VideoOverseas markets seem to grow by the minute, luring ever smaller and younger U.S. companies with the promise of booming economies and lower costs. But for these relatively inexperienced firms, the dream of international expansion soon collides with reality: many companies find themselves unprepared to deal with the challenges of running foreign operations.
At the same time, the Sarbanes-Oxley Act has fueled regulators' enthusiasm for rooting out wrongdoing both at home and abroad, leaving CFOs personally liable for operations that may be thousands of miles away. "I've been doing business internationally since the start of my career, but what's changed recently, what really magnifies the risk, is Sarbanes-Oxley," says Jeff Babka, finance chief at NeuStar, a telecom services firm that has built its international operations mostly through acquisition.
"Between the rapid pace of globalization and the new focus on corruption and fraud, CFOs are facing a perfect storm today that they did not face 10 years ago," says Frank Piantidosi, CEO of Deloitte Financial Advisory Services. Adds Don Devost, CFO of iWatt, a small semiconductor manufacturer with subsidiaries in Hong Kong and Japan: "The biggest difficulty is understanding the regulatory environment wherever you're doing business, and the risk that noncompliance poses, not just locally but also here in the U.S."
The risk isn't confined to small companies like iWatt. At large U.S. multinationals it can be easy for a busy CFO to overlook a distant foreign operation until a problem pops up. And problems will almost certainly pop up: more than 43 percent of companies in PricewaterhouseCoopers's 2007 Global Economic Crime Survey reported suffering one or more economic crimes, such as fraud, in the past two years. Just ask Dow Chemical, which paid a $325,000 civil penalty last year for improper payments made to a foreign official by a fifth-tier subsidiary in India.
The moral: Ordinary due diligence isn't enough when it comes to foreign operations. Before setting up shop abroad, whether through acquisition or from scratch, CFOs need to take a particularly hard look at the backgrounds of the managers who will be running the shop, at the people those managers do business with, and at the laws and regulations that govern how they do business.
Grease Is the Word
A good place to start is with the Foreign Corrupt Practices Act (FCPA), which prohibits the bribing of foreign officials. Although the act was passed 30 years ago, the Department of Justice is becoming more serious about enforcing it. The DoJ is taking on more cases than ever, opening 73 new investigations in the past 5 years, and the fines are getting bigger, according to law firm Shearman & Sterling.
"You used to see a couple of [FCPA] enforcement actions a year. Now you sometimes see a couple a week," says Alexandra Wrage, president of TRACE International, a nonprofit membership organization that helps companies in their antibribery efforts. "It's not just more cases," she adds. "It's also bigger fines and more personal actions. They're sending executives to prison."
Last April, for example, oil giant Baker Hughes paid a record $44 million fine after a subsidiary pleaded guilty to charges that its employees bribed a government official in Kazakhstan. And last June, a long-serving deputy vice president at telecom company Alcatel pleaded guilty to bribing a Costa Rican official to win a contract. He could be sentenced to as many as 10 years in prison.
The spike in FCPA enforcement is linked closely to Sarbanes-Oxley. Almost all recent violations, including those at Dow and Baker Hughes, have been self-reported after companies found problems during their annual audits or as part of their Sarbox compliance. "The most conservative approach is to disclose [the findings] to the Department of Justice and hope that you leave with your head intact," says Wrage.
At first glance, FCPA compliance seems simple: just tell employees not to pay bribes. But in many countries, doling out kickbacks is considered a normal part of doing business. "Bribes paid in foreign countries were tax-deductible in Germany until 1999," points out Piantidosi. "The concept is so foreign to us, but so normal in some countries." Indeed, five months after launching a bribe-reporting service last summer, TRACE International had received more than 1,500 accounts of bribe demands in 136 countries.
"If you combine low levels of transparency and high levels of cash, you can have a real problem," says Wrage. Nigeria and Russia are notorious corruption hot spots, and in China stories of payments to municipal officials abound. Employees in countries around the world can be ingenious in their efforts to grease palms; Wrage cites examples of employees cashing in first-class plane tickets and flying coach in order to pay off customs officials with the difference.
Watch the Coffee Fund
One aspect of the FCPA that may surprise some executives is that companies can violate the law even if a bribe hasn't been paid. The act's "books and records" provision holds companies accountable if their accounting controls are so weak that off-the-books payments would be possible, says Wendy Schwartz, a partner with Reed Smith in New York. For example, if an employee is caught embezzling money for his personal use, the company could be found in violation of the act, since the employee was able to circumvent the company's controls and could have paid a bribe.
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