Commercial Due Diligence | A Critical Step in Business Integrity and Growth
16 May, 2025
7 minutes read
Do you know that AAR Corp – an Illinois-based aviation services provider, consented to pay up to $30 million in disgorgement and prejudgment interest to resolve FCPA charges related to bribery schemes in Nepal and South Africa? It involves the payments that were made to secure lucrative government contracts. The case underlines the serious consequences of failing to comply with anti-bribery and accounting regulations, an FCPA provision.
The AAR Corp. case serves as a cautionary tale for business globally. FCPA compliance is not just a legal requirement but a fundamental part of an ethical business practice. Explore the blog to learn about the Foreign Corrupt Practice Act(FCPA) and how business verification can save your company from heavy penalties.
What is the FCPA (Foreign Corrupt Practice Act)?
FCPA, or Foreign Corrupt Practice Act, is a US law created in 1977. The law makes it illegal for specific entities and businesses to pay foreign government officials to gain an unfair advantage in business.
FCPA aims to mitigate corruption in international business deals. It prohibits the use of mail, phones, or any other communication methods to influence or offer bribes.
Who Must Follow the Foreign Corrupt Practice Act?
Initially, the law was applied to U.S. citizens, U.S.-based companies, and certain foreign organizations listed in the United States. However, in 1988, the FCPA law was expanded to include foreign individuals or businesses if they are associated with the U.S. to encourage corruption.
Why Does FCPA Compliance Matter?
With the significant impact of FCPA on how to conduct international business. Companies are required to comply with it for the following reasons.
Legal and Financial Consequences
Violations of regulations can result in substantial fines and heavy penalties. Businesses may face disgorgement of profits and pre-judgment interest imposed by the Securities and Exchange Commission(SEC).
Alignment with Global Anti-Corruption Norms
Many countries have enacted anti-bribery laws similar to or even stricter than the Foreign Corrupt Practice Act. FCPA compliance can help in aligning a company’s practice with diverse international regulations.
Also, the companies that are proactive about anti-corruption measures are in positions of leadership regarding global integrity standards.
Reputational Protection
Any public scandal involving bribery or corruption can seriously damage the business reputation, losing client trust and investor confidence. Non-compliance with FCPA can further lead to strained and severed relationships.
Operational and Financial Efficiency
Strong internal control and proper record keeping assist the companies in detecting and combating multiple business fraud cases. It further leads to better financial and operational outcomes. Further, complying with FCPA provides a standardized code of conduct across global operations and reduces the risk of unpredictable legal and ethical pitfalls.
Key FCPA Regulations | Prohibit Corrupt Payments
The Foreign Corrupt Practice Act is generally divided into two main components discussed as follows:
1. Anti-Bribery Provision
This provision prohibits the offering, promising, or giving away any valuable thing to foreign officials. It can be directly or indirectly with the intention of corruption to obtain or retain business.
The anti-bribery provision enables only narrow exceptions or defenses, including facilitating payments for routine government services and legitimate business expenses.
2. Accounting Transparency Provision
It includes books and records & internal control provisions. In books and records, companies must keep detailed, accurate, reflective transaction records.
Moreover, companies must implement financial management designed to provide reasonable assurance in internal control. This will ensure transactions are properly authorized and recorded making sure that the company assets are safeguarded.
FCPA Penalties and Enforcement Authorities
| Types | Anti-bribery Provisions | Accounting Provisions |
| Criminal Penalties | Business entities are fined up to $2 million per violation, and individuals, including officers, directors, and stockholders, are fined up to $250,000 and imprisoned for up to 5 years. | Business entities are fined up to $25 million per violation, while individuals are fined up to $5 million and imprisoned up to 20 years. |
| Civil Penalties | Corporations are fined up to $21,410 per violation, and individuals are fined up to $21,410 per violation. | Civil penalty up to the greater of gross pecuniary gain or tier-based dollar limitation (ranging from $9,639 to $192,768 for individuals and $96,384 to $963,837 for companies) |
According to the Alternative Fine Act (18 U.S.C. § 3571(d)), the court may impose fines up to twice the benefit gained by the corrupt payment if proven or admitted. Moreover, fines imposed on individuals cannot be paid by their employer.
The enforcement authorities behind the FCPA penalties are as follows:
Department of Justice (DOJ)
The primary role of this department is to enforce criminal and certain civil provisions of the FCPA, especially the anti-bribery provisions. It leads criminal investigations, coordinates with other U.S. and foreign agencies, and brings criminal actions against corporate defendants.
Securities and Exchange Commission (SEC)
SEC enforces the civil provisions of the Foreign Corrupt Practice Act against firms and individuals subject to U.S. securities laws. Moreover, the FCPA’s accounting provisions (books and records and internal controls) can also bring civil action against issuers for anti-bribery violations.
Explore the Role of Business Verification
Business background checks and verifying entities are critical for ensuring compliance with the Foreign Corrupt Practice Act(FCPA). It will help in prohibiting bribery of foreign officials and provide robust internal controls.
Business Background Check Essentials
Third- parties entities are usually a common source of FCPA violation; however, conducting the following checks can ensure that potential partners and vendors do not have a history of corruption and unethical practices
- Business information collection
- Risk Assessment
- Corporate screening
- Enhanced Due Diligence
These solutions help in evaluating financial health and transparency while validating the credibility and past performance of the business entities. Screening entities and individuals against sanctions assist in validating their legitimacy.
Moreover, continuous monitoring identifies changes in ownership structures, or behavior that may signal elevated risk. Therefore, business verification builds an integrated compliance ecosystem combining due diligence and risk monitoring that enhances FCPA compliance efforts.
Build an Effective FCPA Compliance Program with The KYB
A strong FCPA compliance program ensures that a business is proactively preventing, detecting, and addressing corrupt practices. Therefore, The KYB has a dedicated team that supports the leadership and legitimacy of entities. We help organizations to confirm that the third party is a legitimate entity and not a shell company that is used for illicit activities.
Furthermore, The KYB offers integrating background checks into the onboarding process to identify risk at early stages during vendor or partner onboarding to reduce compliance failures. With tailored solutions according to your domain, The KYB can help your business navigate complex anti-bribery and accounting requirements, ensuring your company operates ethically and transparently in the global market.
FAQs
1. What is FCPA Compliance?
FCPA compliance refers to adhering to the U.S. Foreign Corrupt Practices Act, which prohibits bribery of foreign officials and mandates accurate record-keeping. Organizations must integrate robust internal controls, training, and due diligence measures to prevent, detect, and address potential corruption.
2. Why FCPA Compliance is Important?
FCPA compliance is important because it helps companies avoid large penalties and legal risks while maintaining a good reputation. It also shows integrity in business practices, which builds trust with partners and investors.
3. What is FCPA Due Diligence?
FCPA due diligence is the critical review and assessment of potential business partners or transactions to spot and prevent corrupt activities, such as bribery. By checking partners’ backgrounds, risks, and compliance records, firms can follow FCPA rules and avoid legal or reputational damage.
