Chapter 6
The Role of Government
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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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The Foreign Corrupt Practices Act (FCPA)
• 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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The Foreign Corrupt Practices Act (FCPA)
• 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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The Foreign Corrupt Practices Act (FCPA)
• 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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The Foreign Corrupt Practices Act (FCPA)
• 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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MONETARY FINES UNDER THE FGSO
• 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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MONETARY FINES UNDER THE FGSO
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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MONETARY FINES UNDER THE FGSO
• 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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Sarbanes-Oxley Act (2002)
• 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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Sarbanes-Oxley Act (2002)
• 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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