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THE FEDERAL
CORRUPT PRACTICES ACT: THE BASICS
Introduction:
Many locales in the
world utilize bribery to facilitate the workings of business
transactions on a regular basis. Any company involved in international
business will soon discover that the operations abroad place upon the
United States business obligations and methodology that is at times
difficult to understand and, at other times, illegal in the United
States.
When competing with
other companies from other nations, it is often tempting to utilize the
local techniques to achieve successful contracts. Paying filing fees to a local
official or taking a top level official to an expensive dinner is so
common that the next step-bribing a high level official…can be
undertaken without a great deal of thought.
The FEDERAL CORRUPT
PRACTICES ACT was passed by Congress to specifically control such
activities on the part of United States businesses and can impose severe
penalties upon the United States business who is tempted to engage in
prohibited activity. As with most criminal sanctions, “ignorance is no
excuse” and the business engaged in business abroad must take the time
to master the intricacies of the Act or faces extreme liability.
This article briefly
summarizes the U.S. Foreign Corrupt Practices Act (FCPA), particularly
how it is currently being interpreted in 2009 by the U.S. Department of
Justice (DOJ) and Securities and Exchange Commission (SEC), how it has
recently been applied in well-publicized cases, how the FCPA is now
regarded by publicly-traded U.S. corporations, and some circumstances in
which the FCPA applies to non-U.S. persons as well as U.S. persons.
The Basic Act:
1. The FCPA applies
to the all worldwide business activities of U.S. corporations. It
prohibits U.S. companies, first, from paying bribes directly to foreign
officials. It also prohibits offering or promising to pay, or
authorizing, a bribe, and prohibits making gifts or otherwise providing
anything of value to foreign officials to obtain or retain business or
secure an improper advantage. This prohibition even extends to the
offering of business opportunities, lavish entertainment, excessive
“business promotional” activities, covering or reimbursing expenses of
officials, and charitable, political, or in-kind contributions.
The FCPA defines the
term “foreign official” very broadly so as to include any government
employee – elected, appointed, or otherwise. It also includes officers,
directors, and employees of government-owned companies or other
instrumentalities. Even if a person would not be considered a public
servant locally, the DOJ is prone to construe the individual as an
official. Indeed, DOJ officials construe the FCPA to cover gifts or
payments to employees of companies in which the government has any
ownership, not just wholly-owned and controlled companies.
The FCPA also covers
the giving of anything of benefit to a candidate for government office,
an official of a political party, or the political party itself in order
to obtain or retain business or secure an improper advantage. The
Justice Department and the SEC have applied the FCPA to cover payments
or gifts to members of the family of a government or party official, as
well as charitable contributions The FCPA also covers, and has been
enforced against, payments to officials of public international
organizations such as the United Nations and the World Bank.
2. The FCPA’s books
and records provisions, which apply to U.S. or foreign-based
companies whose stock is publicly-traded in the United States,
require that not only a parent company but all companies in a controlled
group or which are related entities which form part of the corporate
group, maintain accurate books and records and a system of internal
controls over assets.
3. A
major source of risk to U.S. companies is the provision of the FCPA that
allows U.S. companies, U.S. citizens, and residents of the United States
to be held liable for improper payments made by non-employee third
parties, even payments of which they may be unaware. For
example, if a U.S. company were to hire a local introducer, co-broker,
agent or consultant in another country, or enter into business with a
foreign partner, and that person or partner were to make an improper
payment or share part of his or its compensation with a government
official of that country, the U.S. company that entered into the
relationship with the agent or partner could be liable. In fact, if
the partner were acting as an agent for the U.S. company, or if the
partner took any action in furtherance of the payment while in the
United States, the FCPA would apply to the partner itself, in addition
to applying to the U.S. company.
Penalties:
The FCPA provides
for criminal liability in the form of fines and imprisonment for persons
who willfully violate the law; these provisions apply without regard to
the nationality of the person, and in recent cases, non-US persons have
been extradited to the United States to face FCPA charges. Both the DOJ
and the SEC also have civil enforcement authority, in the SEC’s case
limited to “issuers”.
Being practical, any
U.S. company should fear being found in violation of the FCPA—or even
being investigated for having possibly violated the FCPA—for many
reasons. The first is the cost of adverse publicity. Companies
prosecuted or investigated for FCPA violations are often the subject of
intense press scrutiny and can sustain severe commercial consequences
for being tainted as a company engaged in “corrupt” practices.
In addition, the
mere fact of an investigation—without any wrongdoing having been
proved—can prompt severe sanctions. In the case of Lockheed, for
example, upon its indictment by a grand jury, Lockheed lost its right to
obtain State Department export licenses, and it was in danger of having
its rights to do business with the U.S. government suspended, or of
being debarred. As a result, Lockheed was forced to agree to pay a
record-setting fine without the government’s having proved that what
Lockheed did was in fact, a violation of the FCPA.
Moreover, penalties
under the FCPA have sharply increased. A base fine of up to
$2,000,000.00 may be imposed for every FCPA violation. Lockheed
ultimately paid a total of more than $25,000,000.00 in fines -- twice
its profit on the subject transaction -- after required penalty formulas
were applied. These penalties are applied to U.S. and to foreign
companies. In a recent case, Syncor Taiwan Ltd., a Taiwanese
company paid a $2 million criminal fine under the FCPA for a violation
committed while in the United States. ABB, Ltd., a Swiss company
that is also an “issuer,” and two of it subsidiaries together paid a
total of $16.4 million in criminal and civil FCPA fines.
Individual penalties
have also increased.
Any individual in violation may be fined $100,000.00 per violation
and imprisoned for up to five years per violation. No reimbursement
of fines by the employer is allowed. Since 1994, all individuals
charged with a criminal FCPA violation have been sentenced to jail or
probation. In the Lockheed case, two Lockheed executives were
imprisoned for FCPA violations. More significantly, one of the two, a
Syrian-born naturalized U.S. citizen who had sought refuge in his native
Syria, was ultimately arrested by Syrian authorities and incarcerated in
Syria until he decided “voluntarily” to return to the United States to
face FCPA charges.
The SEC has brought
literally hundreds of books and records cases challenging the record
keeping practices of companies subject to the FCPA. On the antibribery
side, DOJ officials, particularly in the last few years, have been
construing and applying the FCPA very aggressively. In some instances
they have asserted jurisdiction and authority over situations which may
have been beyond their statutory authority. U.S. enforcement
authorities asked to approve proposed transactions under the FCPA
typically condition such approval upon receipt of a direct certification
from the foreign partner as to its compliance with the prohibitions of
the FCPA, and insist on contractual undertakings from the foreign
partner as well.
Other Jurisdictions:
More than 60 other
countries have adopted anti-corruption standards and rules similar to
those found in the FCPA under conventions concluded under the auspices
of the Organization for Economic Cooperation and Development (OECD), the
Organization of American States (OAS), and, most recently, the United
Nations. Members of the World Bank group and other international
financial institutions now follow strict anticorruption rules in their
procurements. This international movement has forged a global consensus
against corruption. It also has provided U.S. enforcement officials
with new enforcement cooperation and extradition agreements with other
countries to facilitate FCPA prosecutions for activities that take place
entirely outside the United States. U.S. investigators have now
repeatedly succeeded in obtaining financial records from Swiss banks as
a part of their investigations, in Lockheed and subsequent
cases. Meanwhile, U.S. laws such as the USA PATRIOT ACT and the
Sarbanes-Oxley Act have significantly increased U.S. companies’
compliance obligations, and the consequences for any failure to satisfy
those obligations. It is true that few of the other nations are as
aggressive in enforcing these laws as the United States is. However, any
entity would be foolish to rely on continued lack of effective
enforcement in any jurisdiction.
In short, the
existing business climate has caused U.S. companies to be more sensitive
about corruption than previously. As a result, U.S. companies are
increasingly careful in the arrangements they make with third parties,
increasingly committed to avoiding situations in which improper payments
might be required or demanded, and increasingly willing to withdraw
altogether from countries in which corruption is so pervasive as to
effectively preclude their doing business. Foreign partners of such
companies need to be aware of these sensitivities, legal and business
risks that their U.S. partners face, as well as their own potential
exposure under U.S. laws.
Conclusion:
While it is tempting
to assume that only the largest companies face scrutiny for such
conduct, in realty all entities are subject to the same rules and there
is every reason to assume that the US government will become more and
not less effective in seeking out violators. It is also common for an
unsuccessful competitor on a bid to “turn in” the United States entity,
hoping that they will be smeared and removed as a competitor. Such
charges and counter charges are increasingly common and can apply to the
smallest entity engaged in business abroad.
It is a good law and should even the playing field. However, the
ramifications of even an unintentional violation are so severe that it
is vital for the entity considering business abroad to make sure that
all relevant employees are fully briefed on proper procedures and what
is allowed and disallowed under the law. The reader should also review
our article on
International Transactions. |
