The latest accounting scandal? Yesterday's news. Stock options backdating? Heard it already. Today's headlines whisper of international intrigue: foreign bribes from Americans looking for overseas deals. The Foreign Corrupt Practices Act ("FCPA")1, after decades of obscurity, now occupies center stage in the federal government's war on white collar crime. The Department of Justice increased the number of its FCPA investigations sevenfold in the last three years, and that is just the beginning. According to a recent press release, DOJ is hiring an army of new prosecutors just to handle these cases.
No one is immune from FCPA scrutiny. Current cases, and subpoenas directed to entire industries, probe every manner of transaction from a rice shipment to the design of a space station. Whenever American business steps across a border, an FCPA investigation is now a distinct possibility.
Many people know the FCPA imposes Sarbanes-like reporting obligations on public companies.2 But the Act's anti-bribery provisions apply also to private businesses large and small, and to individuals. Penalties can include stiff prison terms and millions of dollars in fines. Americans can be held accountable for the acts of their foreign sales and marketing agents, distributors and consultants, even with no direct knowledge of an illegal payment.
The Act is a labyrinth of undefined terms, exceptions and defenses. Add foreign locales and separate laws in each country, and FCPA compliance can seem as elusive as a reasonably-priced hotel in Tokyo. Still, it is possible, and even critical, to identify risks, develop a workable compliance policy, and handle small problems before they become (literally) a federal case.
The FCPA In A Nutshell
The FCPA was enacted in 1977 to restore confidence in U.S. companies operating abroad. In addition to recordkeeping and reporting obligations for public companies, the Act outlaws the making, offer or promise of anything of value, to a foreign official, "corruptly," for the purpose of "obtaining or retaining business for or with, or directing business to, any person" in interstate commerce.3 That applies not just to issuers of registered securities, their officers, directors, employees, agents, or stockholders who act on the issuer's behalf, but also to any "domestic concern," including a U.S. citizen, national or resident, corporation, partnership, association, joint stock company, business trust, unincorporated organization or sole proprietorship. A 1998 amendment made the provisions applicable as well to "any person" -- in other words, to everyone.4
Violators risk criminal and civil penalties in DOJ and SEC actions. Public companies face criminal fines of up to $2 million per violation. Officers, directors, employees, agents and stockholders risk up to five years in person and a $100,000 fine. If a violation is "willful," or results in "willful and knowing" false or misleading statements in a document required to be filed under SEC or self-regulatory organization laws or rules, 20 years and a $5 million fine are possible for an individual, $25 million for a corporation.5
In separate civil actions, the SEC can seek fines of up to $500,000, ill-gotten gains, and cease and desist orders. In addition, many countries have beefed up their own laws, and investigators from multiple countries typically coordinate investigations.
The mere opening of an inquiry can trigger fiduciary or reporting obligations, investor and customer trepidation, harm to careers and goodwill and, at the very least, distraction and legal costs. It is not unusual for an investigation to continue for five years or more.
Government activity in September 2008 illustrates its broad reach in this area. In September, former Halliburton officer and director Albert "Jack" Stanley admitted he conspired to pay Nigerian officials $180 million for engineering, procurement and construction contracts spanning more than a decade. He faces years in prison and $10.8 million in fines. Also in September, DOJ arrested four employees of a private company that exported equipment and technology, on charges they had paid $150,000 to Vietnamese officials for supply contracts. That same month, a 62 year-old assistant to the vice president for a telecommunications company, Alcatel CIT, was sentenced to 30 months in prison for paying $2.5 million to Costa Rican officials in exchange for $149 million in mobile telephone contracts. Finally, in September the FBI arrested a Newport News, Virginia physicist on charges of bribing Chinese officials. The physicist, who consulted for a French company, allegedly induced the award of a $4 million contract for work at a Chinese facility designed to send space stations and satellites into orbit.
Those very different cases send the message that government is looking for targets large and small, individual and corporate, public and private, high tech and low. Anyone who even thinks of doing business overseas needs a basic understanding of the FCPA and some simple compliance strategies.
The Anti-Bribery Provisions
In order to prove a criminal FCPA violation, the government must prove:
- an offer, payment, promise to pay, or authorization of payment
- of a thing of value
- by a publicly traded company OR a U.S. citizen, national or resident, domestic corporation, partnership, trust, association or sole proprietorship
- to a foreign official, political party or candidate for a foreign government or "instrumentality," or to anyone acting on their behalf
- for the corrupt purpose of influencing the foreign official to act or not to act, with the aim of obtaining or retaining business or of directing business
- in interstate commerce.
It is not necessary that a "thing of value" – money, a vacation stay, an exchange of rights for other than fair market value, e.g. – change hands. The "foreign official" need not be a government employee nor able to direct business. A laboratory worker in a state-owned hospital was a "foreign official" under the Act.6 It is not necessary that the U.S. person actually do anything. Actions on behalf of a U.S. person by a foreign person, known or foreseeable, are prosecuted. It is not even necessary that an attempt succeed. As with fraud, it is the intent, not the success or failure of the scheme, that establishes the crime.
No particular business need be at stake. In a leading case, an American company, ARI, told the SEC that two of its executives had paid Haitian officials to understate customs duties on rice shipments. The district court dismissed criminal charges, finding that a general purpose to lower a tax burden was not an effort to obtain or retain business under the FCPA. The appellate court reversed. Although it criticized the Act's language as "oblique," it found that money saved on duties and taxes contributes to the bottom line, goes to "FCPA's core of criminality" and so can establish an FCPA violation. The executives were convicted. On appeal, the same court held that whatever the Act's wording, the defendants were culpable because "a man of common intelligence would have understood that ARI, in bribing foreign officials, was treading close to a reasonably-defined line of illegality." But even DOJ requires more in the way of intent: "The payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person."7 No such direction of business was involved in Kay. A petition for certiorari is on the United States Supreme Court's October 2008 docket.
Exceptions and defenses are murky as well. Exempt are payments "to expedite or secure the performance of a routine governmental action" such as permits, visas, police protection, mail delivery, border inspection scheduling, phone, water, power, cargo loading or "action of a similar nature," commonly called grease payments.8 In the real world, however, it may be impossible for an American to know whether the same official in the Duchy of Fenwick handles both routine and discretionary functions. And what is "action of a similar nature?"
It is a defense that a payment "was lawful under the written laws and regulations" of the foreign country. Trickier is the defense for a payment that "was a reasonable and bona fide expenditure, such as travel and lodging expenses," and "directly related to the promotion, demonstration, or explanation of products or services" or "the execution or performance of a contract" with a foreign government.9 So it is a crime to pay for business, but legal to pay for promotion of products or services? Mais certainment! And who decides, in hindsight, whether a payment was "reasonable," "bona fide" or "directly related?"
Industry-Wide Investigations, Personal Targets
Instead of merely targeting persons for their own conduct, government is using the more aggressive strategy, in FCPA cases, of subpoenaing all players in an industry. When DOJ and SEC investigated the involvement of oil companies in the now-defunct U.N. Iraq Oil for Food program, they targeted multiple participants. In 2007, they investigated a dozen oil companies concerning customs payments in Nigeria and elsewhere.
The medical device industry is the latest to feel the effect of an industry-wide probe. In an early (2004) case, Schering-Plough settled claims that its Polish subsidiary contributed to the favorite charity of a regional health fund director (a Polish castle restoration project) to induce purchases. Johnson & Johnson voluntarily disclosed its own possible FCPA violations to the SEC in 2007. In June 2008, Wright Medical Group joined SEC targets Smith & Nephew PLC, Biomet Inc., Medtronic Inc., Zimmer Holdings Inc., and Stryker Corp. in a probe of alleged payments to European doctors for using or prescribing products. Also in June, AGA Medical Corporation, a privately-held medical device manufacturer, entered into a deferred prosecution agreement with DOJ concerning payments made by its Chinese distributor.
DOJ also has escalated prosecutions of individuals. Since 1990, it has charged more than twice as many people as companies, with a corresponding increase in penalty severity.10 During the Act's first 25 years, four companies paid $1 million to settle FCPA enforcement actions. Since January 2005, six multi-million dollar fines and disgorgements have been ordered, four of them more than $15 million apiece.11 In April 2007, Baker Hughes agreed to pay a $44.1 million penalty in connection with payments to employees of a Kazakhstan-owned oil company.
Parallel litigation is a risk as well in the form of shareholder suits, employee stock pension fund claims, or competitors' claims that a bribe caused a competitive disadvantage.
On the brighter side, the DOJ has begun to use deferred prosecution agreements, in which the government agrees not to prosecute a violation in exchange for future compliance. Any further violation, however, results in prosecution for both offenses. While obviously preferable to indictment for the company, deferred prosecution also involves years of investigation, significant compliance and monitoring costs, in general disclosure to shareholders;12 and, of course, often leads to prosecution of individuals.
Compliance Is Key
So how is an American to know a "facilitating payment" from a bribe, "routine" action from an unlawful benefit, product "promotion" from a boondoggle to the Big House? Despite heightened enforcement and the Act's land mines, it is possible to minimize the risk of a government inquiry, and to limit the damage if an investigation does result. Self-assessment, effective and documented compliance, investigation, and professional handling of suspected violations translate to fewer and shorter investigations, lower penalties, and reduced likelihood of prosecution.
Take a good look at your business. The extent of your planned or existing relationships outside the United States dictates your exposure. If you rely on consultants, sales or marketing agents or distributors abroad, your risk increases. Check the laws of countries where you do or solicit business. Monitor foreign travel, promotions and charitable giving.
Educate yourself and your outside agents about the FCPA. Do not limit training to employees with direct contract with foreign governments. Require outside agents as well as employees to attend annual training and certify their compliance. Equip your accounting staff with audit methods to track troublesome expenses and payments. See that they use random and unannounced techniques, and report results to senior management. Document training and audit efforts.
Make FCPA compliance part of your written ethics and conflict of interest policies. Make it simple to report violations, through supervisors, a designated individual, and via an anonymous hotline. Establish consequences for violations, then apply them from the bottom to the top: no exceptions.
Make sure your foreign sales and marketing representatives, distributors and consultants know who at your company to contact with questions or concerns. Consider making FCPA compliance a standard provision in outside contracts, including a right to conduct unannounced audits or inspections and to run criminal background checks. Then, actually perform those checks.
If you uncover a problem, get ahead of the government. Better treatment goes to those who self-disclose and take responsibility. Even if you decide against disclosure, a credible internal investigation allows you to take (and document) appropriate remedial measures, an advantage if the government ever does knock. The investigation must be professional and unbiased, or it can backfire and result in even greater skepticism and scrutiny.
The DOJ website posts advisory opinions, and a "Lay Person's Guide to FCPA," at usdoj.gov/criminal.fraud.fcpa. You can request an advisory opinion from the SEC. Seek legal advice before taking such a step.
Conclusion
Until the next trend emerges, FCPA awareness is de rigeur. But common sense principles still apply. As with everything, knowledge is power. With so much at stake, it is critical to know the international realities of your business. An FCPA compliance program should build on the same ethical standards that guide your overall business. So as long as those practices do not collect dust, but are consistently put in play, it should be safe to pick up the newspaper for another day without finding yourself in it.
Ms. Davidson, a former federal prosecutor, chairs the white collar crime practice of Calfee, Halter & Griswold LLP in Cleveland, Ohio. She and Calfee Associate Eric Zell thank summer law clerk Sean Ganley, Case Western Reserve University School of Law Class of 2009, for his help in preparing this article.
Footnotes
1. 15 U.S.C. §§ 78dd-1 et seq.
2. Sarbanes-Oxley Act of 2002, 115 Stat. 745.
3. 15 U.S.C.§§ 78dd-1(a), 2(a), 3(a).
4. Id.
5. 15 U.S.C.§§ 78ff.
6. United States v. DPC (Tianjin) Co. Ltd., No. CR 05-482 (C.D. Cal. 2005).
7. U.S. Attorney's Manual Title 9, Criminal Resource Manual §1018 "Prohibited Foreign Corrupt Practices" (November 2000).
8. United States v. Kay, 359 F.3d 738 (5th Cir. 2004); after remand, 513 F.3d 432, 442 (5th Cir. 2007); rehearing and rehearing en banc denied, 513 F.3d 461 (2008); petitions for certiorari filed April 2008 (no. 07-1281).
9. 15 U.S.C. §§ 78dd-1(c), 78dd-2(c), 78dd-3(c).
10. Danforth Newcomb & Philip Urofsky, The Foreign Corrupt Practices Act 2008: Coping with Heightened Enforcement Risks, 1665 P.L.I. 367, 375 (2008).
11. Betty Santangelo, Gary Stein, & Margaret Jacobs, The Foreign Corrupt Practices Act: Recent Cases and Enforcement Trends, 8 J. INV. COMPLIANCE 31, 32 (2007).
12. Form 8-K Item 1.01 instructs registrants that have "entered into a material definitive agreement not made in the ordinary course of business of the registrant" to disclose the pertinent information.
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.
