Ethics Hotlines and the FCPA
In 1977, Congress enacted the U.S. Foreign Corrupt Practices Act (“FCPA”) to combat bribery as a business practice. Recently, the U.S. Department of Justice and the Securities and Exchange Commission released a guidance document articulating their focus on FCPA violations, stating “In the three decades since Congress enacted the FCPA, the extent of corporate bribery has become clearer and its ramifications in a trans-national economy starker.”
While the FCPA may be starting to take center stage in the modern economy, the following sentence from this guidance document merely states the cliché: “An effective compliance program should include a mechanism for an organization’s employees and others to report suspected or actual misconduct or violations of the company’s policies on a confidential basis and without fear of retaliation.”
To understand why the ethics hotline is such an important tool in situations involving allegations of corrupt practices under the FCPA, one needs to consider the essential elements required to win a government prosecution of a violation. In many FCPA cases, it is the mindset, or, “scienter,” of the offending party that is at issue. What was the purpose of the payment or gift? Was the employee trying to impact the outcome of an exchange through undue influence?
The anonymous hotline call in the FCPA setting could come in from the one employee or third party with actual knowledge of an impermissible transaction, who can narrow the various interpretations of what transpired. This FCPA-related anonymous hotline report can then trigger an internal compliance investigation that speaks to the appropriate employee, collects relevant documentation, determines an appropriate response, and otherwise follows steps in the relevant standard operating procedure.
FCPA violations can be more challenging to identify and decipher than other compliance violations. By their very nature, FCPA violations tend to be recorded as accounting transactions, looking routine, and as part of hundreds – if not thousands – of other numbers in spreadsheets. It can be tricky to pinpoint a potential FCPA violation in a sea of numerical transactions.
Examples to illustrate this point can be taken both from the guidance document and from reported cases, including bribes incorrectly characterized as commissions, royalties, consulting fees, sales and marketing expenses, rebates, discounts, petty cash, and write-offs. Every one of these expense categories can be proper. It’s the peeling away of the accounting entry to get into the purpose of the payment that becomes the added value to a company’s compliance program from the employee reporting hotline.
Whether your company requires compliance with the FCPA or other statutes, the opportunity for management to learn more about what individual employees are doing can and should be enhanced through the anonymous hotline. It is true that management cannot be everywhere all the time, but, if management is to be effective and pro-active, it’s the element of the hotline that allows for 24/7 global eyes and ears.