Anyone who thinks bribery is good for business should think again. Last year was a record for Foreign Corrupt Practices Act (FCPA) enforcement with the highest ever number of cases filed and with offending corporations and individuals paying record penalties for bribery.

The U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) marked the Act’s 30th anniversary by filing a record 38 cases in 2007. The DOJ also imposed a record $26 million in criminal fines against three wholly-owned subsidiaries of Vetco Gray International and a record $44 million in combined civil and criminal penalties against Baker Hughes.

The FCPA has become the de facto international benchmark for anti-bribery and corruption, yet despite the news-paper headlines generated by some of the huge fines, knowledge of the Act is surprisingly low.

Ernst & Young’s 10th global fraud survey, released earlier this year, shows that although companies are recognising the risks of corruption and are doing more to combat it, knowledge of anti-corruption legislation such as the FCPA remains patchy, with a third of respondents saying they had some knowledge of it and an astonishing 58 percent of senior in-house counsel admitting they were not familiar with it.

The United States introduced the FCPA following a survey done by the SEC in the mid-1970s in which more than 400 companies, including 117 in the Fortune 500, admitted making questionable or illegal payments in excess of $300 million to foreign government officials, politicians and political parties. In addition to ethical concerns and reputational damage to the United States, there were also worries that bribery on the scale disclosed would have a corrosive impact on the free market eco-nomy and would put pressure on ethical enterprises to lower their standards or risk losing business.

FCPA initially made it illegal for all U.S.companies to bribe foreign officials to obtain or retain business. It was then extended to cover foreign companies that issued shares and were regulated in the United States. Foreign companies and individuals are also covered by the Act if they either directly or indirectly, through agents, are responsible for corrupt pay-ments within the United States. So, for example, Chinese companies listed on U.S. exchanges have to be FCPA compliant. U.S. government officials are currently investigating the British firm BAE Systems to determine if it paid bribes to win the so-called al-Yamamah arms contracts with Saudi Arabia, which date back more than 20 years. The DOJ is interested because it believes BAE used the U.S. banking system to transfer regular payments to accounts controlled by a senior figure in the Saudi royal family at Riggs Bank in Washington, D.C.

Damage to companies that run afoul of the FCPA is significant. Along with stiff penalties, the U.S. government continues to regularly seek disgorgement of profits earned from the business allegedly won as a result of bribery. To avoid prosecu-tion, companies will frequently agree to deferred prosecution, involving an enhanced compliance program and the engagement of an independent corporate monitor. In addition, companies also face the prospect of private lawsuits from competitors that can claim damages arising out of corruptly obtained business. Compass Group, the world’s largest catering company, recently agreed to pay $74 million to settle claims made by two rival companies that they lost business after Compass allegedly bribed United Nations officials to secure contracts offering food rations to peacekeepers. On top of all this, companies found guilty of FCPA violations also typically suffer reputational damage and loss of business.

To avoid inadvertently violating the FCPA, companies need to ensure that when they sign an agreement with an overseas business partner, vendor or distributor, they know whether or not politically exposed persons are connected either directly or indirectly through business associates or relatives to their business partners.

The term “foreign official” is quite broad and may include an officer, employee or person acting in an official capacity for a foreign government department, agency or public international organisation (including employees of state-owned enterprises); or an external consultant acting in an official capacity on behalf of a foreign government. It can include members of the police, the military, judiciary and members of political parties. It also covers business associates and family members from acting as intermediaries for officials.

Certain payments are permissible under the FCPA. These include payments that are legal under the laws of the host country and those made in connection with the promotion, marketing or sale of a product, or in connection with the performance of a contract with the foreign government.

The FCPA also provides an exception for facilitating payments. Facilitating payments are small dollar amounts meant to expedite routine government action, such as securing basic utilities and speeding up paperwork.

Companies face considerable chal-lenges in tracking the conduct of foreign officials, particularly in emerging and frontier economies. This is because there is no comprehensive way of tracking them. They are a moving target because appointments change, parties are voted out and people die. One possible solution is to subscribe to a foreign official database. Some of these databases are used primarily for banking and money laundering compliance and perform the same function.

The Internet can also provide information on foreign officials. But contrary to popular belief, most of the information on the Internet is not in English. So, for example, to find out who is an official in Mongolia requires doing a local language search and replicating the English language searches in a foreign language.

Lack of information can be another problem in emerging economies. It is difficult to obtain lists of politically exposed persons in places such as the Central African Republic, Afghanistan or Nigeria.

Even more problematic than tracking foreign officials is tracking the business associates and family members of foreign officials. This requires a higher level of investigation and involves searching around an official’s name by trawling through local media and official biographies. Local languages again add yet another layer of difficulty.

So what kind of information do companies need to know to protect themselves? The DOJ has a suggested list of questions which should raise a red flag if not answered satisfactorily. These include:

• Is the transaction or contracting party in a country that has a history of bribes and kickbacks?
• Is the transaction or contracting party involved in an industry that has a history of FCPA violations?
• Is the transaction or contracting party in a country where there is widespread corruption?
• Are the subjects on a debarred or proscribed list?
• Do the subjects have a family or business relationship with a government official?
• Is the subject’s identity confidential or secretive?
• Does the subject maintain an opaque or secretive ownership or management structure?
• Does the subject have relevant business experience?
• Does the subject have a history of making improper payments?
• Does the subject refuse to comply with the FCPA?
• Does the subject or individuals connected to it have a poor business reputation?

In many emerging economies, some of these questions cannot be answered. The ownership structure of a company is not in the public domain, for example, in Taiwan and the United Arab Emirates. Incomplete answers to some of these questions do not necessarily rule out doing business with a potential partner, but they do indicate a higher level of risk.

A key issue for companies is how to screen international partners and vendors. One school of thought advocates reaching out to vendors by asking them to offer the information that companies use as a basis for screening. This approach has its draw-backs. Companies have to wait for their vendors to fill out and return a self-reported questionnaire-if they even agree to do it in the first place. And many vendors are reluctant to admit to derogatory practices such as paying bribes. Additionally, some firms may take offense at what they perceive to be the imposition of western values on local trading practice. Given that any response to a vendor questionnaire will need to be verified to maintain compliance “best practice,” this approach is time-consuming, inefficient and fundamentally ill-suited for large-scale international screening projects.

It is generally better for both the business relationship and the effectiveness of the background screening if the company performs a screening based on publicly available information sourced from primary sources, such as company registries, courthouses, foreign official databases and other databases. This way, the vendor need never know he is being screened and the checks can be completed in a matter of days. Companies such as IntegraScreen, with experience in working in emerging and frontier market environments, have developed FCPA programs for particular geographical regions and industries.

A further advantage of such a program is that, in the event of an FCPA investigation, companies can demonstrate they have a system in place and that they took reasonable steps to guard against FCPA violations.

An effective FCPA program also helps to form the basis of a wider risk management program within a company. Screening potential business partners is an integral part of managing the risk of fraud through tender rigging and purchasing fraud, and in protecting intellectual property. It should be part of a holistic enhanced due diligence program within the firm that encompasses background screening not only for business partners, but also for staff. The program should involve staff training in anti-corruption and anti-fraud measures, and a clear message should be sent to the company’s business partners and staff that it does not tolerate corruption.

The cost of implementing a screening program is a small price to pay compared to the costs of an FCPA violation or of being defrauded.

Michael Short is a founder and also the functional head for international FCPA compliance solutions for IntegraScreen-one of the largest international compliance screening companies which has operations in 13 emerging market locations.