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value” to:

1. Any foreign official,
2. Any foreign political party or official thereof, or
3. Any person, while knowing or having reason to know that all or a portion of
the payment will be offered to any of the preceding groups or any candidate for
foreign political office.2

Moreover, it should be noted that certain payments called “facilitating” or
“grease” payments are not covered under the act because such payments are min-
isterial or clerical. However, with respect to disclosure of such payments, the SEC

These so-called facilitating payments have been deemed to be material where the
payments to particular persons are large in amount or the aggregate amounts are
large, or where corporate management has taken steps to conceal them through false
entries in corporate books and records.3

Thus it is management™s responsibility to identify and determine whether pay-
ments for customs documents or minor permits, which are essentially facilitating
payments, should be disclosed.
As mentioned in Appendix E on this book™s website, the Foreign Corrupt Prac-
tices Act was amended in August 1988. The amendments not only limited crimi-
nal penalties to individuals who knowingly failed to comply with the internal
accounting control provision but also clarified the term bribery and increased
penalties.4 As Judith L. Roberts reports, the amendments™ clarification and re-
striction of criminal penalties should substantially reduce the compliance burden
and anticompetitive impact of the Foreign Corrupt Practices Act.5 In addition,
Marlene C. Piturro observed that since the enactment of the act, the FBI has un-
covered “400 cases of misconduct and recouped $300 million in illegal pay-
ments.”6 See Appendix E on this book™s website, for further discussion of the act.
Triton Energy Corporation, for example, disclosed the following in its annual
report to stockholders:

The act is contained in Title I of Public Law No. 95-213. (See Appendix E on this book™s website.)
Securities and Exchange Commission, “Report of the Securities and Exchange Commission on
Questionable and Illegal Corporate Payments and Practices,” submitted to the Senate Banking, Hous-
ing and Urban Affairs Committee, May 12, 1976, p. 27.
The amendments are contained in The Omnibus Trade and Competitiveness Act, in Title V of Public
Law No. 100-418, August 23, 1988. (See Appendix E on this book™s website.)
Judith L. Roberts, “Revision of the Foreign Corrupt Practices Act by the 1988 Omnibus Trade Bill:
Will It Reduce the Compliance Burdens and Anticompetitive Impact?” Brigham Young University
Law Review, No. 2 (1989), p. 506.
Marlene C. Piturro, “Just Say . . . Maybe,” World Trade 5, No. 5 (June 1992), p. 86.
Questionable Foreign Payments 351

Federal Securities Lawsuits”From May 27, 1992, through June 15, 1992, six sepa-
rate suits were filed in federal district court in Dallas, Texas, by alleged sharehold-
ers against the Company and various present and former directors and officers of the
Company. Plaintiffs in all of these cases seek to represent alleged classes of persons
and/or entities who purchased the Company™s securities. The plaintiffs in five of the
six suits allege violations of the Securities Exchange Act of 1934 (the “1934 Act”)
and Rule 10b-5 promulgated thereunder, common law fraud and statutory fraud and
negligent misrepresentation. Among other allegations, the plaintiffs base their claims
upon alleged disclosure deficiencies in the Company™s reports filed under the 1934
Act with respect to the financial condition of the Company, the Janacek litigation, the
Company™s Indonesian operations, including certain alleged bribes, violations of In-
donesian law and falsified accounting records, and related arbitration and litigation
matters. Plaintiffs in these cases seek, among other relief, to recover both actual and
exemplary monetary damages in unspecified amounts. The parties to these five law-
suits have agreed, subject to the Court™s approval, to consolidate these cases into a
single lawsuit. The parties in a sixth lawsuit have not yet agreed to consolidation with
the other federal securities lawsuits. Plaintiffs in the sixth case allege violations of
Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5 promulgated thereunder.
Among other allegations, the plaintiffs assert claims based upon an alleged conspir-
acy among the defendants in the case to manipulate the price of the Company™s se-
curities and alleged insider trading. Plaintiffs in this case also allege disclosure
deficiencies, including failure to disclose material facts about the Company™s finan-
cial condition. In addition, the plaintiffs in the sixth case have asserted certain claims
against the Company™s independent auditors. Plaintiffs in this case seek, among
other relief, to recover actual and exemplary monetary damages in unspecified
amounts and to force the individual defendants to disgorge alleged profits made in
certain securities transactions.
These federal securities lawsuits are at a very preliminary stage. Due to the various
uncertainties inherent in litigation, no assurance can be given as to the ultimate out-
come of this litigation or any effect the litigation may ultimately have on the Com-
pany™s consolidated financial condition. The Company intends to vigorously defend
these lawsuits. Based on knowledge of the facts to date and consultation with its legal
advisors, including in-house counsel to the Company, the Company currently be-
lieves that the Company™s liabilities, if any, with respect to these lawsuits should not
have a material adverse effect on the Company™s consolidated financial condition.7

On May 20, 1993, the Wall Street Journal observed:

Triton Energy Corp. acknowledged that the Justice Department is investigating
whether the company violated federal law and is most likely focusing on the Foreign
Corrupt Practices Act related to Triton™s Indonesian operations. The SEC is con-
ducting a similar inquiry and the company is cooperating.8

Triton Energy Corporation, 1992 Annual Report, p. 34.
“Triton Energy Corp.: Justice Department Probing for Possible Law Violations,” Wall Street Journal
(May 20, 1993), Sec. A, p. 7, col. 3. See also Andy Zipser, “Crude Grab? How a Tiny Producer Lost
Its Indonesian Stake,” Barron™s 72, No. 21 (May 25, 1992), pp. 12“15, and “Triton to Settle SEC™s In-
donesia Bribery Charges,” Oil and Gas Journal 95, No. 10 (March 10, 1997), p. 27.
352 Reviewing Certain General Business Practices

More recently, the SEC continues to enforce the provisions of the Foreign Corrupt
Practices Act, as shown in Exhibit 12.1.

Moreover, the Organization of Economic Cooperation and Development
(OECD) reached an accord with its member countries to address the problem of
bribery in international business. As Donald J. Johnston, secretary-general of the
OECD, points out:

The Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions is an instrument which will permit OECD and other countries
to move in a co-ordinated manner to adopt national legislation to make it a crime to
bribe foreign public officials. The Convention sets a high standard for national laws.
It includes a broad, clear definition of bribery; it requires dissuasive penalties; it sets
a strong standard for enforcement; and it provides for mutual legal assistance. The

Exhibit 12.1 Selected Cases and Alleged Violations”Foreign Corrupt Practices

Date Release
Filed No. Nature of Alleged Violations
12/21/00 LR-16839 On December 21, 2000, the Commission insti-
tuted settled administrative proceedings against a
registrant for books and records violations result-
ing from payments of $22 million to foreign
officials by one of the company™s wholly owned
subsidiaries in Argentina. These improper pay-
ments were made in violation of the Foreign
Corrupt Practices Act of 1997 (FCPA). The
company also consented to the entry of a judg-
ment in U.S. District Court ordering it to pay a
$300,000 penalty.
1/15/02 LR-17310 The Commission filed a civil action against two
former officers of registrant, alleging that they
authorized over $500,000 in bribery payments to
Haitian customs officials to reduce the com-
pany™s import taxes by approximately $1.5
8/1/02 LR-17651 The Commission instituted settled cease-and-
desist proceedings against the registrant and
obtained an order directing it to pay a $150,000
penalty based on its expansion into Venezuela
and Nicaragua.

Source: Securities and Exchange Commission, 2001 and 2002 Annual Report (Washington, DC:
U.S. Government Printing Office, 2001, 2002).
Questionable Foreign Payments 353

entry into force provisions are designed to encourage signatories to act quickly and
in concert.9

The Convention contains 17 articles. Article 8 includes an accounting provision
that states:

1. In order to combat bribery of foreign public officials effectively, each Party shall
take such measures as may be necessary, within the framework of its laws and regu-
lations regarding the maintenance of books and records, financial statement disclo-
sures, and accounting and auditing standards, to prohibit the establishment of
off-the-books accounts, the making of off-the-books or inadequately identified trans-
actions, the recording of non-existent expenditures, the entry of liabilities with in-
correct identification of their object, as well as the use of false documents, by
companies subject to those laws and regulations, for the purpose of bribing foreign
public officials or of hiding such bribery.
2. Each Party shall provide effective, proportionate and dissuasive civil, administra-
tive or criminal penalties for such omissions and falsifications in respect of the
books, records, accounts and financial statements of such companies.10

Obviously, the negotiated convention by the OECD with its member nations is a
major step toward solving the problem of bribery in international business. Pre-
sumably the OECD™s convention will be adopted by the individual governments of
the member countries.

Summary Guidelines: Historical Perspective
To monitor questionable foreign payments effectively, the audit committee should
review the corporate policy and other documentation that supports management™s
compliance with such policy. Concerning corporate policy, the American Assem-
bly™s recommendations regarding the standards of corporate conduct are useful in
formulating policy guidelines:

Although American corporations operating overseas should give due regard to the
ethical judgments of other societies, each U.S. corporation can maintain only one set
of universal principles that must not be compromised in foreign subsidiaries. Some
U.S. practices of a less important nature may be adjusted to custom, practice, and
law; such cases should be evaluated before the fact and stated publicly.
American corporations should proscribe bribery and kickbacks everywhere. . . .
American corporations operating in foreign lands should not be prohibited by Amer-
ican law from contributing to political parties when such contributions are legal
under that country™s laws, expected as part of good corporate responsibility, and are

Organization of Economic Cooperation and Development, Convention on Combating Bribery of For-
eign Public Officials in International Business Transactions (Paris: OECD, 1997), p. 3.
Ibid., p. 8.
The American Assembly, The Ethics of Corporate Conduct, Pamphlet 52 (New York: Columbia Uni-
versity, April 1977), pp. 6“7.
354 Reviewing Certain General Business Practices

Such a corporate policy is essential as evidenced by a Conference Board study
whereby the Board surveyed 35 firms on their approaches to the improper payments
problem and found that “a handful” of companies did not have problems because of
their existing corporate policies and practices.12 Such companies “simply enjoin
company employees from any illegal activity or conflicts of interest.”13 However,
“many companies reported sharp divisions in their management ranks regarding the
types of payments that should be enjoined.”14 Thus it is necessary to define clearly
the proper and improper payments within the context of the Foreign Corrupt Prac-
tices Act to avoid any misunderstanding among the employees. Furthermore, the jus-
tification for such a corporate policy is supportable, as the Journal of Accountancy
observed in a study of 109 large corporations, which disclosed:
. . . Dozens of corporations maintained more than $63.1 million in off-book bank ac-
counts that were not part of the official corporate books. . . . $14.2 million in sensi-
tive payments was financial through overbilling, and $3.3 million was through . . .
phony invoices . . . $2 million was funneled through closely guarded cost funds . . .
known to just a few top company executives. Inflated expense accounts generated al-
most $500,000 more”typically for personal political contributions by key manage-
ment personnel.15

Moreover, “such payments are usually concealed by schemes that would be unde-
tectable by auditors, no matter how thorough the audit.”16 Such findings and con-
clusions totally agree with the discussion in Chapter 11.
Consequently, as Walter E. Hanson, former chairman of Peat, Marwick,
Mitchell & Co. (now KPMG Peat Marwick) points out, senior management should
establish “clear and unequivocal statements of policy and codes of conduct as
well as ˜mechanisms,™ such as the audit committee, to monitor corporate manage-
ment™s behavior.”17 In short, “self-policing by business is the only alternative . . .
to increasing government regulation and eventual government takeover.”18 See
Appendix J on this book™s website for further discussion on business conduct.
With respect to monitoring the improper foreign payments area, former part-
ner Dennis R. Beresford and James D. Bond of Ernst and Whinney (now Ernst &
Young) conclude:

A key element in preventing and detecting illegal foreign bribes is proper supervision
of employees in sensitive positions. A formal code of conduct that is appropriately
communicated and monitored is a most important step in exercising this proper care.19

James Greene, “Assuming Ethical Conduct Abroad,” Conference Board Information Bulletin, No. 12
(November 1976), p. 1.
Ibid., p. 3.
See Charles E. Simon and Company, “An Examination of Questionable Payments and Practices,”
Journal of Accountancy 145, No. 4 (May 1978), p. 7.
Walter E. Hanson, “A Blueprint for Ethical Conduct,” Statement in Quotes, Journal of Accountancy
145, No. 6 (June 1978), p. 80.
Ibid., p. 82.
Dennis R. Beresford and James D. Bond, “The Foreign Corrupt Practices Act”Its Implications to
Financial Management,” Financial Executive 46, No. 8 (August 1978), p. 32.


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