On November 14, 2012, the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) jointly issued a much-anticipated guidance document outlining the governments views on enforcement and compliance with the Foreign Corrupt Practices Act (FCPA). While not legally binding, the 120-page Resource Guide reiterates existing case law, provides insight into certain governmental positions and priorities, and allows companies to better understand the prosecutorial discretion used by DOJ and SEC in FCPA enforcement actions.
Some key substantive areas discussed in the Resource Guide are:
- Gifts, travel and entertainment. The Resource Guide expresses the government's view that large, extravagant gifts are suspect, but also that even gifts of smaller items may be considered part of a pattern of bribes if they are frequent and extensive. By contrast, "[i]tems of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items" will not generally be the subject of enforcement. Common sense, adherence to company policy, and customary and usual business practices appear to be the guideposts for avoiding liability.
- Charitable giving. Companies have a responsibility to ensure that charitable giving not be used as a screen to conceal corrupt payments. The Resource Guide provides "Five Questions to Consider" regarding charitable payments, including whether the payment was made at the request of a foreign official and whether the foreign official or his family is associated with the charity.
- Foreign officials. The FCPA prohibits corrupt payments to foreign officials, including any "instrumentality" of a foreign government. The Resource Guide makes clear that "the FCPA broadly applies to 'any' officer or employee of a foreign government" or foreign instrumentality (such as a state-owned utility company). The Guide also includes an 11-point list of factors that trial courts allow as jury instructions in determining whether an entity qualifies as an instrumentality, such as the extent of state ownership and the foreign government's degree of control over the entity. If a foreign government owns less than 50 percent of an entity and does not exert substantial control over it, it is unlikely that DOJ and SEC will consider that entity to be a foreign instrumentality. Upcoming appellate decisions will affect this area of the FCPA.
- Reasonable and bona fide business expenditures for a foreign official. The FCPA exempts reasonable, bona fide travel and lodging expenses for a foreign official that are directly related to promotion or demonstration of a company's products or services, or are related to a company's execution or performance of a contract with a foreign government or agency. However, it is often unclear exactly what constitutes "reasonable" in a particular situation. The Resource Guide provides a non-exhaustive but useful list of factors for considering whether an expenditure is appropriate, such as transparency, mode of payment, and conditions for approval and recording of the expense.
- Facilitating or expediting payments. Another exception to the FCPA's bribery prohibition is for facilitating or expediting payments made to further routine, nondiscretionary governmental action. Over the years it has seemed DOJ was intent on, in effect, closing this exception by interpreting it very narrowly in enforcement actions and settlements. The Resource Guide provides helpful clarification of the government's views. Nonetheless, it is clear that this is a narrow exception and, because the UK Bribery Act categorically outlaws facilitation payments, the practical effect of the Resource Guide's clarification of the facilitation exception may be quite small.
- Mergers and acquisitions. The Resource Guide emphasizes the importance of premerger and postmerger due diligence as well as voluntary disclosures by the acquiring company on behalf of the target. Importantly, it assures businesses that generally DOJ and SEC will pursue successor liability only in cases of "egregious and sustained violations" - although it remains to be seen whether they will adhere to this assurance.
- Parent-subsidiary liability. The Resource Guide makes clear the government will continue to hold parent companies accountable for the FCPA violations of their subsidiaries under traditional principal-agent principles. How accountable - insisting on a parent guilty plea, a deferred prosecution agreement, a nonprosecution agreement or declining to proceed at all - will depend on such factors as the parent's degree of control of, and involvement in, the illegal activities of its subsidiary, as well as the effectiveness of the parent's and subsidiary's compliance and internal controls programs.
- Third-party due diligence. The Resource Guide recognizes that third parties are commonly used to conceal bribes to foreign officials. The guidance recommends a three-pronged approach for vetting third parties: (1) ascertaining the third party's qualifications and associations through effective due diligence; (2) understanding the business rationale for the inclusion of the third party; and (3) undertaking ongoing monitoring, including periodic audits, training and annual compliance certifications.
- Effective compliance programs and internal controls. The Resource Guide highlights the importance of developing and implementing a robust FCPA compliance program as well as internal controls specially tailored to a company's business. It emphasizes that FCPA compliance programs and internal controls should be (a) risk-based; (b) specifically adapted to the size, industry sector and sophistication of each company; (c) endorsed and enforced by senior management; and (d) regularly assessed and updated. In contrast to a risk-based approach, the guidance notes that a "check-the-box" or "one-size-fits-all" approach can be inefficient and ineffective. The importance of an effective compliance program was highlighted by the government's settlement with Morgan Stanley, which was announced shortly before release of the Resource Guide: because Morgan Stanley had an excellent FCPA compliance program affirmatively evaded by a senior manager of the firm in China, the government declined to take any action whatsoever against the company even as the senior manager was prosecuted and pled guilty.
The Resource Guide provides valuable insight into the federal government's FCPA enforcement priorities and decisions, which should enable businesses to "maximize their ability to comply with the FCPA in the most effective and efficient way." Although long, it is a must-read for every in-house lawyer and compliance officer responsible for a company's FCPA compliance activities.