The United States is stepping up its enforcement of the Foreign Corrupt Practices Act of 1977 (FCPA), and violations of the act carry steep fines and other penalties. Companies can reduce the likelihood of facing such penalties with an effective anticorruption program. Establishing this preventive measure and interpreting the facilitation payment exclusion were hot topics at the American Conference Institute's 21st National Conference on the FCPA in March in New York.
Anticorruption programs undoubtedly will be put to the test by the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC), both of which are looking to increase revenue streams for the government by enforcing the FCPA. Second only to antiterrorism investigations, FCPA investigations have become a priority for the U.S. government, and the FBI is now a very active participant.
FCPA Violations
At least 120 companies are under investigation, according to Mark Mendelsohn, deputy chief of the fraud section in the criminal division of the DOJ.1 Since January 2008, there have been three opinion releases2 and 12 settlements with companies. Even more individuals have been indicted or reached plea agreements.3
In September 2008, Albert "Jack" Stanley, the former CEO of Kellogg Brown & Root (KBR), entered into an agreement with the DOJ to pay restitution and serve an 84-month prison sentence for pleading guilty to violations of the FCPA and conspiracy to commit mail and wire fraud. Through February 2009, KBR settled five counts of FCPA violations, with a $402 million fine, $177 million disgorgement of profits, and monitoring for three years.
Another recent settlement involved SEC charges against ITT Corporation for alleged violations of the books and records and internal controls provisions of the FCPA. The company agreed to pay a $250,000 civil penalty plus $1,428,650 in disgorgement of profits and prejudgment interest.
In December 2008, Siemens AG paid a fine of $800 million to the U.S. government, with matching fines in Germany, for FCPA violations.
Interest was therefore understandably high for the FCPA conference's keynote speech by Peter Y. Solmssen, head of corporate legal and compliance and member of the managing board of Siemens. Solmssen emphasized the importance of the tone at the top and encouraged companies to engage in self-regulation within their relevant industries.
Siemens' compliance operating officer, Dr. Klaus Moosmayer, also spoke at the conference, suggesting that companies adjust their anticorruption programs to focus on prevention, detection, and response to violations. He cautioned, however, that complying with the Sarbanes-Oxley Act4 is not the same as putting FCPA controls in place.
For example, an employee's expense reimbursement request for entertainment, supported by a paid receipt, approved by the employee's supervisor, and including narrative of a business purpose, would typically be considered compliant with SOX and the company's internal control system. That same documentation, however, could be proof of an FCPA violation if the person being entertained is considered a public official under the act.
Reducing Violations on a Budget
Another theme of the FCPA conference was managing employees' compliance with an anticorruption program in a distressed economy when a compliance department might have been asked to downsize or to operate "lean."
The chair of the conference, Homer E. Moyer Jr. of Miller & Chevalier Chartered, one of the country's leading authorities on the FCPA, does not advocate a reduced emphasis on compliance activities, however. He outlined eight recommended ways for companies to respond to cost pressures in an environment of more vigorous enforcement of the law.
- Educate colleagues about the financial risk. The average fine for an FCPA violation last year, excluding Siemens, was $11 million. Recent settlements have included, in addition to civil penalties, disgorgement of profits and prison terms for executives.
- Develop a risk-based anticorruption program. If a company's international sales model includes joint ventures, tailor the program to focus on the joint venturers' activities.
- Promote ethical behavior with the right tone at the top. Communication by a company's top leaders and audit committee are the least expensive means of reinforcing appropriate conduct among employees.
- Provide general employee training on "red flags." Employees don't need to be FCPA experts to identify and report transactions that might be violations. (See sidebar, "20 Red Flags for Possible FCPA Violations.")
- Eliminate or minimize third-party compensation. A review of current investigations and fines indicates that compensation for third parties (anyone who is not an employee) is the highest area of risk.
- Conduct smart investigations. Rather than identifying every transaction, investigate until you have identified a clear pattern. The evidence might never be conclusive, especially when third parties are involved.
- Train internal audit staff in the FCPA. The internal auditor who is trained in FCPA requirements, the lack of a materiality provision, cultural norms, and common schemes will be more likely to identify possible violations.
- Take disciplinary action against violators. One disciplinary act against a violator is worth more than a formal policy.
Claiming Facilitation Payments
Compliance officer and attorney presenters at the conference spoke frequently about the difficulty of determining what constitutes an allowable "facilitation payment."5 Recent court decisions offer little guidance about what meets this exception to the FCPA. If anything, the decisions seem to narrow what a company can claim as a facilitation payment. It is apparent, however, that the payments must be clearly identifiable in a company's books and records as facilitation payments and that the invoices and other supporting documentation should be consistent with the accounting records.
According to Jenner & Block,6 the FCPA does not apply "to any facilitating payment or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action."7 This exception for what are colloquially referred to as "grease payments" is designed to cover routine, nondiscretionary "ministerial activities performed by mid- or lowlevel foreign functionaries,"8 such as obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country; processing governmental papers; or providing general governmental services like police protection, mail, power, or water.9 This narrow exception exempts from liability only those acts that are "essentially ministerial [and] merely move a particular matter toward an eventual act or decision or which do not involve any discretionary action."10
The Jenner & Block authors further recommended that companies seeking to justify payments under this exception make sure that counsel is familiar with the FCPA and the DOJ's enforcement policy and that proposed payments are scrutinized before being made. Issues to consider include the amount of the payment and whether the official at issue must exercise any discretion or judgment in deciding whether to take the requested action. Although there is no statutory limit on the amount of grease payments, the DOJ has expressed approval of payments of less than $1,000 only.
Mitigating Big Risks, Big Fines
FCPA conference panelist Rick Firestone, associate director of the division of enforcement of the SEC, said, "This is the era of big risks." Violation of the act can result in multimillion-dollar fines and disgorgement of any ill-gotten profits, attorneys' fees, the cost of an FCPA monitor, debarment from federal procurement opportunities, and loss of export licenses.
Those in violation of the FCPA face fines up to $2 million in a criminal case (or, even worse, fines equal to twice the amount of the benefit sought through the inappropriate payment), and the individual performing the violating act can face criminal fines up to $100,000 (which may not be paid by his or her employer) and up to five years in prison. In some instances, the violator might even face a private cause of action under the Racketeer Influenced and Corrupt Organizations Act statutes.
Organizations that conduct any business internationally must remain diligent in their efforts to prevent such violations and to immediately report those that do occur. As the DOJ's Mark Mendelsohn reminded conference attendees, "FCPA is not the place to cut corners."
20 Red Flags for Possible FCPA Violations
1. Many petty cash transactions
2. Entertainment of and gift giving to foreign officials
3. U se of third-party agents in transactions dealing with foreign officials
4. Lack of documentation or support with respect to services provided by third parties 5. Contractual agreements that differ from invoice and payment support
6. Unexplainable profit margins – particularly negative or break-even sales
7. Unexplainable transactions through "miscellaneous," "other," "consulting," or "entertainment" expenses
8. Transactions labeled as "facilitation payments"
9. Unrecorded cash transactions
10. Unusual cash reconciling items
11. Reimbursement of travel expenses for foreign officials and their families
12. A customer that designates use of a particular sales agent
13. Payment to vendors in advance of their services
14. Falsified accounting entries and documents
15. Sales agents being paid higher-than-market commission rates
16. Hiring of companies or individuals because of their relationships with foreign officials
17. Unusual requests for backdated or altered documents or out-of-period or barter transactions
18. Payments of school fees or scholarships for children of foreign officials
19. Donations to charitable organizations headed or supported by foreign officials
20. Renting of property from foreign officials or their families
Footnotes
1 Dionne Searcey, "U.S. Cracks Down on Corporate Bribes," The Wall Street Journal, May 26, 2009.
2 www.usdoj.gov/criminal/fraud/fcpa/opinion /. The DOJ allows a company to secure immunity from prosecution for specific future conduct. The company must take advantage of the opinion procedure before the payment takes place.
3 For recent FCPA enforcement actions, see www.fcpaenforcement.com/documents/document_listing.asp?ID=20&PAGE=2 .
4 The Sarbanes-Oxley Act, which came into force in 2002, requires public companies to publish information in their annual reports concerning the scope and adequacy of their internal control structure and procedures for financial reporting.
5 U.S. Code, Title 15, §78dd-1(e)(1). One of the two statutory affirmative defenses to FCPA liability is for payments to foreign officials to secure the performance of a "routine governmental action."
6 Joseph P. Covington, Thomas C. Newkirk, Andrew Weissmann, Iris E. Bennett, Jessica Tillipman, and Eric Haren, "Doing Business Under the FCPA," Jenner & Block, February 2008.
7 U.S. Code, Title 15, §78dd-1(b).
8 United States v. Kay, 359 F.3d 738 (5th Cir. 2004).
9 U.S. Code, Title 15, §78dd-1(f).
10 United States v. Kay, 359 F.3d 747 (5th Cir. 2004).
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