Case Study 3

CASE STUDY NO. 3

Antibribery Laws Force U.S. Companies to Raise the Bar on Business Ethics

In the mid-1970s, investigations by the U.S. Securities and Exchange Commission (SEC) revealed that more than 400 companies in the United States had made illegal or questionable payments to foreign sources. To clean up the United States’ image overseas, Congress enacted the Foreign Corrupt Practices Act (FCPA), which allows the U.S. Department of Justice (DOJ) and the SEC to prosecute businesses and company personnel who bribe governments, politicians, or political parties abroad. Companies can be fined up to $2 million and be barred from doing business with the U.S. government, receiving an export license, and engaging in the securities business. People can be imprisoned for up to five years and fined twice the amount they hoped to receive as a result of the bribery.

So, executives of a large IT company today wouldn’t dare bribe foreign officials, say, to obtain a large government contract. Or would they?

In the wake of the Enron scandal, a Saudi Arabian telecommunications company called National Group for Communications and Computers filed a lawsuit in a New York District Court against Lucent Technologies, claiming that the telecommunications giant, along with the Swiss company ACEC, had bribed a former Saudi Arabian minister. The telecommunications minister, Ali Al-Johani, allegedly persuaded a government-controlled company to purchase Lucent and ACEC equipment. In return, company officials purportedly gave cash gifts, paid medical and hotel bills, and made available private jets to Al-Johani between 1995 and 2002. The suit claims that these favors are worth approximately $15 million.

An amended complaint later named former Lucent CEO Richard McGinn and former chief protocol officer, Robert W. Frye, as having approved two checks totaling more than $2 million to a Seattle cancer center where Al-Johani was being treated. The complaint also fingered the CEO of Lucent’s spin-off company Avaya, Donald Peterson, claiming that he signed the checks to the cancer center.

In response to these accusations against its former highest-ranking officials, Lucent launched an internal audit in 23 of its overseas operations and reported potential FCPA violations to the DOJ and the SEC. In April 2004, Lucent made headlines again when it dismissed four top Chinese officials, including President Jason Chi and Chief Operating Officer Michael Kwan. Kwan spoke out to the press, denying wrongdoing and accusing Lucent of damaging his reputation. The Chinese government subsequently failed to prosecute the executives.

In China, where certain types of bribery are pervasive, this outcome is not surprising, and the question arises: is the FCPA damaging the competitiveness of U.S. companies abroad by preventing them from securing awards that foreign companies can acquire without fear of repercussion? Congress certainly thought so in 1988, when it requested that the executive branch take measures to ensure that the United States’ major trading partners adopt antibribery laws similar to the FCPA.

The FCPA further provides for affirmative defenses, the assertion that a payment considered unlawful in the United States is in fact legal in the country where it occurred. Although the Department of Justice warns that lawfulness of a payment may be difficult to prove, some acts that the FCPA would consider unlawful are perfectly legal in China. For example, if an executive pays a Chinese government official $1000 to facilitate approval procedures, the executive has acted legally according to Chinese law. To constitute criminal bribery, the value of the bribe would have to surpass a threshold of $1208. Commercial bribes under this threshold value are permitted as long as their purpose is not linked to the sale of goods or services.

Reaction Essay::

Bribery refers to the offering, giving, soliciting, or receiving of any item of value as a means of influencing the actions of an individual holding a public or legal duty. It can give a huge advantage to a company when they get a promising deal with a person with high power. This is the reason why the Congress enacted the Foreign Corrupt Practices Act (FCPA).

Questions:

1.    Lucent purportedly gave cash payments, paid medical and hotel bills, and made available private jets to Al-Johani. Under what circumstances would these actions be considered gifts? Under what circumstances would these actions be considered bribes?

          - Under the circumstance that these actions would be considered as gift is that when it is not stated in the contract that Al-Johani will receive any of these things. It will be considered as bribery when Al-Johani can’t prove that it is only gifts from Lucent company.

2.    The SEC is considering taking civil action against Lucent’s former CEO Richard McGinn and Lucent’s former head of Saudi Arabia operations, John Heindel. What would they have to prove to make an affirmative defense of their actions?

          - They would have to prove that all transactions they have made is only gift and not for a deal with the use of bribery.

3.    In 2004, IBM dismissed several senior executives in Korea after they were indicted by the Seoul District Prosecutor’s Office, which charged that the executives used a $2.5 million slush fund to obtain contracts worth $55 million. Compare this case to Lucent’s situation in China.

          - Contrast with Lucent's circumstance, in Korea, Seoul District Prosecutor's Office rejected the individuals who are member from this wrongdoing and they treated the case appropriately.