South African businesses with links to American organisations need to be aware of the potential risks associated with US-enacted legislation that makes it illegal for facilitation payments to be paid to third party agents for facilitating a 'corrupt act'.

The legislation in question is the Foreign Corrupt Practices Act (FCPA), which is pertinent to organisations such as US corporations doing business in South Africa or who are trading with South African counterparts. The Act does not apply to South African businesses with no links with the US.  

The FPCA legislation specifically provides that payment to third parties to facilitate corrupt acts is a violation.

David Loxton, director in the Forensics Department of Werksmans Attorneys, cites below a typical case study that illustrates the extent to which companies could be put at risk of violating the Act and the onerous penalties they would be in line to incur.    

"A company constructing subsea oil equipment in Nigeria authorised an agent to pay processing fees to Nigerian customs officials. Over a period of five years, the agent made more than 400 payments involving an amount of some USD $2,500,000.00. 

However, in an investigation into the company's corporate operations worldwide, it was found that these payments amounted to a violation of the FCPA. The corporation co-operated and pleaded guilty to violations of the Act, incurring a fine of USD $26,000,000.00." 

With this in mind, companies need to have a comprehensive system of safeguards in place, says Loxton. He points out that in order to mitigate risk, corporations are advised to institute proper due diligence of their agents and should, for example, write into the agents' contracts that the company is entitled to follow every payment that the agent makes to ensure that it is above board.

Should companies suspect or become aware that agents are violating the Act, they would need to mitigate the risk further by investigating the circumstances - and if there is a violation - to terminate the contract immediately and institute  proceedings against that agent.

In South Africa, the legislation is still quite new and untested because it applies only to US corporations with a presence in this country. However Loxton points out that the equivalent British legislation (UK Bribery Act) is definitely more onerous as it does not have an exemption that allows for these so-called 'facilitation payments', which the US legislation does. 

General consensus among legal analysts is that the US legislation is deficient in that it allows for this exemption, whereas the British and South African legislation takes a contrary standpoint.   

Loxton says the US legislation on facilitation payments could arguably be regarded as reasonable from the point of view of individual companies wishing to comply with normal and proper business practices. But for organisations that feel that they could be disadvantaged by having to compete with companies who effectively pay bribes, "then the legislation is clearly unreasonable from their perspective."

Depending on the approach, such companies should exit the market, or alternatively – should they wish to remain competitive - they would need to find ways of circumventing the Act and finding legitimate ways,  through agents, to facilitate these payments.

For their part, adds Loxton, companies' legal representatives would need to advise corporations on the extent of the potential risks, undertake a proper assessment and categorise what specific risks the corporation may be exposing themselves to. 

This would take the form of a due diligence study, which is the type of compliance audit that firms such as Werksmans Attorneys are qualified to undertake.

Loxton concluded "The case law relating to this legislation is quite developed in the US but is in its relative infancy in the UK. While the legislation in South Africa is also far advanced, insufficient case law has so far been accumulated to allow for the development of proper jurisprudence."      

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