In 2020, Goldman Sachs paid $2.9 billion for its role in a massive bribery and embezzlement scheme tied to 1Malaysia Development Berhad, a government-run development fund in Malaysia. Taking place between 2009 and 2014, lapses in Goldman’s compliance led to the theft of more than $2.7 billion, used by corrupt officials to fund lavish purchases like yachts and real estate—and highlighting the critical need for sanction screening for businesses.
Besides leading to criminal charges against its Malaysian subsidiary, the scandal tarnished Goldman’s reputation and shined a light on its compliance failures. To date, the settlement is the largest penalty ever for violating the Foreign Corrupt Practices Act (FCPA), a U.S. law aimed at curbing bribery and corruption in international business.
Established in 1977, the FCPA sets the standard for anti-corruption laws worldwide. Compliance isn’t just a legal requirement but a safeguard for reputation and financial stability. Below, we explore the key aspects of FCPA compliance, its impact on businesses, and actionable steps to ensure adherence.
Understanding the Foreign Corrupt Practices Act (FCPA)
The FCPA, enforced by the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), is designed to prevent bribery of foreign officials and ensure accurate financial record-keeping. Its provisions are twofold:
- Anti-bribery provisions: Prohibit offering, paying, or promising anything of value to foreign officials to gain business advantages.
- Accounting provisions: Mandate maintaining accurate books and records and implementing internal controls to detect and prevent corrupt practices.
Non-compliance with the FCPA can lead to severe consequences. Civil and criminal penalties imposed by the DOJ and SEC vary based on the provision breached, but generally look as follows:
- Civil penalties: For anti-bribery violations, the DOJ and SEC can impose civil penalties of more than $20,000 per violation for corporations and individuals, with individuals prohibited from having their penalties paid by employers. For accounting violations, the SEC may impose fines close to $200,000 for individuals and more than $900,000 for corporations, depending on the severity and risk to investors.
- Criminal penalties: Corporations found in violation of the FCPA may face fines of up to $5 million for anti-bribery violations and up to $25 million for accounting violations. Individuals meanwhile can incur fines of up to $250,000 for anti-bribery offenses and up to $5 million for accounting violations, along with potential imprisonment of up to five years for anti-bribery offenses or up to 20 years for accounting-related offenses.
It’s important to note, however, that the figures above are adjusted periodically for inflation.
Apart from fines and criminal charges, businesses may also face debarment from future government contracts. Additionally, they often suffer from reputational damage.
In the Goldman Sachs case, high-profile executives were implicated, with claw backs and compensation reductions totaling over $170 million. Acknowledging internal compliance failures, Goldman has since grown its compliance team—but it continues to contend with the lingering fallout on its credibility.
What Does FCPA Compliance Involve?
Given that non-compliance can lead to severe financial penalties and lasting reputational harm, understanding the FCPA is crucial, especially for businesses operating internationally.
To ensure FCPA compliance, companies must establish and maintain robust systems designed to prevent corruption. Key components include:
- Due diligence: Conduct thorough background checks on foreign partners, third parties, and stakeholders to identify potential risks.
- Employee training: Educate employees on anti-corruption policies and best practices to ensure understanding and adherence.
- Internal reporting mechanisms: Create channels for employees to confidentially report potential violations.
- Cooperation with authorities: Be prepared to work with regulators during investigations or enforcement actions.
A big piece of compliance is being able to identify potential red flags and understanding what FCPA violations look like. Obvious examples include falsifying accounting records to conceal bribes and so-called “grease payments” made to foreign officials to expedite certain services. Less obvious violations are gifts to third parties as an indirect way of influencing. The DOJ and SEC provide a few examples of improper travel and entertainment, including giving government officials and decision makers dinners, drinks, and trips.
How Does FCPA Compliance Impact Your Business?
The FCPA applies broadly to U.S. companies, their foreign subsidiaries, and any foreign entities connected to U.S. operations. However, certain types of companies may require extra vigilance in ensuring compliance:
- Industries with high corruption risks: Companies in the oil and gas, construction, medical devices, pharmaceuticals, telecommunications, and defense sectors tend to be subject to heightened scrutiny. Frequent dealings with government entities, large-scale contracts, and regulatory approvals increase the risk of corruption in these industries.
- Companies in high-growth stages: Startups and mid-sized firms expanding internationally may lack robust compliance frameworks, while the pressure to secure contracts in new or high-risk markets increases their vulnerability to FCPA violations. Also, companies involved in mergers and acquisitions (M&A) must exercise caution because of inheriting potential FCPA liabilities from the target company. These liabilities can lead to unexpected financial losses, as seen in a $63M loss that underscores the critical role of due diligence.
- Businesses with complex third-party relationships: Companies relying on agents, distributors, or joint ventures face significant risk, as improper actions by third parties can trigger FCPA liability, particularly in regions with weak anti-corruption enforcement.
- Publicly traded companies: Publicly traded firms, especially those listed in the U.S., face stringent scrutiny under the FCPA’s accounting provisions, requiring strong financial controls and transparent record-keeping to avoid violations.
How to Ensure FCPA Compliance: A Complete Checklist
To minimize exposure to FCPA violations, companies must set proactive controls and processes in their operations and organizational culture. Below are five key items to consider.
- Conduct risk assessments. First, determine your business’s level of risk by considering factors like the types of foreign transactions you’re involved in, the geographic location of these transactions, and the federal regulations your company must comply with. Depending on these factors, it may be necessary to regularly evaluate your business's exposure to corruption risks.
- Vet employees, vendors, and other third parties. A key piece of FCPA compliance is rigorous vetting, particularly for individuals with direct contact with decision-makers, control over financial data, or agency authority. While basic checks may suffice for lower-risk employees and vendors, extreme vetting is often necessary for those in financial and decision-making roles or job roles with potential conflicts of interest. Background checks can reveal red flags, such as connections to or a history of bribery or corruption.
- Train employees. Provide ongoing education about FCPA regulations and create a culture of compliance. For example, educate employees to look out for potential red flags like unusual payment patterns and excessive commissions. Also, make it easy for employees to report potential violations, like with an anonymous reporting channel.
- Establish internal controls. Implement robust accounting systems and monitoring mechanisms to detect and prevent corrupt practices. That could include periodic audits and clear approval hierarchies so that multiple levels of oversight are necessary for sensitive transactions.
- Maintain accurate records. Keep detailed records of all financial transactions, including receipts, invoices, and contracts. Also create a centralized system to document due diligence efforts and contracts.
FCPA Compliance with Business Screen
Unfortunately, today’s challenging economic conditions increase the risk of FCPA violations, with the global recession intensifying financial pressures on businesses. For some companies, intense competition can push leaders to focus on profitability, often at the expense of regulatory priorities.
Partnering with a trusted service like Business Screen can help your organization navigate the complexities of FCPA compliance. Business Screen specializes in conducting comprehensive background checks on companies and individuals, reducing the risk of associating with entities that might jeopardize your compliance efforts.
By proactively identifying potential red flags, Business Screen empowers your business to operate with integrity and confidence in the global marketplace. Take the first step towards robust FCPA compliance today—partner with Business Screen to protect your business from corruption risks and secure your reputation.
Contact us to learn how background checks can help ensure your FCPA compliance and protect your business from corruption risks.
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