The rapid growth in international transactions and the expansion of foreign businesses in other countries has made the present regulatory environment more complex. It is now a common occurrence to find subsidiaries of US companies located in the Philippines. Under these circumstances, the said subsidiary would not only be subject to Philippine laws (having been incorporated here) but would also be required to abide by US laws. Thus, in terms of customs, trade and tax compliance, officers of US based companies in the Philippines would have to ensure that both fronts are covered.
Obviously, individual countries are sovereign in themselves, meaning only their respective governments have full control over the laws and policies by which their citizens are to be governed. However, in the private realm, because of contractual obligations, officers and employees of US companies based in the Philippines are required to adhere to laws set by their home countries. Arguably, this reality does not constitute an intrusion into another country’s sovereignty but is a necessary implication of companies and assets crossing borders.
The Sarbanes-Oxley Act is a case in point which governs US companies, including their affiliates in other countries. Our friends in the accounting profession can readily attest to significant policy changes that this US law has brought about in the Philippines. Although technically the subject of the said law is limited to US companies, the fact that US companies located in the Philippines would likewise have to follow the new guidelines has led to de-factor policy changes within the accounting industry in the country. Again, the bottom line is more regulation on the part of companies and the compelling need for more vigilance in protecting themselves from the risk of non-compliance from both its home country and the host country.
This now brings us to the Foreign Corrupt Practices Act (FCPA) of the US. The said Act may be compared to a set of rules for US companies which provides requirements for accounting transparency and strictly prohibits the bribery of foreign officials. Note that this Act only binds US companies and not Philippine companies. It also applies to individuals who hold US citizenship, green card holders, or who are officers, directors, employees, or shareholders of a US business. Within the US, the FCPA applies to all companies and individuals irrespective of nationality.
Important to consider here are the anti-bribery prohibitions, particularly the issue of what constitute a “foreign official” and an “improper payment.” The term “foreign official” is quite broad and may include, among others: an officer, employee, or person acting in an official capacity for a foreign government department, agency, or public international organization (including employees of state-owned enterprises); or an external consultant acting in an official capacity on behalf of a foreign government (this may include unofficial advisors to the foreign government).
An improper payment, on the other hand, is one that is made to a foreign official for the purpose of “obtaining or retaining business for or with, or directing business to, any person.” A company however, may justify a payment if the same is legal under the written law of the host country and/or it is made in connection with the promotion, marketing, or sale of a product or is in connection with the performance of a contract with the foreign government. Also, the FCPA provides an exception for facilitating payments. This refers to small dollar amounts meant to expedite “routine government action” (such as securing basic utilities and speeding paperwork). Such facilitating payments however should be non-discretionary, which means the official has no legal basis to refuse providing the service and must be accurately recorded as facilitating payments. Failure to document them as such may lead to a presumption of the same being improper. Also, since facilitating payments can be vague and be interpreted loosely, the risk of an FCPA violation cannot be immediately ruled out using this defense.
Should a foreign subsidiary of a US company be found to be in violation of the FCPA, substantial penalties may be levied against it. Corporate violators may be fined US$2 million per violation, in criminal cases; and US$10,000 per violation, in civil cases. Individual violators, on the other hand, may be fined US$100,000 per violation and up to 5 years in prison, for criminal cases; and US$10,000 per violation, in civil cases. In recent history, in May 2007, a US oilfield services company was fined as much as US$44 million for making improper payments to foreign officials. It is important to note that such cases and convictions may be triggered even by a subcontracted agent of a subsidiary of a US based company (e.g. broker) in a far corner of the world acting out of its own discretion without the knowledge of the company.
Thus, officials of US based companies should be wary of this possibility and undertake the necessary measures to prevent such occurrences. This may require the assistance of an objective third party to oversee the company’s operations and tag potential risk areas ahead of time for immediate correction. This would involve checks on the company’s policies and practices of record keeping, payment of fees and commissions, written agreements with third parties and consultants, authenticity of invoices, family or business relationships, and transaction records among others.
An important area often flagged for these issues is the company’s compliance with customs regulations and the manner by which it manages its customs function. Affiliates of US based companies therefore should ensure that, on top of the requirements of Philippine law, it would also have effective internal mechanisms that can quickly spot red flags that may hint at the slightest suspicion of an FCPA violation.
(Raphael B. Madarang is a Manager for International Trade and Customs Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email manila@kpmg.com.ph or rmadarang@kpmg.com).