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Chapter 6

The Role of Government

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Key Legislations

• The Foreign Corrupt Practices Act (1977)• The U.S. Federal Sentencing Guidelines for

Organizations (1991)• The Sarbanes-Oxley Act (2002)• The Revised Federal Sentencing Guidelines for

Organizations (2004)• The Dodd-Frank Wall Street Reform and

Consumer Protection Act (2010)

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The Foreign Corrupt Practices Act (FCPA)

• Legislation introduced to control bribery and other less obvious forms of payment to foreign officials and politicians by American publicly traded companies

• Prior to the passing of the law, the illegality of paying bribes was punishable through secondary sources of legislation

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• Securities and Exchange Commission (SEC) could fine companies for failing to disclose such payments under its securities rules

• Bank Secrecy Act required the full disclosure of funds that were taken out of or brought into the USA

• Mail Fraud Act made the use of the U.S. mail or wire communications to transact a fraudulent scheme illegal

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• Jointly enforced by the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC)

• Encompasses all the secondary measures that were currently in use to prohibit such behavior by focusing on:

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• Disclosure: Requirement that corporations fully disclose any and all transactions conducted with foreign officials and politicians

• Prohibition: Inclusion of wording from the Bank Secrecy Act and the Mail Fraud Act to prevent the movement of funds overseas for the express purpose of conducting a fraudulent scheme

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• Criticized for lack of real authority because of its formal recognition of facilitation payments• Facilitation payments: Acceptable (legal)

provided they secure the performance of a routine governmental action• Routine governmental action (FCPA): Any regular

administrative process, excluding any action taken by a foreign official in the decision to award new or continuing business

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Figure 6.1 - Illegal versus Legal Behaviors under the FCPA

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Figure 6.1 - Illegal versus Legal Behaviors under the FCPA

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The U.S. Federal Sentencing Guidelines For Organizations (FSGO) 1991

• Hold businesses liable for the criminal acts of their employees and agents

• Penalties under FSGO• Monetary fines• Organizational probation• Implementation of an operational program to

bring the organization into compliance with FSGO standards

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MONETARY FINES UNDER THE FGSO

• Process for calculating a fine• Determination of the base fine - Will be the

greatest of:• Monetary gain to the organization from the offense• Monetary loss from the offense caused by the

organization• Amount determined by a judge based on an FSGO

table

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• Culpability score: Calculation of a degree of blame or guilt that is used as a multiplier of up to 4 times the base fine• Can be adjusted according to aggravating or

mitigating factors

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Aggravating factors• High-level personnel involved

in or tolerated the criminal activity

• Organization willfully obstructed justice

• Organization had a prior history of similar misconduct

• Current offense violated a judicial order, an injunction, or a condition of probation

Mitigating factors• Organization had an effective

program to prevent and detect violations of law

• Organization:• Self-reported the offense to

governmental authorities• Cooperated in the

investigation• Accepted responsibility for

the criminal conduct

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• Determining the total fine amount - Base score multiplied by the culpability score• Death penalty: Fine that is set high enough to match

all the organization’s assets and put the organization out of business• Warranted where the organization was operating

primarily for a criminal purpose

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Organizational Probation

• Organizations can be sentenced to probation for up to five years

• Requirements for the status of probation • Reporting the business’s financial condition to

the court on a periodic basis

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Organizational Probation

• Remaining subject to unannounced examinations of all financial records by a designated probation officer and/or court-appointed experts

• Reporting progress in the implementation of a compliance program

• Being subject to unannounced examinations to confirm that the compliance program is in place and is working

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Steps for a Compliance Program

• Management oversight• Corporate policies• Communication of standards and procedures• Compliance with standards and procedures• Delegation of substantial discretionary

authority• Consistent discipline• Response and corrective action

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Revised FSGO 2004

• Key changes• Required companies to periodically evaluate the

effectiveness of their compliance programs on the assumption of a substantial risk that any program is capable of failing

• Revised guidelines required evidence of actively promoting ethical conduct rather than just complying with legal obligations

• Accountability more clearly defined

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Sarbanes-Oxley Act (2002)

• Legislative response to the corporate accounting scandals of the early 2000s that covers the financial management of businesses

• Contains 11 sections relating to prominent examples of corporate wrongdoing• Public company accounting oversight board:

Independent oversight body for auditing companies

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• Auditor independence• Corporate responsibility• Enhanced financial disclosures• Analyst conflicts of interest• Commission resources and authority• Studies and reports• Corporate and criminal fraud accountability

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• White-collar crime penalty enhancements• Corporate tax returns• Corporate fraud and accountability

• SOX does not help you create an ethical corporate culture or hire an effective and ethical board of directors

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Dodd-Frank Wall Street Reform and Consumer Protection Act 2010

• Legislation that was promoted as the fix for the extreme mismanagement of risk in the financial sector that lead to a global financial crisis in 2008–2010• Consumer Financial Protection Bureau (CFPB):

Oversees financial products and services

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Dodd-Frank Wall Street Reform and Consumer Protection Act 2010

• Financial Stability Oversight Council (FSOC): Prevents banks from failing and otherwise threatening the stability of the U.S. economy

• Volcker rule - Limits the ability of banks to trade on their own accounts in any way that might threaten the financial stability of the institution

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