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.
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.
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.
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.