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Send comments to: William Gamble, J.D., LL.M. Tel 401-272-8906 Fax 401-272-8139 |
William Gamble, J.D., LL.M. |
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September 22, 1997 [home] The IBM Argentina Case - Comments on the Foreign Corrupt Practices ActBy:William Gamble, President On May 21, 1997, both the New York Times and the Wall Street Journal reported that Judge Bagnasco, an Argentine Federal Judge, indicted 10 people on charges of bribery in connection with a scandal, over a contract between an Argentine subsidiary of IBM and Banco Nacion, Argentina's state owned bank. IBM Argentina and its former President, Ricardo Martirano, were accused of paying up to $37 million in bribes to secure a contract to computerize Banco Nacion's 525 branches. In July, an Argentine appeals court overturned the bribery charges but left the lesser charge of fraud in place. Opposition politicians are clamoring to have the charges reinstated. Since IBM Argentina is a subsidiary of an American company, there was a question as to whether there was a violation of the U.S. law. The Foreign Corrupt Practices Act (FCPA, 15 U.S.C. §§78dd-1&2) The law makes the extraterritorial payment of bribes by domestic U.S. companies. As applied in the IBM case, FCPA raises two issues. First, is IBM liable for criminal fines? Second, assuming that there is the possibility criminal liability, what action is being taken by the U.S. authorities? FCPA specifically states that the prohibition against bribery extends not only to the Corporation, but also to any director, employee or agent. In the case of Dooley v. United Technologies Corp., the Judge found that the law definitely applied to foreigners outside of U.S. jurisdiction. The problem with the IBM case is that the company claims the Argentine executives were acting without the knowledge of anyone in the U.S. The company had internal business controls and procedures in place, which were ignored and violated by the highest executives in IBM Argentina. IBM fired the executives in September 1995.The legal issue is whether the criminal acts of IBM's agents or employees in contravention of policy can be attributed to IBM. The general rule under U.S. law is that the criminal acts of agents cannot be attributed to principals. Only the acts of employee within the scope of their employment are imputed to employers. It is generally assumed that criminal acts would be outside the scope of employment especially when the prohibition is clearly stated in company policy. Nevertheless, it could be argued that in certain countries 'gifts' to government officials are not viewed as an impropriety. (see Bribery in the Global Market, 54 Wash. & Lee L. Rev. 229, at 277 notes 304 & 305) Since these gifts are within the regular course of business according to local morals, the acts of foreign employees might be attributable to a domestic concern even though the same acts by domestic employees would not be attributed. With legal conundrums surrounding the interpretation of FCPA, it is not surprising that the authorities have been lax in enforcing it. No chief executive has ever been convicted of a violation. From the date of its enactment in 1977 through to is amendment in 1988 only twenty-three cases were prosecuted. The enforcement of the provision is divided between the U.S. Securities and Exchange Commission and the Department of Justice. Before either of these agencies can act, they must establish that the defendant had "actual knowledge" or a "firm belief" that the unlawful activity is "substantially certain to occur." It is generally believed that an effective compliance program that includes a code of conduct, a protected means for employees to report potential or actual violations and a system to educate employees about FCPA will protect the company from prosecution. Nevertheless, even with a compliance program in place, it was reported by the Wall Street Journal that both Securities and Exchange Commission and the Department of Justice began a formal investigations into the IBM's Argentina operations. The probe has been troubled by poor relations between U.S. investigators and Judge Bagnasco. By: William Gamble Emerging Market Strategies Company 1990 Pawtucket Avenues, Suite 1D Tel. 401-272-8906 This article can also be found on the University of Virginia Darden School of Business Administration Alumni Forum and in the EMS Newsletter. Some of these articles are referenced in Professor Roubini of New York University Stern School of Business Administration Asia Crises Home Page and in the Providence Journal - Commentary Section |