United States: Business Update: The Foreign Corrupt Practices Act - Frequently Asked Questions

Any domestic and foreign companies involved in international commercial transactions must understand and appreciate their obligations under the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1(a) ("FCPA"), because failure to comply could result in severe criminal and civil penalties. Below are questions frequently asked of the attorneys at Gibson, Dunn & Crutcher LLP as their corporate clients expand into foreign markets.

The FCPA prohibits the corrupt giving or offering of anything of value to a foreign official, a foreign political party, official of a foreign political party, or a candidate for foreign political office for the purpose of (a) influencing an official act or decision of that person; (b) inducing a person to do or omit to do any act in violation of his or her lawful duty; (c) inducing that person to use his or her influence with a foreign government to affect or influence any government act or decision; or (d) securing any improper advantage, and in order to obtain, retain, or direct business to any person. "Foreign official" includes any officer or employee of a foreign government or any department, agency or instrumentality thereof, as well as officers and employees of certain public international organizations, as set out in 22 U.S.C. §288, and any person acting in an official capacity for a government or public international organization.

The FCPA applies to United States-based parent corporations that authorize, direct, or control acts by their foreign subsidiary. Liability arises under an actual payment, offer, or promise to pay, or an authorization of a payment, offer, or promise.

The FCPA also requires publicly-traded companies to keep accurate books and records in reasonable detail and to maintain internal controls sufficient to provide reasonable assurance that management authorizes all corporate transactions.

The FCPA applies to any individual, firm, officer, director, employee or agent of a firm and any stockholder acting on behalf of the firm. Jurisdiction over corrupt payments to foreign officials depends upon whether the violator is an "issuer," a "domestic concern," or a foreign national or business. An "issuer" is a corporation that has issued securities or is required to file periodic reports with the SEC. A "domestic concern" includes any citizen, national, or resident of the United States, or any corporation, partnership, association, or the like, which has its principal place of business in the United States or which is organized under the laws of the United States or its territories. Additionally, the 1998 amendments expanded the FCPA's territorial jurisdiction to include any act by an issuer or domestic concern committed outside the United States in furtherance of a bribe, irrespective of the nexus with U.S. commerce. Although the change is significant in scope, the DOJ has interpreted the nexus requirement so broadly that the amendment does not bring about a major change.

Finally, the FCPA also applies to foreign companies and foreign nationals not covered as domestic concerns that cause an act in furtherance of the corrupt act to take place within the United States.

Penalties for violating the FCPA can be severe. Criminal penalties for corporations may rise to $2 million for a violation of the anti-bribery provision and $2.5 million for a violation of the accounting requirement. Criminal penalties for individuals may rise to $100,000 and/or five years in prison for a violation of the anti-bribery prohibition and $1 million and/or ten years in prison for a violation of the accounting requirement. Moreover, the Alternative Fines Act, 18 U.S.C. § 3551(d), enlarges fines when a person derives pecuniary interest from an offense - the fine may increase to twice the benefit received.

Civil fines of $10,000 may be imposed for both corporate and individual violations of the FCPA. The SEC may also impose a fine not to exceed the greater of (a) the gross amount of the pecuniary gain to the defendant as a result of the violation; or (b) a specified dollar limitation depending on the egregiousness of the violation.

Companies found in violation of the FCPA also may be barred from participating in federal government procurement, receiving State Department export licenses, or investing in programs of the Overseas Private Investment Corporation or Commodities Futures Trading Commission. In fact, merely an indictment for an FCPA violation could result in suspension.

Recently, Saybolt North America, Inc. and Saybolt, Inc. pled guilty to an FCPA violation and agreed to pay $1.5 million in fines. U.S. v. Saybolt North America, Inc. v. Saybolt, Inc., Cr. No. 98-10266 WGY (D. MA), August 1998.

Prosecutors have also relied on conspiracy liability to target FCPA violations. In fact, Herbert Tannenbaum pled guilty in the Southern District of New York to one count of Conspiracy to violate the FCPA, pursuant to 18 U.S.C. § 371. The Court sentenced Tannenbaum to incarceration for one year and one day, three years probation, and a fine of $45,000. U.S. v. Tannenbaum, 98 CR 00784 (SDNY), March 1998.

Incidentally, an employer or principal may not pay the fines incurred by individuals.

There are three exceptions to the anti-bribery provisions. First, a corporation or its agent is permitted to make facilitating or expediting payments to a foreign official for performance of routine governmental action. This is a very narrow exception, permitting only small payments for non-discretionary actions, such as obtaining licenses or permits. Second, a corporation or its agent is allowed to reimburse a foreign official for reasonable and bonafide expenditures incurred, such as travel or lodging, as long as such expenses are directly related to business promotion or execution of a contract with a foreign government. Third, a corporation or its agent is permitted to make payments to foreign officials that are authorized under the written local laws of the foreign state.

Recently, the government restricted the use of the second exception - reasonable and bona fide expenditures - and disapproved of an extended interpretation of the defense. In U.S. v. Metcalf & Eddy, Inc., 99cv12566NG, (D. Ma), December 1999, the government sued Metcalf & Eddy for violating the FCPA by providing illegal travel benefits to an Egyptian official, such as first-class travel for the official and his family and an all-expense paid promotional tour of the United States, including a trip to Disney World. In a consent decree, Metcalf & Eddy, without admitting guilt, agreed to a fine of $400,000 and a payment of $50,000 for litigation costs. Metcalf & Eddy also agreed to remedial actions, including modifying its compliance program.

Although foreign-based corporations have not been directly subject to the provision of the FCPA, the Organization for Economic Cooperation and Development ("OECD") Convention on Combating Bribery of Foreign Officials in International Business Transactions seeks to level the playing field between domestic and foreign corporations. As a result of the OECD Convention, member states have committed to adopt legislation that, like the FCPA, contains both anti-bribery and accounting components. Accordingly, corporations based in OECD member states should now be subject to their own foreign corrupt practices laws. Under a recent amendment to the FCPA, to conform to this OECD standard, foreign corporations and individuals are subject to the FCPA's jurisdiction and penalties when an act in furtherance of the bribe is committed within the United States.

Significantly, under the OECD Convention, parties to the Convention are bound to provide mutual legal assistance to one another in the investigation and prosecution of offenses within the scope of the Convention. These offenses are extraditable.

The one significant disparity between U.S. law and the OECD standard involves payments to foreign political parties and party officials. Although the FCPA prohibits these payments, the OECD Convention does not.

As a first step, corporations should conduct FCPA due diligence on prospective business associates, agents, or contacts whenever a foreign state, state-controlled enterprise, political party or government official may be directly or indirectly involved. Corporations should also implement a corporate compliance program and adopt a code of conduct, procedures for dealing with intermediary agents, procedures for identifying and reporting potential "red flags" in international transactions, a training manual, and controls for ensuring accurate books and records.

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