United States: Revisiting My Brother's Keeper: Latest Learning And Best Practices On Dealings With Third Parties Under The FCPA

Over the past decade, one of the most common and perplexing questions posed by U.S. multinational corporations with respect to compliance with the Foreign Corrupt Practices Act ("FCPA") is, "Am I my brother's keeper?" Corporations and their personnel have long struggled, and continue to struggle today, to answer this question as it relates to third-party intermediaries, including distributors, resellers, service providers, and other business partners who may put the company in harm's way. In 2012, the issuance of the FCPA Resource Guide by the United States Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") shed some light on this question. Since then, lessons learned from specific cases and broad experience in this area merit renewed discussion of third-party dealings.

The FCPA and the "Agency" Doctrine

As applied to organizations and corporations, the FCPA governs the extraterritorial activity of all U.S. issuers and companies, along with their non-U.S. subsidiaries, affiliates, joint venture partners, and agents. In an effort to prevent, and to criminalize, willful ignorance of FCPA violations, the statute contains express provisions prohibiting corrupt payments made by a third party on a company's behalf. As will be discussed further below, the extent of a company's liability for the corrupt actions of third parties requires an analysis of that relationship, most importantly as to the potential creation of an agent relationship. Should that third party be determined to be an agent of the parent company, the DOJ and SEC, as reflected in the Resource Guide, would take the position that the FCPA will reach the acts of those agents undertaken within the scope of their duties intended to benefit the company. A review of just a few enforcement actions made public since the release of the Resource Guide serves to highlight the practical implications of this policy for U.S. multinationals.

In April 2013, the DOJ and SEC announced the resolution of a matter that illustrates a dual-threat involving foreign agents. A U.S.-based provider of drilling services admitted to using a freight forwarder to fraudulently avoid the payment of Nigerian customs duties and tariffs on equipment exported to that country. Compounding the company's wrongdoing, the U.S. company then provided more than $1 million to an agent in order to corruptly influence a Nigerian government panel reviewing the avoidance of those duties and tariffs. Using this money to entertain members of the government panel, the agent was able to reduce the fine levied by the Nigerian government on the U.S. company from almost $4 million to just $750,000. The U.S. company entered into a deferred prosecution agreement ("DPA") with the DOJ to pay nearly $12 million in penalties and more than $4 million in disgorgement and prejudgment interest in a related SEC resolution. This matter underscores the risk of attempting to insulate the company through the use of foreign third parties to engage in misconduct on its behalf.

In July 2013, the DOJ announced the superseding indictment against two former executives of a multinational energy company and its U.S.-based subsidiary. The charges, which include violations of the FCPA and money laundering statutes, stem from a systematic bribery scheme that made corrupt payments to Indonesian officials in order to secure a $118 million power-supply contract to the country. According to the charges, the bribes were paid out through the deliberate use of consultants, who were retained specifically to funnel payments to officials in order to win the contract. A seemingly damning series of emails recounts the executives' frustration with the lack of headway made by one consultant and the hiring of a second consultant. Of particular note with respect to the hiring of this second consultant, it appears that the company did not adhere to its standard practice of paying consultants on a pro rata basis and instead made one large payment up front in order to facilitate the corrupt payments to the Indonesian officials.

In November 2013, three subsidiaries of a multinational oil services company that publicly trades in the U.S. pleaded guilty to violating the FCPA, among other crimes. Court documents indicate that the company failed to establish an effective system of internal anticorruption controls, despite the high corruption risk present in its industry and global operations. Thus, when employees of a subsidiary set up a joint venture in Africa with local foreign officials, the company failed to detect the joint venture's role as a conduit to funnel corrupt payments to these officials. In another scheme, employees of a different subsidiary in the Middle East awarded improper discounts to a distributor who supplied the company's products to a government-owned national oil company. These discounts, in turn, were used by the distributor to generate bribes to officials at the state-owned company. The multinational agreed to pay more than $252 million in penalties and fines to the DOJ, SEC, and a host of other U.S. agencies.

In December 2013, a Ukrainian subsidiary of the Archer Daniels Midland Company ("ADM") pleaded guilty to violating the FCPA and agreed to pay more than $17 million in criminal fines. The charges related to a years-long system wherein the subsidiary paid third-party vendors, which bribed Ukrainian government officials for unearned tax refunds. The corrupt payments were brought to the attention of ADM executives, but that knowledge did not result in any enhanced antibribery controls at the company or its subsidiaries. ADM itself entered into a non-prosecution agreement ("NPA") and agreed to pay more than $36 million in disgorgement and prejudgment interest to the SEC as a result of this failure to maintain an adequate compliance regime.

In July 2014, the SEC announced that it had charged Smith & Wesson Holding Corporation with violating the FCPA. As set forth in the SEC's order instituting a settled administrative proceeding, Smith & Wesson hired third-party agents to assist with sales of firearms to law enforcement agencies in Pakistan, Indonesia, Turkey, Nepal, and Bangladesh. In the course of this relationship with these third parties, Smith & Wesson employees endorsed and authorized their agent's provision of gifts (including firearms as "test" samples) and cash payments to officials in order to consummate the sales. Ultimately, the SEC order found that Smith & Wesson violated the antibribery, books and records, and internal controls provisions of the FCPA. These findings were based, at least in part, on the absence of any due diligence performed on these third-party agents, as well as the lack of internal controls over the payment of commissions to these agents and provision of firearms as "test" samples. Smith & Wesson agreed to pay $2 million in disgorgement, prejudgment interest, and penalties. Smith & Wesson also agreed to a two year period of self-reporting and, as part of its demonstrated remediation efforts, terminated its entire international sales staff.

And finally, in December 2014, a U.S.-based company, along with its wholly owned Chinese subsidiary, entered into a $135 million settlement with both the DOJ and SEC for violating the books and records and internal controls provisions of the FCPA. The factual allegations stated that in order to secure a license for direct sales under newly instituted Chinese regulations, the Chinese subsidiary gave $8 million in payments and gifts to government officials. In addition, the DOJ and SEC alleged that the Chinese subsidiary made these payments to secure favorable media coverage—and to suppress negative media coverage—that would have decreased the likelihood of any license approval. At the time the settlement was announced, the DOJ and SEC made clear that the U.S. company initially attempted to hide the improper payments made by its subsidiary and ceased the activity upon receipt of a whistleblower complaint.

The International Arena: Local Enforcement on the Increase

The playing field for multinational companies has grown immeasurably more complex over the past several years, not only as a result of U.S. enforcement actions but also due to the increase in both the number of foreign countries passing similar anticorruption statutes and the upswing in enforcement of bribery laws already on the books. Brazil presents an excellent example of both of these paradigms.

First, in August 2013, the nation passed a landmark anticorruption law that governs the conduct of Brazilian companies, either within Brazil or abroad, as well as the operations of foreign-owned entities in Brazil. The law took effect in January 2014 and enforcement activity will continue to be closely watched to determine both the law's efficacy and the resolve of the Brazilian government to pursue prosecutions.

Second, even before the passage of the anticorruption law, the Brazilian enforcement authorities were clearly beginning to press harder in conducting bribery investigations. In November 2011, the Brazilian aircraft company Embraer SA, which trades publicly on the New York Stock Exchange, announced in a filing that it had received an SEC subpoena seeking information related to possible FCPA violations. This news was followed by disclosure of a joint investigation by U.S. and Brazilian authorities into bribery allegations stemming from Embraer's sale of aircraft to at least three other countries. The company stated that it was cooperating with agencies from both the U.S. and Brazil. The Embraer investigation, then, not only predates the new Brazilian anticorruption law, but it also would appear to provide precedent for future collaboration between Brazil and enforcement agencies from other nations.

India stands out not only as another economic power on the rise, but also as a nation with an apparently increasing commitment to pursuing corruption charges against third-party intermediaries acting on behalf of foreign multinationals. In June 2013, the Central Bureau of Investigation ("CBI") filed bribery charges against the Indian representative of a German defense manufacturer. The bribes were reportedly funneled through a U.S.-based third-party intermediary in order to corruptly influence the proposed blacklisting of the German firm by Indian government contractors. CBI's pursuit of corruption allegations is unlikely to wane anytime soon, as in 2013 the Indian government began aggressively investigating Italian and British firms for bribery related to a multimillion-dollar defense deal. The recent passage of the Lokpal Bill will also add to the recent anticorruption trend in India, as the law will establish an independent authority with a mandate to inquire into corruption allegations against public officials.

When it comes to violations of the FCPA, China has long ranked as one of the countries with the highest risk of corruption activity. Yet due to a high-visibility anticorruption campaign by the Chinese government, violations of the FCPA and U.S. law no longer remain the sole concern of multinational corporations operating in China.

No case better illustrates this fact than the Chinese Ministry of Public Security's investigation into the British global pharmaceutical company GlaxoSmithKline ("GSK"). The Chinese authorities allege that GSK funneled millions of dollars to government officials, doctors, and hospitals in order to secure prescriptions of the company's drugs. These payments were funneled through travel agencies in the form of trips, entertainment, and cash. Like many corruption investigations in China, the alleged GSK misconduct was likely revealed through one or more whistleblowers within GSK's China operations.

The Chinese government ultimately imposed a fine of nearly $500 million for these bribery allegations in September 2014, but this will surely not be the last such financial penalty imposed for this type of conduct. Throughout 2014, there was a clear signal that the Chinese authorities are continuing to investigate foreign pharmaceutical companies, with several companies making public announcements that their China offices had been searched and their employees interviewed. In almost every case, the corrupt payments were made to doctors through third parties and concealed as research grants, consulting fees, or remuneration for conducting clinical trials.

Oh Brother, Who Art Thou?

For a multinational seeking to manage its third-party business relationships and mitigate risk associated with anticorruption enforcement, the above review of recent enforcement actions portrays a daunting landscape in need of the most careful navigation. Fortunately, these actions, as well as the guidance propounded by the DOJ and SEC, do provide a roadmap to avoiding the potential FCPA perils accompanying a company's use of third-party intermediaries.

In answering the frequent question—"Am I my brother's keeper?"—a company first must answer this question: "Who is my brother?" In practical terms, this means that the company must assess the nature of those third-party relationships in order to determine whether an agency has been created. This stage of the analysis is critical, as it not only provides a useful gauge to measure the potential risk posed by the third party's conduct, but the results of this analysis also will govern the compliance program that should be implemented with respect to that third party. A handy yardstick in conducting this analysis is the amount of control retained and exercised by the parent company over the third party, regardless of the type of person or entity involved (e.g., subsidiary, distributor, consultant, contractor). The formal contractual arrangements that established this relationship are but one factor in need of close review, as the day-to-day interactions between the parent company and third party are equally important in determining control and, as a result, potential liability. Below is a chart outlining possible business relationships established by a multinational during the course of its overseas operations:

For those third-party relationships falling to the left-hand side of the chart, the parent company is, in comparison to those relationships toward the right of the chart, generally less likely to have maintained the level of knowledge and control that would give rise to the creation of an agency relationship. The arrangements depicted toward the right of the chart are typically more formalized and part of the parent company's routine business operations in the foreign country, and as such generally more likely to create an agency relationship.

Thus, while each relationship of course must be evaluated in light of the circumstances involved, the key danger zone in assessing the existence of an agency relationship often lies in the middle of this chart—third-party intermediaries such as distributors, consultants, and subcontractors. As borne out by the above review of anticorruption enforcement actions, these are the third-party relationships most likely to run afoul of bribery and corrupt payment statutes. As with any fact-based assessment, the more detail that is obtained with respect to the analysis, the better the results. Thus, a parent company should carefully review the contractual terms of the consultant or distributor (or, preferably, use a company-standard set of contracts containing anticorruption provisions), the method and frequency of payment, the scope of the duties and responsibilities undertaken by the third party, any required periodic reporting on expenditures and sales by the third party, and the level of technical or logistical support provided by the parent company. Ultimately, though, the inquiry should steer back to the question of control: How much authority does the parent company maintain to direct the activities of this third party?

All in the Family

When designing a system of compliance measures relating to anticorruption, it is useful to keep one eye on the above chart. For those less risky business relationships on the far left of the chart, experience suggests that monitoring and compliance with anticorruption laws is perhaps best managed by the business operations personnel who have the most frequent contact with the third party. Indeed, in many overseas settings, these "third parties" are in fact customers of the parent company; the exercise of audit rights or insistence on mandatory compliance training, then, could obviously be seen as an onerous and possibly counterproductive method of enhancing compliance.

In those instances where the relationship does not lend itself to these more probing compliance steps, the parent company should certainly consider the need for heightened internal due diligence with respect to those third parties. Such steps can include consistent and regularly reviewed payment terms for those third parties, additional scrutiny on the third party's claimed expenses (especially for travel, entertainment, and leisure), and required documentation as proof that work has actually been performed. The following chart, when used along with the companion chart above, can help a company to plot out the most effective course in avoiding anticorruption violations and maintaining an effective system of compliance.

Thus, when introduced at the lowest and most personal level, the least intrusive of these compliance measures are likely to result in a heightened awareness of anticorruption with the third party. By providing notice of a company's anticorruption policy and requiring an annual certification that the third party will comply with that policy, the parent company has, at the very least, initiated a conversation between the third party and the company's representative about the need to maintain a corruption-free business model. For most relationships between the company and its customers or consortium partners, this may prove to be sufficient. Whether the parent company will need to adopt additional internal controls relies to a large degree on the risks presented with respect to the third party: Does the company's industry, geographic area of operations, or the third party itself (e.g., a consultant who advertises close ties to government officials) merit additional scrutiny from the parent company? As for those relationships with tighter parent company control and direction, such as a wholly owned subsidiary or a joint venture, a stricter regime of compliance measures may be necessary after accounting for these same risk factors.

So when asked, "Am I my brother's keeper?," arriving at an answer requires care and analysis and, most critically, the exercise of judgment. Perhaps the most important first step that a company's leaders can take is asking the question in the first place. Since the answer requires ever more inquiry, and ever more thought, the process of seeking that answer may not turn up a simple "yes" or a "no." What will be answered during that process, though, is what really matters to a multinational company facing a complex, global array of interweaving anticorruption requirements: Are we at risk and, if so, what steps can we take to protect ourselves?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Theodore T. Chung
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions