Summary of Part I (Appearing in The October 2007 issue of The Metropolitan Corporate Counsel):
The FCPA, a thirty-year-old U.S. statute has received unprecedented attention in recent years. Largely this is due to the tremendous increase in international pressure on foreign countries to begin to reverse the tremendous history of bribery and corruption in government and business.
One of the most aggressive countries in the world in this regard, and the most significant for U.S. companies, is China. In the last 18 months we have seen a dramatic change in Chinese focus from the Party to commercial entities and private business. The result has been that prosecutions of foreign agents, subsidiaries and partners that U.S. companies rely upon to do business in China, and which acted in concert with tradition by bribing the necessary officials to secure results, are being caught, charged and prosecuted.
These companies are turning over information on their unsuspecting U.S. clients resulting in a dramatic increase in investigations and prosecutions by the Department of Justice and the Securities and Exchange Commission.
Traditional ideas of independent contractor status do not apply to FCPA violations. Failure to make sure that your agents are not bribing foreign officials can render the U.S. company liable for tremendous damages and disgorgement of profits, even if the company was blissfully unaware of the activities.
Longstanding cultural attitudes in many countries have allowed and even encouraged bribery. In some countries bribes were a tax-deductible business expense. It will take more than a few years to undo centuries of built-in behaviors. For U.S. companies, however, this is no excuse. Our laws have been in place, only modestly changed, for thirty years. Ignorance of that existing law will be no excuse.
In most instances, a foreign agent is paid on performance - secure a contract, get paid. Find a source of products, receive a payment. Find a buyer, receive a commission. The pressure in foreign countries to make the right connections and make the deal happen is heavy and will continue to encourage bribery if that is the most effective way to make the deal happen. That is no consolation to the U.S. company.
Whether found guilty of FCPA violations or not, undergoing an investigation is expensive, time consuming and disruptive to the ongoing management of a business. In most cases, government investigations have resulted in settlements. However, it is important to consider that these settlements have resulted in fines and penalties, often in the millions of dollars, disgorgement of profits (or losses) made from any deal obtained through the use of bribery, and termination, if not prosecution, of top corporate officials. This can be true even if the U.S. company did not directly participate in the bribery and was not aware of its occurrence.
What To Do?
Traditionally, the U.S. has shown greater leniency with companies who identify a problem themselves before they are caught, make all required efforts to fix the problems, and then turn themselves in and cooperate with authorities.
When Mark Mendelsohn took over the job of enforcing the FCPA for the Department of Justice, he made it clear that this was to be a priority for his office. He also stated that while self-reporting violations will not get a company off the hook entirely, cooperation, confession, investigation and establishment of internal controls will help reduce the punishment. The result could still be a significant fine, but it is clear, as it has been historically in the U.S., having the right story and showing the right level of remorse and responsiveness has gone a long way with prosecutors toward securing significantly lower punishments.
A U.S. corporation that does business internationally should consider implementing the following:
1. Identify all foreign agents, partners, contractors, representatives and other parties.
a. Verify that written contracts exist with all such entities.
b. That those contracts contain anti-bribery language and the right to audit the books and records of the foreign entity.
c. Perform background checks on all foreign entities to make sure that they are legitimate and do not have a criminal track record or ties to government officials.
d. Review amounts paid historically to these entities to determine whether there are any irregularities and that the fees or commissions paid are within acceptable market rates. Over payments could be used to make illegal payments.
2. Review all existing internal financial and operational controls to determine whether they are adequate to ensure that FCPA violations are not occurring. If they are not adequate, improve them.
3. Establish FCPA required written policies and training of foreign entities and employees so that they understand the prohibitions under U.S. law and the laws of the native country.
a. Make sure policies are translated into all native languages.
b. Make sure that all training is in the native languages.
c. Make sure that all local company employees understand the rules.
4. If there are indications that FCPA issues may exist, immediately engage an attorney experienced in FCPA law and conduct a thorough investigation of all activities to determine whether, where, when and who was involved in FCPA violations.
5. If actual violations are uncovered, consult with your attorneys as to how to proceed and whether to present findings to the DOJ and the SEC.
How To Do It
While this can be done using internal personnel, since it is a criminal issue and since the very people involved in the internal investigation could be those who do not want the issues uncovered, it is usually advisable to secure the assistance of a trusted and experienced group of professionals. There are many organizations that can assist with this effort.
Make sure that the organization has professionals in the countries in which you do business so that at most they have to send a few leaders to coordinate the efforts. This is important on several levels.
1. Cultures and customs vary dramatically and how a process is carried out in a country requires someone trustworthy and known in-country to handle these issues.
2. What we would refer to as "generally accepted accounting practices" are not at all consistent across countries.
3. The effects of local tax laws also can affect how books are kept.
4. Privacy laws vary widely by country. The European Union and Canada, relatively closely aligned culturally with the U.S., have markedly different and much stricter privacy and other laws relating to investigations. Failing to follow them can result in several penalties.
5. Acquisition of information in foreign countries is subject to many diverse rules and circumstances. For example, only Chinese attorneys can access certain types of records in that country.
6. Language is of course a major barrier, both in terms of the main language and the various dialects spoken throughout various countries.
7. Finally, much of the information is held by government officials and accessing it, reading it and gaining cooperation can be an issue.
The group that you are working with should be sensitive to the fact that this is a potentially criminal issue. In that regard it may be wise to enlist the services of an FCPA attorney at the onset to help determine the required steps and to guide the investigation.
Wait and hope that perhaps nothing is going on in your overseas operations, even though corruption has so long been a part of the business fabric, and that at least whatever might exist will not be caught. In doing this you are trusting that your competitors will not turn you in, your foreign agent, if investigated by the foreign authorities will not implicate you in anything they have been caught doing, and that the Department of Justice and the Securities and Exchange Commission will not be notified by foreign authorities and come knocking at your door. The only risk is termination, fines, criminal sanctions and perhaps imprisonment.
Or, initiate an internal investigation, uncover any potential issues, institute corrective action, clean up your international contracts and relationships, and if a violation is uncovered, consider with legal counsel how to best communicate with the authorities. If the company was legitimately unaware of the circumstances, the law and the risks, the U.S. has always been willing to "reward" first offenses and efforts to remediate and that may be the best path.
In the end, the choice is yours.
Jeffrey Harfenist is a Managing Director of UHY Advisors FLVS, Inc., and is the Houston Practice Leader for the Forensic, Litigation and Valuation Services Group. Jeffrey also leads the firm's Fraud and Forensics Service Line and the Foreign Corrupt Practices Act Team. He is also a Partner with UHY LLP, a licensed CPA firm, and is a licensed CPA in the state of Texas.