Corporate ethics and practices are increasingly in the sights of regulators as a growing number of scandals prompt action.

The global economy has recently seen an increase in the level of regulatory enforcement and Australian companies are becoming used to operating in an environment where corporations and securities regulators, prudential regulators and competition regulators are granted significantly increased powers which they actively deploy.

As an aside, the integrity of the financial sector was again called into question last month as the US Securities and Exchange Commission launched an investigation into the trading activities of Goldman Sachs.

The events which confronted Rio Tinto in China and, more recently, the reports of investigations into BHP Billiton's activities suggest that Australia is about to experience the effects of another enforcement trend which has so far passed it by.

In 1977, following the Watergate hearings and a series of corporate bribery scandals, the American Congress passed the Foreign Corrupt Practices Act. This law prohibits US corporations from bribing or attempting to bribe the government officials of other countries.

While the legislation has been in existence for many years, its enforcement has increased dramatically. In fact, from 2004 to 2009, the number of enforcement actions undertaken by US regulators has increased eight-fold. In late 2008 Siemens agreed to pay total penalties of $1.6 billion (split about equally between US and German authorities) to resolve an investigation into corrupt conduct.

Most DECO countries, including Australia, have similar laws. The United Kingdom has just passed a new Bribery Act which consolidates the law relating to bribery in that country. For many countries, including the US and the UK those laws have an extensive extra-territorial reach, such that Australian companies whose businesses have some connection with the US or the UK may well find themselves subject to investigation by the regulators from those jurisdictions.

Australia's laws are found in Commonwealth Criminal Code. While the Commonwealth Government dramatically increased the penalties in February of this year, we have yet to see the active enforcement of those laws in Australia. That may well have lulled Australian companies into a false sense of security. However, the signs are that Australia's isolation from the trends in the enforcement of international corruption law will not continue and that the trend for regulatory activity across international boundaries will soon touch Australia.

The US and European experience has taught that companies which find themselves the subject of an investigation or prosecution face the risk of large fines (often calculated by reference to the benefit supposedly received from the corrupt conduct) and the imprisonment of officers or employees found to be involved in the conduct. There are other risks as well. The costs to the company of an investigation, both in fees paid to external advisors and internal costs, are usually significant. In extreme cases investigations have resulted in the complete loss or apparently profitable overseas subsidiaries or business units.

The unique aspect of international anti-corruption law is that it makes companies liable for the actions of their employees, partners or agents overseas. This presents a cultural challenge for Australian companies, which may find themselves held accountable for things which have occurred in a cultural and environment which management in Australia does not fully understand or control.

Part of the answer to this problem requires Australian companies to understand the importance of corporate culture. Under Australian law, a company may be held liable for the actions of its employees and agents if it can be shown that its culture directed, encouraged, tolerated or led to corrupt conduct. If Australian companies operating internationally are to avoid the grave consequences of investigation or prosecution by regulators (of whatever country), it is critical that they engage with the question of corruption and bribery. This incorporates the extent to which their internal culture draws a clear line in the sand – even in the face of an external culture which tolerates, permits or encourages such conduct.

The assertiveness of US investigators and prosecutors in investigating and pursuing regulatory enforcement actions has set the bar extremely high for companies when it comes to addressing the risk of corrupt conduct. Australian companies – from board level down – need to make sure their own houses, and those of their overseas partners and subsidiaries, are in order. If they do not, they risk not only severe financial penalties and possible jail terms for individuals, but irreparable damage to their corporate reputations and to the bottom lines. It's a risk that is becoming much less remote – and one that companies need to treat seriously.

This was first published in Australian Financial Review Dealbook on 10 May 2010