SEC and DOJ Issue Guidelines on Foreign Corrupt Practices Act (FCPA)
Corporate counsel take note: The SEC and the DOJ jointly issued guidelines on the Foreign Corrupt Practices Act (FCPA) on November 14, 2012, and it will be a must read for counsel advising businesses that operate in countries around the world.
This topic is gaining a considerable amount of attention as Walmart disclosed in its regulatory filings on November 15, 2012 that it was being investigated for FCPA violations in countries "including but not limited to Brazil, China and India." The WSJ also reported that Walmart had disclosed that it was investigating allegations that employees of Wal-Mart de Mexico paid bribes to Mexican officials to further the company's rapid expansion there.
The FCPA guide aims to provide businesses and individuals with information to help them abide by the law, detect and prevent FCPA violations, and implement effective compliance programs.
In a released statement, Assistant Attorney General Lanny A. Breuer of the Justice Department's Criminal Division said, "Our FCPA enforcement is critical to protecting the integrity of markets for American companies doing business abroad, and we will continue to make clear that bribing foreign officials is not an acceptable shortcut. The Guide is an important illustration of our transparency and a useful reference for companies and individuals who wish to act responsibly and in compliance with the law."
Also by released statement, the Director of the SEC's Division of Enforcement, Robert Khuzami, stated: "Investors must have faith that the economic performance of public companies reflects lawful considerations of markets, price and product rather than a mirage resulting from bribery and corruption. This guide will protect investors by assisting businesses in preventing such unlawful behavior, thus avoiding FCPA violations in the first place, which is in the interest of law enforcement and business alike."
History of the FCPA
The FCPA was originally passed in 1977, following the scandal of Watergate and revelations by the SEC that more than 400 U.S. companies had paid hundreds of millions of dollars in bribes to foreign government officials to secure business overseas. The SEC reported that companies were using secret slush funds to make illegal campaign contributions in the United States and corrupt payments to foreign officials abroad and were falsifying their corporate financial records to conceal the payments, says the Guide.
The goal in passing the FCPA was to stop corporate bribery, and in doing so, restore confidence in the financial integrity of businesses and efficient functioning of markets, assist businesses in resisting corrupt demands, and ultimately, dealing with the foreign policy implications of corrupt business practices.
The FCPA also prohibited off-the-books accounting through provisions designed to strengthen the accuracy of the corporate books and records and the reliability of the audit process.
In 1988, Congress amended the FCPA to add the affirmative defenses of the local law defense; and the reasonable and bona fide promotional expense defense. Negotiations at the Organisation for Economic Co-operation and Development (OECD) resulted in the Convention on Combating Bribery of Foreign Officials in International Business Transactions (Anti-Bribery Convention), which, among other things, required parties to make it a crime to bribe foreign officials.
The FCPA was amended in 1998 to conform to the requirements of the Anti-Bribery Convention. These amendments expanded the FCPA's scope to: (1) include payments made to secure "any improper advantage"; (2) reach certain foreign persons who commit an act in fur¬therance of a foreign bribe while in the United States; (3) cover public international organizations in the definition of "foreign official"; (4) add an alternative basis for jurisdiction based on nationality; and (5) apply criminal penalties to foreign nationals employed by or acting as agents of U.S. companies.
The Anti-Bribery Convention came into force on February 15, 1999. As of November 1, 2012, there were 39 parties to the Anti-Bribery Convention: 34 OECD member countries (including the United States) and five non-OECD member countries (Argentina, Brazil, Bulgaria, the Russian Federation, and South Africa).
The DOJ is responsible for criminal enforcement of the FCPA, and the SEC is responsible for civil enforcement.
The Guide is an extensive 120 page document that provides specific knowledge and advice on a variety of aspects of the FCPA, as well as hypotheticals to illustrate application of the FCPA provisions.
Here are some of the highlights:
The FCPA prohibits offering to pay, paying, promising to pay, or authorizing the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business. (pg. 10)
This "business purpose test," is interpreted broadly, and the Guide provides examples of what would fall under the test: winning a contract, influencing the procurement process, circumventing the rules for importation of products, gaining access to non-public bid tender information, evading taxes or penalties, influencing the adjudication of lawsuits or enforcement actions, obtaining exceptions to regulations, and avoiding contract termination. (page 13)
Who is covered?
The anti-bribery provisions cover three categories:
(1) "Issuers" and their officers, directors, employees, agents, and
(2) "Domestic concerns" and their officers, directors, employees, agents, and shareholders; and
(3) Certain per¬sons and entities, other than issuers and domestic concerns, acting while in the territory of the United States.
An "issuer" is any company with a class of securities listed on a national securities exchange in the United States, or any company with a class of securities quoted in the over-the-counter market in the United States and required to file periodic reports with SEC.
"Domestic concern" is defined as 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 that is organized under the laws of the United States or its states, territories, possessions, or commonwealths or that has its principal place of business in the United States.
The third category is directed at foreign nationals or entities that engage in any act in furtherance of a corrupt payment (or an offer, promise, or authorization to pay) while in the territory of the United States. This includes officers, directors, employees, agents, or stockholders acting on behalf of such persons or entities. (page 10-11)
What type of conduct triggers these provisions?
The provisions apply to conduct both inside and outside of the United States. Using the U.S. mails or any means or instrumentality of interstate commerce in furtherance of a corrupt payment to a foreign official will subject issuers and domestic concerns to prosecution. This includes intrastate use of any interstate means of communication, or any other interstate instrumentality. The Guide explains that making a telephone call, sending an e-mail, text, or fax, from, to or through the United States involves interstate commerce, as does using the U.S. banking system. (page 11)
U.S. companies or persons may also be subject to the anti-bribery provisions even if they act outside the United States based on the nationality principle. (page 12)
Meaning of "Anything of Value"
The Guide instructs that a corrupt benefit may take many forms. It also emphasizes that there is no minimum threshold amount. The focus of the inquiry is instead on the corrupt intent of the payor, that is, the intent to improperly influence the government official. Moreover, the DOJ and SEC have considerable discretion in deciding what conduct warrants investigation, and the Guide notes that anti-bribery enforcement actions have focused on small payments and gifts only when they comprise part of a systemic or long-standing course of conduct that evidences a scheme to corruptly pay foreign officials to obtain or retain business. (page 14-15)
The FCPA does not prohibit gift-giving altogether. Small gifts or tokens of gratitude may be appropriate and the Guide stresses that they are more likely to be viewed as such when the gift is given openly, transparently, properly recorded by the giver, and permitted by local law. However, the larger the gift, the more likely it will draw scrutiny. (page 15-16)
Legitimate charitable giving is also permitted by the FCPA. Compliance with the FCPA merely requires that charitable giving not be used as a vehicle to conceal payments made to corruptly influence foreign officials. (page 19)
The Guide recommends businesses implement compliance programs with clear guidelines and processes in place for gift-giving by the company's directors, officers, employees, and agents.
Who is a Foreign Official?
The FCPA's anti-bribery provisions apply to corrupt payments made to (1) any foreign official; (2) any foreign political party or official thereof ; (3) any candidate for foreign political office; or (4) any person, while knowing that all or a portion of the payment will be offered, given, or promised to an individual falling within one of these three categories. (page 19).
A foreign official includes any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any per¬son acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization. (page 19-20) Thus, the Guide explains, the provisions apply to both high and low level employees.
The term "instrumentality" is broad and can include state-owned or state-controlled entities. Whether a particular entity constitutes an instrumentality under the FCPA requires a fact-specific analysis of an entity's ownership, control, status, and function. Examples of cases that involved instrumentalities under the FCPA included payments to two executives of a state-owned Mexican national oil company and a chairman of the Trinidad and Tobago racing authority. (page 20-21)
The definition of "foreign official" also includes employees of public international organizations. (page 21)
Payments made through third parties are also expressly prohibited by the FCPA. (page 21)
Two affirmative defenses exist: the local law defense and the reasonable and bona fide expenditure defense.
For the local law defense, a defendant must establish that "the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official's, political party's, party official's, or candidate's country. (page 23). The Guide cautions that this defense does not often arise, as the laws of other countries rarely allow for corrupt payments.
The FCPA allows companies to provide reasonable and bona fide travel and lodging expenses to a foreign official, and it is an affirmative defense where expenses are directly related to the promotion, demonstration, or explanation of a company's products or services, or are related to a company's execution or performance of a contract with a foreign government or agency (page 24).
The Guide provides examples of measures companies can take to ensure to avoid violating the FCPA:
1. Do not select the particular officials who will participate in the party's
proposed trip or program or else select them based on pre-determined,
2. Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of a receipt.
3. Do not advance funds or pay for reimbursements in cash.
4. Ensure that any stipends are reasonable approximations of costs likely to be incurred and/or that expenses are limited to those that are necessary and reasonable.
5. Ensure the expenditures are transparent, both within the company and to the foreign government.
6. Do not condition payment of expenses on any action by the foreign official.
7. Obtain written confirmation that payment of the expenses is not contrary to local law.
8. Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred.
9. Ensure that costs and expenses on behalf of the foreign officials will be accurately recorded in the company's books and records.
Expenditures will not give rise to FCPA prosecution if they are reasonable, bona fide, and directly related to the promotion, demonstration, or explanation of products or services or the execution or performance of a contract (page 24).
Exception for Facilitating or Expediting Payments
The FCPA provides a narrow exception for "facilitating or expediting payments" made in furtherance of routine governmental action, and must be limited to non-discretionary acts, i.e. processing visas, providing police protection or mail service, and supplying utilities like phone service, power, and water (page 25).
Extortion or Duress
The Guide clarifies that situations involving extortion or duress will not give rise to FCPA liability because a payment made in response to true extortionate demands under imminent threat of physical harm cannot be said to have been made with corrupt intent or for the purpose of obtaining or retaining business (page 27).
Successor liability applies to FCPA violations, and whether it applies to a particular corporate transaction depends on the facts and the applicable state, federal, and foreign law.
The Guide recommends companies conduct pre-acquisition due diligence in this area, and also notes that in a significant number of instances, DOJ and SEC have declined to take action against companies that voluntarily disclosed and remediated conduct and cooperated with DOJ and SEC in the merger and acquisition context (page 28).
The second prong of the guidelines deal with the accounting rules related to corporate expenditures.
Books and Records
Section 13(b)(2)(A) of the Exchange Act (15 U.S.C. § 78m(b)(2)(A)), commonly called the "books and records" provision, requires issuers to "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. (page 39)
The Guide notes that there may be instances where improper payments do not meet all of the requirements to find a violation under the anti-bribery provisions, however, improper recording may serve as the basis for FCPA liability.
Section 13(b)(2)(B) of the Exchange Act (15 U.S.C. § 78m(b)(2)(B)), commonly called the "internal controls" provision, requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:
(i) transactions are executed in accordance with management's general or
(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences …
The Guide explains that there is not a particular method prescribed for implementing these controls; companies have the flexibility to develop a system that takes into account their own needs and circumstances (page 40).
Importantly, the accounting provisions do not apply just to bribery-related violations. The Guide advises that the accounting provisions ensure that all public companies account for all of their assets and liabilities accurately and in reasonable detail, and they form the backbone for most accounting fraud and issuer disclosure cases brought by DOJ and SEC (page 38).
Companies also have reporting obligations under Section 13(a) of the Exchange Act, and must comply with various accounting requirements under the Sarbanes-Oxley Act, which could also be implicated in an FCPA case (page 41-42).
Other Related U.S. Laws
The Guide warns that violations of the FCPA's anti-bribery and accounting provisions may also implicate other laws, including the Travel Act, anti-money laundering statutes, mail and wire fraud statutes, certification and reporting violations, and tax violations (page 48-49).
Principles of Enforcement
Nine factors are considered in conducting an investigation, determining whether to charge a corporation, and negotiating plea or other agreements:
1. The nature and seriousness of the offense, including the risk of harm to
2. The pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management;
3. The corporation's history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it;
4. The corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents;
5. The existence and effectiveness of the corporation's pre-existing compliance program;
6. The corporation's remedial actions, including any efforts to implement an effective corporate compliance program or improve an existing one, replace responsible management, discipline or terminate wrongdoers, pay restitution, and cooperate with the relevant government agencies;
7. Collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution;
8. The adequacy of the prosecution of individuals responsible for the corporation's malfeasance; and
9. The adequacy of remedies such as civil or regulatory enforcement actions. (page 53)
In determining whether to open an investigation and, if so, whether an enforcement action is warranted, SEC staff considers a number of factors, including:
1. The statutes or rules potentially violated;
2. The egregiousness of the potential violation;
3. The potential magnitude of the violation;
4. Whether the potentially harmed group is particularly vulnerable or at risk;
5. Whether the conduct is ongoing;
6. Whether the conduct can be investigated efficiently and within the statute of limitations period;
7. Whether other authorities, including federal or state agencies or regulators, might be better suited to investigate the conduct.
8. Whether the case involves a possibly widespread industry practice that should be addressed,
9. Whether the case involves a recidivist, and
10. Whether the matter gives SEC an opportunity to be visible in a community that might not otherwise be familiar with SEC or the protections afforded by the securities laws. (page 53-54)
The Guide advises that although the conduct at issue is the first and foremost consideration in determining what action to pursue in enforcing the FCPA, both DOJ and SEC place a high premium on self-reporting, along with cooperation and remedial efforts, in determining the appropriate resolution of FCPA matters (page 54)
Like the accounting internal controls, there is no specific formula for companies to use when implementing an FCPA compliance program.
The SEC and DOJ simply look at three questions when evaluating a compliance program:
1. Is the company's compliance program well designed?
2. Is it being applied in good faith?
3. Does it work?
The Guide advises that for each violation of the anti-bribery provisions, the FCPA provides that corporations and other business entities are subject to a fine of up to $2 million, and individuals, including officers, directors, stockholders, and agents of companies, are subject to a fine of up to $100,000 and imprisonment for up to five years.
For each violation of the accounting provisions, the FCPA provides that corporations and other business entities are subject to a fine of up to $25 million, and individuals are subject to a fine of up to $5 million and imprisonment for up to 20 years.
Significantly, much higher fines may be imposed under the Alternative Fines Act (page 68).
For violations of the anti-bribery provisions, corporations and other business entities are subject to a civil penalty of up to $16,000 per violation, and individuals, including officers, directors, stockholders, and agents of companies, are similarly subject to a civil penalty of up to $16,000 per violation, which may not be paid by their employer or principal.
For violations of the accounting provisions, the SEC may obtain a civil penalty not to exceed the greater of (a) the gross amount of the pecuniary gain to the defendant as a result of the violations or (b) a specified dollar limitation. The specified dollar limitations are based on the egregiousness of the violation, ranging from $7,500 to $150,000 for an individual and $75,000 to $725,000 for a company (page 69).
An independent corporate monitor may be required in criminal cases and an independent compliance consultant may be required in civil cases depending on the circumstances of the case (page 71-72).
There are a variety of different types of resolutions to these cases, including:
For the DOJ: criminal complaints, plea agreements, deferred prosecution agreements, non-prosecution agreements, and declinations
For the SEC: civil injunctive actions and remedies, civil administrative actions and remedies, deferred prosecution agreements, non-prosecution agreements, and termination letters and agreements (page 74-77).
The Guide instructs that both the Sarbanes-Oxley Act and the Dodd-Frank Act contain provisions that affect whistleblowers who report violations of the FCPA.
The Sarbanes-Oxley Act prohibits issuers from retaliating against whistleblowers and provides that employees who are retaliated against for reporting possible securities law violations may file a complaint with the Department of Labor, for which they would be eligible to receive reinstatement, back pay, and other compensation. Sarbanes-Oxley also prohibits retaliation against employee whistleblowers under the obstruction of justice statute.
In 2010, the Dodd-Frank Act added Section 21F to the Exchange Act, addressing whistleblower incentives and protections. Section 21F authorizes SEC to provide monetary awards to eligible individuals who voluntarily come forward with high quality, original information that leads to an SEC enforcement action in which over $1,000,000 in sanctions is ordered. The Dodd-Frank Act also prohibits employers from retaliating against whistleblowers and creates a private right of action for employees who are retaliated against (page 82).
Individuals and companies with information about possible FCPA violations by issuers may report them to the Enforcement Division via SEC's online Tips, Complaints and Referral system, http://www.sec.gov/complaint/tipscomplaints.html.
Anne O'Donnell is a recovering litigator who is now currently a Senior Writer for legal professional content at Findlaw.com. She practiced for 10 years in civil litigation in San Francisco.