Chapter 11-Crimes & Business

Crimes Crimes

F e lon ies M isd em ean ors Treason

Necessary Elements:-Actus reus (evil act)-Mens rea (evil intent)

White Collar Crime--White Collar Crime--Managers BewareManagers Beware

Whit Collar Crimes are those crimes created by business people Whit Collar Crimes are those crimes created by business people and Congress has enacted federal sentencing guidelines in an and Congress has enacted federal sentencing guidelines in an effort to discourage both white-collar and street crime. These effort to discourage both white-collar and street crime. These “mandatory” sentencing guidelines have been held to be “mandatory” sentencing guidelines have been held to be “unconstitutional” by the US Supreme Court in the Winter of “unconstitutional” by the US Supreme Court in the Winter of 2005 as sentencing must be done by the Judges. These 2005 as sentencing must be done by the Judges. These guidelines are now “advisory” only in nature. guidelines are now “advisory” only in nature.

Whistle-Blowing: Is the process of workers or individuals Whistle-Blowing: Is the process of workers or individuals reporting to the government that improper or illegal conduct is reporting to the government that improper or illegal conduct is taking place within a corporation. A number of laws provide for taking place within a corporation. A number of laws provide for protection of whistle-blowers to encourate them to “blow the protection of whistle-blowers to encourate them to “blow the whistle” whistle” Despite these laws, whistle-blowers usually pay a price for Despite these laws, whistle-blowers usually pay a price for their decisions to go public. Note: the Whistleblower Protection Act of their decisions to go public. Note: the Whistleblower Protection Act of 1989 only applies to federal employees!1989 only applies to federal employees!

Bribery AbroadBribery Abroad

Often business Often business professionals must professionals must confront graft and confront graft and bribery in international bribery in international transactions. The US has transactions. The US has a specific law that a specific law that prevents US businesses prevents US businesses from participating in from participating in such activity. The FCPA such activity. The FCPA prevents these types of prevents these types of payments and is limited payments and is limited to US Companies and to US Companies and Citizens or those acting Citizens or those acting on their behalfon their behalf..

F C P AF C P A The Foreign Corrupt Practices Act of 1977 (FCPA) The Foreign Corrupt Practices Act of 1977 (FCPA)

was amended in 1998 and prevents:was amended in 1998 and prevents:• Giving “anything of value” Giving “anything of value” • To a foreign official To a foreign official • To Gain an Improper Advantage.To Gain an Improper Advantage.

• Accounting standards also require close record keeping Accounting standards also require close record keeping by companies and make such bribes more difficult to by companies and make such bribes more difficult to conceal. conceal.

The FCPA is very controversial and generally not The FCPA is very controversial and generally not favored by US Executives as it puts American favored by US Executives as it puts American businesses at a disadvantage internationally businesses at a disadvantage internationally when competing for business against other when competing for business against other competitors (who do not have to abide by the competitors (who do not have to abide by the FCPA)FCPA)

F C P AF C P A Controversy exists over the FCPA because it Controversy exists over the FCPA because it

preserves the ethics of American businesses but preserves the ethics of American businesses but harms their competitiveness internationallyharms their competitiveness internationally..

There are exceptions: 1) if it is legal to give the There are exceptions: 1) if it is legal to give the bribe under the “host” countries’ laws (very rare!) bribe under the “host” countries’ laws (very rare!) or 2) the payment is for a routine governmental or 2) the payment is for a routine governmental activity that is meant to “speed up” a non-activity that is meant to “speed up” a non-discretionary act. This latter exception is discretionary act. This latter exception is sometimes called the “grease payment” of sometimes called the “grease payment” of “facilitating payment” exception. It is risky to use “facilitating payment” exception. It is risky to use this, but it can legitimize a payment under the this, but it can legitimize a payment under the FCPAFCPA

OECD Treaty exists But not very

effective

FCPAFCPA The FCPA allows for “facilitating and The FCPA allows for “facilitating and

expediting” payments to secure expediting” payments to secure business. This is an exception to the business. This is an exception to the FCPA and generally applies to routine FCPA and generally applies to routine governmental decisions. (Thus not governmental decisions. (Thus not an absolute ban on payments)an absolute ban on payments)

Liability could exist for managers & Liability could exist for managers & accountantsaccountants

OECD Treaty

Exists on Topic

Olympic Bribery---Olympic Bribery---

Salt Lake City RepresentativesWere accused of offering fullUSA College scholarships toOlympic Site Selection CommitteeMembers Relatives if theyWould select Salt Lake City asThe site for the 2002 games---

The Representatives wereCharged with FCPA violationsAnd after 2 years the caseWas dismissed for lack of Evidence to convict the Representatives.

It is illegal for persons to trade public securities based on inside information. Inside information

Is defined as information that is not accessibleTo the public. Once

a person is determined to have “insideinformation” that person must (1) refrainfrom trading the stock (or advising othersto do so) or (2) trade only after releasing

the information to the public.

InsiderInformation

Sarbanes-Oxley Act of 2002

Due to the very public and dramatic rise in corporate corruption, the federal law was passed to expose and root out corporate crooks. Also known as the Corporate Social Responsibility Act of 2002” and applies only to publically traded companies.

Congress Responds: Passage of Sarbanes-Oxley Act (7/30/02)

Auditing/Accounting Provisions New board to oversee audits of public companies (only 40% of

members from accounting) Audit committee must consist of all independent directors Auditor now responsible directly to audit committee, which

appoints auditor and sets compensation Most consulting forbidden for audit clients; what consulting

remains requires advance written permission from audit committee

Senior Executive/Officer/Director Provisions CEO/CFO must certify accuracy of financial statements (penalties

of up to $5 million plus 20 years in jail) No loans from companies to senior executives/directors CEO/CFO performance-based compensation forfeited if accounting

results revised because of misconduct Persons violating antifraud provisions barred from service as public

company officer/director

Source: The McGraw-Hill Companies, Inc./ McAdmas

Sabanes-Oxley Act 2002IncreasesStat. of Limit.From 1 to 2years

WhistleBlowerProtect.

Fines &Judgments

Non-dischargablein

bankruptcy