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Guidelines on business abroad revamped

The Foreign Corrupt Practices Act, adopted in 1977, prohibits U.S. companies (public or private) from bribing foreign government officials to obtain business. The U.S. Securities and Exchange Commission has civil enforcement powers with which to punish both the act of bribery and the inaccurate recording of the related expenses. The U.S. Department of Justice has criminal enforcement powers.

Early enforcement of the statute was rare; the SEC brought perhaps one case a year during the 1990s. But all that has changed. The SEC and DOJ have launched a sustained campaign to remake the ethical standards applied to doing business abroad.
The corrupt practices act, or FCPA, prohibits a U.S. entity from paying or offering anything of value to a foreign official, political party or political candidate, including through an agent, when one should know that such payment could be used to influence any official act for the purpose of obtaining or retaining business.

The statute does not cover private company bribery (but does cover bribery of government-owned businesses). Furthermore, the statute does not prohibit any action that is clearly legal under foreign law and that is properly booked, including: an ordinary non-cash gift; customary business entertainment; travel and related expenditures to promote or demonstrate products or services; and certain so-called grease payments, made to foreign officials for carrying out routine government actions (as opposed to actions designed to obtain business).

“Grease payments” (if they are legal locally) may include payments to expedite permits, process papers, load cargo, schedule inspections, protect perishable commodities or effect non-discretionary clerical activity.

Enforcement actions

The SEC has two FCPA roles: bribery violates Section 30A of the Exchange Act and improper recordation of expenses violates Section 13(b)(2)(A and B) of the Exchange Act and Rule 3b2-1 thereunder. The SEC can sue to enjoin and obtain civil penalty.
The DOJ has criminal jurisdiction as well as the ability to levy fines on companies and their officers and agents and incarcerate individuals. (For non-reporting companies, the DOJ has civil jurisdiction that parallels the SEC’s powers under the Exchange Act.)

Until 2007, FCPA cases tended to arise through company self-reporting. It may be that such reporting was recently spurred by Section 404 of the Sarbanes-Oxley Act, which requires certification of the efficacy of internal financial controls. In turn, fines have begun to escalate.

In a 2007 settlement, Baker Hughes Inc. paid $44.1 million to settle bribery charges in six countries. The SEC alleged that the company utilized two agents, to whom it paid millions of dollars, to bribe government officials. In one instance, the company had been told by a business (owned by the government of Kazakhstan) that unless a particular agent was retained, the company could “say good-bye to this and future business.”

Payments were booked as service or consulting fees, while in fact no identifiable services were obtained. Those payments were sometimes made directly into Swiss bank accounts. The SEC further alleged a failure to implement sufficient internal controls, to determine whether payments were for legitimate services or for bribes.

In 2007, Schnitzer Steel Inc. entered into a deferred prosecution agreement with the DOJ, and its subsidiary pleaded guilty to conspiracy, violation of the FCPA, wire fraud and aiding in the making of false entries in company books, in connection with payments to government customers in China and South Korea to induce them to purchase scrap metal. The fine that was levied was about four times the total amount of corrupt payments, and a former officer of the offshore subsidiary also pleaded guilty to conspiracy to violate the FCPA.

At the end of 2007, Lucent Technologies settled an SEC complaint by the payment of $1.5 million in civil penalties; contemporaneously, Lucent entered into a non-prosecution agreement with the DOJ that called for a $1 million fine. The complaint is worthy of review in that it provides factual texture for things that attract the SEC’s attention. There are specific examples of entertainment and travel expenses (including trips to the United States for foreign customers) that help draw the line between permissible and corrupt expenditures.

The SEC looked at the actual primary activities of the travelers to the United States: Did they in fact go to product demonstrations and tour facilities and engage in negotiations, or did they end up in Las Vegas or Disney World? Were the travelers truly decision-makers with respect to the business being sought, or were these efforts to buy influence?

The SEC pointed out the manner in which these trips were accounted for in Lucent’s books, trips that were primarily sightseeing (even if they included some business) but entered as “services rendered — other services” or as “transportation international” (an account used only for costs of international freight). Additionally, entries of expenses as “factory inspections” were suspect when they surfaced after a sale actually had been made.

Lucent was criticized not only for bribery and for mischaracterization of book entries but also for failure to provide sufficient internal control as would uncover such improprieties, in light of the fact that there were 315 such trips for Chinese government officials.

The long arm of regulatory law

The jurisdictional reach of the FCPA is broad. The DOJ announced in September that a former Alcatel executive, a French citizen employed by a French company (the shares of which were traded in the United States through depository receipts), was sentenced to three years of supervised release and the forfeiture of $261,500 for funneling $2.5 million through one of Alcatel’s Costa Rican consulting firms with knowledge that the funds would be redirected to government officials so as to obtain mobile telephone contracts.

The SEC has been investigating other possible FCPA violations for many years and, in September, filed a complaint against Albert Stanley, an individual executive with Halliburton. As of press time, no settlement had been obtained although most FCPA cases in the past, whether brought against the company or against individuals, indeed have been settled.
Stanley is accused of devising a scheme to bribe Nigerian government officials to obtain more than $6 billion worth of contracts to build liquefied natural gas facilities. To conceal payments, Stanley approved sham “consulting” or “service” agreements with intermediaries, understanding they would funnel their “fees” to government officials. Seemingly, the effort to disguise these transactions upset the SEC: Stanley utilized a Gibraltar shell company, controlled by a solicitor based in the United Kingdom, and a Japanese company as conduits. Claims are asserted in connection with effectuating the bribe and by reason of Stanley having “knowingly circumvented certain internal accounting controls of a U.S. issuer.”

Some of the acts of which Stanley is accused occurred as long ago as 1994; the company announced it was under investigation over five years ago.
Finally, the German conglomerate Siemens A.G. disclosed in 2006 that it had discovered more than $1 billion in bribes that might have been paid in a dozen different countries to win orders. (Siemens announced it was reserving about $1.3 billion for purposes of settling cases with U.S. and German regulators.)

On Dec.15, Siemens settled its FCPA exposure by agreeing to pay $800 million in fines. While well below a possible fine exposure of $2.7 billion, this settlement of $450 million to the DOJ for criminal charges and $350 million to the SEC for civil charges is almost 20 times the largest previous settlement.

Siemens agreed to admit inadequate internal controls and “doctoring” its books, but not the actual acts of bribery. The company will appoint a government-approved compliance officer for a period of years. In effecting bribes in 10 countries, Siemens made payments through alleged consulting agreements, obscured audit records with removable notes and established cash drops where suitcases could be filled with currency.

The Siemens saga is far from over. A settlement with the German government will cost several hundred million dollars more, and expenses of investigation and external consultation have run over $1 billion, according to the Wall Street Journal.

Head in sand, but body visible

The literature and SEC pronouncements indicate increasing pressure on companies to properly record transactions, avoid governmental bribery and admit FCPA violations. The SEC maintains that the failure to publicly disclose FCPA violations is itself likely a material reporting omission. The adequacy of financial statements, and the ability to certify efficacy of internal controls, also are implicated.

What should a company do?

There should be an express written policy explaining the Foreign Corrupt Practices Act.
There should be an educational policy that educates all persons overseas, and all persons supervising overseas operations, to understand the act.

Contracts with foreign agents and distributors should require certification that the counterparty understands and will abide by the provisions of the FCPA and acknowledges that the U.S. company affirmatively expects such compliance.

Policing is important; an ostrich with his head in the sand still leaves a significant part of its body clearly visible to the SEC and the DOJ. Such policing should have two aspects: internal controls should test all accounts; and spot checks should confirm actual services rendered by consultants and agents.

A culture of compliance must be established at the very top of a company hierarchy and enforced by frequent discussion down the line: senior financial, businesspeople and sales staff should affirmatively raise FCPA compliance and seek assurance from people in the field.

Common wisdom has been that you cannot do business in many countries without spreading the wealth to governmental officials. The FCPA was viewed much like jaywalking laws — a good idea, but no one is going to obey.

The simple message today is: Those days are over.

Stephen M. Honig is a partner in the Boston office of Duane Morris.

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