As we have written several times over the past couple of years, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have increased pressure on pharmaceutical companies through the Foreign Corrupt Practices Act (FCPA). There have been a number of recent settlements, involving Pfizer, Johnson and Johnson, and several others.
The Foreign Corrupt Practices Act of 1977 (FCPA), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to or bribe foreign government officials to assist in obtaining or retaining business. In other words, the FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business.
The FCPA also has accounting provisions that require companies to make and keep accurate books and records and to devise and maintain an adequate system of internal accounting controls; and prohibit individuals and businesses from knowingly falsifying books and records or knowingly circumventing or failing to implement a system of internal controls.
The underlying goal of the FCPA is to ensure that law-abiding companies are not placed at a competitive disadvantage, thereby hurting consumers, by companies who win or lose business by paying bribes. Violations of the FCPA can lead to civil and criminal penalties, sanctions and remedies, including fines, disgorgement, and/or imprisonment.
There have been criticisms of the FCPA’s growing industry of attorneys and accountants all based around this law. Many have called for new guidance on enforcement discretion under the FCPA. Heeding their calls, DOJ and SEC released last week an official 130-page “Resource Guide to the FCPA.” The Guide addresses:
- Who and what is covered by the FCPA’s anti-bribery and accounting provisions
- The definition of a “foreign official”
- What constitute proper and improper gifts, travel, and entertainment expenses
- The nature of facilitating payments
- How successor liability applies in the mergers and acquisitions (M&A) context
- Hallmarks of an effective compliance program; and
- The different types of civil and criminal resolutions available in the FCPA
The guidance offers an assessment of key provisions of the FCPA, hypothetical scenarios and “best practices” for corporate compliance. The Wall Street Journal provided a good analysis of the document.
“Anything of Value”
In enacting the FCPA, Congress recognized that bribes can come in many shapes and sizes—a broad range of unfair benefits—and so the statute prohibits the corrupt “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.
The FCPA does not contain a minimum threshold amount for corrupt gifts or payments. Regardless of size, for a gift or other payment to violate the statute, the payor must have corrupt intent—that is, the intent to improperly influence the government official. The corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.
Thus: “It is difficult to envision any scenario in which the provision of cups of coffee, taxi fare, or company promotional items of nominal value would ever evidence corrupt intent.” The same goes for “a small gift or token of esteem or gratitude.” “Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law”
Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC. The larger or more extravagant the gift, however, the more likely it was given with an improper purpose. DOJ and SEC enforcement cases thus have involved single instances of large, extravagant gift-giving (such as sports cars, fur coats, and other luxury items) as well as widespread gifts of smaller items as part of a pattern of bribes.
On the other hand, “bankrolling a $12,000 birthday trip for a government official that includes visits to wineries is ill-advised,” the agencies say. Companies also may violate the FCPA if they give payments or gifts to third parties, like an official’s family members, as an indirect way of corruptly influencing a foreign official.
The guidance further clarifies that DOJ and SEC will exercise discretion in deciding which cases promote law enforcement priorities, but noted certain patterns. For example, the agencies have brought actions “focused on small payments and gifts only when they comprise part of a systemic or long-standing course of conduct that evidences a scheme to corruptly pay foreign officials to obtain or retain business.” Below is a more detailed summary of the important topics covered by the Guide.
Companies are not prohibited from giving gifts, but cannot use them to disguise bribes. Similarly, companies can make charitable contributions but cannot use the pretense of charitable contributions as a way to funnel bribes to government officials. When making charitable contributions, DOJ may look favorably to proposed grants or donations based on due diligence measures and controls such as:
- certifications by the recipient regarding compliance with the FCPA;
- due diligence to confirm that none of the recipient’s officers were affiliated with the foreign government at issue;
- a requirement that the recipient provide audited financial statements;
- a written agreement with the recipient restricting the use of funds;
- steps to ensure that the funds were transferred to a valid bank account
- confirmation that the charity’s commitments were met before funds were disbursed; and
- on-going monitoring of the efficacy of the program
Five Questions to Consider When Making Charitable Payments in a Foreign Country:
- What is the purpose of the payment?
- Is the payment consistent with the company’s internal guidelines on charitable giving?
- Is the payment at the request of a foreign official?
- Is a foreign official associated with the charity and, if so, can the foreign official make decisions regarding your business in that country?
- Is the payment conditioned upon receiving business or other benefits?
As part of an effective compliance program, a company should have clear and easily accessible guidelines and processes in place for gift-giving by the company’s directors, officers, employees, and agents. Though not necessarily appropriate for every business, many larger companies have automated gift-giving clearance processes and have set clear monetary thresholds for gifts along with annual limitations, with limited exceptions for gifts approved by appropriate management. Clear guidelines and processes can be an effective and efficient means for controlling gift-giving, deterring improper gifts, and protecting corporate assets.
Facilitating or Expediting Payments
The FCPA’s bribery prohibition contains a narrow exception for “facilitating or expediting payments” made in furtherance of routine governmental action. The facilitating payments exception applies only when a payment is made to further “routine governmental action” that involves non-discretionary acts. Examples of “routine governmental action” include:
- obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;
- processing governmental papers, such as visas and work orders;
- providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country;
- providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or
- actions of a similar nature.
Routine government action does not include a decision to award new business or to continue business with a particular party. Nor does it include acts that are within an official’s discretion or that would constitute misuse of an official’s office. Thus, paying an official a small amount to have the power turned on at a factory might be a facilitating payment; paying an inspector to ignore the fact that the company does not have a valid permit to operate the factory would not be a facilitating payment.
The document explains that if a company discovers evidence of potential bribes while conducting due diligence on a company it recently acquired, the company must stop the bribe, report it to the government, and institute reforms at the acquired company. The agencies say that an acquiring company that follows such steps is unlikely to face prosecution. More details of the Guide are below.
Response from FCPA Lawyers
Despite its initial hope for clearer guidance, “the memo recites positions long held by the government and avoids rigid policy pronouncements,” WSJ writes.
But the agencies reject calls by the Chamber of Commerce and others for blanket protection for acquiring companies and warn of “unusual circumstances” not described in the guidance that could lead to charges. The chamber has lobbied for tweaks to the law to spell out precisely what constitutes a bribe and exactly whom the FCPA makes it illegal to bribe. Without such clarity, companies spend huge sums investigating whether seemingly innocuous employee expenditures violate the law, the chamber says.
Assistant Attorney General Lanny Breuer, head of the Justice Department’s Criminal Division, has dismissed any reforms “whose aim is to weaken the FCPA.”
One of the longest-running debates between FCPA critics and the government is the definition of a “foreign official.” WSJ explained that “Defendants in several cases have argued that employees of state-owned companies don’t count as foreign officials under the FCPA. But DOJ and the SEC say in the memo that such individuals qualify.” The Atlanta-based 11th U.S. Circuit Court of Appeals is considering the issue.
Nevertheless, the Chamber of Commerce’s reaction to the memo as a whole was largely positive. Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, described the agencies’ effort as “an important step forward in an ongoing process of providing much-needed clarity and certainty.” She didn’t say whether the chamber would continue to press for legislative changes, only that “guidance by definition can never provide the same certainty as an affirmative statute.”
WSJ provided numerous quotes from practicing FCPA lawyers about the impact of the DOJ/SEC guidance. Most said the guidance was not groundbreaking or anything new, while others said it contains new types of guidance not seen from the government before.
Mark Mendelsohn, a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP who previously supervised the Justice Department’s FCPA unit, said the guidance didn’t “break any new ground” but was nevertheless useful, particularly to small and midsize companies that have less experience with the law than bigger companies and fewer resources to devote to compliance programs.
Corporate-governance advocacy groups, which fought the chamber’s campaign, praised the document. Stefanie Ostfeld, a policy adviser at anticorruption group Global Witness, said the guidance addressed business concerns “without reducing the government's ability to pursue FCPA prosecutions to curb foreign bribery.”
But Steven Tyrrell, a partner at Weil, Gotshal & Manges LLP, said the memo “does little to fill in the gray areas.” Mr. Tyrrell, a former chief of the Justice Department’s criminal-fraud section, called the memo “more of a scrapbook of past DOJ and SEC successes than a guide book for companies who care about playing by the rules.”
Robert Khuzami, the SEC’s enforcement director, said he expected opinions to be mixed. “Some will say maybe it goes too far, and others will say it hits the sweet spot and yet others will say it's not far enough,” he said. “That’s just the nature of an undertaking like this.”
Since 2009, prosecutors and regulators have entered into more than 50 settlements and plea deals with companies, yielding a total of more than $2 billion in penalties. Siemens in 2008 racked up the biggest levy so far, $800 million, for paying millions of dollars to foreign officials to win government contracts.
Still, the agencies heralded the guidance as an “unprecedented undertaking,” saying it would satisfy everyone, from the FCPA novice to seasoned practioners who specialize in the anticorruption law.
The Legal Times explained how Lanny Breuer is taking the new anti-corruption resource guide on a “roadshow, speaking at legal events in the Washington area.” Breuer was in National Harbor, Md., addressing the American Conference Institute’s annual conference on corruption.
Breuer dedicated the start of his remarks to a description of DOJ's overall anti-corruption fight. Breuer said the department has more than doubled the number of prosecutors working to enforce foreign bribery laws. Discussing the guidance, Breuer noted in his prepared remarks that “Transparency is … a worthwhile goal all by itself.” “We want U.S. businesses, foreign officials, non-governmental organizations and others to understand why we prosecute FCPA cases as vigorously as we do, and also how and why we make our charging decisions.”
Breuer noted that “no guide will satisfy every constituency, and I would be surprised if the people in this room thought the guide answered all of their questions.” He continued: “It’s fair to say that the guide is one of the most comprehensive efforts” to explain how and why the government enforces the FCPA. “The idea that a company could get away with bribing foreign officials for the sake of corporate profits didn’t make sense 35 years ago, and … It doesn’t make sense today.”
Who is covered by the FCPA?
The FCPA’s anti-bribery provisions apply broadly to three categories of persons and entities: (1) “issuers” and their officers, directors, employees, agents, and shareholders; (2) “domestic concerns” and their officers, directors, employees, agents, and shareholders; and (3) certain persons and entities, other than issuers and domestic concerns, acting while in the territory of the United States.
A company is an “issuer” under the FCPA if it has a class of securities registered under Section 12 of the Exchange Act or is required to file periodic and other reports with SEC under Section 15(d) of the Exchange Act. In practice, this means that any company with a class of securities listed on a national securities exchange in the United States, or any company with a class of securities quoted in the over-the-counter market in the United States and required to file periodic reports with SEC, is an issuer. A company thus need not be a U.S. company to be an issuer.
A domestic concern is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship that is organized under the laws of the United States or its states, territories, possessions, or commonwealths or that has its principal place of business in the United States. Officers, directors, employees, agents, or stockholders acting on behalf of a domestic concern, including foreign nationals or companies, are also covered.
The FCPA also applies to certain foreign nationals or entities that are not issuers or domestic concerns. Since 1998, the FCPA’s anti-bribery provisions have applied to foreign persons and foreign non-issuer entities that, either directly or through an agent, engage in any act in furtherance of a corrupt payment (or an offer, promise, or authorization to pay) while in the territory of the United States.55 Also, officers, directors, employees, agents, or stockholders acting on behalf of such persons or entities may be subject to the FCPA’s anti-bribery prohibitions.
The FCPA’s anti-bribery provisions can apply to conduct both inside and outside the United States. Issuers and domestic concerns—as well as their officers, directors, employees, agents, or stockholders—may be prosecuted for using the U.S. mails or any means or instrumentality of interstate commerce in furtherance of a corrupt payment to a foreign official. The Act defines “interstate commerce” as “trade, commerce, transportation, or communication among the several States, or between any foreign country and any State or between any State and any place or ship outside thereof ….”
The term also includes the intrastate use of any interstate means of communication, or any other interstate instrumentality. Thus, placing a telephone call or sending an e-mail, text message, or fax from, to, or through the United States involves interstate commerce—as does sending a wire transfer from or to a U.S. bank or otherwise using the U.S. banking system, or traveling across state borders or internationally to or from the United States.
Those who are not issuers or domestic concerns may be prosecuted under the FCPA if they directly, or through an agent, engage in any act in furtherance of a corrupt payment while in the territory of the United States, regardless of whether they utilize the U.S. mails or a means or instrumentality of interstate commerce. Thus, for example, a foreign national who attends a meeting in the United States that furthers a foreign bribery scheme may be subject to prosecution, as may any co-conspirators, even if they did not themselves attend the meeting. A foreign national or company may also be liable under the FCPA if it aids and abets, conspires with, or acts as an agent of an issuer or domestic concern, regardless of whether the foreign national or company itself takes any action in the United States.
Jurisdiction may also be established under the “nationality principle.” In particular, the 1998 amendments removed the requirement that there be a use of interstate commerce (e.g., wire, email, telephone call) for acts in furtherance of a corrupt payment to a foreign official by U.S. companies and persons occurring wholly outside of the United States.
What is Covered by the FCPA?—The Business Purpose Test
The FCPA applies only to payments intended to induce or influence a foreign official to use his or her position “in order to assist … in obtaining or retaining business for or with, or directing business to, any person.” This requirement is known as the “business purpose test” and is broadly interpreted. Examples of actions taken to obtain or retain business include:
- Winning a contract
- Influencing the procurement process
- Circumventing the rules for importation of products
- Gaining access to non-public bid tender information
- Evading taxes or penalties
- Influencing the adjudication of lawsuits or enforcement actions
- Obtaining exceptions to regulations
- Avoiding contract termination
Bribe payments made to secure favorable tax treatment, to reduce or eliminate customs duties, to obtain government action to prevent competitors from entering a market, or to circumvent a licensing or permit requirement, all satisfy the business purpose test.
In 2004, the U.S. Court of Appeals for the Fifth Circuit addressed the business purpose test in United States v. Kay and held that bribes paid to obtain favorable tax treatment— which reduced a company’s customs duties and sales taxes on imports—could constitute payments made to “obtain or retain” business within the meaning of the FCPA. The court explained that in enacting the FCPA, “Congress meant to prohibit a range of payments wider than only those that directly influence the acquisition or retention of government contracts or similar commercial or industrial arrangements.”
The Kay court found that “[t]he congressional target was bribery paid to engender assistance in improving the business opportunities of the payor or his beneficiary, irrespective of whether that assistance be direct or indirect, and irrespective of whether it be related to administering the law, awarding, extending, or renewing a contract, or executing or preserving an agreement held that payments to obtain favorable tax treatment can, under appropriate circumstances, violate the FCPA.
To violate the FCPA, an offer, promise, or authorization of a payment, or a payment, to a government official must be made “corruptly.” As Congress noted when adopting the FCPA, the word “corruptly” means an intent or desire to wrongfully influence the recipient:
The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, wrongfully to direct business to the payor or his client, to obtain preferential legislation or regulations, or to induce a foreign official to fail to perform an official function.
Where corrupt intent is present, the FCPA prohibits paying, offering, or promising to pay money or anything of value (or authorizing the payment or offer). By focusing on intent, the FCPA does not require that a corrupt act succeed in its purpose. Nor must the foreign official actually solicit, accept, or receive the corrupt payment for the bribe payor to be liable.
In addition, as long as the offer, promise, authorization, or payment is made corruptly, the actor need not know the identity of the recipient; the attempt is sufficient. Thus, an executive who authorizes others to pay “whoever you need to” in a foreign government to obtain a contract has violated the FCPA—even if no bribe is ultimately offered or paid.
To be criminally liable under the FCPA, an individual must act “willfully.” Proof of willfulness is not required to establish corporate criminal or civil liability,though proof of corrupt intent is. The term “willfully” is not defined in the FCPA, but it has generally been construed by courts to connote an act committed voluntarily and purposefully, and with a bad purpose, i.e., with “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law.” As the Supreme Court explained in Bryan v. United States, “[a]s a general matter, when used in the criminal context, a ‘willful’ act is one undertaken with a ‘bad purpose.’ In other words, in order to establish a ‘willful’ violation of a statute, ‘the Government must prove that the defendant acted with knowledge that his conduct was unlawful. To be guilty, a defendant must act with a bad purpose, i.e., know generally that his conduct is unlawful.
The definition of a “foreign official”
The FCPA’s anti-bribery provisions apply to corrupt payments made to
(1) “any foreign official”;
(2) “any foreign political party or official thereof ”;
(3) “any candidate for foreign political office”; or
(4) any person, while knowing that all or a portion of the payment will be offered, given, or promised to an individual falling within one of these three categories.
Although the statute distinguishes between a “foreign official,” “foreign political party or official thereof,” and “candidate for foreign political office,” the term “foreign official” in the guide generally refers to an individual falling within any of these three categories. The FCPA defines “foreign official” to include:
any officer or employee of a foreign government or any department, agency, or instrumentality thereof or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
The FCPA broadly applies to corrupt payments to “any” officer or employee of a foreign government and to those acting on the foreign government’s behalf. The FCPA thus covers corrupt payments to low-ranking employees and high-level officials alike. The FCPA prohibits payments to foreign officials, not to foreign governments. That said, companies contemplating contributions or donations to foreign governments should take steps to ensure that no monies are used for corrupt purposes, such as the personal benefit of individual foreign officials.
Foreign officials under the FCPA include officers or employees of a department, agency, or instrumentality of a foreign government. When a foreign government is organized in a fashion similar to the U.S. system, what constitutes a government department or agency is typically clear (e.g., a ministry of energy, national security agency, or transportation authority). Although governments can be organized in very different ways, “by including officers or employees of agencies and instrumentalities within the definition of “foreign official,” the FCPA accounts for this variability.”
The term “instrumentality” is broad and can include state-owned or state-controlled entities. Whether a particular entity constitutes an “instrumentality” under the FCPA requires a fact-specific analysis of an entity’s ownership, control, status, and function. The Guide summarizes a non-exclusive list of factors courts may consider:
- the foreign state’s extent of ownership of the entity;
- the foreign state’s degree of control over the entity (including whether key officers and directors of the entity are, or are appointed by, government officials);
- the foreign state’s characterization of the entity and its employees;
- the circumstances surrounding the entity’s creation;
- the purpose of the entity’s activities;
- the entity’s obligations and privileges under the foreign state’s law;
- the exclusive or controlling power vested in the entity to administer its designated functions;
- the level of financial support by the foreign state (including subsidies, special tax treatment, government-mandated fees, and loans);
- the entity’s provision of services to the jurisdiction’s residents;
- whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government; and
- the general perception that the entity is performing official or governmental functions
While no one factor is dispositive or necessarily more important than another, as a practical matter, an entity is unlikely to qualify as an instrumentality if a government does not own or control a majority of its shares. However, there are circumstances in which an entity would qualify as an instrumentality absent 50% or greater foreign government ownership. Companies and individuals should also remember that, whether an entity is an instrumentality of a foreign government or a private entity, commercial (i.e., private-to-private) bribery may still violate the FCPA’s accounting provisions, the Travel Act, anti-money laundering laws, and other federal or foreign laws. Any type of corrupt payment thus carries a risk of prosecution.
Public International Organizations
In 1998, the FCPA was amended to expand the definition of “foreign official” to include employees and representatives of public international organizations.127 A “public international organization” is any organization designated as such by Executive Order under the International Organizations Immunities Act, 22 U.S.C. § 288, or any other organization that the President so designates. Currently, public international organizations include entities such as the World Bank, the International Monetary Fund, the World Intellectual Property Organization, the World Trade Organization, the OECD, the Organization of American States, and numerous others. A comprehensive list of organizations designated as “public international organizations” is contained in 22 U.S.C. § 288.
Payments to Third Parties
The FCPA expressly prohibits corrupt payments made through third parties or intermediaries. Specifically, it covers payments made to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly,” to a foreign official. Many companies doing business in a foreign country retain a local individual or company to help them conduct business. Although these foreign agents may provide entirely legitimate advice regarding local customs and procedures and may help facilitate business transactions companies should be aware of the risks involved in engaging third-party agents or intermediaries. The fact that a bribe is paid by a third party does not eliminate the potential for criminal or civil FCPA liability.
Because Congress anticipated the use of third-party agents in bribery schemes—for example, to avoid actual knowledge of a bribe—it defined the term “knowing” in a way that prevents individuals and businesses from avoiding liability by putting “any person” between themselves and the foreign officials. Under the FCPA, a person’s state of mind is “knowing” with respect to conduct, a circumstance, or a result if the person:
- is aware that [he] is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or
- has a firm belief that such circumstance exists or that such result is substantially certain to occur.
Thus, a person has the requisite knowledge when he is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist. As Congress made clear, it meant to impose liability not only on those with actual knowledge of wrongdoing, but also on those who purposefully avoid actual knowledge. Common red flags associated with third parties include:
- excessive commissions to third-party agents or consultants;
- unreasonably large discounts to third-party distributors;
- third-party “consulting agreements” that include only vaguely described services;
- the third-party consultant is in a different line of business than that for which it has been engaged;
- the third party is related to or closely associated with the foreign official;
- the third party became part of the transaction at the express request or insistence of the foreign official;
- the third party is merely a shell company incorporated in an offshore jurisdiction; and
- the third party requests payment to offshore bank accounts.
The FCPA’s anti-bribery provisions contain two affirmative defenses: (1) that the payment was lawful under the written laws of the foreign country (the “local law” defense), and (2) that the money was spent as part of demonstrating a product or performing a contractual obligation (the “reasonable and bona fide business expenditure” defense). Because these are affirmative defenses, the defendant bears the burden of proving them.
For the local law defense to apply, a defendant must establish that “the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country.” The defendant must establish that the payment was lawful under the foreign country’s written laws and regulations at the time of the offense. In creating the local law defense in 1988, Congress sought “to make clear that the absence of written laws in a foreign official’s country would not by itself be sufficient to satisfy this defense.” Thus, the fact that bribes may not be prosecuted under local law is insufficient to establish the defense.
The FCPA allows companies to provide reasonable and bona fide travel and lodging expenses to a foreign official, and it is an affirmative defense where expenses are directly related to the promotion, demonstration, or explanation of a company’s products or services, or are related to a company’s execution or performance of a contract with a foreign government or agency. Trips that are primarily for personal entertainment purposes, however, are not bona fide business expenses and may violate the FCPA’s anti-bribery provisions. Moreover, when expenditures, bona fide or not, are mischaracterized in a company’s books and records, or where unauthorized or improper expenditures occur due to a failure to implement adequate internal controls, they may also violate the FCPA’s accounting provisions. Purposeful mischaracterization of expenditures may also, of course, indicate a corrupt intent.
DOJ has opined that the following types of expenditures on behalf of foreign officials did not warrant FCPA enforcement action:
- travel and expenses to visit company facilities or operations;
- travel and expenses for training; and
- product demonstration or promotional activities, including travel and expenses for meetings
Whether any particular payment is a bona fide expenditure necessarily requires a fact-specific analysis. But the following non-exhaustive list of safeguards, compiled from several releases, may be helpful to businesses in evaluating whether a particular expenditure is appropriate or may risk violating the FCPA:
- Do not select the particular officials who will participate in the party’s proposed trip or program or else select them based on pre-determined, merit-based criteria.
- Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of a receipt.
- Do not advance funds or pay for reimbursements in cash.
- Ensure that any stipends are reasonable approximations of costs likely to be incurred and/or that expenses are limited to those that are necessary and reasonable.
- Ensure the expenditures are transparent, both within the company and to the foreign government.
- Do not condition payment of expenses on any action by the foreign official.
- Obtain written confirmation that payment of the expenses is not contrary to local law.
- Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred.
- Ensure that costs and expenses on behalf of the foreign officials will be accurately recorded in the company’s books and records.
In sum, while certain expenditures are more likely to raise red flags, they will not give rise to prosecution if they are (1) reasonable, (2) bona fide, and (3) directly related to (4) the promotion, demonstration, or explanation of products or services or the execution or performance of a contract.
How successor liability applies in the mergers and acquisitions (M&A) context
As a general legal matter, when a company merges with or acquires another company, the successor company assumes the predecessor company’s liabilities. Successor liability is an integral component of corporate law and, among other things, prevents companies from avoiding liability by reorganizing. Successor liability applies to all kinds of civil and criminal liabilities,and FCPA violations are no exception. Successor liability does not, however, create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer
Hallmarks of an effective compliance program
Factors DOJ and SEC will look for include:
- Commitment from Senior Management and a Clearly Articulated Policy Against Corruption
- Code of Conduct and Compliance Policies and Procedures
- Oversight, Autonomy, and Resources
- Risk Assessment
- Training and Continuing Advice
- Incentives and Disciplinary Measures
- Third-Party Due Diligence and Payments
- Confidential Reporting and Internal Investigation
- Continuous Improvement: Periodic Testing and Review
- Mergers and Acquisitions: Pre-Acquisition Due Diligence and Post-Acquisition Integration
The different types of civil and criminal resolutions available in the FCPA
The FCPA’s anti-bribery and accounting provisions do not specify a statute of limitations for criminal actions. Accordingly, the general five-year limitations period set forth in 18 U.S.C. § 3282 applies to substantive criminal violations of the Act. In civil cases brought by SEC, the statute of limitations is set by 28 U.S.C. § 2462, which provides for a five-year limitation on any “suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” The five-year period begins to run “when the claim first accrued.”
The five-year limitations period applies to SEC actions seeking civil penalties, but it does not prevent SEC from seeking equitable remedies, such as an injunction or the disgorgement of ill-gotten gains, for conduct pre-dating the five-year period. In cases against individuals who are not residents of the United States, the statute is tolled for any period when the defendants are not “found within the United States in order that proper service may be made thereon.” Furthermore, companies or individuals cooperating with SEC may enter into tolling agreements that voluntarily extend the limitations period.
For each violation of the anti-bribery provisions, the FCPA provides that corporations and other business entities are subject to a fine of up to $2 million. Individuals, including officers, directors, stockholders, and agents of companies, are subject to a fine of up to $100,000 and imprisonment for up to five years.
For each violation of the accounting provisions, the FCPA provides that corporations and other business entities are subject to a fine of up to $25 million. Individuals are subject to a fine of up to $5 million and imprisonment for up to 20 years.
For violations of the anti-bribery provisions, corporations and other business entities are subject to a civil penalty of up to $16,000 per violation. Individuals, including officers, directors, stockholders, and agents of companies, are similarly subject to a civil penalty of up to $16,000 per violation, which may not be paid by their employer or principal.
For violations of the accounting provisions, SEC may obtain a civil penalty not to exceed the greater of (a) the gross amount of the pecuniary gain to the defendant as a result of the violations or (b) a specified dollar limitation. The specified dollar limitations are based on the egregiousness of the violation, ranging from $7,500 to $150,000 for an individual and $75,000 to $725,000 for a company. SEC may obtain civil penalties both in actions filed in federal court and in administrative proceedings.
In addition to the criminal and civil penalties described above, individuals and companies who violate the FCPA may face significant collateral consequences, including suspension or debarment from contracting with the federal government, cross-debarment by multilateral development banks, and the suspension or revocation of certain export privileges.
Companies and individuals who violate the FCPA may face consequences under other regulatory regimes, such as the Arms Export Control Act (AECA), 22 U.S.C. § 2751, et seq., and its implementing regulations, the International Traffic in Arms Regulations (ITAR), 22 C.F.R. § 120, et seq. AECA and ITAR together provide for the suspension, revocation, amendment, or denial of an arms export license if an applicant has been indicted or convicted for violating the FCPA.
One of the primary goals of both criminal prosecutions and civil enforcement actions against companies that violate the FCPA is ensuring that such conduct does not occur again. As a consequence, enhanced compliance and reporting requirements may be part of criminal and civil resolutions of FCPA matters. The amount of enhanced compliance and kind of reporting required varies according to the facts and circumstances of individual cases.
In criminal cases, a company’s sentence, or a DPA or NPA with a company, may require the appointment of an independent corporate monitor. Whether a monitor is appropriate depends on the specific facts and circumstances of the case. Factors DOJ and SEC consider when determining use of a monitor include:
- Seriousness of the offense
- Duration of the misconduct
- Pervasiveness of the misconduct, including whether the conduct cuts across geographic and/ or product lines
- Nature and size of the company
- Quality of the company’s compliance program at the time of the misconduct
- Subsequent remediation efforts