The Ambiguous FCPA: In Need Of Updates And Clarifications

Monday, May 2, 2011 - 09:29

Imagine if a foreign government defined employees of General Motors and AIG as "foreign officials" of the United States government because the government owns portions of the companyor called Bloomberg Media employees "foreign officials" because 85 percent of the company is owned by a government official, the Mayor of New York City.Take a GM senior manager out to lunch and you may have committed bribery!

You'd laugh at the absurdity of it.Unless you were Keith Lindsey and you were defending yourself in a trial in which how one defines "foreign official" could mean jail and millions of dollars in fines.

Lindsey is the president of a small business, Lindsey Manufacturing, and he and his company face felony charges by U.S. prosecutors for allegedly paying off officials at an electric utility in Mexico.They are fighting the charges, arguing that the government has defined too broadly executives of the utility as "foreign officials" of the Mexican government.That argument got a boost when, after prosecutors alleged in the indictment that the Mexican utility was state-owned, the government recently conceded to the court that the Mexican entity was not.

So Lindsey and his company are fighting, even though it threatens to put his company, which employs 110 Americans, out of business."If this drags on for much longer, there won't be a Lindsey Manufacturing," he has said.

The Lindsey case and others like it have brought attention to the need to reform an outdated law that many believe is hurting American businesses' ability to compete fairly in the global market: the Foreign Corrupt Practices Act (FCPA).

The FCPA was established in 1977 to punish companies that engage in foreign bribery.Though the basic premise of the act - that corrupt business transactions are unethical and undermine public confidence in the free market system - remains as true today as when initially enacted, the recent explosion in its enforcement, coupled with its many ambiguities, is exacting a toll on law-abiding corporations, whose connection to allegedly improper acts is attenuated at best and nonexistent at worst.

At the end of 2009, 120 investigations were pending - a 40-fold increase from 2002, when there were 3 open FCPA investigations.The total number of FCPA enforcement actions nearly doubled from 2009 to 2010 - from 45 to 76.

This increased focus by the Department of Justice and the Securities Exchange Commission has led some companies to curtail or cease certain foreign operations, as well as abandon acquisitions of and joint ventures with foreign companies, rather than face the vagaries of FCPA enforcement.

This is highlighted by a recent survey of financial industry participants conducted by Deloitte, where 63 percent of respondents reported that FCPA and anti-corruption issues caused their companies to renegotiate or pull out of planned business relationships, mergers or acquisitions over the last three years.

But there are specific modernizations that can be made to the FCPA to meet its original goals, as well as satisfy the needs and realities of U.S. businesses trying to compete in today's global economy.

First: Add a compliance defense.A company can currently be held liable for FCPA violations committed by its employees or subsidiaries without the company's knowledge even if the company has a first-rate FCPA compliance program and individual employees or agents circumvented it.

The adoption of a compliance defense will increase compliance with the FCPA by providing businesses with an incentive to deter, identify, and self-report potential and existing violations, and protect corporations from employees who commit crimes despite a corporation's diligence.The United Kingdom and Italy both offer a compliance defense.

Second: Clarify the definition of a "foreign official."Many of the new global markets, such as former Communist countries in Europe and Asia, include governments that have taken a prominent role in business affairs.Many companies in these countries are state-owned and it may not be immediately apparent whether an individual is considered a "foreign official" within the meaning of the act.

The DOJ and SEC are interpreting the definition of "foreign official" extremely broadly, and this interpretation includes payments to companies that are state-owned or state-controlled.In the criminal law arena there is no room for ambiguity.

Third: Add a "willfulness" requirement for corporate criminal liability.The lack of a "willful" requirement means that corporations can be held criminally liable for anti-bribery violations in situations where they not only do not have knowledge of the improper payments, but also do not even know that American law is applicable to the actions in question.This runs counter to the intent of the drafters of the FCPA.

Fourth : Limit a company's liability for prior actions of a company it has acquired.Under the current enforcement regime, a company may be held criminally liable under the FCPA not only for its own actions, but for the actions of a company that it acquires or becomes associated with via a merger - even if those acts took place prior to the acquisition or merger and were entirely unknown to the acquiring company after substantial due diligence.

Under criminal law, a company (just like a person) should not be held liable for the actions of another company with which it did not act in concert.Yet in the FCPA context, that is what can happen today.

Fifth: Limit a parent company's civil liability for the acts of a subsidiary.The SEC routinely charges parent companies with civil violations of the anti-bribery provisions based on actions taken by foreign subsidiaries of which the parent is entirely ignorant.

This is at variance with DOJ policy and contrary to the position taken by the drafters of the FCPA who made clear that an issuer or domestic concern should only be liable for the actions of a foreign subsidiary if the issuer or domestic concern engaged in bribery by acting "through" the subsidiary.

Sixth : Add a materiality requirement, so that de minimus payments that could not possibly affect the illicit procurement of government contracts are not covered by the FCPA.Taking someone to dinner or paying for a taxi should not be covered by U.S. criminal law.The United Kingdom has carved such payments out of its new anti-bribery bill; the U.S. should do the same.

The FCPA as it is currently written and implemented leaves corporations vulnerable to civil and criminal penalties for a wide variety of conduct that is in many cases beyond their control and sometimes even their knowledge.These six recommended updates would correct this.

While companies guilty of unethical practices that undermine public confidence in the free market system should always be brought to justice, the public, the business community, and the U.S. economy would benefit from straightforward, reasonable guidelines that are consistently enforced.