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.

6-2 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)

6-3 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

6-4 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

6-5 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:

6-6 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

6-7 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

6-8 Figure Illegal versus Legal Behaviors under the FCPA

6-9 Figure Illegal versus Legal Behaviors under the FCPA

6-10 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

6-11 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

6-12 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

6-13 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

6-14 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

6-15 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

6-16 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

6-17 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

6-18 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

6-19 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

6-20 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

6-21 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

6-22 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

6-23 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