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Cost of Global Compliance is more than just Political Debate…it’s Big Money

Big money

Given the state of the economy, I am sure the 2012 Presidential Debates will focus on the costs of domestic regulatory issues– (e.g. Health Care, Financial Reporting, EPA, FDA, etc.) However, it will be interesting to see if the cost of “global regulations” even gets called out during the coming presidential debates given their impact on corporations. Three global compliance requirements that clearly come to mind are FCPA, Conflict Minerals and FATCA.  Here is a summary of the regulations and the cost associated with them –

Foreign Corrupt Practices Act: FCPA penalties cover both anti-bribery and accounting provisions for individuals and their corporate entities. The law explicitly prohibits companies from paying bribes to foreign government officials and political figures for the purpose of obtaining business. While not a new law (i.e. initially enacted in 1977 and updated in 1988), enforcement of FCPA by the SEC and DOJ has been heightened in recent years due to increase in global business and concerns over corruption. According to a NY Times article published on September 3rd, FCPA has produced more than $3 billion in settlements. Moreover, where some of the most recognized global companies have paid millions of dollars in ongoing legal fees or in settlements related to FCPA investigations. Consider three recently listed on the SEC website.

  • Tyco International – SEC charged the Swiss-based global manufacturer with violating the FCPA when subsidiaries arranged illicit payments to foreign officials in more than a dozen countries. Tyco agreed to pay $26 million to settle the SEC’s charges and resolve a criminal matter with the Justice Department. (9/24/12)
  • Oracle – SEC charged the California-based computer technology company with violating FCPA by failing to prevent a subsidiary from secretly setting aside money off the company’s books to make unauthorized payments to phony vendors in India. (8/16/2012)
  • Pfizer – SEC charged the pharmaceutical company for illegal payments made by its subsidiaries to foreign officials in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia to obtain regulatory approvals, sales, and increased prescriptions for its products.Pfizer and recently acquired Wyeth LLC – charged with its own FCPA violations – agreed to pay a combined $45 million in their settlements. (8/7/12)

Conflict Minerals: On August 22, 2012 the final rule on conflict minerals pursuant to Dodd-Frank Section 1502 was issued requiring organizations potentially involved with conflict minerals [i.e. tantalum, tin, tungsten, and gold] to publicly disclose their use of them and whether those minerals originated in the Democratic Republic of the Congo (“DRC”) or adjoining countries (“covered countries”). The rule outlines a three step process for organizations involved in conflict minerals to help determine if they are subject to requirements, which includes a comprehensive assessment of supply chain activities to determine whether conflict minerals originated in the DRC or an adjoining countries. The law demonstrates a heightened consciousness of corporate social responsibility combined with high public profile of companies particularly in the consumer electronics industry (i.e. Apple, HP, Intel, Samsung). For those organizations that need to comply there is time to prepare; companies will first need to comply with the disclosure requirements on May 31, 2014 for the 2013 calendar year. The SEC had estimated cost of compliance would range between $2 – $3 billion, and the annual continuing cost of compliance will be $206 – $609 million, with some saying that the cost will be more like 4 – 5x this estimate. For instance, consider the cost of replacing legacy systems unable to map current supply chains for reporting on conflict minerals. Furthermore some researchers at the UC-Davis note that the rules could even have a spill over effect into state legislation further increasing the costs for those companies found violating federal law.

FATCA – While FCPA and Conflict Minerals has gotten a lot of attention, few people are aware of the little-known Foreign Account Tax Compliance Act (FATCA), which was conveniently stuck into the Hiring incentives to Restore Employment Act of 2010. The intent: eliminate the ability leverage offshore tax shelters. Though there is controversy around its intent (i.e. whether a tax a reporting mechanism or other). From a business perspective FATCA requires foreign financial institutions (FFIs) to report to the IRS, account information on U.S. individuals or be subject to a 30% withholding tax on income from US financial assets held by the banks. Owners of these foreign-held assets must report them on a new Form 8938 along with US tax returns if they are worth more than US$50,000; higher thresholds apply for those residing overseas. For individuals impacted, FATCA relates to 2011 tax returns filed during the 2012 tax filing season, but does not take effect until June 2013 for Foreign Financial Institutions – regardless cost of noncompliance is heavy. These institutions are incented to comply in order to avoid payment withholding – and, upon entering the agreement with the IRS, the foreign institution will receive a FATCA ID and FATCA EIN number. A WSJ blog posting in August states that according to The Banking Federation and the International Institute of Bankers, that it could conservatively cost the top 25 foreign banks $7.5 billion to comply with this legislation.


While the presidential election is under away, perhaps the old saying “an ounce of prevention is better than a pound of cure”, could be well applied here. Whether it’s old, new or on the way, these are just a few examples of regulations that demonstrate the impact government regulation has on global business and procurement teams, and demonstrates the need to improve governance due to the potential cost of non-compliance. The bottom line here is regardless of the specific compliance requirements, organizations need to under take the planned costs of internal process and technology improvements that mitigate the unexpected costs of noncompliance. Here are some suggested approaches  –

  • Support global compliance programs throughout the organization
  • Involve internal, external, and third parties both local and abroad within a compliance initiative
  • Ensure that all proper processes and approvals are adhered to within the regulation
  • Receive timely updates on program compliance progress or potential challenges
  • Establish the ability to quickly report on all compliance aspects, whether information gathered, scoring metrics, program success, or audit control
  • Have systems, processes and insight already in place before our government goes silly and passes another burdensome regulation 🙂



NY Times – –

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