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The FCPA and why it Matters

October 04, 2010

Michael Osajda

The History, the Details and the Significance of the FCPA

The year is 1977. The place is Washington, D.C. The forum is the United States Congress. The

94th Congress, which ended its term on January 3, 1977, and the 95th Congress both obtain

information revealing evidence of payments from U.S. businesses to foreign governmental

officials and political parties. The payments exceed $300 million and were made either to secure

favorable action by foreign governments, or to prompt government functionaries to discharge

their administrative or clerical duties. The companies accused of the payments represent a wide

range of industrial sectors; drugs and health care, oil and gas production and services, food

products, aerospace, airlines and air services, and chemicals.1

These embarrassing revelations were discussed by the Congress on a number of levels, most

notably their impact on international relations, their reflection on the state of U.S. business

ethics, and their effect on competition.

On the level of international relations, while détente with the Soviet Union had commenced, the

Cold War was still a fact of life. There was an active struggle for worldwide influence between

the Soviet Union and the United States. In that context, Congress stated that corporate bribery

had foreign policy implications. These scandals lent ―credence to the suspicions sown by foreign

opponents of the United States that American enterprises exert a corrupting influence on the

political processes of their nations.‖2

There were also ethical and business levels to the issue. Congress flatly stated the obvious: ―The

payment of bribes to influence the acts or decisions of foreign officials, foreign political parties

or candidates for foreign political office is unethical. It is counter to the moral expectations and

values of the American public.‖3 These sentiments resonated in Washington in 1977. While

President Jimmy Carter’s credentials as an economic leader or as the Commander-in-Chief of the

Armed Forces may have been questioned by his critics, his role as a proponent of moral and

ethical behavior was an important part of his presidency. President Gerald Ford signed the

Helsinki Accords on human rights, but Jimmy Carter elevated the principles contained in the

Accords in importance during his term.4

Finally, on the pure business level, Congress concluded that the corrupt activity that had been

presented was bad business. It skewed the economic transaction. Rather than quality, service,

salesmanship, price, or other factors being rewarded, corruption was paramount. Exposure of

such activity could also have negative consequences for the company involved. It could ―damage

a company’s image, lead to costly lawsuits, cause the cancellation of contracts, and result in the

appropriation of valuable assets overseas.‖5

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With this background, and in the wake of the domestic corruption uncovered in the Watergate

scandal that resulted in felony convictions for Presidential advisors and the resignation of a

sitting President, Congress chose to address the issue of foreign public corruption caused by U.S.

persons. Two methodologies were originally considered. One proposal would allow companies

to continue to make payments to foreign governmental officials but require them to annually

disclose such payments. Failure to disclose would be criminalized. The other proposal would

criminalize the payments outright. Congress rejected the ―name and shame‖ approach in favor of

criminalizing both bribery and concealment.

THE ACT

The Foreign Corrupt Practices Act (FCPA) 15 U.S.C. §§ 78dd-1, et seq. was enacted in 1977. At

the signing, President Carter emphasized his belief that corporate bribery was ―ethically

repugnant.‖6

The statutory scheme of the FCPA, as amended, is divided into the anti-bribery and the

accounting provisions. The anti-bribery provisions of the FCPA make it unlawful for a U.S.

person, certain foreign issuers of securities, as well as foreign firms and persons who take any act

in furtherance of such a corrupt payment while in the United States, to make a corrupt payment

to a foreign official for the purpose of obtaining or retaining business for or with, or directing

business to, any person. The accounting provisions require companies whose securities are listed

in the United States to make and keep books and records that accurately and fairly reflect the

transactions of the corporation and to devise and maintain an adequate system of internal

accounting controls.

ANTI-BRIBERY PROVISIONS

The Lay–Persons’ Guide to FCPA (The Guide), published by the United States Department of

Justice sets forth an easily understandable exposition of the anti-bribery provisions of the FCPA.

The Guide lists five elements necessary to constitute a violation of the anti-bribery provisions.

Those elements are: who, corrupt intent, payment, recipient and business purpose test.

Who The FCPA casts a wide net. It potentially applies to any individual, firm, officer, director,

employee or agent of a firm, and any stockholder acting on behalf of a firm. Issuers are covered

by the FCPA. An issuer is defined as any entity that has a class of securities registered pursuant

to the Securities Exchange Act of 1934 or that is required to file reports under that Act.7 This

definition includes U.S. publicly traded companies and foreign public companies that may be

listed on U.S. stock exchanges through the use of American Depositary Receipts.

Domestic concerns are also covered by the FCPA. A domestic concern is not an issuer but any

individual who is a citizen, national, or resident of the United States, as well as any corporation,

partnership, association, joint-stock company, business trust, unincorporated organization or sole

proprietorship which has its principal place of business in the United States, or which is

organized under the laws of a State of the United States or a territory, possession, or

commonwealth of the United States.8 In 1998, the FCPA was amended to broaden the

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jurisdiction over multinationals. U.S. parent corporations (issuers or domestic concerns) may be

held liable for the acts of their foreign subsidiaries if the U.S. parent authorized, directed, or

controlled the activity in question, as can U.S. citizens or residents, themselves domestic

concerns, who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

Amendments made to the FCPA in 1998 also expanded the jurisdiction over other foreign

companies and nationals.

Corrupt intent The act must be performed with a corrupt intent. If the payment is made for the purpose of:

1. Influencing any act or decision of a foreign official in his official capacity; 2. Inducing a foreign official to do or omit to do any act in violation of his lawful duty; or 3. Inducing a foreign official to use his position to affect any decision of the government,

the element of corrupt intent is met.13

The Department of Justice has taken the position that the FCPA does not require that the corrupt

act succeed in influencing the official receiving the payment. The offer or promise of a corrupt

payment can constitute a violation.14

Payment

The FCPA prohibits paying or making an offer or promise to pay money or anything of value.15

Anything of value may be interpreted broadly to include travel, gratuities, physical gifts and even

charitable contributions. The statute does not quantify the value of the payment. There is no

statutory de minimus test for the payment.

Recipient The FCPA prohibits the corrupt payments to a foreign official, foreign political party or official

of such party or any candidate for political office, or a third party (such as an agent or joint

venture partner) with knowledge that all or a portion of the payment will be given to one of the

prohibited persons or parties. Unlike the UK Bribery Act, the FCPA was not intended to prohibit

private foreign corruption. The FCPA defines ―foreign official‖ as ―any officer or employee of a

foreign government or any department, agency, or instrumentality thereof, or of a public

international organization, or any person acting in an official capacity for or on behalf of any

such government or department, agency, or instrumentality, or for on or behalf of any such

public international organization.‖16 Willful blindness or reckless disregard is not a shield from

the knowledge element.

Business purpose test The FCPA prohibits payments made in order to assist the payor in obtaining or retaining

business with, or directing business to, any person. Although the recipient of the payment may be

a foreign official, the business does not have to be with a foreign government to satisfy the

business purpose test. The Department of Justice warns that it will interpret ―obtaining or

retaining business‖ broadly.17 There is support for this position in the legislative history of the

1988 Amendments to the FCPA.

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There are three circumstances in which acts otherwise prohibited by the FCPA will not constitute

a punishable violation. A payment otherwise prohibited by the FCPA is permitted if it is a

facilitating or expediting payment made to secure the performance of a routine government

action by the recipient with regard to the award or continuation of business. This so called

―grease payment‖ exception is limited to non-discretionary acts of the official. The FCPA further

limits such a payment to one ―which is ordinarily and commonly performed by a foreign official

in:

(i) obtaining permits, licenses, or other official documents to qualify a person to do business in a

foreign country;

(ii) processing governmental papers, such as visas and work orders;

(iii) providing police protection, mail pick-up and delivery, or scheduling inspections associated

with contract performance or inspections related to transit of goods across country;

(iv) providing phone services, power and water supply, loading and unloading cargo, or

protecting perishable products or commodities from deterioration; or

(v) actions of a similar nature.‖19

The two other circumstances are affirmative defenses set forth in the statute. These affirmative

defenses will shield the payor if the otherwise illegal payment was: 1) lawful under the written

laws and regulations of the recipient’s country; or 2) a reasonable and bona fide expenditure,

such as travel and lodging expenses incurred by or on behalf of the recipient and directly related

to product promotion, demonstration or explanation or the execution or performance of a

contract with a foreign government.20 In other words, there must be a valid business reason for

the payment other than to influence the recipient in favoring or awarding business to the payor.

The burden of proof for the affirmative defenses is with the person or entity that has been

charged with a violation of the FCPA, i.e. that the payment met the requirements of the

affirmative defense.

A single violation of the anti-bribery provisions of the FCPA may place more than one

person/entity in criminal and civil jeopardy. The business entity as well as its officers, directors,

employees, agents, or shareholders acting on behalf of the entity may be penalized for a violation

of the FCPA. Issuers and domestic concerns may be subject to a fine of up to $2,000,000.

Natural persons who willfully violate the FCPA may be subject to a fine of up to $100,000 and

imprisonment for up to 5 years. In addition, both the offending entity and natural persons acting

on its behalf may be subject to civil penalties of up to $10,000 for each violation and be subject

to other injunctive relief, such as a cease and desist order.21 For violations of the anti-bribery

provisions, issuers are prohibited from indemnifying their natural persons who are subject to

criminal or civil fines.22

ACCOUNTING PROVISIONS

The accounting provisions of the FCPA are seemingly less expansive than the anti-bribery

provisions but may be more troublesome. The accounting provisions require issuers to maintain

certain records and adequate internal controls.23 The same definition of issuer is applicable to

the accounting provisions as to the anti-bribery provisions, i.e. U.S. publicly traded companies

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and foreign public companies that may be listed on U.S. stock exchanges through the use of

American Depositary Receipts.

The maintenance of certain records required by the FCPA is commonly known as the ―books and

records‖ provisions. Each issuer is required to ―make and keep books, records, and accounts,

which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the

assets of the issuer.‖24 There are no exceptions to this provision for materiality or for the

facilitating payments exception or the affirmative defenses to the anti-bribery provisions of the

FCPA. Covered companies must decide how to record for their shareholders and the rest of the

public payoffs to low level government functionaries, payments to foreign officials that would

otherwise be illegal but lawful under the written laws and regulations of the recipient’s country,

or even private nongovernmental bribery. These record keeping issues could be challenging.

Issuers are also required to ―devise and maintain a system of internal accounting controls

sufficient to provide reasonable assurances that:

(i) transactions are executed in accordance with management’s general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in

conformity with generally accepted accounting principles or any other criteria applicable to such

statements, and (II) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with management’s general or specific

authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable

intervals and appropriate action is taken with respect to the differences.‖25

If proper controls are implemented, illegal payments become more difficult. But a knowing

failure to implement such controls could result in liability.

Both of the accounting provisions are applicable to 50 percent or greater foreign subsidiaries and

joint ventures. For foreign subsidiaries and joint ventures in which the issuer has a lesser interest,

the issuer must make a ―good faith‖ effort to ensure compliance with the accounting

provisions.26

A willful violation of the accounting provisions of the FCPA can result in criminal fine of up to

$25,000,000 for an entity. An individual may face a penalty of a $5,000,000 fine and

imprisonment for up to 20 years.27 On the civil side, a violation of the accounting provisions can

result in a civil penalty of up to $50,000 for entities or up to $100,000 for individuals as well as

accountings, cease and desist orders and disgorgements. Like violations of the anti-bribery

provisions, issuers are prohibited from indemnifying their natural persons who are subject to

criminal or civil fines for violations of the accounting provisions.

WHY IT MATTERS

In this period of globalization, many entities other than recognized multinationals are taking the

first steps in doing business overseas. For them, a thorough understanding of not only the FCPA,

but also patterns of SEC and DOJ activity, is necessary to navigate the shoals of enforcement.

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The FCPA does not only apply to publically traded companies. Virtually any U.S. entity doing

business overseas—from the privately held small manufacturer to the one man software shop—

will be subject to the Act. Foreign companies that are traded in the United States are also subject

to the Act. If those entities sell directly to foreign governments, they are in the sweet spot of the

Act. But it is important to understand that sales need not only be to governments; private sales

may also be within enforcement jurisdiction if there is an interface with government for even

peripheral reasons. Use of intermediaries, subsidiaries or other business formats may not shield

the entity from liability. A misinterpretation of the facilitating payments exemption or the

affirmative defenses by operators or finance personnel in the field may give rise to prosecution.

The FCPA requires the enactment of certain internal controls and makes a willful failure to do so

a violation. This may also expose publicly traded companies to a Sarbanes-Oxley compliance

issue.

In short, the FCPA may not be as straightforward as it seems. It casts a wide net and has been

enforced with more vigor in the past few years. That trend is likely to continue. As recently as

November 12, 2009, Assistant Attorney General Lanny Breuer publicly commented on the

priority being given to FCPA actions by the Department of Justice. 28

The FCPA matters and is relevant for entities and persons who do or propose to do business

outside the United States. There are a number of actions that affected entities can take in order to

reduce the likelihood of a violation. Among them are adoption of an ethical business culture and

adoption and implementation of a comprehensive anti-corruption policy. But in the end, doing

the right thing may be best way to comply with the FCPA.