The Foreign Corrupt Practices Act (FCPA), like many U.S. laws dealing with international transactions, has attracted governmental attention in recent years as a way to further insulate U.S. businesses from errant influences in their operations. The FCPA acts as a watchdog against U.S. business engaging in corrupt actions abroad. With the increasingly interdependent global economy, more businesses are operating abroad than ever, which only creates more opportunity for corrupt actions. Violations of the FCPA receive more attention every year, usually resulting in severe penalties. One way the government has enforced the FCPA is through the application of successor liability. When the U.S. company buys the violator, they are also “buying the violation,” as this is commonly phrased. The legal concept of successor liability has allowed the government to turn the FCPA into a powerful tool to counteract corruption and bribery abroad.
The FCPA is the U.S. law addressing corruption and bribery of foreign officials and merits a brief introduction. Two government agencies oversee its implementation: the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). The law contains anti-bribery and corruption provisions, as well as accounting reporting provisions which are designed to work together. The anti-bribery and corruption portions of the law prohibit corrupt payments to foreign government officials for the purpose of obtaining or keeping business. The law applies to certain classes of people and companies organized under the categories of issuers, domestic concerns or a foreign national or business. An issuer is a corporation which has issued securities in the U.S. or is required to file reports with the SEC. A domestic concern can be an individual citizen, national or permanent resident of the U.S., or a company with its principal place of business in the U.S. or one that does business in the U.S. Finally, a foreign national or company may be subject to the FCPA if it acts either directly or through an agent to further the corrupt foreign payment while in U.S. territory.
There are affirmative defenses and an exception available to negate liability under the law. An exception exists where the payment to the foreign official was made to expedite or facilitate a routine government action, such as obtaining permits, licenses and providing phone or water supply. Affirmative defenses to alleged violations of the FCPA exist where the money paid was a bona fide expenditure and was legal under the laws of that country, or if the bona fide expenditure was paid as part of demonstrating a product or performing a contractual obligation.
Repercussions from violating the FCPA can be severe, and there are both criminal and civil penalties under the statute. For example, on the criminal side, business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees and agents could receive a fine of up to $100,000 and five years imprisonment. In addition, under the Alternative Fines Act, these fines could be doubled, as they would then equal twice the amount of the benefit sought by the corrupt payment. On the civil side, officers, directors, employees or agents of a business could receive up to a $10,000 fine. Under the accounting provisions, the SEC can levy a fine not to exceed the larger of either 1) the amount of financial gain to the defendant arising from the violation; or 2) a specified dollar amount based on the egregiousness of the violation ranging from $5,000 to $10,000 for an individual and from $50,000 to $500,000 for a company.
So how does the concept of successor liability come into play, with such strong provisions already contained within the FCPA? Between the enactment of the statute in 1977 and the early 2000s, the government only investigated and prosecuted a relative handful of violations. However, the ability to apply successor liability in enforcing the FCPA has allowed the government to pick up its enforcement actions. In 2011, approximately 48 FCPA cases were initiated compared to approximately 15 in 2006. A large portion of these cases included successor liability issues.
In the race for U.S. companies to remain globally competitive, they often must acquire businesses abroad. In many cases, these acquired companies have been engaging in corrupt practices such as bribing officials to obtain a favorable position in the marketplace. The list of the recent enforcement actions under FCPA show that successor liability has been applied consistently, and resulted in some of the largest fines in the history of the statute. In one staggering 2009 case treating the Halliburton/KBR successor liability issue, Halliburton and KBR were fined $402 million.
In general common law, successor liability typically applies when a company has acquired another company as a result of an actual merger or acquisition. Successor liability is usually not recognized if there is only a sale of the assets or stock. U.S. Supreme Court cases since the 1800s have held that a purchaser of only assets takes the assets free and clear of any liability or debts. However, some exceptions exist where an asset sale could generate the same successor liability as a merger or acquisition. One exception occurs when the purchasing entity is merely a continuation of the existing business. The specific facts of each asset sale must be analyzed to determine if successor liability is applicable.
Generally, successor liability in FCPA actions can be categorized into two main areas: pre- and post-acquisition liability. Prosecutors of pre-acquisition FCPA violations have shown little leniency, although an acquirer may be able to avoid or limit liability depending on the extent of pre-closing due diligence, and a commitment to prevent further violations. As an example, General Electric was able to avoid successor liability when it acquired InVision Technologies in 2006. FCPA violations by InVision had come to light during the pre-deal due diligence. GE reported these violations to the government which led to a deferred prosecution agreement with InVision, and the requirement that InVision pay an $800,000 fine. In this instance, GE’s detailed due diligence and adherence to the FCPA likely led to it being absolved of direct fines under successor liability.
Published guidance from the DOJ in specific situations, called opinion releases, reflect this trend. In Opinion Procedure Releases 01-01 and 03-01, the DOJ indicated that companies that do reasonable due diligence, investigate possible red flag activities and disclose any uncovered violations to the government have a strong likelihood of not being charged with these violations. More recently, the DOJ reiterated this idea in Opinion Procedure Release 08-02 in which Halliburton requested the DOJ’s opinion on the chance of acquired liability given a certain set of facts in an upcoming acquisition. In the request, Halliburton posited it would follow a strong preemptive compliance plan for the acquired company and wanted to know if the DOJ would still hold it liable. The DOJ responded that it would not hold Halliburton liable for prior violations by the company it acquired if it followed the compliance steps as initially set forth.
However, in another 2011 case, the acquirer was not so fortunate. Alliance One International, through two of its foreign subsidiaries, was held liable for FCPA violations by companies the two foreign subsidiaries had acquired. Alliance One was required to pay a fine of approximately $9.45 million.
Post-deal violations appear to provoke the government into bringing charges for FCPA violations by an acquired company. In a 2006 case, Tyco was fined $50 million for the actions of two companies it acquired, one in Brazil and the other in South Korea. In both acquisitions, the government determined that Tyco’s pre-deal due diligence had uncovered potential violations. However, Tyco proceeded with the deals without addressing the possibility of violations and without alerting the government. The violations thus continued post-acquisition. The government made an emphatic statement by assessing such a large fine, in part due to the element of “willful blindness” as Tyco's due diligence had raised red flags, yet the violations continued after the acquisitions.
It is interesting to note that most FCPA cases are never actually litigated in court. Once the charges are brought, the companies usually settle and accept the penalties and any other restrictions imposed. Once an FCPA charge is brought, there is often a correlating drop in the stock price of the company. It is therefore usually in the company’s (and the national economy’s) best interest to settle the matter as efficiently as possible.
Even though it is possible to limit the successor liability of a company for FCPA violations of an acquired company, there is a growing movement to amend the FCPA. Most recently, in November 2011, a bill was introduced in the House of Representatives that proposed amendments including eliminating criminal penalties for successor liability under the FCPA. However, this bill has yet to pass. Those who support changing the law feel that the FCPA is being forged into a tool that ends up unfairly blocking or slowing large international transactions, thereby impeding economic growth and flexibility. Opponents of the proposal to delete criminal penalties from the FCPA worry that removing these heavy fines and personal liability would make companies less motivated to perform strong due diligence in acquisitions and maintain strong anti-corruption compliance programs. In addition, the acquired company would not have a strong incentive to reveal current violations. Either way, it does not appear that criminal liability under the FCPA will be eliminated any time soon.
A review of successor liability in FCPA enforcement teaches us that, as in many other compliance fields, a detailed due diligence and compliance plan can be strong factors in reducing or avoiding liability. Though this is not a guarantee, it is fairly certain that an acquiring company will be sharply penalized if it allows FCPA violations to continue unchecked after an acquisition.