Globalization is both a bane and a blessing for American companies with foreign operations or points of contact. One potential pitfall stems from the federal statute known as the U.S. Foreign Corrupt Practices Act, 15 USC § 78 dd-1 et seq. (“FCPA”). This statute makes it illegal for U.S. companies and individuals to bribe foreign officials for the purpose of securing business abroad. Because in many foreign cultures solicitation of bribes is considered an acceptable means of doing business, American companies are regularly confronted with demands for payments that violate the FCPA.
The FCPA produces hundreds of millions of dollars of civil and criminal penalties each year. In the recent past, two cases resulted in well over a billion dollars each in fines and penalties, and in just the first four months of 2016, ten cases have produced nearly $900 million in fines and penalties. The FCPA is also a criminal statute with the very real potential for imprisonment of individuals. In addition, disgorgement of profits and debarment from pursuit of government contracts are potential consequences. Other outcomes include large amounts of pre- and post-judgment interest, as well as the prospect of follow-on litigation from private parties. FCPA cases often produce hefty defense costs. Expenses related to post litigation compliance monitoring are also high. Not surprisingly, all these potential sanctions give the government a great deal of leverage in resolving cases to its advantage. Trials are rare because the risks of loss are simply too high for most accused companies and individuals.
The FCPA is complex, broadly worded and broadly construed by the Department of Justice and the Securities Exchange Commission, the two federal agencies charged with its enforcement. It applies to both public and private U.S. companies and their foreign subsidiaries without regard to size, as well as to other “person(s)” committing an act in furtherance of the bribery of a foreign official whether it is generated from within or without the territorial United States. The statute also reaches officers, directors, employees, agents and stockholders when they act on behalf of a covered business entity.
An FCPA violation requires a knowing act supporting or offering a payment or anything of value, directly or indirectly, to a foreign official or a third party intermediary with a corrupt intent to influence the official in securing an improper business advantage. A “knowing act” under the FCPA can include so called “willful blindness” and “anything of value” may include such things as travel and expenses, offers of employment, personal favors, stock, gifts, donations, in kind services, entertainment, discounts on products and services not readily available to the public or a promise to do any of these things. Illegal “payments” may be and often are made “indirectly” through third parties, including brokers, consultants, representatives or agents. A “foreign official” is anyone acting on behalf of a foreign government, a public international organization such as the World Bank or the World Trade Organization. Foreign candidates for political office, employees of a foreign state owned company or their family members are covered.
There is a notable but narrow exception in this statute for so called “facilitating payments.” These are small sums paid to secure or expedite performance of routine nondiscretionary governmental acts. Examples of such acts are issuing permits or licenses, processing payments for items like visas or work permits, providing mail pick up or delivery, phone service, power and water supply and scheduling inspections related to contract performance. Qualifying for this exception requires payments to be accurately described in considerable detail in the company’s books and records. Failure to do so may be a source of liability in and of itself.
There are two affirmative defenses to FCPA liability. The first is for payments permitted by the written law of the country where made. For example, the law of some countries permits political contributions to foreign officials even if the contributing party made the contribution in order to get or retain business. The second affirmative defense is for expenditures directly related to the promotion of products or the execution of contracts. These expenditures must be reasonable and cannot be paid to family members of a foreign official. They must also be made directly to the contracting party, not the foreign official. In addition to being necessary to establish the exception or one of the affirmative defenses, there are separate provisions in the statute generally requiring companies and other covered persons to keep detailed books and records reflecting all transactions in or dispositions of company assets, as well as reasonable internal controls and a system designed to ferret out prohibited payments to foreign officials.
The availability of criminal penalties and imprisonment is a major compliance incentive, perhaps even more than the prospect of very large fines and other penalties. Over the years, government enforcement efforts have involved about as many investigations, prosecutions and/or settlements with individuals as with companies. Adding to the enforcement pressure, companies cannot pay criminal penalties on behalf of their employees and corporate D&O policies typically exclude coverage for matters such as FCPA violations. The Dodd Frank Act expands corporate whistleblower opportunities and makes them applicable to FCPA violations. FCPA violations can also create liability under federal mail fraud, wire fraud, money laundering and racketeering laws which carry their own steep criminal and monetary penalties. There is also the prospect of shareholder suits for FCPA-generated loss of stock value. Finally, it is important to reemphasize that the FCPA has no minimum size threshold. The small and medium-size companies who increasingly participate in the global economy have the same exposure as the largest of business entities.
Exploring the nuances of this complex and punitive statute requires more detailed investigation of defense and avoidance mechanisms. To this end, future postings will explore how to detect and prevent violations, how to conduct internal audits for FCPA violations and how to handle government and private enforcement actions.
Image by Djembayz - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=26128831