Why The Foreign Corrupt Practices Act Is High On Everyone's Radar Screen

Saturday, December 1, 2007 - 01:00
Michael Schwartz
Rocco de Grasse

Editor: Would each of you gentlemen give our readers background about your professional experience?

Schwartz: I was a practicing lawyer for over twenty years in Houston, working first in law firms, then as in-house counsel and later as a prosecutor in the U.S. Attorney's Office. I probably have the record for the shortest tenure on DOJ's Enron task force - about six weeks in 2002. I have been at KPMG Forensic for about five and a half years, and my practice involves primarily reactive investigative matters. My clients include energy companies that do business world-wide, exposing them to potential FCPA issues. We work with outside and inside counsel in performing financial analyses and investigations in determining the underlying facts in any FCPA matter.

De Grasse: I served as a law clerk to a Federal judge in North Carolina, and after was an Assistant U.S. Attorney in Raleigh for two years before transferring to the U.S. Attorney's Office in Chicago. I prosecuted cases involving organized crime, narcotics trafficking and public corruption for eight years. I joined Winston & Strawn where I was a partner working on white-collar matters, then went to Foley & Lardner where I oversaw the firm's Midwest White-Collar practice. I became a principal in KPMG's Forensic Practice in April, 2002 and am located in Chicago. My practice primarily consists of FCPA due diligence and investigative matters.

Editor: The FCPA has been on the books since 1977. What was it originally designed to accomplish?

Schwartz: There were a number of incidents in the mid to late '70s involving U.S. companies making payments to foreign officials for the purpose of either generating or maintaining business. Congress and President Carter determined that U.S companies should not be allowed to make payments to foreign officials or their governments and enacted the FCPA. The intent of the statute was to prevent bribery and to restore public confidence in the integrity of the American business system.

De Grasse: Watergate was a significant factor in the enactment of the FCPA as well. The political climate at the time supported passage of anti-corruption legislation.

Editor: The Act draws a distinction between bribery and facilitation payments, which may be permissible if they are not against local laws. How do you define what is bribery and what is a facilitation payment?

De Grasse: Facilitation payments present a slippery scale for analytical purposes. Many countries, in fact, just simply outlaw any kind of payments, including facilitation payments - whether they enforce those laws is another question. Generally speaking, facilitation payments are payments for government actions that are ministerial, or non-discretionary, in nature. Where a payment is being made to influence a discretionary act by a government agency or one of its officials, then the payment might well be considered a bribe. Payments for telephone or utilities, for example, are considered facilitating payments. In short, if a government official is simply following an already established law or regulation and is performing a ministerial duty, the payment has a better chance of being considered a facilitation payment. If the task for which payment is made involves a government official exercising his or her discretion in making a decision, or an outright violation of the law, that payment will be considered a bribe. Companies often will simply prohibit any facilitation payment because, even if such a payment is legitimately made, the company risks violating the books and records provision if that payment is not accurately recorded. This type of violation constitutes a breach of securities law, for which there is no materiality threshold, and which can provide a simpler and more readily provable means by which to bring an FCPA-related charge than by proceeding under the anti-bribery provision of the Act.

Schwartz: Part of the problem is that there is very little case law interpreting the provisions of the FCPA. Even if the facilitation payment involves paying for the ministerial act of stamping someone's passport to let them into the country or stamping the customs declaration to allow the goods to enter, at some point if you do it frequently enough and if you pay enough money or if the payment is viewed by regulators as excessive in some way after the fact, you may have crossed the line from facilitation to bribery. There is not a bright line in this area. Many countries prohibit outright payments to government officials of any kind. Some companies do not allow facilitation payments because of the ambiguity, with a possible exception for personal safety issues.

Editor: Please tell our readers about the enforcement of FCPA by Justice and by the SEC.

Schwartz: Both the DOJ and the SEC have the ability to sanction companies and individuals for FCPA violations. DOJ engages in criminal prosecutions and imposes criminal sanctions. The SEC only has civil jurisdiction but can invoke penalties on individuals and companies as well. Reported settlements in the past year have involved a joint investigation or prosecution by both the DOJ and SEC with the DOJ component typically including a plea agreement in which companies agree to criminal fines and penalties as well as an SEC component which typically involves the payment of a civil penalty. An interesting development in 2007 occurred when after the plea agreement with Vetco, the Department of Justice started looking proactively for information from a number of companies dealing with the same freight forwarder involved with Vetco. It appears that DOJ is not just reacting to certain matters but is now apparently proactively seeking information about what it perceives to be problem areas with the FCPA. The other interesting trend I suppose is the DOJ and SEC pursuing companies with prior FCPA-related issues which predated the conduct that led to their respective plea agreements. The penalties that the Department of Justice and the SEC obtained in several cases reflected that those companies were repeat offenders and paid a premium to put the enforcement actions behind them.

De Grasse: The SEC and DOJ often work in tandem because they address different enforcement priorities and consequently wield different remedial penalties. The SEC must be concerned with protection of investors and the public, while DOJ addresses traditional criminal justice notions of deterrence and retribution. Working in tandem often allows the SEC and DOJ to effectively investigate and address FCPA violations with maximum impact.

Editor: What are you seeing in the way of enforcement of anti-bribery statutes by other countries?

DeGrasse: This is one of the topics mostly vigorously discussed among FCPA practitioners. We are seeing more and more anti-corruption conferences being held across the globe in which international enforcement efforts, whether undertaken pursuant to the FCPA , OECD or local law, are being discussed and highlighted. The UN and the World Bank also are intensifying their anti-corruption efforts. Most interestingly, regulators from different countries are beginning to coordinate their efforts, as we are seeing in Germany with Siemans. Cooperation between international regulators also occurred in the case of Statoil, in which the Department of Justice demonstrated that it did not have any reluctance to charge a foreign registrant for actions which occurred outside the United States. U.S and Norwegian authorities worked in a collaborative effort that resulted in a significant fine being paid to the Norwegian and U.S. governments.

Schwartz: The highest recorded fine was the forty-plus million dollars paid by Baker Hughes in the spring of 2007 which consisted of a criminal fine, a payment to the SEC, and disgorgement of profit. That last piece, the disgorgement of profit, should get the attention of most general counsel and chief compliance officers. The amount of the bribe may be small but the amount disgorged from the venture may be enormous, coupled with reputational damage associated with an FCPA violation. In addition, there is the trend by DOJ to impose a monitoring arrangement as part of plea agreements.

Editor: How do you define the term "government official"?

Schwartz: In a number of countries, the government is an owner or partial owner of all sorts of ventures. There are national oil companies in many countries. In China, the government is an owner or government officials are owners of what appear to be commercial ventures and that government ownership creates all sorts of issues from an FCPA perspective. As a general proposition, it is critical from a risk standpoint that companies understand who they're doing business with, but from an FCPA risk standpoint companies certainly need to understand the involvement of any active government officials or people with close relationships to government officials.

De Grasse: I will provide an example of why this issue is a challenging one for FCPA practitioners. We normally consider doctors in Canada who work for hospitals as public officials, because the healthcare system there is socialized to a far greater extent than it is in the United States. One of the challenges in dealing with foreign jurisdictions is that so many economies are socialized that conduct that otherwise constitutes local commercial bribery (a separate problem in its own right) becomes a federal offense under the FCPA.

Editor: Are there any Justice Department opinions or releases?

Schwartz: The Department of Justice has a procedure for issuing an opinion letter following a detailed request by companies. This procedure has been infrequently used because of the detailed facts and the length of time required. There were two opinion letters that came down this week having to do with foreign nationals traveling in the U.S. and only two letters issued in 2006.

Editor: Why is taking a proactive approach to the FCPA essential to an American corporation carrying on activities abroad?

Schwartz: I think that it is really for all of the reasons that we have discussed in terms of the size of the penalties in terms of dollars, reputational injury and operational concerns. The topic of risk in companies generally has a much higher profile - not just FCPA risk, but enterprise risk, operational risk and Sarbanes Oxley requirements. In addition to risk avoidance and pre-acquisition due diligence, many companies are being much more rigorous in the way they vet vendors and customers with whom they do business. In the FCPA context companies are inserting the right to audit clauses in agreements with agents who represent them in foreign countries, giving them the right to inspect books and records in order to assess FCPA and other contractual compliance. This would include suppliers who must be on approved lists and who may be required to make certifications that they conform their actions to a company's code of conduct as well as joint venture partners. For all of the same reasons - whether it is FCPA risk, general fraud or misconduct - just understanding your business partners and business relationships, domestically or internationally, the same dynamic works.

Editor: Has the playing field evened out in the responsibility of other nations to identify and eliminate corrupt business practices?

De Grasse: Clearly the FCPA, at 30 years of age, has led the way in establishing international prohibitions against public corruption. We are seeing international organizations in various jurisdictions create statutes, or sign treaties that are consistent with the aims of the FCPA. And indeed the U.S. has altered the FCPA so that we can have some international consistency in standards. Assistant Attorney General Alice Fisher, in remarks in mid-November of this year, addressed the issue of a level playing field for U.S. and foreign business. She noted that the enactment of anti-corruption conventions and laws around the world, together with increasing coordination of law enforcement efforts in many countries, will result in a more level playing field for U.S. businesses. The challenge that lies ahead is not in terms of the standards that exist, but the rigorousness of the enforcement of those standards. And clearly some of the cases we have talked about today in Europe, as well as some underway in Asia, suggest that enforcement is beginning to occur internationally. I think it is still an open question as to what the actual level of enforcement will be in certain parts of the world.

Please email the interviewees at mschwartz@kpmg.com or rdegrasse@kpmg.com with questions about this interview.