The U.S. Foreign Corrupt Practice Act. John McDermott Professor of Law Loyola Law School Los Angeles

Transcription

1 The U.S. Foreign Corrupt Practice Act John McDermott Professor of Law Loyola Law School Los Angeles

2 The U.S FCPA and other Anti-bribery laws The US FCPA was enacted in 1977 It was prompted by the Watergate investigations that revealed that some U.S. companies were paying bribes to foreign officials to obtain business. It took almost 20 years for other countries to address the problem. In March 1996, the members of the Organization of American States adopted the Inter-American Convention Against Corruption. The following year (1997) member countries of the Organization for Economic Cooperation and Development promulgated the Convention on Combating Bribery of Foreign Public Officials. The Convention was never implemented as it had to be ratified by each member country which then had to enact implementing legislation. But six years later (December 2003), 140 countries signed the U.N. Convention Against Corruption eventually was accepted by 161 countries the first global consensus.

3 Three features make this U.S. law somewhat unique 1. Most U.S. laws regulate conduct which takes place within the borders of the United States but violations of this U.S. law generally takes place in other countries 2. And the conduct may be legal - or at least not illegal - under the laws of the country where the "bribe" takes place. 3. the "bribe" may be ineffective, i.e. the party offering the bribe may not have received the contract or business it sought.

4 Basic Goal of the FCPA The Act prohibits companies from giving money or any valuable item to foreign government officials for the purpose of obtaining business from government agencies or to influence the adoption or modification of government regulations which benefit them Examples: (1) Allowing importation of certain previously prohibited goods (2) Reducing tariffs or import duties on goods from a specific country

5 Who is affected by the FCPA Any person or business entity which has some connection with the U.S. which has engaged in any type of foreign corrupt practice. Including: U.S. businesses, foreign corporations trading securities in the U.S. (i.e. listed on the New York Stock Exchange American nationals, citizens, and residents acting in furtherance of a "foreign corrupt practice "whether or not they are physically present in the U.S.

6 The U.S. Government s View of the Importance of the FCPA

7 Targets of Enforcement US companies and their subsidiaries Officers, directors, employees, conspirators (US v. King, 8 th Cir., 2003) Shareholders Agents Foreign corporations and foreign nationals in a US territory

8 FCPA Basics Prohibits making improper payments to foreign officials, parties or candidates, in order to assist a company in obtaining or retaining business for, or directing business to, any person Imposes record keeping and internal control requirements on companies subject to SEC jurisdiction

9 Who Is Bound? Issuers companies whose securities are registered or are required to file periodic reports with the SEC Domestic concerns US citizens and business entities having their principal place of business in the United States Other persons who act in furtherance of a corrupt payment while in a territory of the United States Note liability for acts of non-us citizens

10 Enforcers US Department of Justice: criminal and civil prosecutions of companies having their principal places of business in the US Securities and Exchange Commission: civil enforcement actions against registered issuers (SEC v Diagnostic Products)

11 Who are the targets? US companies and their subsidiaries Their officers, directors, employees, conspirators And indirectly their shareholders Their agents especially their foreign agants Foreign corporations and foreign nationals in a US territory

12 Key Elements of A FCPA Violation Using an instrumentality of interstate commerce (telephone, etc.) by any person (US or foreign) or an act outside the US by a domestic concern or US person, or an act in the US by a foreign person in furtherance of the offer or promise to pay (or offer to pay) money or anything of value, directly or indirectly To a foreign official, a foreign political party or party official, a candidate for foreign political office, an official of a public international organization, or any other person while knowing that the payment or promise will be passed to one of these. To influence an official act or decision of the bribed person or to get that person to use influence to assist the company in obtaining or retaining business or to direct business to any person, or to secure an improper advantage.

13 Examples Anything of Value Cash or cash equivalents Tangible and intangible property Useful information Promise of future employment College scholarship Sports equipment

14 Corrupt Intent Payment must be intended to influence the recipient to misuse his official position in order to wrongfully direct, obtain, or retain business Done voluntarily and intentionally and with the bad purpose of accomplishing an unlawful end or an action by unlawful means. US v. Liebo, 8 th Cir, 1991.

15 Knowing Conduct Not quite specific intent But knowledge that a violation will occur or is substantially certain to occur Or firmly believing that a circumstance exists or that a result is substantially likely to occur No willful blindness, deliberate ignorance, or head in the sand.

16 Liability for Acts of Third Parties Company authorized the illegal payment or knew it would be made Company consciously disregarded a high probability that an illegal payment would be made

17 Red Flags: Some Warnings that a violation will occur Foreign agent refuses to agree in writing to FCPA compliance Unusual payment arrangements or large sums of money Country or official reputed to be corrupt Official or agent with poor books or records Involvement of undisclosed or unnecessary third parties Agent is also a government official or closely related to one

18 Exception ( grease payments ) Payments to low-level foreign officials who perform routine governmental actions to encourage them to process an application Not to approve a questionable request Examples: permit processing, licenses, visas, police protection, power supply, cargo handling, inspection scheduling Essential that payments to whom and how much) are recorded in company's accounts i.e. transparency

19 But necessity Is Not a Defense It is not a defense to argue that business cannot be done in the foreign country without bribing officials Or that competitors from other countries are engaging in bribery. Grease payments may be used to expedite a decision BUT NOT to GRANT the request. [Perhaps like adding additional postage for priority mail]

20 Good Compliance Practices - 1 Establishing FCPA compliance programs and training Requiring that all contracts explicitly require FCPA compliance Payments by check or wire transfer, not cash or bearer instruments No use of unnumbered or offshore bank accounts Detailed, accurate books, records, and accounts, which are periodically audited

21 Good Compliance Practices - 2 Prior approval for travel, meals, and entertainment Screening applicants for jobs in foreign offices to exclude those who are public officials or are closely associated with a foreign government Exercising due diligence in mergers and acquisitions Meaningful country research Avoidance of grease payments even if potentially lawful and maintaining proper accounting practices. Every payment must be on the books.

22 Formal Opinion Procedure When doubts exists: Submit written request for US Department of Justice Formal Opinion under 28 CFR BUT only for future transactions (for past transactions can confess and rely on leniency procedures No hypotheticals Like kid who asks his parents if he d get in trouble if he broke a window in a neighbor s huse

23 Adopt FCPA Compliance Practices Establish FCPA compliance program and training Insure that all contracts requiring FCPA compliance, with periodic certification Make all payments by check or wire transfer, not cash or bearer instruments Doe not use of unnumbered or offshore bank accounts Maintain detailed, accurate books, records, and accounts, which are periodically audited Obtain prior approval for travel, meals, and entertainment Screen all applicants for jobs in foreign offices and exclude those who are public officials or are closely associated with a foreign government Due diligence in mergers and acquisitions Avoid grease payments if possible.

24 Record Keeping Maintain accounts and controls so that All transactions must have management s general or specific authorization Transactions should be recorded in conformity with GAAP and assets are accounted for (even petty cash) Access to assets only in accordance with management s authorization Regular audits to insure that recorded assets conform to existing assets

25 Penalties for FCPA Violations Criminal penalties $2 million for companies $100,000 per violation for individuals (not reimbursed by company), plus up to 5 years in prison Alternative Fines Act: twice the gain or loss from the offense Civil penalty: $10,000 per violation for companies and individuals SEC action: gain to defendant or fine of $5-100,000 for individuals and $50-500,000 for businesses Debarment for companies

26 Recent Fines Titan Corporation - $28.4 million Monsanto - $1.5 million ABB - $10.5 million penalty and $5.9 million disgorgement InVision - $800,000 penalty and $600,000 disgorgement Fines are highest for companies without effective compliance programs.

27 Key Cases: SEC v. Monsanto Company On January 6, 2005, the Commission filed two enforcement proceedings charging Monsanto Company (a US-domiciled public company) with making illicit payments in violation of the FCPA. 1 st the Commission filed a lawsuit in the United States District Court for the District of Columbia charging Monsanto with violating the FCPA and seeking a civil penalty. 2 nd the Commission issued an administrative order finding that Monsanto violated the anti-bribery and other provisions of the FCPA. The allegations: in 2002, an official of Monsanto authorized an intermediary to pay a bribe to an Indonesian official to influence him to repeal an decree requiring an environmental impact study before Monsanto could grow genetically modified crops. Although the payment was made, the unfavorable decree was not repealed. Importance of the decision: 1. The requested change would not have solely benefited the company making the bribe as repeal of the decree who have also benefited other growers. 2. The fact that the attempt failed and Monsanto never received any benefit was irrelevant. 3. The illegality is THE ATTEMPT!

28 U.S. v. Vetco Gray Controls, Inc. U.S. District Court (Texas) 2007 Several subsidiaries of Vetco International Ltd pleaded guilty to violating the anti-bribery provisions of the FCPA. The plea included the admission that from at least September 2002 to at least April 2005, each of them engaged the services of a major international freight forwarding and customs clearing company and authorized it to make almost 400 corrupt payments totaling approximately $2.1 million to Nigerian Customs Service officials to induce them to disregard their official duties with respect to goods that were either improperly imported into Nigeria, improperly documented or otherwise not in accordance with Nigerian customs laws. The illegal effect was to give the defendants preferential customs treatment which gave them an advantage over competitors.

29 Gift Giving The practice of exchanging gifts is very common in some business cultures BUT can constitute a violation of the FCPA The DOJ/SEC regulations seem to acknowledge that a small gift or token of esteem or gratitude may often be an appropriate way for business people to display respect for each other which will not necessarily result in a FCPA violation But to avoid a violation of the Act, gifts should be: 1. Given openly and transparently 2. Properly recorded in the giver s books and records 3. Provided only to show gratitude or esteem 4. Permitted under local law

30 When is a gift a bribe? The FCPA specifically prohibits gifts given with a corrupt intent to influence a corporate official to obtain or retain business, or otherwise secure an improper business advantage. Small, token, and infrequent gifts of nominal value that are not provided with any expectation of return favor would not likely to be found to violate the FCPA. A gift related to the promotion or demonstration of a product may be permissible as a business promotion expense. The U.S. Department of Justice has established FCPA Opinion Procedure, through which any U.S. company or national may request a written statement from it regarding proposed business conduct.

31 DOJ s formal opinions regarding gift giving include the following: Give gifts of nominal value. Do not give gifts frequently to the same individual or group. Give gifts that are perishable, such as plants, or consumable which the entire office can share rather giving gifts to individuals. Give gifts with a corporate logo that promote your company but do not have retail value. Build business relationships through recreational activities instead of lavish private dinners. Provide sample products (of nominal value) from your company. Give something unique from your region, such as crab cakes from Maryland or blue bonnets from Texas. Give something proverbially useless, like a coffee table book. Never give cash or cash equivalents, such as gift cards. Present gifts openly and in front of a group of people. Give gifts for official, rather than personal, use. Make sure that any gift would comply with both local law and the internal policies at the official s company.

32 Formal Opinion Procedure When in doubt, a company can submit a written request for DOJ Formal Opinion May only use for future transactions (for past transactions rely on leniency procedures) No hypothetical's

33 Elements of FCPA Violation Using an instrumentality of interstate commerce (telephone, etc.) by any person (US or foreign) or an act outside the US by a domestic concern or US person, or an act in the US by a foreign person in furtherance of the offer or promise to pay someone to influence an official act or decision Which is intended to assist the company in obtaining or retaining business in a foreign country or to direct business to any person, or to secure an improper advantage.

34 Examples Anything of Value Cash or cash equivalents Tangible and intangible property Useful information Promise of future employment College scholarship Sports equipment

35 Corrupt Intent Payment must be intended to influence the recipient to misuse his official position in order to wrongfully direct, obtain, or retain business Done voluntarily and intentionally and with the bad purpose of accomplishing an unlawful end or an action by unlawful means.

36 Knowing Conduct Knowing that a violation will occur or is substantially certain to occur Firmly believing that a circumstance exists or that a result is substantially likely to occur No willful blindness, deliberate ignorance, or head in the sand.

37 Some Red Flags Foreign agent refuses to agree in writing to FCPA compliance Unusual payment arrangements or large sums Country or official reputed to be corrupt Official or agent with poor books or records Involvement of undisclosed or unnecessary third parties Agent is also an official or closely related to one

38 Exception for Facilitating Payments Statutory exception for facilitating ( grease ) payments to low-level foreign officials who perform routine governmental actions Examples: permit processing, licenses, visas, police protection, power supply, cargo handling, inspection scheduling Reflect payments in accounts

39 Other Affirmative Defenses Payment permitted by written laws of the foreign country (But what country has written laws permitting bribery?) Reasonable and bona fide expenditures Travel for promotion or demonstration of products Travel for execution or performance of a contract (But not a large, unaccountable expense account)

40 Record Keeping Maintain accounts and controls so that All transactions have management s general or specific authorization Transactions are recorded in conformity with GAAP and assets are accounted for (even petty cash) Access to assets is only in accordance with management s authorization Recorded assets are found periodically to conform to existing assets

41 Best Practices Establish a FCPA compliance program with employee training Review contracts requiring FCPA compliance, with periodic certification Payments by check or wire transfer, not cash or bearer instruments Do not use unnumbered or offshore bank accounts Maintain detailed, accurate books, records, and accounts which are periodically audited

42 Best Practices - 2 Require prior approval for travel, meals, and entertainment Screen all applicants for jobs in foreign offices to exclude those who are public officials or are closely associated with a foreign government Exercise due diligence in mergers and acquisitions Conduct country research using an independent entity (e.g. Transparency International) Avoid grease payments even when technically legal

43 Formal Opinion Procedure Submit a written request to the U.S. Department of Justice for a Formal Opinion of the propriety of the planned transaction

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45 Questions? Thank you.