As discussed in our Newsletter of March 1, 2002, the Foreign Corrupt Practices Act (“FCPA”) was the attempt by the Federal government to halt the use of bribes by multinational companies to obtain contracts and favors in bids or other means of getting business abroad. The unique aspect about the FCPA was that it could impose liability upon an American business even if the activity was not considered illegal or unethical in the host nation and even if the activity was not specifically approved by the American company.
For example, an expensive gift to a foreign official to assure close review and possible approval of a bid for a major contract would be considered illegal under the FCPA even if that particular nation never enforced its own anti bribery laws and even if various other nations vying for the contract freely bribed other officials.
And the penalties could be severe, including massive fines and jail terms. As one client put it, “Not only is our government not helping us get contracts like in most other nations but it’s putting us in jail for doing what every other major industrial power is doing to get business.”
Nevertheless, this is the law and the United States is seeking to impose upon its trade competitors rigorous enforcement of similar laws to “even the playing field.” It is incumbent upon every United States business to be familiar with its provisions and to abide by them or face dire consequences.
Note: The 1988 Trade Act directed the Attorney General to provide guidance concerning the Department of Justice's enforcement policy with respect to the Foreign Corrupt Practices Act of 1977 ("FCPA"), to potential exporters and small businesses that are unable to obtain specialized counsel on issues related to the FCPA. However, that guidance is limited to broad responses to requests under the Department of Justice's Foreign Corrupt Practices Act Opinion Procedure and to general explanations of compliance responsibilities and potential liabilities under the FCPA. The Department of Justice has publicly stated that United States firms seeking to do business in foreign markets must be familiar with the FCPA. Ignorance of the law will be no excuse.
The reader is invited to read the above cited Newsletter for the overview of the FCPA. This article shall go into more detail as to how the FCPA works and its various provisions.
THE BASIC ACT:
It was in the 1970’s that the scandal concerning allegedly unethical business practices by American companies abroad made the headlines. Investigations by the Securities and Exchange Commission in the mid-1970's revealed that over 400 United States companies admitted making questionable or illegal payments in excess of $300 million to foreign government officials, politicians, and political parties. The admitted abuses ran the gamut from bribery of high foreign officials in order to secure some type of favorable action by a foreign government to “facilitating payments” that allegedly were made to ensure that government functionaries discharged certain ministerial or clerical duties.
Congress enacted the FCPA to bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system. The anti-bribery provisions of the FCPA make it unlawful for a U.S. person to make a corrupt payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person.
The FCPA also requires issuers of securities to meet its accounting standards. These accounting standards, which were designed to operate in tandem with the anti-bribery provisions of the FCPA, require corporations covered by the provisions to maintain books and records that accurately and fairly reflect the transactions of the corporation and to design an adequate system of internal accounting controls. This article shall discuss only the anti-bribery provisions.
2. Basic Provisions Prohibiting Foreign Corrupt Payments
a. Anti-bribery Provisions
The FCPA makes it unlawful to bribe foreign government officials to obtain or retain business. The anti-bribery provisions apply both to certain issuers of registered securities and issuers required to file periodic reports with the SEC (referred to as "issuers") and to others (referred to as "domestic concerns".) A "domestic concern" is defined to mean any individual who is a citizen, national, or resident of the United States, or 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.
The FCPA's anti-bribery provisions extend to two types of behavior. The basic prohibition is against making bribes directly; a second prohibition covers the responsibility of a domestic concern and its officials for bribes paid by intermediaries.
The FCPA's basic anti-bribery prohibition makes it unlawful for a firm (as well as any officer, director, employee, or agent of a firm or any stockholder acting on behalf of the firm) to offer, pay, promise to pay (or even to authorize the payment of money, or anything of value, or to authorize any such promise) to any foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. (A similar prohibition applies with respect to payments to a foreign political party or official thereof or candidate for foreign political office.)
/1/ Payments by Intermediaries
It is also unlawful to make a payment to any person, while knowing that all or a portion of the payment will be offered, given, or promised, directly or indirectly, to any foreign official (or foreign political party, candidate, or official) for the purposes of assisting the firm in obtaining or retaining business. "Knowing" includes the concepts of "conscious disregard" or "willful blindness."
Put simply, if one knows or should know that a local agent is intending to violate the FCPA, one is held to have approved of that action and will be held liable. “Don’t tell me,” will not protect the firm or its officers if they are aware that such a contract will probably require a bribe being placed by their agent. Such means as implicit understandings as to what the agent will probably be doing do not necessarily provide protection.
Nevertheless, if the agent is truly acting without authority or actual or constructive knowledge of the officers and the officers truly had no idea that such efforts were being made, they may not face personal liability but it is likely their company would if the intermediary is an agent of the company. The way to avoid such dangers is a policy of clear and written instructions to all agents as to the terms of the FCPA and their requirement to abide by it. More on that procedure in the last part of this article.
The Department of Justice is responsible for all criminal enforcement and for civil enforcement of the anti-bribery provisions with respect to domestic concerns. The SEC is responsible for civil enforcement of the anti-bribery provisions with respect to issuers.
c. Elements of the Crime
/1/ Anti-bribery Provisions: Elements of an Offense
With respect to the basic prohibition, there are five elements which must be met to constitute a violation of the Act:
A. Who -- The FCPA applies to any individual firm, officer, director, employee, or agent of the firm and any stockholder acting on behalf of the firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the anti-bribery provisions or if they conspire to violate those provisions. A foreign-incorporated subsidiary of a U.S. firm will not be subject to the FCPA, but its U.S. parent may be liable if it authorizes, directs, or participates in the activity in question. Individuals employed by or acting on behalf of such foreign-incorporated subsidiaries may, however, be subject to the anti-bribery provisions if they are persons within the definition of "domestic concern." In addition, U.S. nationals employed by foreign-incorporated subsidiaries are subject to the anti-bribery provisions of the FCPA. Note that this means individual liability may attach to the employees and fiduciaries of the entity and if you are employed by a company whose activities you question, take it seriously: you may end up paying the price.
B. Corrupt intent -- The person making or authorizing the payment must have a corrupt intent and the payment must be intended to induce the recipient to misuse his or her official position in order wrongfully to direct business to the payer. You should note that the FCPA does not require that a corrupt act succeed in its purpose. The offer or promise of a corrupt payment can constitute a violation of the statute. The FCPA prohibits the corrupt use of the mails or of interstate commerce in furtherance of a payment to influence any act or decision of a foreign official in his or her official capacity or to induce the official to do or omit to do any act in violation of his or her lawful duty, or to induce a foreign official to use his or her influence improperly to affect or influence any act or decision.
C. Payment -- The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value.
D. Recipient -- The prohibition extends only to corrupt payments to a foreign official, a foreign political party or party official, or any candidate for foreign political office. A "foreign official" means any officer or employee of a foreign government or any department or agency, or any person acting in an official capacity. There is available, for those who dare, a Department of Justice's Foreign Corrupt Practices Act Opinion Procedure for particular questions as to the definition of a "foreign official", such as whether a member of a royal family, a member of a legislative body, or an official of a state-owned business enterprise would be considered a "foreign official." Of course such a method, however they may insist that the procedure is confidential, must be assumed to alert both the government and potential competitors as to your intentions.
Prior to the amendment of the FCPA in 1988, the term "foreign official" did not include any employee of a foreign government or agency whose duties were essentially ministerial or clerical. Determining whether a given employee's duties were "essentially ministerial or clerical" was a source of ambiguity, and it was not clear whether the Act prohibited certain "grease" payments, such as those for expediting shipments through customs or placing a transatlantic telephone call, securing required permits, or obtaining adequate police protection. Accordingly, recent changes in the FCPA focus on the purpose of the payment, instead of the particular duties of the official receiving the payment, offer, or promise of payment, and there are exceptions to the anti-bribery provision for "facilitating payments for routine governmental action" (see below).
E. Business Purpose Test -- The FCPA prohibits payments made in order to assist the firm in obtaining, or retaining business for or with, or directing business to, any person. It should be noted that the business to be obtained or retained does not need to be with a foreign government or foreign government instrumentality.
d. Third Party Payments
A key aspect of the law is that the actions of others…people retained or asked to work for you from other nations…can invoke the criminal sanctions against the American firm. The FCPA prohibits corrupt payments through intermediaries. It is unlawful to make corrupt use of the mails or of interstate commerce in furtherance of a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official.
The term "knowing" includes conscious disregard and deliberate ignorance. The elements of
an offense are essentially the same as described above, except that in this case the "recipient" is the intermediary who is making the payment to the requisite "foreign official." You should seek the advice of counsel and consider utilizing the Department of Justice's Foreign Corrupt Practices Act Opinion Procedure for particular questions relating to third party payments.
/1/ Permissible Payments and Affirmative Defenses
As amended in 1988, the FCPA now provides an explicit exception to the bribery prohibition for "facilitating payments" for "routine governmental action" and provides affirmative defenses which can be used to defend against alleged violations of the FCPA.
a. Exception for Facilitating Payments for Routine Governmental Actions.
There is an exception to the anti-bribery prohibition for facilitating or expediting performance of "routine governmental action." The statute lists the following examples: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country.
Actions "similar" to these are also covered by this exception. If you have a question about whether a payment falls within the exception, you should consult with counsel. You should also consider whether to utilize the Justice Department's Foreign Corrupt Practices Opinion Procedure, but consult with legal counsel before taking that action.
"Routine governmental action" does not include any decision by a foreign official to award new business or to continue business with a particular party.
b. Local Law Support. A person charged with a violation of the FCPA's anti-bribery provisions may assert as a defense that the payment was lawfulunder the written laws of the foreign country or that the money was spent as part of demonstrating a product or performing a contractual obligation. Used to the rather explicit nature of United States laws, many American companies are shocked to discover remarkable ambiguity or conflicts in the laws of other nations, quite common in the developing world. Whether a payment was lawful under the written laws of the foreign country may be difficult to determine. You should consider seeking the advice of counsel or utilizing the Department of Justice's Foreign Corrupt Practices Act Opinion Procedure review procedure for such issues as (a) the issuance of an advisory opinion by a foreign government agency; (b) the issuance of regulations by a unit of local government; and (c) a course of conduct of a foreign government or government agency indicating that the payment is legal.
Note, however, that the cost of relying on these types of defenses may be significant. One raises an affirmative defense once one is being investigated or prosecuted under the Act and, of course, with an affirmative defense one has the burden of proof of demonstrating that the affirmative defense applies. The prosecution would not bear the burden of demonstrating in the first instance that the payments did not constitute this type of payment. Advice of both United States and local counsel is vital before deciding to rely on such defenses.
3. Sanctions For Violating the Bribery Provisions of the FCPA
/1/ The following criminal penalties may be imposed for violations of the FCPA's anti-bribery provisions:
1. Companies are subject to a fine of up to $2 million;
2. Officers, directors, and stockholders are subject to a fine of up to $100,000 and imprisonment for up to five years.
3. Employees and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. You should also be aware that fines imposed on individuals may not be paid by the firm.
/2/ There can be civil penalties as well.
1. The Attorney General or the SEC, as appropriate, may bring a civil action for a fine of up to $10,000 against any firm as well as any officer, director, employee, or agent of a firm, or stockholder acting on behalf of the firm, who violates the anti-bribery provisions.
2. In addition, in an SEC enforcement action, the court may impose an additional fine not to exceed the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of the violation, or (ii) a specified dollar limitation. The specified dollar limitations are based on the egregiousness of the violation, ranging from $5,000 for a natural person and $50,000 for any other person, to $100,000 for a natural person and $500,000 for any other person.
3. The Attorney General or the SEC, as appropriate, may also bring a civil action to enjoin any act or practice of a firm whenever it appears that the firm (or an officer, director, employee, agent, or stockholder acting on behalf of the firm) is in violation (or about to be) of the anti-bribery provisions. The SEC may also enter a cease-and-desist order against a person who violates, or is about to violate, the anti-bribery provisions.
4. And, if the above penalties are not enough to make one hesitate, consider that there are alternative fines available to the authorities for enforcement actions not necessarily brought under the direct authority of the FCPA. Under federal criminal laws other than the FCPA, individuals may be fined up to $250,000 or up to twice the amount of the gross gain or gross loss if the defendant derives pecuniary gain from the offense or causes a pecuniary loss to another person. The FCPA's penalty provisions do not override the provisions in these other statutes providing for alternative fines.
/3/ Other Governmental Action.
1. Under guidelines issued by the Office of Management and Budget, a person or firm found in violation of the FCPA may be barred from doing business with the Federal government. Indictment alone can lead to suspension of the right to do business with the government. The President has directed that no executive agency shall allow any party to participate in any procurement or non-procurement activity if any agency has debarred, suspended, or otherwise excluded that party from participation in a procurement or non-procurement activity. No executive party or agency will allow any party to participate in any procurement or non-procurement activity if any agency has excluded that party.
2. In addition, a person or firm found guilty of violating the FCPA may be ruled ineligible to receive export licenses; the SEC may suspend or bar persons from the securities business and impose civil penalties on persons in the securities business for violations of the FCPA; the Commodity Futures Trading Commission and the Overseas Private Investment Corporation both provide for possible suspension or debarment from agency programs for violation of the FCPA; and a payment made to a foreign government official that is unlawful under the FCPA cannot be deducted under the tax laws as a business expense.
/4/ Private Cause of Action
Conduct that violates the anti-bribery provisions of the FCPA may also give rise to a private cause of action for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO), or to actions under other federal or state laws. For example, an action might be brought under RICO by a competitor who alleges that the bribery caused the defendant to win a foreign contract.
This is a remarkably effective tool for competitors to consider using against those companies who ignore the law. As discussed below, quite often the Federal government is slow or not inclined to enforce this law, predicated often on the current political climate within the government or the proximity of the next election. However, by utilizing RICO, a private cause of action is available to competitor and while expensive, that defendant faces bad publicity and a Federal government who may, based on such publicity and with much of the work being done privately, decide to join in. One client put it well: “the government scares me a lot but my competition is the one who would take this opportunity and run with it…and they know I will do the same to them!”
3. Guidance from the Government?
The Department of Justice has established the Foreign Corrupt Practices Act Opinion Procedure under which any party may request a statement of the Justice Department's present enforcement intentions under the anti-bribery provisions of the FCPA regarding any proposed business conduct. The details of the opinion procedure are found at 28 CFR Part 77. Under the opinion procedure, the Attorney General is required to issue an opinion in response to a specific inquiry from a person or firm within thirty days of the request. (The thirty day period does not run until the Department of Justice has received all the information it requires to issue the opinion and this loop hole, of course, often delays when the opinion will be received, as does the reluctance of the petitioner to pressure the government and perhaps get an adverse opinion..) Conduct for which the Department of Justice has issued an opinion stating that the conduct conforms with current enforcement policy will be entitled to a presumption, in any subsequent enforcement action, of conformity with the FCPA. Note that this is only a presumption: it does not stop a later administration from prosecuting, only makes the burden of proof upon them more difficult.
Although the Department of Commerce has no enforcement role with respect to the FCPA, it supplies general guidance to U.S. exporters who have questions about the FCPA and about international developments concerning the FCPA. For further information from the Department of Commerce about the FCPA contact Eleanor Roberts Lewis, Chief Counsel for International Commerce, or Arthur Aronoff, Senior Counsel for International Finance and Trade, Office of the Chief Counsel for International Commerce, U.S. Department of Commerce, Room 5882, 14th Street and Constitution Avenue, N.W., Washington, D.C. 20230, (202) 482-0937.
4. Thoughts and Conclusions
As with so much involving governmental enforcement, the FCPA has teeth and has been used with catastrophic results upon occasional companies, but its enforcement depends a great deal on the current political climate both in the United States and in the local nation involved. Enforcement is spotty but the cost of an indictment is so tremendous that most companies walk softly in this particular area of doing business.
The problem arises from the fact that as spotty as enforcement is by the United States, enforcement by other trading nations is even more occasional and the constant complaint of American companies is that only the United States seems to enforce these procedures and rules.
In reality, it is the private cause of action that creates the greatest danger for the company tempted to stretch the rules. Unlike most nations, the United States grants its companies the right to enforce this particular law and since they have an overriding interest in doing so, the wise business person will realize that the danger can not be ignored. It is not uncommon for competitors, losing out on a bid, to ponder whether some additional investigation may generate more profit than the bid would have if action is brought.
The law is subject to political vagaries of enforcement but the law of competition is one not likely to change and the wise business person should keep that danger in mind.
For companies, a fully written fully publicized policy explaining the attributes of the FCPA and instructing all agents and employees to abide by its terms is vital. Our office normally creates such documents for our clients to hand to any agents it hires, either directly or indirectly, along with prohibitions as to violating any aspect of the Act. The usefulness of that procedure in halting enforcement efforts has been demonstrated again and again and any entity seriously considering engaging in business abroad should seriously consider creating such a standard “package” for its agents abroad.