As if hefty fines and the threat of jail time weren't enough, manufacturers that bribe foreign officials could lose potential business deals.
More investors are backing out of business deals because of their prospective partners' less-than-stellar ethical reputation, according to a Deloitte Financial Advisory Services survey.
The firm's "Look Before You Leap" survey published in February of more than 500 investors and executives shows 63% of respondents said they renegotiated or pulled out of planned business relationships, mergers or acquisitions over a three-year period because of Foreign Corrupt Practices Act, or FCPA, issues.
Since the 2004-2005 timeframe, the federal government has cracked down on multinational corporations that are guilty of bribing foreign officials through FCPA. The stepped-up enforcement has led to record fines and in some cases imprisonment. But experts caution another negative side-effect could be lost business opportunities.
"I think most companies are saying they are conducting this kind of integrity, FCPA due diligence and all agree this is a very important area to concentrate in," says Wendy Schmidt, leader of Deloitte's business intelligence services practice..
Increasingly, investors are examining whether a company has had issues in the past with corruption. This includes investigating falsified documents, the use of slush funds and past issues with payoffs or awarding contracts to relatives of public officials, Schmidt says.
Specific reasons cited by survey respondents who said they renegotiated or pulled out of deals, included:
- A lack of transparency or unusual payment structures (25%)
- Use of agents, consultants, distributors or third parties to obtain or facilitate business (20%)
- Sales in high-risk countries (18%)
Some manufacturers are reluctant to implement robust compliance programs because they don't view it as a value-added activity. In some cases, companies believe fines are simply a cost of doing business, and those businesses are willing to gamble because detection is relatively low, says Bill Athanas, a corporate attorney with Waller Lansden Dortch & Davis LLP in Birmingham, Ala.
But the cost of doing nothing can be much greater than manufacturers think if a violation occurs.
"If you don't comply, the cost of conducting investigations and responding to government investigations is very, very high so by doing due diligence and trying to prevent these problems it will go a long way to avoiding these costs on the other end," Schmidt says.
Ben Heineman, senior fellow at Harvard's schools of law and government and former General Electric senior vice president and general counsel, points to Siemens AG as a prime example of how noncompliance can backfire. The company paid a record $1.6 billion FCPA fine in 2008 for paying off foreign officials.
"The costs are minor compared to the failures," Heineman says. "Look at Siemens. That cost them billions of dollars out of pocket. Not to mention the loss of the leadership, the loss of reputation, the loss of the CEO -- an enormous amount of time to rebuild and rehabilitate the company. So the argument that we're getting away from strategy and becoming an enterprise full of checkers is, I think, completely fallacious."
Aside from the financial costs, individuals who violate the law could lose their freedom, Athanas notes.
"The fear that not only might my company have to pay a fine, but I might go to jail is something that definitely resonates with a typical senior manager in a U.S. company," he says.
Check out the upcoming April issue of IndustryWeek for further coverage on compliance and how the Foreign Corrupt Practices Act impacts manufacturers.