Sophisticated corporate counsel who advise firms doing business abroad are well aware of the Foreign Corrupt Practices Act's ("FCPA") prohibition on corrupt payments to foreign officials. A number of well-publicized FCPA cases have shed a spotlight on the potential for severe penalties, including Munich-based Siemens' agreement to pay a record $1.6 billion to settle corporate corruption investigations in the United States and Germany. Such high profile cases illustrate the risks that companies face when securing government contracts abroad. What may not be on the radar screen of corporate counsel are the potential risks under the FCPA when transferring personnel around the world. This article will provide a brief overview of the FCPA and then discuss two recent cases that exemplify the risks inherent in international expansion and foreign assignments.
Brief History Of The FCPA
Before the United States enacted the FCPA in 1977, it was not common for countries in the world to consider the bribing of foreign officials for business purposes to be illegal. In fact, bribing foreign government officials to obtain or retain business was generally viewed as accepted in many parts of the world, and some countries even permitted businesses to deduct such payments from their taxes.
Congress enacted the FCPA in response to several corporate bribery scandals, much like the Sarbanes-Oxley Act of 2002. Inquiries by the United States Senate and the Securities Exchange Commission ("SEC") revealed that more than 400 U.S. companies admitted making questionable or illegal payments in excess of $300 million to foreign government officials, politicians, and political parties.1Congress became concerned that the disclosure of these dishonest systematic corporate practices would undermine public confidence in the U.S. business community.
Initially the FCPA applied solely to U.S. companies, and the United States was essentially the only country that outlawed public corruption and fraud in the international marketplace. U.S. businesses quickly became concerned that they were at a strategic disadvantage relative to foreign companies, which continued to make corrupt payments to secure business. As a result of efforts to repeal the FCPA, Congress amended the Act in 1988 by adding an exception and two affirmative defenses, and again in 1998 to extend the Act's anti-bribery provisions to certain foreign firms and persons.
Over the years, the United States has also worked with foreign governments and international trade organizations to ensure that foreign companies are also restricted in their ability to make corrupt payments to gain an improper business advantage.
Applicability Of The FCPA
The FCPA applies to all U.S. nationals or U.S. companies that do any act outside the United States in furtherance of an improper payment, regardless of whether they use the mails or any means of interstate commerce. The Act also imposes liability on foreign nationals and foreign businesses that do any act in furtherance of a prohibited payment while in U.S. territory. Proof of a U.S. territorial nexus is not required for an FCPA violation to occur - FCPA violations can occur even if the prohibited activity takes place entirely outside of the United States.
The Scope Of The FCPA: The Anti-bribery Provisions And The Accounting Provisions
The FCPA contains two primary parts: 1. accounting provisions; and 2. anti-bribery provisions.
1. The FCPA's Books and Records and Internal Control provisions require:
a. that companies keep books, records and accounts in reasonable detail to accurately and fairly reflect transactions and dispositions of assets, and
b. that companies maintain a system of internal accounting controls to:
i. provide reasonable assurances that transactions are executed in accordance with management's authorization;
ii. ensure that assets are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets;
iii. limit access to assets to management's authorization; and
iv. to make certain that recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
2. The elements of an anti-bribery violation:
a. an act by a covered person (including U.S. and foreign issuers of U.S. securities, non-public U.S. companies and U.S. residents, and some foreign non-residents),
b. in furtherance of an offer, payment, promise to pay, or authorization of payment of anything of value,
c. directly or indirectly,
d. to a foreign official,
f. for the purpose of influencing official action or decision (including a decision not to act), inducing an unlawful act, inducing official influence over government action, or securing any improper advantage, and
g. in order to obtain or retain or redirect business.
The FCPA's anti-bribery provisions provide two affirmative defenses:
1. that the payment was lawful under the written laws of the foreign country, and
2. that the payment was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, and directly related to the explanation of a product or service or performance of a contract with a government agency. The Act also includes an exception allowing "grease" or "facilitating" payments, which are payments made to expedite or secure performance of a routine government action. The "grease payment" exception is limited and generally only applies to non-discretionary actions by a foreign official such as processing government paperwork, and providing routine government services. The statute lists the following examples: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; and providing police protection.
Why Is It Crucial To Devote Resources To FCPA Compliance?
The potential penalties for violations of the FCPA can be severe. Individuals who violate the anti-bribery provisions may be imprisoned for up to five years per count, and face criminal fines of up to $100,000 per violation, and civil penalties of up to $10,000 per violation. An individual who knowingly commits a violation of the books and records provision may be fined $5 million, imprisoned for up to 20 years, and may face up to $100,000 in civil penalties. Under guidelines issued by the Office of Management and Budget, a person or firm violating the FCPA may be barred from doing business with the federal government - indictment alone can lead to suspension of the right to conduct business with the government.
In the past five years, there has been a dramatic increase in FCPA enforcement activities by the U.S. Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") leading to increased prosecution of individuals and of corrupt practices by foreign governments. Often, FCPA investigations result in charges under related criminal laws and regulations, such as money laundering, mail and wire fraud, export control, prohibitions on terrorist financing, and the Racketeer Influence and Corrupt Organization Act ("RICO").
As an illustration of the extent of liability that corporations face under the FCPA, consider the example of Germany's Daimler AG: In March 2010, the SEC settled an FCPA action against Daimler for engaging in a repeated and systematic practice of paying bribes to foreign government officials to secure business in Asia, Africa, Eastern Europe and the Middle East. The bribery was so pervasive that it extended outside of the sales organization to the internal audit, legal, and finance departments, which sanctioned or were involved directly in the illegal practices. Daimler agreed to pay $91.4 million in disgorgement to settle the SEC's charges and $93.6 million in fines to settle charges in separate criminal proceedings by the DOJ.
Although the headlines are dominated by million dollar fines imposed on large multinational corporations, all companies engaged in international business need to be concerned about FCPA compliance. To illustrate how corrupt payment issues can arise in areas beyond contract procurement, consider the following two cases involving FCPA violations associated with the international transfer of personnel.
Case Illustration: The SEC Investigation And Settlement With NATCO Group, Inc. ("NATCO")
Facts: NATCO Group Inc. ("NATCO") is a Houston-based company that provides products and services to the oil and gas industry. In an administrative cease-and-desist order, the SEC alleged that NATCO's wholly-owned subsidiary, TEST Automation & Controls, Inc. ("TEST"), "created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan." The SEC further alleged that NATCO's "system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO's consolidated books and records did not accurately reflect these payments." NATCO settled the case without admitting or denying the SEC's allegations, agreeing to pay a $65,000 civil penalty.
Lessons learned from the NATCO case:
• Payments to "immigration consultants" can result in FCPA anti-bribery violations - securing visas for unqualified individuals (or for qualified individuals on an expedited basis) can lead to an unlawful business advantage.
• Corrupt practices by employees of foreign subsidiaries can lead to parent company liability under the FCPA.
Case Illustration: Hydro-Kleen
Facts: Hydro-Kleen, Inc., an international company that removes coke and other byproducts from oil refinery pipes, admitted to having given $28,299.88 in a series of payments to a senior immigration inspector with U.S. Customs and Immigration Enforcement at the Calgary International Airport. Hydro-Kleen's payments were made to induce him to issue L-1 intra-company transferee visas for Hydro-Kleen employees. The U.S. immigration official also entered comments about Hydro-Kleen's competitors' employees into an immigration "lookout" database, thus making it more difficult for the parties to gain entry into the United States. The company paid a $25,000 fine under Canada's Corruption of Foreign Public Officials Act, the Canadian counterpart to the FCPA, a fine that would have likely been higher if there were not unclear facts related to the company's motives and knowledge regarding the U.S. Immigration official's actions.
To enhance internal controls and improve worldwide FCPA compliance, consider taking the following steps:
• establish internal reporting protocols for possible FCPA violations, such as a compliance hotline;
• establish due diligence procedures to vet third-party intermediaries;
• increase global compliance staffing and appoint a full-time Compliance Officer;
• join a non-profit association that specializes in anti-bribery due diligence (e.g. TRACE International https://secure.traceinternational.org/about/);
• increase FCPA compliance training worldwide;
• invest in software to enhance internal controls and compliance; and
• develop and enhance internal audit and compliance monitoring processes.
Any company that operates internationally simply cannot afford not to have an effective FCPA compliance program.While many companies may think FCPA fines have been confined solely to procuring government contracts, the U.S. government has begun to hold companies liable for improper immigration related activities as well.It is crucial companies design and implement programs aimed at preventing corrupt practices at all levels of operations including their immigration and mobility providers. 1 See the FCPA Lay Person's Guide, available at the U.S. Department of Justice website at http://www.justice.gov/criminal/fraud/fcpa/docs/lay-persons-guide.pdf.
Cynthia J. Lange is the Managing Partner for the Northern California practice of Fragomen, Del Rey, Bernsen & Loewy, LLP, the world's leading global corporate immigration law firm. To contact Ms. Lange call 408-919-0600. More information about Fragomen may be found by visiting http://www.fragomen.com.