Regulation: beware the long arm of the US

Companies, and indeed anyone with risk management responsibilities, must
consider all the potential regulatory and reputational risks associated with
fraud. This includes the regulatory pressures imposed by international
requirements.

The widening and deepening reach of the US regulators into other
jurisdictions is putting added pressure on local governments to increase their
diligence, legislation and enforcement regimes.

The US regulators remain active, enforcing regulations across borders,
specifically focusing on compliance with the Foreign Corrupt Practices Act
(FCPA) and the anti-terrorism clauses of the Patriot Act.

Central to the FCPA is that transactions will be deemed in breach of the Act,
whatever the size or materiality. For example, a dinner with a government
official that includes a gift or is in excess of company policy could be deemed
a breach.

In a decision that may further widen the US reach, the Supreme Court is
hearing a case that tests the rights of investors who seek to recover losses due
to fraud from third parties (such as insurance companies, accounting firms or
banks). There may be a formal liability for any third party doing business in
which they did or did not know about the scheme being perpetrated.

In response, the UK is increasing resources for investigations, and is
working within the OECD to make its guidelines more effective, and establish a
dedicated overseas corruption unit in the UK.

The Serious Fraud Office is continuing to be involved with equivalent
organisations in other countries and reports that in the 2006-07 reporting year
‘nearly 200 overseas investigators, prosecutors, judges and ministers, from 34
countries, were received’.

Companies need to keep up with the pace of this change. Not only do
corporations face potential fines and sanctions, executives may find themselves
personally liable.

And with the signing of the 2003 UK-US Extradition Treaty, executives could
face charges in the US courts that may not have been legally prohibited in their
country.

The message is: be proactive. Don’t wait for investigations to hit you
unexpectedly. Perform risk assessments and develop a compliance programme. The
exposure is greater than many might think.

John Smart is head of fraud investigation & dispute services at Ernst
& Young