On November 14, 2012, the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) released a 120-page “Resource Guide” to the U.S. Foreign Corrupt Practices Act (“FCPA”) (the “Guidance”).1 This follow-up to our earlier client alert2 provides a more detailed breakdown of the insights that the Guidance provides to businesses and practitioners seeking to navigate the unsettled waters of FCPA enforcement.
Two key points about the Guidance should be recognized at the outset. First, despite the length of the Guidance, it contains little new information. Rather, it is largely a restatement of positions previously advanced by DOJ and SEC in enforcement actions around the country. Its principal (and not insignificant) value is in collecting the views of the agencies, which were previously available only by searching through agency advisory opinions, policy manuals, press releases, settlement agreements, and judicial decisions, in a single convenient resource.
Second, it is important to note that the Guidance is just that: an informal, summary, and non-binding reference aid rather than a set of enforceable rules and regulations. Many of the positions taken in the Guidance have yet to be tested or ruled on by any court and remain subject to potential constitutional and other challenges. Moreover, the Guidance expressly states that it does not limit DOJ’s and SEC’s enforcement options or litigating positions and does not create any enforceable rights. Nevertheless, the Guidance sets forth the enforcement agencies’ interpretations of key FCPA provisions, and those agencies can reasonably be expected to act consistently with the Guidance.
The following is a summary of the key points to be gleaned from the Guidance with regard to some of the most significant and recurring issues in FCPA enforcement.
FCPA Jurisdiction
The anti-bribery provisions of the FCPA prohibit U.S. persons and businesses, U.S. and foreign public companies listed on U.S. stock exchanges or required to make SEC filings, and certain foreign persons and businesses acting within U.S. territory from offering, authorizing, or making corrupt payments to foreign officials to obtain or retain business. The Guidance sets forth the agencies’ view that foreign persons and businesses may be prosecuted under the FCPA if they engage, directly or through an agent, in any act (such as attending a meeting) in furtherance of a corrupt payment while in the territory of the United States, even in the absence of such traditional “interstate commerce” jurisdictional hooks as wire transfers, telephone calls, or emails. Moreover, U.S. persons and businesses may be prosecuted for actions taken wholly outside the United States in furtherance of a corrupt payment, even in the absence of any use of the instrumentalities of interstate commerce. Thus, DOJ and SEC continue to espouse an extremely broad view of their enforcement jurisdiction.
Payments to Obtain or Retain Business
The Guidance makes clear that prohibited payments to foreign officials to obtain or retain business go beyond bribes to obtain or retain government contracts. Under the “business purpose” test, any payment made to gain a business advantage violates the FCPA. This includes, for example, bribes paid to secure favorable tax treatment, to circumvent licensing requirements, or to evade customs duties. As long as the bribe may be viewed as allowing the company to carry out its existing business, it will fall within the FCPA’s prohibition of corrupt payments made for the purpose of “retaining” business. Thus, while the Guidance acknowledges that “the FCPA does not cover every type of bribe paid around the world for every purpose,” DOJ and SEC take a very broad view of what payments are made to obtain or retain business.
Gifts, Travel, and Entertainment
The Guidance recognizes that gifts and tokens of esteem and gratitude are often an appropriate part of a business relationship. In distinguishing legitimate gift-giving from the payment of bribes disguised as gifts, the agencies will look to whether the gift was given with corrupt intent, i.e., the intent to improperly influence officials into misusing their positions. While items of nominal value, including reasonable meals and entertainment expenses or company promotional items, are unlikely to have been given with corrupt intent, larger and more extravagant gifts (sports cars, fur coats, $12,000 birthday trips) are far more likely to lack any legitimate business purpose. Thus, DOJ and SEC will bring enforcement actions involving small payments and gifts only where they are part of a systemic or long-standing pattern of bribes to foreign officials. To ensure that gift-giving does not run afoul of the FCPA, the Guidance recommends that an effective compliance program includes clear and easily accessible guidelines and processes for gift-giving by the company’s directors, officers, employees, and agents.
Definition of “Foreign Official”
The FCPA prohibits corrupt payments to foreign officials, and defines “foreign official” to include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.”3 “Instrumentality” is not defined in the statute, and there has been much uncertainty and litigation over what constitutes an instrumentality of a foreign government for FCPA purposes. Here, too, DOJ and SEC opt for an extremely broad interpretation. The Guidance reiterates the agencies’ long-held broad position that instrumentalities include state-owned and state-controlled entities, and provides a non-exhaustive list of factors to be considered in determining whether an entity constitutes an instrumentality of a foreign government. Those factors include the extent of the foreign government’s ownership of or control over the entity, the purpose of the entity’s activities, the circumstances surrounding the entity’s creation, the level of financial support by the foreign government (including subsidies and special tax treatment), and the general perception that the entity is performing official or governmental functions. Although an entity is unlikely to qualify as an instrumentality if the government does not hold a majority interest, the Guidance notes that enforcement actions have been brought where the government, despite having a minority shareholder position, nevertheless had substantial control over the company (e.g., where the government controlled important operational decisions and most senior officers were political appointees).
Importantly, the Guidance points out that even where an entity is not an instrumentality of a foreign government, the payment of purely private commercial bribes may still violate the FCPA’s accounting provisions, the Travel Act,4 anti-money laundering laws, and other federal or foreign laws. Thus, effective compliance programs should recognize that any type of corrupt payment places the company at risk of prosecution.
Payments Through Third Party Agents or Intermediaries
As compliance officers know, the FCPA presents a potential minefield for companies who retain local consultants in foreign countries to help them conduct business. Entities that hire third-party agents who in turn make corrupt payments are liable for the acts of those intermediaries if they had actual knowledge of the conduct, were aware of a high probability of the conduct, or purposefully avoided actual knowledge (“willful blindness”). The Guidance lists a number of “red flags” associated with third parties, including excessive commissions to third-party agents, unreasonably large discounts to third-party distributors, vague descriptions of services in third-party consulting agreements, relationships between third parties and foreign officials, third parties involved in a different line of business than that for which they have been engaged, third parties becoming involved in the transaction at the request or insistence of foreign officials, and requests for payment to offshore bank accounts. Here, as elsewhere, the Guidance emphasizes the importance of an effective compliance program, to include thorough due diligence of any prospective foreign agents.
Successor Liability
Businesses engaged in mergers and acquisitions face the risk of being held civilly and criminally liable for pre-acquisition FCPA violations committed by their acquired entities. The Guidance counsels that pre-acquisition due diligence and post-acquisition improvement of compliance programs and internal controls will benefit the successor company by demonstrating its genuine commitment to uncovering and preventing FCPA violations. Indeed, the Guidance notes that the government’s actions against successor companies have generally involved egregious and sustained violations, or situations in which the successor company either directly participated in or failed to stop the misconduct from occurring after the acquisition. In contrast, DOJ and SEC have often declined to take action against successor companies that voluntarily disclosed the offending conduct, took remedial action, and cooperated with the government’s investigation.
While the exercise of prosecutorial discretion to charge a successor company ultimately turns, like so much else in FCPA enforcement, on a fact-based inquiry, the Guidance provides five “practical tips” for companies engaging in mergers and acquisitions:
The Guidance states that DOJ and SEC will give “meaningful credit” to companies who undertake the above actions as part of their M&A transactions, and may “in appropriate circumstances” decline to bring an enforcement action against the successor company. The Guidance further notes that a successor company’s voluntary disclosure, appropriate due diligence, and implementation of an effective compliance program can also decrease the likelihood of an enforcement action regarding an acquired company’s post-acquisition misconduct.
Guiding Principles of Enforcement
In deciding whether to bring FCPA charges against an individual or corporate entity and how those charges should be resolved, “both DOJ and SEC place a high premium on self-reporting, along with cooperation and remedial efforts.” The Guidance makes clear that a company’s voluntary and timely disclosure, its willingness to provide relevant information, and its improvement of an existing compliance program and appropriate disciplining of wrongdoers will all inure to the company’s benefit in both the criminal and civil arenas.
In a discussion that is particularly helpful because it contains previously non-public information, the Guidance outlines six real-world instances in which DOJ and SEC have declined to pursue enforcement actions against U.S. companies. The underlying fact patterns of the identified declinations vary, but recurring factors include the existence of a robust compliance program at the time of the violation, a thorough internal investigation, voluntary disclosure to DOJ and SEC, full cooperation with the government’s investigation, and prompt remedial measures, including enhancement of internal controls, comprehensive FCPA training, termination or discipline of the employees involved, and termination of relationships with culpable third parties. (Also, in three of the cases, the total amount of the bribes was relatively small.)
Hallmarks of Effective Compliance Programs
In addition to considering a company’s self-reporting, cooperation, and remedial actions, DOJ and SEC will consider the adequacy of a company’s compliance program – in both its design and its implementation – when determining whether to bring charges and how to resolve them. The Guidance makes clear that a compliance program need not be perfect in order to be deemed effective. Thus, DOJ and SEC may decline to bring charges or otherwise reward a company based on the company’s compliance program, even when that program did not prevent the FCPA violation that gave rise to the investigation.
Because different companies might have vastly different compliance needs based on factors such as their size and the specific risks associated with their businesses, the Guidance eschews strict formulas in favor of a “common-sense and pragmatic approach” that considers (1) whether the compliance program is well designed, (2) whether it is being applied in good faith, and (3) whether it works. To be effective, a compliance program should be tailored to the company’s specific needs, risks, and challenges, and should evolve as those needs, risks, and challenges change.
With the caveats that there is no “one-size-fits-all” compliance program and that a company must assess the needs of a program most appropriate for its particular business, the Guidance nevertheless offers a number of “hallmarks” of effective compliance programs that DOJ and SEC assess. These include:
Conclusion
FCPA enforcement remains a priority at both DOJ and SEC, with more than 250 enforcement actions since 2007 resulting in billions of dollars in criminal and civil penalties. While the Guidance does not change the landscape in any significant way (and, regrettably, does not recognize a long-advocated affirmative defense based on a company’s robust compliance program), it is nevertheless a valuable resource. By providing insight into the government’s interpretations of the statute and enforcement priorities, the Guidance provides the clearest and most comprehensive directions to date of what a company should do to avoid running afoul of the FCPA. Compliance officers should carefully study the Guidance in evaluating their existing programs and, where appropriate, update and improve those programs to ensure that they are effective, well-tailored, and consistently enforced.
Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Saunders-Daniel1 http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf
2 “DOJ and SEC Issue Long-Awaited FCPA Guidance,” www.bingham.com/Alerts/2012/11/DOJ-SEC-Issue-FCPA-Guidance
3 15 U.S.C. §§ 78dd-1(f)(1)(A), 78dd-2(h)(2)(A), 78dd-3(f)(2)(A).
4 18 U.S.C. § 1952 (prohibiting travel in interstate or foreign commerce, or using the mail or any facility in interstate or foreign commerce, with the intent to distribute the proceeds of any unlawful activity or to promote, manage, establish, or carry on any unlawful activity).
This article was originally published by Bingham McCutchen LLP.