Imagine that your company is about to launch a new product in the market and you want to invite prospective customers to a seminar to explain how the product works. Part of the company's marketing initiative includes paying for the prospective customers' travel and lodging expenses, including meals, entertainment and so forth. In addition, some of the prospective customers are foreigners, employed by companies wholly or partially owned by foreign governments. While this scenario does not appear to pose legal problems on the surface, the Foreign Corrupt Practices Act - which prohibits bribes to foreign officials - is likely implicated and will require you to sit down and discuss the risks involved in this scenario with your legal counsel.
The Foreign Corrupt Practices Act (FCPA) is a federal anti-bribery statute that applies to all U.S.-based companies, companies registered with the Securities and Exchange Commission, and U.S. citizens and residents that prohibits them from making corrupt payments to foreign officials in order to obtain or retain business or to obtain a competitive advantage. It also imposes accounting requirements upon certain U.S. companies to ensure that business transactions are accurately reflected in the companies' books and records. The FCPA's anti-bribery provisions are enforced by the Department of Justice, and the accounting provisions are enforced by the SEC. In the past two years, the number of enforcement actions by the DOJ and the SEC has escalated substantially, spotlighting the necessity of having compliance programs and current and efficient training of employees to avoid inadvertent violations of the FCPA.
Background On The Foreign Corrupt Practices Act
The FCPA's anti-bribery provisions prohibit the "use of the mails or any means or instrumentality of interstate commerce corruptly 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" for the purpose of obtaining (or retaining) business.1
The FCPA applies to:
• Issuers of securities. An issuer of securities is a company that either issued securities registered with the SEC or is required to file reports under section 15(d) of the Securities Exchange Act.
• Domestic concerns. A domestic concern is a U.S. citizen, national or resident or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization or sole proprietorship that has its principal place of business in the United States, or is organized under the laws of a U.S. state.
• Persons other than issuers or domestic concerns. Persons other than issuers or domestic concerns are natural persons other than a national of the U.S. or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization or sole proprietorship organized under the law of a foreign nation.
In other words, the FCPA applies to virtually everyone in the United States, companies and individuals, who conduct business with a foreign official.
The FCPA applies to more than just obvious bribery situations involving payments made to high-level officers. It covers other situations as well, such as those involving low-level corporate employees, and can involve less-obvious bribes, such as providing entertainment, meals, travel, gifts or prospects for future employment. The broad application of the FCPA can be attributed to the courts' broad interpretation of the statute, which has expanded the reach of the FCPA to situations seemingly benign, but dangerous. For instance, the phrase "anything of value" means not only cash and cash equivalents, gifts, and so forth, but also intangibles, such as making a charitable donation that the foreign official "values."2,3,4The term is not defined in the Act, and there is no de minimis threshold.
The phrase "foreign official" captures a broad array of individuals, including "any officer or employee of a foreign government" and "any person acting in an official capacity for or on behalf of any such government."5Notably, "foreign official" includes not only the traditional government employees but also employees of companies partially owned by a foreign government. For instance, physicians employed in a hospital owned by the government are deemed "foreign officials."6,7
Another phrase broadly interpreted is to "obtain or retain business." The FCPA does not only apply to situations where the bribe was material in obtaining, for example, a government contract. It has been interpreted to also apply to situations in which an offer or gift enables a company to gain a favorable advantage or further a business objective. Classic examples include securing a special tax treatment, government permits and licenses, and other unfair advantages over competitors.8Accordingly, payments or offers of payments made to influence a decision can be a violation of the FCPA, even when the official decides against the interest of the payor.
An area of concern involves hiring or contracting third parties to serve as intermediaries to negotiate with foreign officials. This is because the FCPA applies "to any person [who knows] that all or a portion of such money or thing of value will be offered, given, promised, directly or indirectly to a foreign official."9Therefore, companies are not insulated from FCPA liability if they use third-party intermediaries who bribe foreign officials. For instance, a company should be suspicious of an intermediary who asks for an excessively large fee to negotiate a contract with a foreign official, because the third-party intermediary may be planning to use part of the fee to make an improper payment to the official. Knowledge that part of the fees will be used improperly could be imputed to the company. For that reason, companies hiring intermediaries should be cautious.
There is one kind of payment to foreign officials that is lawful under the FCPA - the "grease" payment. The "grease" payment is a lawful payment made "to expedite or to secure the performance of routine governmental action by a foreign official."10Examples include payments to obtain police protection, mail service, routine paperwork and transportation, and similar lawful acts by the foreign official.
The record-keeping requirements apply only to issuers of securities and are aimed at detecting bribes to foreign officials. The statute simply requires issuers of securities 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." It also requires issuers of securities to devise and maintain a system of internal accounting controls. SEC enforcement actions tend to focus on bribes improperly recorded as promotional, advertising or training expenses.
Penalties For FCPA violations
Violations of the FCPA's record-keeping and anti-bribery provisions can have harsh and expensive consequences. The penalties range from multimillion-dollar fines to imprisonment and disgorgement. A company that violates the anti-bribery provisions can be fined up to $2 million per violation. Natural persons who willfully violate the statute can incur a civil penalty of up to $100,000 or be imprisoned for a maximum of five years, or both. Notably, the FCPA prohibits domestic concerns from indemnifying their officers, directors, employees, agents or stockholders for a penalty imposed under the statute.11Other penalties also apply.
An Effective Compliance Program Is Required To Avoid FCPA Exposure
An effective FCPA compliance program can save a company many headaches and millions of dollars. Given the recent increase in DOJ and SEC enforcement actions for FCPA violations, every company should have a thorough compliance program in place. The program should be tailored to detect warning signs and identify areas of the business where potential violations are most likely to emerge. For example, a company that relies heavily on third-party intermediaries should have a compliance program tailored to the interactions of these intermediaries. Similarly, companies doing business in the Third World, where bribery more commonly takes place, should take additional steps to avoid violating the FCPA in those countries.
When drafting a compliance program, one should consider including the following components:
• Written policies - These policies should be made available to all employees, even those who do not directly deal with foreign officials. The policies should also be transmitted to third parties who will be in contact with foreign officials.
• Policies relating to gift giving, entertainment and other intangibles should be spelled out.
• Internal controls - Each company should embrace a culture in which detection of FCPA violations is promptly brought to the attention of the management and the chief legal or compliance officer.
• Compliance oversight - The company should designate a committee to oversee compliance with FCPA and review procedures and standards that are in place.
• Training - All employees should participate in training tailored to detect potential violations of the FCPA. Training should also be made available to third-party intermediaries.
• Addressing potential violations - The company should be prepared to address potential violations of the FCPA. An effective reporting procedure (e.g., hot lines) should be available to allow individuals to report suspected FCPA violations.
• Effective accounting controls - Books and records should be maintained in a way that enables detection and deterrence of potential briberies. This may include performing regular internal audits.
• Risk assessment - The company should periodically reassess and identify areas of potential violation of the FCPA.
• Third-party intermediaries - The written compliance manual should identify warning signs involving third-party intermediaries.
• Disciplinary measures for violators - Employees should be aware of the potential repercussions for violating the FCPA.
The FCPA covers a great deal of activity, even activity that is seemingly benign and without risks. The recent increase in enforcement actions underscores the necessity of having an FCPA compliance program in place to detect, avoid and correct possible violations. A compliance program that takes into account the specific needs of a company and identifies areas where violations are most likely to occur can save a company the trouble, expense and embarrassment of litigating and defending DOJ and SEC actions.
1Foreign Corrupt Practices Act, 15 U.S.C. §§78dd-1(a), 78dd-2(h)(1)(A), 78dd-3(f)(1) (1977) (amended 1998).
215 U.S.C. §§ 78dd-1(a), 78dd-2(a).
3 See also "Lucent Technologies Agrees to Pay $1 Million Fine to Resolve FCPA Allegations," United States Dep't of Justice, (Dec. 21, 2007).
4SEC v. Schering-Plough Corp. , Litigation Release No. 18,740 (June 9, 2004).
515 U.S.C. § § 78dd-1(f)(1); 78dd-2(h)(2).
6 SEC v. Syncor Int'l, Litigation Release No. 17,887 (Dec. 10, 2002).
7"Syncor Taiwan, Inc. Pleads Guilty to Violating the Foreign Corrupt Practices Act," United States Dep't of Justice (Dec. 10, 2002).
8 See United States v. Kay , 359 F.3d 738, 743-56 (5th Cir. 2004).
915 U.S.C. §§ 78dd-1(a)(3), 78dd-2(a)(3), 78dd-3(a)(3).
10 15 U.S.C. §§ 78dd-1(b), 78dd-2(b), 78dd-3(b).
1115 U.S.C. § 78dd-2(g)(3).
Gabriela Arce de Smith is an Associate in Stradley Ronon's Litigation Practice Group, focusing primarily in the areas of insurance, premises liability and commercial disputes.