01.06.2010

Anti-bribery act could weigh on corp ratings: Fitch

(Reuters) - Violations of the Foreign Corrupt Practices Act could weigh on ratings of U.S. companies, as fines, penalties and investigations absorb cash and distract management, Fitch Ratings said on Tuesday.

In April alone three Fitch-rated companies, Avon Products Inc, Hewlett-Packard Co and BHP Billiton, were in the news because of FCPA-related actions, and enforcement activity is set to increase, Fitch said in a report.

"Companies that violate FCPA or other anti-bribery conventions have committed a criminal act that makes them potentially subject to indictment," Fitch said. "Criminal indictment can be hazardous to the financial health and existence of corporations."

Indictment alone can trigger onerous reporting requirements, civil lawsuits, business losses and reputational risks, Fitch said. Violations of the act can also become a sticking point in acquisitions or dispositions of businesses, Fitch added.

The FCPA, passed in 1977, makes it a crime to bribe foreign officials to obtain or keep business abroad. The law has long lain dormant, but in the last three years the Justice Department and U.S. Securities and Exchange Commission have brought more cases under it, heralding a more aggressive approach to rooting out corruption.

Emerging markets have been a key engine of growth for many companies, but bribery and corruption can be commonplace and viewed as a cost of doing business, Fitch said.

Avon, the world's top direct seller of cosmetics, in April suspended four executives pending an internal investigation of bribery allegations in China.

Avon recently disclosed that the cost of its investigation is expected to be in a range of $85 million to $95 million this year, Fitch noted. The low end, $85 million, would represent about 55 percent of Avon's 2009 free cash flow, though Avon has a substantial cash balance that can absorb the costs, Fitch said.

Hewlett-Packard is being investigated to determine whether executives paid bribes to win a contract in Russia. BHP Billiton is facing an SEC investigation over potential violations of anti-graft laws tied to old mining exploration projects.

Proposed financial reform legislation in Congress includes rewards for whistle-blowers, which would increase incentives for employees to report violations, Fitch said.

(Reporting by Dena Aubin; Editing by Leslie Adler)