The uptick in FCPA investigations in recent years is well-known. The two agencies responsible for FCPA enforcement—the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC)—now have special units focused on FCPA cases. Both have been aggressively pursuing cases against corporations and (increasingly) individuals. But there is a third U.S. agency that can and should be more involved in the fight against transnational bribery: the Internal Revenue Service (IRS).
The IRS already has some role in FCPA cases, though the extent of that involvement is not entirely clear. Recently, its joint investigative role has been mentioned in a few high-profile matters. Notably, criminal FCPA charges against Vicente Eduardo Garcia (an SAP regional director who in August pled guilty to an FCPA violation involving bribery for Panamanian government contracts) were investigated cooperatively by the FBI and IRS, a fact that some commentators cautioned signaled a need for companies to increase FCPA compliance efforts through additional channels. IRS Criminal Investigation was also involved in the case against Hewlett-Packard Russia, which last year pled guilty to violating the FCPA, and even the (non-FCPA but bribery-related) investigation of FIFA started with the IRS. Beyond investigation, the IRS can bring separate tax charges related to incidents of bribery or other inappropriate payments. A 2014 settlement included a multi-million-dollar forfeiture to the IRS, apparently the first such forfeiture in an FCPA settlement, though the exact reason for the forfeiture was not revealed.
Several observers have speculated that the last decade’s increase in FCPA actions could lead to an increase in tax-related actions. Up until now it has been relatively rare for FCPA actions to include associated tax charges, but the 2014 settlement might be one indication that the relative scarcity of tax involvement could change. The IRS can further develop its responsibility in FCPA investigations with an expanded formal cooperative role, if indeed it does not have one already, in DOJ or SEC prosecutions. This would be a positive step, since there are two major advantages to FCPA investigations assisted, or tax charges brought, by the IRS:
- First, the IRS has special expertise in identifying and tracing suspicious payments, and in finding red flags in tax documents. In very general terms, when a business has to file a tax return in the U.S., it reports its earnings but is allowed to deduct all of its “ordinary and necessary” business expenses—everything from employee salaries to lawyers’ fees to interest payments. If the funds in and funds out reported to the IRS don’t match up with other reports (like those made to the SEC), or with the financial situation of the business, there might be a problem. When a company pays a bribe or a kickback, the firm must either attempt to pass off a bribe as a legitimate business expense or else submit a return inconsistent with other financial records. Either move could raise red flags by causing discrepancies between account books and tax liability. If there is a large-scale bribery scheme at issue, there is a considerable probability that tax fraud of some sort will have occurred as well. (Payments might seem easy to hide for tax purposes, but consider that former Vice President Spiro Agnew’s resignation came after he pled no contest to criminal tax evasion charges for failing to report kickbacks and payments as income on his tax return.)
- Second, the IRS might be able to impose penalties for civil tax fraud even in cases where the DOJ or SEC could not make out an FCPA violation. Section 162(c) of the Internal Revenue Code disallows deductions for, among other things, bribes that violate the FCPA. However, this disallowance does not require that it be possible to secure an FCPA conviction for such bribe payments. In addition, payments disallowed for tax deductions include those made to “public officials or employees,” a term defined expansively by Treasury regulations to include even temporary or non-compensated individuals related to the government. The DOJ-SEC FCPA Resource Guide describes the FCPA’s definition of “foreign officials” (to whom bribes are forbidden) as including officers, employees, or those acting in an official capacity for a government or a government instrumentality. It may be possible to reach payments to individuals who would be “public officials or employees” for Treasury purposes but would not be “foreign officials” under the FCPA. As highlighted by the Tax Analysts note “Is This Bribe Deductible?,” IRS civil tax fraud charges have the advantage of a less demanding “clear and convincing” burden of proof. In contrast, criminal tax fraud charges or FCPA charges brought by the DOJ would demand a showing of guilt beyond a reasonable doubt, meaning in theory a conviction of criminal bribery may fail where tax fraud charges could still succeed. (However, for FCPA accounting-related civil offenses, the SEC need only show a preponderance of the evidence, a lower burden of proof than clear and convincing evidence to be shown in civil tax fraud actions.) Again, while the IRS capabilities wouldn’t supplant FCPA investigations from other corners, coordination could increase the scope and depth of possible charges. The IRS may by particularly useful when the case involves a non-issuer of U.S. securities, over which the SEC lacks jurisdiction; as long as the firm in question pays U.S. taxes, the IRS can still bring civil tax fraud actions against it. All that said, the penalties of a civil tax fraud charge are limited to 75% of the tax underpayment, likely much less than the fines and other penalties than can be imposed under the FCPA.
Of course, the success of any IRS involvement in non-tax matters depends on successful inter-agency coordination. The DOJ’s FCPA settlement agreements often disclaim any binding effect on charges brought by other federal agencies, although the DOJ may choose to offer assurances that information it has gathered in pursuit of a settlement won’t be shared with other investigative efforts. The IRS—the only agency that can investigate federal criminal tax violations—should be involved in FCPA actions from the beginning. (This may depend on adequate funding, however; unfortunately, the IRS has seen its budget cut in recent years, despite criticism that those cuts sacrifice the large return on such expenditures.)
Beyond the recouping of tax on illegally deducted payments, the IRS could also facilitate proper tax preparation by highlighting the issue of foreign bribery and clarifying for tax professionals their role in ensuring the proper reporting of payments. IRS involvement need not make FCPA compliance more burdensome—to the contrary, thinking about the FCPA as a tax issue channels compliance into workflows that already exist. Even in privately held companies, tax preparation is something that must be done, and there is already a financial incentive to do it well. As an IRS agent emphasized at an FCPA conference, those who prepare corporate taxes should be ready and able to defend categorization or characterization of expenses in a certain way. The characterization of payments for tax purposes adds another deliberate step to ensuring bribes don’t come from U.S.-related coffers.
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Fascinating post! The section on IRS civil tax fraud made me wonder how the penalties for civil tax fraud compare with FCPA penalties and/or the types of settlement sanctions agreed to in FCPA cases in the recent past. If the penalties are similar (or higher, which I doubt) then IRS enforcement could be an important improvement in deterring illegal conduct. If the penalties are substantially lesser, however, I guess there might be some concern that businesses would be more likely to factor potential penalties (multiplied by the perceived likelihood of detection and enforcement) in as a cost of doing business. This “cost of doing business” concern is not unique to the context of course, but it would be interesting to know what sort of penalties a company might face for civil tax fraud when thinking about whether greater enforcement will serve as an effective deterrent.
You’re right, the tax penalties that could be assessed are in many cases going to seem paltry when FCPA-related penalties and settlements are in play. For instance, in the 2014 Alcoa settlement, there was a $209 million criminal fine for FCPA violations and a $175 million disgorgement to the SEC while the forfeiture to the IRS was $14 million. Still, $14 million seems like a very high cost of doing business, particularly if it comes along with increased IRS scrutiny in the future. Even if those penalties standing alone are not an effective deterrent, the enforcement and investigative powers of the three agencies can be combined in a way to make the IRS an intimidating force. Instead of an independent deterrent force, I would think of the IRS as a supportive partner. Certainly there would be questions about whether to make IRS investigations an enforcement priority in individual cases, though it does offer another alternative.
Definitely an interesting post. As you know, a common complaint about the FCPA is that it disproportionately burdens American companies. This critique is largely unfounded given the statute’s broad jurisdictional reach over listed companies. I wonder if increasing IRS involvement would make FCPA detractors’ concern more of a reality. I know very little about corporate tax but, if foreign corporations are only taxed on profits realized in connection with U.S. markets, it seems they might largely fly under tax authorities’ radar. Moreover, increased agency cooperation and selection of cases based on conflicting IRS and SEC documents might cause the DOJ and SEC to pay more attention to companies paying American taxes, too. Of course, disproportionate commercial impact is not a legal or normative reason for not enforcing the FCPA. As you say, breaking the law is breaking the law and, if companies are already compliant with SEC and IRS requirements, they should have nothing to worry about. But ramping up IRS involvement could fan the flames of political and business opposition to the U.S. anti-corruption regime.
Great point. I had the same concern, particularly about the potentially increased compliance costs for those who do file U.S. returns. I think the benefits outweigh any inequality of interest for three reasons. First, the IRS involvement simply offers an alternative to other enforcement mechanisms–it is certainly not meant to usurp exiting channels of investigation. Second, from my understanding, the pool of U.S. corporate tax filers is actually broader than the pool of issuers who are subject to investigation by the SEC. You mention that IRS coordination efforts might cause the DOJ and SEC to focus on U.S. tax filers, but at least where the SEC is concerned, I believe nearly all issuers subject to SEC investigation would also be U.S. tax filers. Third, while there are legitimate concerns about the burden of FCPA compliance, as I try to argue, corporations are already worried about and have existing channels to ensure tax compliance. In terms of opposition, my sense is that increased efforts on tax returns may actually be the easiest to sell.
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