Keynotes: Akzo-Nobel, Flowserve, Foreign Corrupt Practices Act, FCPA, domestic companies, Standefer, Nofziger, Dooley, United Tech. Corp., Syncor Taiwan, foreign companies, vicarious liability
Recent Foreign Corrupt Practices Act ("FCPA") settlements are raising new questions about the potential exposure of foreign corporations and foreign subsidiaries of U.S. "issuers"1 and "domestic companies"2 under the FCPA. To the extent it takes place outside the territorial jurisdiction of the United States, the conduct of foreign corporations and foreign subsidiaries of U.S. entities has long been presumed to be beyond the reach of the FCPA.3 Indeed, in passing the FCPA, Congress indicated a clear desire to avoid the diplomatic complications that might arise from such enforcement actions.4 In recent years, however, foreign corporations and foreign subsidiaries of U.S. entities have found themselves increasingly staring at civil and criminal enforcement FCPA actions. Can these enforcement actions be squared with Congress intent when it passed the FCPA? Stated differently, given Congress express intent to exclude foreign subsidiaries of U.S. entities from the ambit of the FCPA, to what extent is the Department of Justice ("Justice Department") and the Securities and Exchange Commission (the "SEC" or the "Commission") trying to sweep them back in through legal theories of general applicability such as vicarious liability? This article attempts to address this question.
Are Foreign Companies Subject To The FCPA?
Federal courts have consistently held that general principles of criminal liability in particular, aiding and abetting - usually allow a person who is facially exempt from liability under a statute to be punished if he helps a covered person commit an act proscribed by the statute. The Third Circuits decision in United States v. Standefer, 610 F.2d 1076 (3d Cir. 1979), represents a prime example of this general rule. In Standefer, the Court rejected a criminal defendant's argument that, as a private citizen, he could not be charged with aiding and abetting the violation of a federal statute that was applicable only to IRS employees. As the Court explained, the general aiding and abetting statute, 18 U.S.C. § 2, is not so limited. Id. at 1085. It permits the punishment of "aiders and abettors regardless of the fact that they may be incapable of committing the specific violation which they are charged to have aided and abetted." Id. (quoting S.Rep. No. 1020 (1951)). Other federal courts have broadly agreed with the Third Circuit. See, e.g., In re Nofziger, 956 F.2d 287, 290 (D.C. Cir. 1992) ("[T]he law is well-settled that one may be found guilty of aiding and abetting another individual in his violation of a statute that the aider and abettor could not be charged personally with violating.") (citing, inter alia, Coffin v. United States, 156 U.S. 432, 447 (1895); United States v. Smith, 891 F.2d 703, 710-11 (9th Cir. 1989); United States v. Lester, 363 F.2d 68, 72 (6th Cir. 1966). Accordingly, general criminal liability principles would ordinarily not bar prosecutors from charging entities that are not covered by the FCPA such as foreign subsidiaries of U.S. issuerswith having aided and abetted an FCPA violation attributable to a covered party.
But that's not the end of the story. A court asked to consider whether a foreign subsidiary of a U.S. issuer can be charged with violating the FCPA, by virtue of conduct that does not touch on the instrumentalities of interstate commerce, would have to decide whether such an interpretation is consistent with general principles of statutory construction. The first, and foremost, of these principles, of course, is that courts must follow the intent of Congress, as revealed by the text, purposes and legislative history of the relevant bill.5 And on this point, we think the evidence strongly favors the conclusion that Congress did not intend to make the conduct of foreign corporations punishable under the FCPA, so long as that conduct does not take place on U.S. territory or use the instrumentalities of interstate commerce.
The only federal court to have considered this issue directly concluded that a foreign corporation cannot be held liable for violating the FCPA by acting as an "agent" of its domestic parent. See Dooley v. United Tech. Corp., 803 F. Supp. 428, 438-39 (D.D.C. 1992). In this private civil RICO action, the plaintiff charged that certain defendant's U.K. subsidiaries of a U.S. companyhad violated the FCPA by making illicit payments to foreign officials of the government of Saudi Arabia. Noting that the FCPA did not expressly cover these foreign entities, the court went on to consider whether Congress intended to extend the prohibitions of the FCPA to foreign subsidiaries by permitting them to be charged as agents of their U.S. parent company. Id. After reviewing the legislative history of the FCPA, the court found ample evidence to the contrary. In particular, the Court noted that Congress, plainly concerned with the international comity implications of the FCPA, had "recognized the inherent jurisdictional, enforcement, and diplomatic difficulties raised by the inclusion of foreign subsidiaries of U.S. companies in the direct prohibitions of the bill," and concluded that "the same concerns over diplomatic difficulties and jurisdictional contacts would apply whether a U.S.-owned foreign subsidiary or a foreign corporation was involved." Id. at 439. The Dooley court therefore concluded that Congress had not intended to allow foreign subsidiaries of U.S. issuers to be held liable for violating the FCPA.
Faced with a similar question, the Fifth Circuit likewise concluded that the government may not use general principles of criminal liability to extend the scope of the FCPA to foreign parties exempted by Congress. See United States v. Castle, 925 F.2d 831 (5th Cir. 1991). In Castle, the government charged certain U.S. citizens with having violated the FCPA by making illicit payments to Canadian officials. Despite conceding that the foreign officials could not be directly charged with an FCPA violation, the government charged the Canadian officials under the general federal conspiracy statute, 18 U.S.C. § 371. The Fifth Circuit rejected this approach. It instead concluded that the government could not revert to general liability principles to "refute the overwhelming evidence of Congressional intent to exempt foreign officials from prosecution for receiving bribes, especially since Congress knew it had the power to reach foreign officials in many cases, and yet declined to exercise that power." Id. at 835. Like the Dooley decision, the Castle case demonstrates that federal courts generally have been reluctant to allow general liability principles to extend the reach of the FCPA to foreign parties expressly exempted from its reach.
But the most powerful evidence that the extra-territorial conduct of foreign corporations and foreign subsidiaries of U.S. issuers and domestic concerns cannot subject them to prosecution under the FCPA can be found in the 1998 amendments to the FCPA. In pertinent part, the 1998 amendments to the FCPA changed the blanket immunity that had previously shielded foreign corporations from FCPA liability. Foreign corporations can now be prosecuted for violating the FCPAs anti-bribery provisions if they commit a prohibited act "while in the territory of the United States." 15 U.S.C. § 78dd-3(a). See also S. Rep. No. 105-277 (Jul. 30, 1998), at 5-6 ("It is expected that the established principles of liability, including principles of vicarious liability, that apply under the current version of the FCPA shall apply to the liability of foreign businesses for acts taken on their behalf by their officers, directors, employees, agents or stockholders in the territory of the United States, regardless of the nationality of the officer, director, employee, agent, or stockholder."); H.R. Rep. 105-802 (Oct. 8, 1998) (concurring that "this section limits jurisdiction over foreign nationals and companies to instances in which the foreign national or company takes some action while physically present within the territory of the United States"). In other words, with the benefit of 20-plus years of experience with the FCPA, Congress reconsidered whether the acts of foreign corporations should fall within the ambit of the FCPA, and decided to bring only acts taken within the territory of the United States within its scope. One hopes that federal prosecutors will pay close heed to this unambiguous expression of Congressional intent, and refrain from charging foreign corporations with violations of the FCPA based on conduct outside the territory of the United States or conduct with tenuous nexus to the United States. If they do not, history strongly suggests that the federal courts will reject their efforts to alter Congress carefully considered design.
Recent FCPA Settlements Involving Foreign Companies
Foreign corporations have faced indictment under the FCPAs anti-bribery provisions in three recent enforcement actions, raising concerns in at least some quarters that the government has adopted a newly-aggressive view of the amenability of foreign corporations to suit under the FCPA. See, e.g., Lawrence A. Urgenson and Audrey L. Harris, Foreign Companies Prosecuted In The U.S. For Bribes Overseas, 15 Bus. Crimes Bulletin No. 2 (Oct. 2007). On closer examination, however, this alarm seems somewhat overstated. In two of these three cases, the governments allegations plainly assert a violation of the FCPA by the foreign subsidiary in a manner that is wholly consistent with the FCPAs 1998 amendments. (See United States v. Syncor Taiwan, Inc., infra at n.7, 8; United States v. SSI Intl Far East, Ltd., infra at n.10). The charging papers in the governments 2005 prosecution of DPC Tianjin, however, appear to construe the FCPA in an expansive and arguably unwarranted manner.
United States v. Syncor Taiwan, Inc.6 Syncor Taiwan, Inc. ("Syncor Taiwan"), a Taiwan corporation engaged in providing radio-pharmacy services and outpatient medical imaging services, is a wholly-owned subsidiary of Syncor International Corporation, a Delaware corporation. Syncor Taiwan was charged with having paid improper commissions to doctors who controlled the purchasing decisions for the nuclear medicine departments of certain hospitals, including some hospitals owned by the government of Taiwan, for the purpose of obtaining or retaining business with those hospitals. These allegedly improper commissions(typically between 10-20% of sales) totaled at least $400,000 from the inception of Syncor Taiwan through September 2002. Syncor Taiwan pleaded guilty to violating the FCPAs anti-bribery provision and agreed to pay a $2 million fine, the maximum criminal fine for a corporation under the FCPA.7
At first glance, it may appear that Syncor Taiwan, a foreign corporation, pleaded guilty to violating the FCPA by committing entirely foreign conduct. A close review of the charging papers reveals, however, that Syncor Taiwans allegedly illegal conduct had a meaningful domestic component. According to the governments allegations, Syncor Taiwans chairman resided in California, and approved the illegal payments while in California. See Criminal Information, 02-CR-1244-ALL (C.D. Cal. filed Dec. 4, 2002). Because the allegedly violative conduct occurred while Syncor Taiwan, by its chairman, was "in the territory of the United States," the governments prosecution of Syncor Taiwan appears to represent a straightforward application of the FCPAs terms.8
United States v. SSI Intl Far East, Ltd.9 On October 16, 2006, SSI International Far East, Ltd. ("SSI Korea"), the Korean subsidiary of Schnitzer Steel, a U.S.-based company, pleaded guilty to FCPA violations and paid a $7.5 million fine. The parent company, Schnitzer Steel, entered into a deferred-prosecution agreement and settled an enforcement action with the SEC by agreeing to pay $7.7 million in monetary penalties and engage a compliance monitor for three years. Much like Syncor Taiwan, SSI Korea is a foreign subsidiary of a U.S. issuer that was charged with making illegal bribery payments in its country of incorporation. Again, the jurisdictional hook here was the presence of SSI Korea employees in the United States. The criminal information charged that SSI Korea employees in Tacoma, Washington and Portland, Oregon directly participated in the bribery scheme by making wire transfers from Portland, Oregon, to off-the-books bank accounts in South Korea affiliated with employees of defendant SSI Korea. These funds were then allegedly passed on to foreign officials in China and South Korea. Thus, it appears that SSI Korea, by the conduct of its domestic employees, engaged in conduct prohibited by the FCPA "while in the territory of the United States." For this reason, the SSI Korea prosecution appears to represent a relatively uncontroversial application of the expanded jurisdictional provisions of the FCPA.
United States v. DPC (Tianjin) Ltd.10 Conversely, the jurisdictional rationale underpinning the governments prosecution of DPC (Tianjin) Ltd. ("DPC Tianjin") is far from apparent. DPC Tianjin, a Chinese subsidiary of U.S.-based Diagnostic Products Corporation ("DPC"), settled charges that it violated the FCPA. The criminal information principally alleged that DPC Tianjin violated the FCPA by making payments to government employees at various Chinese hospitals, again raising the question of why the extra-territorial conduct of a foreign corporation was violative of the FCPA. Unfortunately, the governments charging document does little to answer this question.
The governments charging document appears to make clear that DPC Tianjin was not charged under 18 U.S.C. § 78dd-3, the expanded jurisdictional provision at issue in Syncor Taiwan and SSI Korea. Rather, the government charges that "Defendant DPC Tianjin acted as an agent within the meaning of the [FCPA]," apparently invoking the terms of 18 U.S.C. § 78dd-1. The factual assertions then veers in the direction of what appears to be 18 U.S.C. § 78dd-3 by charging conduct taken within the territory of the United States: "in the Central District of California and elsewhere, defendant DPC Tianjin used electronic mail and other means and instrumentalities of interstate commerce corruptly in furtherance of an offer, promise to pay and authorization of the payment of money&." But the specific allegations concerning DPC Tianjins conduct make no mention of the kind of domestic conduct that served as the basis for the prosecution of Syncor Taiwan and SSI Korea. Instead, the charging document seems to allege that DPC Tianjins domestic conduct in the Central District of California consisted of sending reports containing financial information "by electronic mail message and facsimile to DPCs principal place of business in Los Angeles, California." This is no throwaway line, as the very next paragraph seemingly makes clear the governments view of why this conduct was important: "DPC Tianjin caused approval of the proposed budgets to be sent by telephone, facsimile and electronic message from Los Angeles, California to Tianjin, China." United States v. DPC (Tianjin) Co. Ltd., No. CR 05-482 (C.D.Cal. filed May 20, 2005).
This prosecution is difficult to square with the text of the FCPA. As the Dooley court explained, Congress clear intent was to exclude foreign corporations from prosecution altogether. Charging foreign corporations as "agents" of their domestic parent based on what can, at best, be described as tenuous jurisdictional grounds, would nullify Congress intent. If Congress had wanted to lift this bar entirely, it could have done so in the 1998 amendments, when it expressly reconsidered the applicability of the FCPA to the acts of foreign individuals and corporations. Instead, Congress chose to limit its expansion of the scope of the FCPA to the prosecution of foreign corporations only for acts that occur while the foreign entity or its agent is physically present in the territory of the United States. The apparent position of the government in the DPC Tianjin case that a foreign corporation may be charged with violating the FCPA for sending email and fax transmissions into the United States from abroad represents a departure from the FCPAs legislative history and judicial precedent.
To date, the DPC Tianjin case appears to be the only instance in which a foreign subsidiary has been criminally prosecuted as an "agent" of a U.S. issuer.11 It also appears to stand alone in using a foreign subsidiarys contacts with its domestic parent as a basis to charge direct liability under the FCPA. Accordingly, it appears that there is little cause for concern at present that the government will adopt the DPC Tianjin model more broadly. The matter certainly merits close scrutiny as other enforcement actions involving foreign subsidiaries wind their way to conclusion.
Is the Government Finding Novel Ways To Prosecute Foreign Entities?
United States v. Akzo Nobel N.V.12 This recently concluded joint Justice Department and SEC enforcement action features yet another foreign corporation as its primary targetthis time Akzo Nobel N.V. ("Akzo Nobel"), a Dutch corporation with its headquarters in the Netherlands. According to the governments charges, Akzo Nobel, through two Dutch subsidiaries, made improper payments to Iraqi government officials with responsibility for aspects of the OFFP. Just as in the Syncor Taiwan and SSI Korea cases, however, theres no jurisdictional novelty here. The Commissions complaint makes it clear that Akzo Nobel, despite its foreign place of incorporation and foreign headquarters, was subject to liability under the FCPA because its American Depository Receipts were traded on the NASDAQ at the time when the alleged misconduct occurred, and therefore was a U.S. issuer within the meaning of the FCPA.13 Akzo Nobel paid approximately $3 million in civil penalties and disgorgement to settle the Commissions charges, and entered into a deferred prosecution agreement with the Justice Department.
This deferred prosecution agreement, however, contains an interesting and seemingly novel provision, which merits some attention from those concerned about the ability of the SEC and the Justice Department to reach foreign corporations under the FCPA. The Justice Departments press release recites that "within 180 days, N.V. Organon [one of the Dutch subsidiaries implicated in the misconduct] is expected to reach a resolution with the Dutch National Public Prosecutors Office for Financial, Economic and Environmental Offences regarding its conduct under the OFFP, wherein it will pay a criminal fine of approximately ¬381,000 in the Netherlands. If N.V. Organon fails to reach a timely resolution with the Dutch Public Prosecutor, Akzo Nobel will pay $800,000 to the United States Treasury."14 The non-prosecution agreement thus appears to impliedly concede that the United States lacks jurisdiction to impose direct punishment on N.V. Organon, but nonetheless contemplates that the parents punishment will be enhanced if the subsidiary (over which the United States has no jurisdiction) does not accede to punishment in its home country.
Somewhat similar to the Akzo Nobel settlement, the Commissions settlement (but not the Justice Departments announcement) calls for Flowserve B.V., a Dutch subsidiary of Flowserve, to "enter into a criminal disposition with the Dutch Public Prosecutor pursuant to which it will pay a fine." Other than the Akzo Nobel and Flowserve settlements, there are no other cases in the FCPA area where the Justice Department and the Commission are compelling entities over which they have no jurisdiction to settle criminal cases in their home country. Only time will tell whether this novel settlement structure is unique to these two cases or whether this kind of settlement will become commonplace as the Commission and the Justice Department continue their aggressive worldwide pursuit of companies believed to have violated the FCPA.
Conclusion
What seems clear from recent FCPA cases, and some of the ongoing publicly disclosed FCPA investigations, is that the Justice Department and the Commission appear to take the view that, notwithstanding Congress stated intent to limit the jurisdictional reach of the FCPA to foreign corporations who take some action while physically present within the territory of the United States, the jurisdictional scope of the FCPA is limitless. The admittedly single litigated case that has confronted this question head-on appears to disagree with the Justice Departments and Commissions position on the jurisdictional scope of the FCPA. Dooley, 803 F. Supp. 428 at 439. It remains to be seen whether a court will get a chance to clarify when, if ever, a foreign corporation can be prosecuted in the United States for conduct taken entirely outside the United States.
Footnotes
1. An "issuer" is any entity "which has a class of securities registered pursuant to [15 U.S.C. § 78l] or which is required to file reports under [15 U.S.C. § 78o(d)]." See 15 U.S.C. § 78dd-1(a).
2. The term "domestic concern" encompasses "any individual who is a citizen, national, or resident of the United States," and "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." See 15 U.S.C. § 78dd-2(h)(1).
3. See, e.g., H. Lowell Brown, Extraterritorial Jurisdiction Under The 1998 Amendments To The Foreign Corrupt Practices Act: Does the Governments Reach Now Exceed Its Grasp?, 26 N.C. J. Intl L. & Comm Reg. 239, 259-260 (2001).
4. See, e.g., Dooley v. United Tech. Corp., 803 F. Supp. 428, 438-39 (D.D.C. 1992) (discussing the legislative history of the FCPA and concluding that "the authors of the FCPA were concerned with international comity").
5. See, e.g., Atl. Mut. Ins. Co. v. Commr of Internal Revenue, 523 U.S. 382, 387 (1998) (noting that in construing a statute, a court "must give effect to the unambiguously expressed intent of Congress"); Dole v. United Steel Workers of Am., 494 U.S. 26, 34 (1990) (noting that traditional tools of statutory construction include a statutes language, structure, and purpose).
6. DOJ Press Release 02-707 (Dec. 10, 2002), available at http://www.usdoj.gov/opa/pr/2002/December/02_crm_707.htm.
7. In addition to the bribery payments in Taiwan, Syncor, the parent company, was alleged to have made illicit payments in Mexico, Luxembourg, Belgium and France. To resolve these allegations, Syncor agreed to cease-and-desist from future violations of the FCPA, retain an independent compliance consultant, and pay a $500,000 civil penalty. Exchange Act Release No. 46979 (Dec. 10, 2002), available at http://sec.gov/litigation/admin/34-46979.htm.
8. See 15 U.S.C. § 78dd-3(a) ("Prohibited foreign trade practices by persons other than issuers or domestic concerns") states: "It shall be unlawful for any person other than an issuer that is subject to section 30A of the Securities Exchange Act of 1934 or a domestic concern, as defined in section 104 of [the FCPA] or for any officer, director, employee, or agent of such person or any stockholder thereof acting on behalf of such person, while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value [to a foreign official, party, etc&]."
9. DOJ Press Release 06-707 (Oct. 16, 2006), available at http://www.usdoj.gov/criminal/pr/press_releases/2006/10/2006_4809_10-16-06schnitzerfraud.pdf.
10. DOJ Press Release 05-282 (May 20, 2005), available at http://www.usdoj.gov/opa/pr/2005/May/05_crm_282.htm.
11. See 15 U.S.C. § 78dd-1(a) (defining "issuer"); 15 U.S.C. § 78dd-2(a) (defining "domestic concern").
12. See DOJ Press Release 07-1024 (Dec. 20, 2007), available at http://www.usdoj.gov/opa/pr/2007/December/07_crm_1024.html.
13. See SEC Complaint ¶ 7, SEC v. Akzo Nobel, N.V., No. 07-2293 (D.D.C. filed Dec. 20, 2007), available at http://www.sec.gov/litigation/complaints/2007/comp20410.pdf.
14. See DOJ Press Release 07-1024, supra at n.12.
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