— Sam Spade in “The Maltese Falcon”
Notwithstanding everything going on at the Securities and Exchange Commission these days, amending rules under Dodd-Frank and the JOBS Act, and bringing anti-fraud litigation, there nonetheless is one subject enjoying intense SEC focus: the Foreign Corrupt Practices Act.
This “black bird” is enforced criminally by the Department of Justice, and civilly by the SEC through injunctions and civil fines.
This year, two valuable resources have become available to assist in FCPA compliance: an academic “primer” and an SEC-DOJ “resource guide.”
The FCPA prohibits public and private companies from bribing foreign government officials to obtain business. The statute also requires ’34 Act registrants to keep books accurately reflecting corporate transactions. Pursuant to SOX Section 404, ’34 Act reporters also must maintain adequate internal financial controls.
After spotty FCPA enforcement until several years ago, both the SEC and the DOJ got serious in cases that ranged from the obvious (outright direct bribe to a government official) to the subtle (payment through a third party to employees of an enterprise indirectly controlled by a foreign government).
High-profile enforcement began in late 2008, when Siemens paid $800 million in FCPA fines: $450 million to the DOJ and $350 million to the SEC.
The FCPA contains several “exceptions” to the ban on payments to foreign officials. You can give ordinary non-cash gifts and provide customary business entertainment; make “grease payments” if legal locally and intended to expedite matters to which you are legally entitled, such as obtaining permits; and pay for travel and related expenditures relating primarily to effecting sales, if incurred prior to placing orders.
Anyone concerned that a practice violates the FCPA can seek an opinion from the attorney general, who has wide discretion as to whether to prosecute. Such opinion must relate only to future conduct, and if favorable creates a rebuttable presumption that an activity is not violative.
Chicago Law School primer
With the uptick in civil and criminal prosecutions and a growing body of FCPA precedent, the American Bar Association’s Global Anti-Corruption Task Force published (January 2012) a compliance primer drafted by the Chicago Law School and Microsoft Corp., available at http://www.americanbar.org/content/dam/aba/uncategorized/criminal_justice/FCPA_Compliance_Report.pdf (case-sensitive).
The primer is worth reviewing, notwithstanding subsequent DOJ-SEC publication of its official resource guide (discussed below), because it provides a non-governmental perspective. The policies set forth in the resource guide may not correspond to how the government actually works.
The primer notes that DOJ enforcement of the FCPA relies on three sources: the U.S. attorney’s guidelines, the federal sentencing guidelines, and the “Good Practice Guidance” issued by the Organisation for Economic Cooperation and Development (an international convention to which the U.S. is signatory).
The primer suggests that the test for the DOJ’s actual practice is best measured by studying deferred and non-prosecution agreements. These agreements generally require a future undertaking to comply with the FCPA, an admission of facts (if prosecution is deferred), a waiver of limitations and the levying of a fine.
What does the DOJ seek in a compliance policy when entering into deferred or non-prosecution agreements?
• A clear written policy
• Specific standards concerning gifts, entertainment, travel, contributions and facilitation (“grease”) payments
• A specific risk assessment reflecting company business, sales methods and geographies in which it operates
• Periodic policy testing
• Senior executive oversight
• Robust accounting procedures
• Training and certification for employees
• Internal whistle-blowing policy, capable of anonymity
• Discipline for violations
• Due diligence in selecting agents and business partners
• Contractual provisions containing anti-corruption pledges, right to audit records, and right to terminate if anti-corruption laws are breached
The primer explicates the U.S. attorney’s “Principles of Federal Prosecution of Business Organizations,” the federal sentencing guidelines for organizations, and anti-bribery guidance from OECD. It recommends monitoring DOJ activity by reviewing public FCPA enforcement actions at http://www.justice.gov/criminal/fraud/fcpa/cases/a.html.
Finally, the primer complains that the DOJ had failed to provide comprehensive guidelines. Eleven months later, that complaint has been answered with the resource guide.
The U.S. government speaks
Published last month, the Resource Guide to the U.S. Foreign Corrupt Practices Act, issued by the Criminal Division of the DOJ and the Enforcement Division of the SEC, is the primary reference for crafting an FCPA policy. Download www.justice.gov/criminal/fraud/fcpa and www.sec.gov/spotlight/fcpa.shtml.
In many ways, the resource guide is remarkable. It not only reviews the law, its history and enforcement, but it also discusses key concepts: what precise activities violate the FCPA; how the FCPA is enforced in international settings; in criminal prosecution, what it means to act “willfully”; what the lawful limits are of gifts, travel allowances, entertainment and contributions; who is a foreign official; what a “reasonable” expenditure is; and which companies are subject to the accounting provisions.
Even more impressive than the focus on practical description, however, are the numerous factual scenarios, taking a hypothetical company through a variety of carefully described behaviors and analyzing those behaviors for FCPA compliance.
While the content of the resource guide is too granular to describe in detail, some highlights are worthy of callout.
First, companies dealing with the FCPA should utilize services of the U.S. Department of Commerce. The department, with specialists in over 100 U.S. cities and 70 countries, consults on compliance issues and due diligence in choosing business partners and agents.
The department’s Country Commercial Guides, covering more than 100 jurisdictions, provide specific market conditions to assist in preparing a risk-based policy reflecting the actual circumstances a company will face (rather than generic admonitions). Other services by the departments of commerce and state also are delineated.
Some of the discussion is humorous. The resource guide, in articulating how much a company safely can spend in feeding a foreign government official, allows that “it is difficult to envision any scenario in which the provision of cups of coffee … would ever evidence corrupt intent,” but, perhaps by necessity, when it gets down to discussing real life (do you feed a government official pasta but not foie gras?), the discussion reduces to an appeal to common sense. Our government also can conceive that in some instances business class airfare might be reasonable (no one better be flying first class).
There is a long discussion defining which agencies are sufficiently state-controlled to constitute part of a foreign government (whose officers thus are “foreign officials”). As a practical matter, it often will be impossible for a U.S. company to understand the ownership and control that a foreign government actually exerts over (for example) a bank, a defense contractor or a hospital.
In 1998, the FCPA was amended to include in the definition “foreign official” the employees and representatives of public international organizations such as the World Bank, IMF, WIPO, WTO, OECD and OAS; these entities would not instinctively appear to fall into the category of “foreign government.”
One historically confusing area is “facilitating” or “grease” payments, permitted in obtaining an otherwise legal service (not sales orders). There is a list of “routine governmental actions” in which, seemingly, it is permissible to “smear” a government employee and not run afoul of the FCPA.
Counsel in M&A transactions should read the extensive discussion of when the DOJ and SEC will seek enforcement against an acquiror for prior FCPA violations of a target. The prudent approach in M&A is to obtain representations of no prior violations, backed by indemnities and escrows; but the lead time for prosecuting FCPA violations outstrips the life of typical indemnities and escrows.
The FCPA is subject to the general federal five-year criminal statute of limitations, and if a single act in a conspiracy occurs within those five years, then all actions occurring before that time can be swept into the enforcement.
Similarly, with SEC civil enforcement powers, there is a five-year statute for civil penalties, but that limitation does not prevent the SEC from seeking equitable remedies including injunctions and disgorgement of ill-gotten gain.
Finally, the primer contains a fascinating Cook’s Tour of numerous previously under-appreciated federal statutes that an FCPA violation also may trigger: the Travel Act prohibits interstate or foreign travel to distribute proceeds of unlawful activity; bribes may trigger a money laundering violation; mail and wire fraud statutes are almost always implicated; certification to the Export-Import Bank that there are no FCPA violations may create criminal liability; similar disclosures are required under statutes controlling the export of armaments; and, falsely booking FCPA-violative payments as commissions or other legitimate expenses may constitute corporate tax fraud.
As the primer is silent on principles of federal prosecution that relate to individuals (as opposed to companies), the resource guide is the only authoritative source for that information.
When it comes to outlining a successful FCPA compliance policy, not surprisingly the resource guide parallels the primer, but for a given set of facts counsel is well advised to consult both sources.
If the bad news is that the FCPA has become the SEC’s and DOJ’s “black bird,” sought out in every quarter of the world, the good news is that newly available sources will guide counsel to best practices without undertaking independent study of caselaw and enforcement proceedings.
Stephen M. Honig practices at Duane Morris in Boston.