. As such, they form the backbone for most accounting fraud cases brought by the DoJ and SEC; they are not used solely against bribery allegations.

The idea behind the accounting provisions of the FCPA is a clever one: the law requires precise and accurate accounting for all payments – including bribes. This means that companies which pay bribes are caught between a rock and a hard place. They can’t both pay bribes and account accurately for them (without admitting what they are doing).

In many instances, the SEC deals with bribery offences primarily via a civil action under the accounting provisions, on the basis that bribes are often falsely characterised and accounted for. A successful claim under the accounting provisions does not require the SEC to first prove that the defendant engaged in a specific act of bribery; proving that false accounts or other false documents were maintained is sufficient.

This makes a civil claim under the accounting provisions potentially easier and more attractive than a criminal prosecution under the anti-bribery provisions.

The UK and beyond

Unlike the FCPA, the UK’s Bribery Act 2010 does not mandate that companies maintain accurate books and records and control systems.

Instead, the duty of UK companies to keep adequate accounting records is set out in both the Companies Act and tax legislation. Section 386 CA2006, for example, requires all companies to keep adequate accounting records that “show and explain the company’s transactions”.

Like the US and UK, all other Organisation for Economic Co-operation and Development (OECD) member countries are committed to putting in place their own local anti-bribery laws governing accounting books and records, and prohibiting any falsification.

The anti-bribery provisions of the OECD Convention on Combating Bribery of Foreign Public Officials in International Transactions are broadly similar to those of the FCPA, and contain recommendations concerning accounting, independent external audit and internal company controls.

It states that companies ought to maintain “a system of financial and accounting procedures, including a system of internal controls, reasonably designed to ensure the maintenance of fair and accurate books, records, and accounts, to ensure that they cannot be used for the purposes of foreign bribery or hiding such bribery”.

The precise requirements that each country might take are wisely, and expediently, not set out. However, in most countries the penalties for false accounting are limited to criminal sanctions against the responsible individual, often with an accompanying knowledge requirement.

Corporate liability for inaccurate books and records is often limited or non-existent. The accounting provisions of the FCPA are more stringent than those of the Companies Act, which merely mandates that “adequate” accounting records are those which are sufficient to show and explain the company’s transactions, and to disclose with reasonable accuracy, at any time, the financial position of the company.

The FCPA does not contain a materiality or lower threshold limit, which means that any transaction, however small, can trigger a breach of the accounting provisions if it is reflected incorrectly.

Clearly, inadvertent mistakes in record-keeping, or insignificant or technical accounting errors of which management was not aware would not result in prosecution. Conversely, though, if people knowingly avoid controls, fail to put in controls in the first place, or deliberately falsify records, then this is a crime and can be dealt with under the criminal law [U.S.C. § 78m(b)(5)].

Working on the basis that it is best to work to the tightest set of rules, a reseller or distributor with growth ambition needs to ensure it complies with the accounting provisions of the FCPA.

UK-based suppliers to international businesses will not only have to confirm full FCPA-compliance but also ensure this compliance has, in turn, been replicated through all companies over which they have control or influence.

Accuracy and detail

The accounting provisions of the FCPA mean that business records must be not only quantitatively, but also qualitatively correct, and they must record more than the bare financial facts, such as the invoice number and the amount. The law demands full transparency regarding date, recipients and purpose of payment, so no omissions or inaccurate or overly-vague descriptions can be allowed.

A bribe accounted for as a ‘sales cost’, for example, would be considered misleading – although literally true (in that the bribe was paid to increase sales) it would be inaccurate because it did not sufficiently specify the nature of the payment.

One key point to note is that the ‘accounting’ requirement of the FCPA is not limited to accuracy in accounting systems or allocating cost codes, but it applies widely across all business records and even internal documents. Everything, down to the last expense receipt, notes, memos and schedules, disks, diary items or “transcribed information of any type” must be sufficiently detailed so that a third party would be able to get a complete understanding of all the significant aspects of a transaction [15 U.S.C. § 78c].

Keep in mind that companies do not need to produce more extensive documentation than is typical in the ordinary course of business, but simply a level of detail and degree of assurance “as would satisfy prudent officials in the conduct of their own affairs” [15 U.S.C. § 78].

Facilitation payments

Finally, a comment on what are known as ‘facilitation’ or ‘grease’ payments.

While facilitation payments are invariably illegal in the country in which they were paid, it has become well-known that the FCPA does not criminalise certain payments made to expedite or secure performance of a routine, non-discretionary governmental action.

It is important, though, to remember that there is no facilitation payment exception under US accounting rules, which makes accounting for such payments exceedingly difficult. The only way  to do so properly under the FCPA is to account for them as something like ‘FCPA-permitted facilitation payments’.

This, however, raises all sorts of problems. For one thing, a company must ensure that all its staff understand the difference between a facilitation payment and a bribe. Although this should stop bribes being accounted for, it is a tricky situation because even experienced FCPA lawyers disagree on what constitutes a true facilitation payment.

Another difficulty is that it takes a brave company to explicitly admit to bribing in its accounts – in the US it might be legal but it won’t be in other places, and this account has red flashing lights around it, just inviting scrutiny.

That scrutiny might come from the US authorities, who will be keen to confirm that the very tight restrictions on bona fide facilitation payments under the FCPA have been adhered to. It will also come from UK prosecutors and regulators, where there is no such facilitation payments exception.

The Bribery Act criminalises the making of all bribes, worldwide, no matter how small. Perhaps even more importantly, if a company has a policy of allowing facilitation payments, then the UK courts may not view its policies as constituting “adequate procedures” under Section 6 of the Act, and this could lead to prosecution of the company itself if a single bribe was found.

This would be the case even if it was an American company trading in the UK, believing itself to be governed by US laws and able to make facilitation payments with impunity.

Keep calm and carry on

Although compliance with the UK Bribery Act, the FCPA, and other international anti-bribery legislation can seem like a daunting task, the majority of resellers and distributors will already have procedures in place that encourage detailed and accurate book keeping.

In the current economic climate, there is every incentive for business owners to understand their company’s finances in even greater detail, with a view to maximising profit and ensuring sustainability.

This not only makes good business sense but is also the approach most likely to ensure that potential violations are caught early. If, on the other hand, you find that your accounting procedures leave something to be desired, now is the time to act to remedy any deficiencies.

David Lawler FCA is a partner at Forensic Risk Alliance (FRA), a specialist forensic accounting and data consulting firm with offices in the UK, US, France and Switzerland. He is experienced in helping international firms deal with bribery and white-collar crime, and is the author of Frequently Asked Questions in Anti-Bribery and Corruption, published by John Wiley & Sons in 2012.