FOREIGN CORRUPT PRACTICES ACT

CRS Report for Congress
Foreign Corrupt Practices Act
March 3, 1999
Michael V. Seitzinger
Legislative Attorney
American Law Division

Congressional Research Service ˜ The Library of Congress

ABSTRACT
The Foreign Corrupt Practices Act of 1977 was intended to prohibit bribery of foreign
officials by American corporations. This report discusses the Foreign Corrupt Practices Act
of 1977, the major 1988 amendments, and the 1998 amendments bringing the Act into
conformance with the Organization for Economic Cooperation and Development’s agreement
on bribery.

Foreign Corrupt Practices Act
Summary
The Foreign Corrupt Practices Act of 1977 was enacted principally to prevent
corporate bribery of foreign officials. This Act had three major parts: 1. It required
the keeping by corporations of accurate books, records, and accounts; 2. It required
issuers registered with the Securities and Exchange Commission to maintain a
responsible internal accounting control system; and 3. It prohibited bribery by
American corporations of foreign officials.
The Act was amended in 1988 in response to numerous criticisms. One of the
changes enacted a “knowing” standard in order to find violations of the Act. Certain
defenses were provided against finding violations of the Act.
In 1998 Congress amended the Act in order for it to comply with the
Organization for Economic Cooperation and Development’s agreement on bribery.

Foreign Corrupt Practices Act
During the mid-1970's investigations and administrative and legal actions against
numerous domestic corporations revealed that the practice of making questionable or
illegal payments by United States corporations to foreign government officials existed
to some extent within the American business community. The legal and regulatory
mechanisms for dealing with these payments had involved actions by the Securities
and Exchange Commission (SEC) against public corporations for concealing from
required public disclosure substantial payments made by the firm and the potential for
an antitrust action for restraints of trade or fraud prosecutions by the Justice
Department.
Government officials and administrators contended that more direct prohibitions
on foreign bribery and more detailed requirements concerning corporate record
keeping and accountability were needed to deal effectively with the problem. The
revelations of slush funds and secret payments by American corporations were stated
to have affected adversely American foreign policy, damaged abroad the image of
American democracy, and impaired public confidence in the financial integrity of
American corporations. Congress responded with the passage of the Foreign¹²
Corrupt Practices Act of 1977.
The principal purpose of the 1977 Act was to prevent corporate bribery of
foreign officials. It has three basic provisions to accomplish this purpose. 1. The Act³⁴
amended section 13(b) of the Securities Exchange Act of 1934 to require issuers
which must register their securities with the SEC to keep detailed books, records, and
accounts which accurately record corporate payments and transactions. 2. SEC
registered issuers must institute and maintain an internal accounting control system⁵
to assure management’s control, authority, and responsibility over the firm’s assets.
3. Domestic corporations, whether or not registered with the SEC, are prohibited
from corruptly bribing a foreign official, a foreign political party, party official, or
candidate for the purpose of obtaining or maintaining business. Two provisions of the⁶
1977 Act provide criminal penalties for any American business which uses the mails
or interstate commerce “corruptly” in furtherance of an offer or payment of money
or anything of value to a “foreign official” or to a political party, party official, or

See S.Rept. 95-114, 95 Cong., 1 Sess., at 3 (1977).¹^th^st
P.L. 95-213, Title I; 91 Stat. 1494, Dec. 19, 1977.²

15 U.S.C. § 78m(b).³

15 U.S.C. §§ 78a et seq.⁴

15 U.S.C. § 78m(b)(2)(B).⁵

15 U.S.C. §§ 78dd-1 and 78dd-2.⁶

making or to use his influence to assist the firm in obtaining or retaining business.
The 1977 Act also prohibits the payment of money to any person by a business
if the business knew or had reason to know that the payment was to be used to bribe
a foreign official for his influence in obtaining or retaining business. Congressional
intent appears to place an affirmative responsibility on the corporation to exercise
control over its officers, directors, and employees and to take steps to assure that its
foreign agents are not using corporate assets or payments made to them to bribe⁷
foreign officials.
Under the 1977 Act not all payments to employees of foreign governments were
intended by Congress to be considered illegal bribes. For example, the definition of
“foreign official” excluded employees of a foreign government “whose duties are
essentially ministerial or clerical.” Also, the legislative history of the Act specifically
states that it was not intended to cover “grease payments” to foreign officials,
explained as “payments for expediting shipments through customs or placing a
transatlantic telephone call, securing required permits, or obtaining adequate police
protection, transactions which may involve even the proper performance of duties.”⁸
The legislative history also suggests that extortions of money by foreign officials may
be used as a defense against bribery charges by a business if its property or lives of its
employees have been threatened. An example used to illustrate acceptable payments
was the payment to a foreign official to prevent the dynamiting of an oil rig.⁹
Almost since passage of the 1977 Act, there has been frequent criticism of its
operation. Opponents have argued that “grey” areas of the law, where what is
permitted may not be clear, have had a chilling effect on United States export trade
because many companies have ceased foreign operations rather than face the
uncertainties in the Foreign Corrupt Practices Act. Some critics of the Act have
contended that these provisions have cost up to $1,000,000,000 annually in lost
United States export trade. Critics of the Act have argued for precise and specific
guidelines to be enacted as to what is prohibited and what particular conduct is
permitted, instead of the vague standards of the 1977 Act, and have argued for
precise statutory language to effectuate Congress’s original intent to allow “grease”
payments.
Critics of the 1977 Act also argued for the removal of the “reason to know”
standard concerning liability for actions of a firm’s agent in a foreign country. This
would eliminate the legal responsibility of the management of a domestic firm over the
unauthorized and undirected actions of an agent without the necessity of
management’s also showing that it had no “reason to know” that the agent was using
corporate funds, payments, or commissions to bribe foreign officials. These critics
argued that American firms should not have to bear the responsibility of playing
detective concerning the independent actions of persons that they retained as agents
in foreign countries.

S.Rept. 95-114, at 1.⁷
S.Rept. 95-114, at 10.⁸
S.Rept. 95-114, at 10-11.⁹

Act were too costly and burdensome upon domestic firms, especially when potential
criminal penalties within the Act for failure to institute adequate controls arguably
made officials of firms overly and unnecessarily cautious in implementing costly
accounting controls. The public record keeping requirements were also criticized as
unduly burdensome. Critics of the Act argued for a materiality standard for public
record keeping in which a firm would be required only to report expenditures and
outlays deemed material to the profits and revenues of the firm.
Another frequent criticism of the 1977 Act was that the United States was more
interested in exporting its cultural biases than its products. It was argued that, in
nations in which acceptance of a fee or payment by a government official from one
doing business with the government is customary and not unlawful under the laws of
that nation, no violation of a United States law should occur. Critics also argued that
an international agreement among the world’s industrialized nations prohibiting
businesses of all those countries from bribing foreign officials was necessary to
prevent businesses of other countries from gaining an unfair and harmful competitive
advantage over American businesses.
In response to these criticisms, Congress for a number of years considered
amending the 1977 Foreign Corrupt Practices Act. After a great deal of debate
through at least three Congresses, the Foreign Corrupt Practices Act Amendments of
1988 were signed into law as Title V of the Omnibus Trade and Competitiveness Act
of 1988 on August 23, 1988. Although the amendments maintained the three major¹⁰
parts of the 1977 Act discussed above, the accounting standards, the requirements of
SEC registered issuers, and the anti-bribery provisions, the 1988 Amendments made
some significant changes in the 1977 Act.
Section 5002 of the Trade Act amends section 13(b) of the Securities Exchange
Act to provide that no criminal liability shall be imposed for violation of the
accounting standards unless a person knowingly circumvents or knowingly fails to
implement a system of accurate and reasonable accounting controls. According to the
legislative history, this provision is intended to ensure that criminal penalties would
be imposed where acts of commission or omission in keeping books or records or
administering accounting controls have the purpose of falsifying books, records, or
accounts or of circumventing the accounting controls. This is also intended to include
the deliberate falsification of books and records and other conduct calculated to evade¹¹
the internal accounting controls requirement.
Section 5002 of the Trade Act also adds to section 13(b) of the Securities
Exchange Act a provision that an issuer which holds 50% or less of the voting power
of a domestic or foreign firm is required to use its influence only in good faith to
cause the domestic or foreign firm to devise and maintain a system of acceptable
accounting controls. The House Report states that this amendment is intended to

P.L. 100-418, 102 Stat. 1107.¹⁰
H. Rept. 100-576, 100 Cong., 2d Sess., at 916-917 (1988).¹¹^th

degree of influence over the accounting practices of a subsidiary.¹²
For purposes of the accounting standards, “reasonable assurances” and
“reasonable detail” mean such level of detail and degree of assurance as would satisfy
prudent officials in the conduct of their own affairs. Thus, the prudent man
qualification was adopted to clarify that the current standard does not require an
unrealistic degree of exactitude or precision.
Section 5003 of the Trade Act amends the provisions of the Foreign Corrupt
Practices Act which concern the anti-bribery prohibitions by issuers and domestic
concerns. It remains prohibited for any issuer which has a class of securities
registered with the Securities and Exchange Commission or for any officer, director,
employee, or agent of the issuer or any stockholder acting on behalf of the issuer or
for any United States concern to make use of the mails or other means of interstate
commerce to offer, pay, promise to give, or authorize the giving of anything of value
to a foreign official, a foreign political party, party official, candidate, or any person
for the purpose of obtaining or maintaining business. Section 5003 amended the 1977
Act to prohibit payments to any foreign official for the purpose of “influencing any act
or decision of such foreign official in his official capacity, or inducing such foreign
official to do or omit to do any act in violation of the lawful duty of such official.”
This language was inserted so that the foreign bribery standard would conform to the
domestic bribery standard found in 18 U.S.C. section 201.¹³
The “knowing” requirement is retained, and the “recklessly disregarding”
standard was abandoned in conference. However, the “knowing” requirement is
intended to encompass the “conscious disregard” and “willful blindness” standards,
including a conscious purpose to avoid learning the truth.
[T]he Conferees agreed that “simple negligence” or “mere
foolishness” should not be the basis for liability. However, the Conferees
also agreed that the so-called “head-in-the-sand” problem--variously
described in the pertinent authorities as “conscious disregard,” “willful
blindness” or “deliberate ignorance”--should be covered so that
management officials could not take refuge from the Act’s prohibitions by
their unwarranted obliviousness to any action (or inaction), language or
other “signaling device” that should reasonably alert them of the “high¹⁴
probability” of an FCPA violation.
The major changes which section 5003 of the Trade Act makes in the 1977
Foreign Corrupt Practices Act have to do with when the bribery provisions will not
be found to apply to an American business or person acting on behalf of an American
business. For example, the anti-bribery provisions shall not apply to any facilitating
or expediting payment to a foreign official, political party, or party official if the
purpose is to expedite or to secure the performance of a routine governmental action
by a foreign official, political party, or party official.

H.Rept. 100-576, at 917.¹²
H.Rept. 100-576, at 918.¹³
H.Rept. 100-576, at 920.¹⁴

defenses” in urging that no violation of the FCPA has occurred. The first of these
enumerated affirmative defenses is that the payment, gift, offer, or promise of
anything of value that was made was lawful under the written laws and regulations of
the foreign official’s, political party’s, party official’s, or candidate’s country.
Another affirmative defense is that the payment, gift, offer, or promise of anything of
value that was made was a reasonable and bona fide expenditure, such as travel and
lodging expenses which were incurred by or on behalf of a foreign official, party,
party official, or candidate, and was directly related to the promotion, demonstration,
or explanation of products or services or the execution or performance of a contract
with a foreign government or agency. This defense would not apply, however, if a
payment or gift is corruptly made in return for an official act or omission because it
would then not be a bona fide, good faith payment.
The Attorney General, after consulting with certain named other federal officials,
is required to issue guidelines which describe specific types of conduct which would
fit within the affirmative defenses and also general precautionary procedures which
issuers may use in order to comply with the amendments. The Attorney General is
also required to issue an opinion within thirty days of a request to provide a response
to a specific inquiry by an issuer concerning the conformance of its conduct with
Department of Justice guidelines.
In the definitional sections of the amendments, the terms “knowing” and “routine
governmental action” are especially important. A person’s state of mind is “knowing”
with respect to conduct, a circumstance, or a result if the person is aware of engaging
in the conduct, that the circumstance exists, or that the result is substantially certain
to occur or if the person has a firm belief that the circumstance exists or that the result
is substantially certain to occur. When knowledge of the existence of a particular
circumstance is required for an offense, the knowledge is established if a person is
aware of a high probability of the existence of the circumstance unless the person
actually believes that the circumstance does not exist.
“Routine governmental action” is only ordinarily and commonly performed by
a foreign official in obtaining permits, licenses, or other official documents to qualify
a person to do business in a foreign country; processing governmental papers;
providing police protection, mail pick-up and delivery, or scheduling inspections
associated with contract performance or inspections related to transit of goods across
country; or providing phone service, power and water supply, loading and unloading
cargo, or protecting perishable products or commodities from deterioration. The term
does not include any decision by a foreign official whether or on what terms to award
new business to or to continue business with a particular firm.
The amendments also increased penalties for violations of the Foreign Corrupt
Practices Act. The maximum criminal fine for a firm or domestic concern was raised
from $1,000,000 to $2,000,000 and for individuals from $10,000 to $100,000. The
maximum potential imprisonment for an individual remained at five years. There was
also a new civil penalty of $10,000.
One of the continuing criticisms of the FCPA was that American businesses were
at a disadvantage in obtaining business abroad because many of the other
industrialized nations do not have severe penalties for bribing foreign officials. Over
the years there has been a considerable amount of international interest in

Cooperation and Development (OECD) has given a great deal of attention to this
issue. The OECD is an organization which permits governments from primarily
industrialized democracies to study and formulate policies concerning economic and
social issues. On November, 21, 1997, negotiators from the twenty-nine OECD¹⁵¹⁶
member states and five other countries adopted in Paris a Convention on Bribery
of Foreign Public Officials in International Business Transactions (Convention). A
signing ceremony occurred in Paris on December 17, 1997.
In many ways the OECD Convention on Bribery is very similar to the Foreign
Corrupt Practices Act. However, there were a few differences which necessitated
changes in the FCPA in order for the FCPA to conform with the OECD Agreement.
In the 105 Congress these needed changes were enacted as P.L. 105-366.^th
P.L. 105-366 revised the Securities Exchange Act of 1934 and the FCPA to
prohibit conduct intended to obtain improper advantages from foreign officials by
securities issuers, officials of international organizations, and domestic concerns. It
redefined “foreign official” to include an official of a public international organization.
It declared that it is unlawful for any issuer organized under United States laws to
commit specified prohibited acts outside the United States. It also amended the
FCPA to prohibit specified foreign trade practices by a covered person or any officer,
director, employee, agent, or stockholder of the covered person while in United States
territory.

OECD member countries are Austria, Australia, Belgium, Canada, Czech Republic,¹⁵
Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea,
Luxembourg, Mexico, New Zealand, The Netherlands, Norway, Poland, Portugal, Spain,
Sweden, Switzerland, Turkey, United Kingdom, and the United States.
Argentina, Brazil, Bulgaria, Chile, and the Slovak Republic.¹⁶