This is the third article in a series in which we explain and discuss key anti-corruption risks and issues when investing or operating in “red flag” jurisdictions and sectors. The series will also discuss key anti-corruption laws and what you and your business can do to minimize the risks of falling foul of those laws. In Part 1 we covered why your business needs an anti-corruption strategy if you are investing or operating in the extractive industries in Africa, and gave examples of recent Africa-related enforcement actions taken by US and UK authorities. In Part 2 we focused on the UK Bribery Act 2010, which has seen increased enforcement in recent years. In Part 3, we turn to the US Foreign Corrupt Practices Act (“FCPA”) to discuss the key elements of the statute and its application to the extractive industries in Africa.
The extractive industries sector in Africa is viewed by most enforcement agencies as “red flagged” for corruption risk. It is not to say that companies in the sector are inherently corrupt, it is more that the nature of the industry involves a number of factors known to increase corruption risk: large scale multinational operations, often dealing in emerging markets where corruption can be systemic and entrenched, depending on third parties, and dealing with governments, state-owned entities and government officials. Companies can be held accountable not only for their own conduct and that of their officers, directors, senior managers and employees, but also for corrupt practices of partners, subsidiaries, agents or distributors. Foreign owned operators and investors in the sector (and their officers, directors, senior managers and employees) face the risk of prosecution for corruption offences not only under local African anti-corruption laws but also under anti-corruption laws of other nations, such as the FCPA or the Bribery Act. Companies in this sector already have been hit with substantial penalties by US and UK enforcement agencies. Put simply, if you are investing or operating in the extractive industries in Africa, your business needs an anticorruption strategy.
Overview of the FCPA
The Foreign Corrupt Practices Act of 1977, 15 U.S.C. §§ 78dd-1, makes it illegal for persons and entities subject to the law to make bribes and other corrupt conduct to foreign officials for the purpose of obtaining or retaining business. Over the past fifteen years, both the U.S. Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) have ramped up enforcement of the FCPA, including historic settlements against companies of up to $800 million and aggressive enforcement against individuals.The FCPA applies broadly to:
- Any “issuer” that files reports to the SEC or trades equity or debt on a US exchange (which includes any foreign company that trades on a US exchange);
- Any “domestic concern” which includes (i) U.S. citizens, nationals, and residents and (ii) any entity organized under the laws of the US or a US territory or that has its principal place of business in the US; and
- Any “person” (including an organization) that does any act in furtherance of the prohibited conduct while in the US or a US territory.
If a foreign subsidiary is acting as an agent of a US issuer or domestic concern, then the FCPA also applies to that subsidiary. There are two primary provisions under the FCPA. First, the FCPA’s anti-bribery provisions prohibit bribery of foreign government or foreign political officials for the purpose of obtaining or retaining business or securing any improper business advantage. The DOJ primarily enforces the anti-bribery provisions as criminal violations. Second, the FCPA’s books and records provisions require SECregistered or reporting issuers to make and maintain accurate books and records and to implement adequate internal accounting controls. The SEC primarily enforces these provisions as civil violations.
The FCPA’s Anti-Bribery Provisions
Much of the FCPA’s enforcement activity involves the anti-bribery provisions and the expansive interpretations of statutory provisions staked out by the DOJ and SEC.
First, the anti-bribery provisions make it unlawful to directly or indirectly with corrupt intent offer, pay, promise to pay, or authorize payment of “anything of value” to a “foreign official” for the purpose of obtaining or retaining business. Key elements of the prohibition are discussed below.
Anything of Value. This broad category includes any benefit of any kind. US regulators have taken the position that “anything of value” includes but is not limited to cash or a cash equivalent (a gift card, voucher, or coupon), entertainment or travel, gifts that are more than a mere token or modest in value, political or charitable contributions, and giving a job to a family member or someone with a close personal relationship with a foreign official.
Foreign Official. US regulators have also staked out a broad interpretation of who qualifies as a “foreign official” under the FCPA. The statutory definition includes foreign government employees or officials, political officials or members of their staffs, employees of public international organizations, and candidates for political office. But the DOJ has also interpreted the definition to include employees of government-owned or government-controlled businesses. This interpretation would include, for example, the Nigerian National Petroleum Corporation (“NNPC”) and Angola’s Sonangol Group.
Direct or Indirect Payments. The FCPA prohibits conduct by third parties acting for or on behalf of a company or individual subject to the FCPA. Many enforcement actions involve indirect payments paid through third parties, such as agents, consultants, distributors, sales representatives, customs brokers, professional service providers, and joint venture partners.
Second, the FCPA contains several exceptions to the general anti-bribery provisions which have either been narrowly construed or never recognized.
Facilitating Payments. Unlike the UK Bribery Act as discussed in Part 2, the FCPA allows for facilitating payments if the purpose of the payment is to expedite or secure performance of a “routine governmental action” by a foreign official. Examples can include: obtaining licenses, permits, or other official documents; processing governmental papers, such as visas and work orders; providing police protection; providing phone service, power, and water supply; and loading and unloading cargo. Many companies no longer permit facilitating payments as a matter of corporate policy and local foreign law may not permit facilitating payments.
Promotional Payments. The FCPA allows payments for “reasonable and bona fide” expenses in conjunction with promoting a company’s goods or services. This can involve the promotion, demonstration, or explanation of products or could include the execution or performance of a contract.
Lawful Under Local Law. The FCPA allows payments if “lawful under the written laws and regulations” of the foreign official’s country. Notably this exception has never been recognized as a valid defense to a payment prohibited by the FCPA.
The FCPA’s Books and Records Provisions
Under the FCPA, a public company’s books, records, and accounts must be kept in reasonable detail to accurately and fairly reflect transactions and dispositions of assets. It requires a public company to maintain a system of internal accounting controls to ensure accurate recordkeeping. Notably a parent company may be liable for false or fraudulent entries on any book or record that is ultimately consolidated with an issuer’s books and records for financial reporting purposes.
Penalties Under the FCPA
The FCPA contains both civil and criminal penalties. Under the anti-bribery provisions, a corporation can be fined to up to $2 million per violation and an individual can be fined up to $250,000 per violation and imprisoned for up to five years. Under the books and records provisions, a corporation can be fined up to $25 million per violation and an individual can be fined up to $5 million per violation and imprisoned for up to 20 years.
But, under the US Alternative Fines Act, 18 U.S.C. § 3571(d), a court may impose up to twice the benefit that a corporation or individual obtained for the particular improper payment, which often results in significantly higher penalties in FCPA enforcement actions. Bryan Cave LLP America | Europe | Asia www.bryancave.com 4
Section 1504 of the Dodd-Frank Act
Extractive industries have been targeted by the US government for increased transparency and scrutiny related to government payments. The 2010 Dodd-Frank Act instructed the SEC to promulgate rules requiring issuers engaged in the commercial development of oil, natural gas, or minerals to disclose payments made to the US or a foreign government. In 2012, the SEC announced a rule requiring that any issuer in the oil, gas, or mineral industries file a certified report identifying all payments totaling $100,000 made to a US or foreign government in the development of an oil, gas, or mineral project. In 2013, a federal court vacated the entire SEC rule, suspended its implementation, and remanded the matter to the SEC for further action. To date, the SEC has not proposed a new rule.
Common Issues for the Extractive Industries
As we pointed out in Part 1, both extractive industries and business conducted in Africa rank highly on international surveys of perceived corruption. Below is an overview of several of the common issues that impact the extractive industries and trigger FCPA risk.
Government-Owned or Controlled Companies. Many of the energy and oil & gas companies in African nations are owned and/or controlled by foreign governments. Accordingly, any interactions with these companies and its employees will inevitably subject a company to heightened FCPA risk including, for example, payments made during a bid/tender process and entertainment of officials.
Licenses & Permits. Many countries require developers to obtain environmental or natural resource permits and approvals to explore, develop, and mine. Companies often must obtain approval or extensions for permits at different contractual stages (exploration, feasibility studies, and development/mining). Foreign officials often exercise discretion with respect to each permit, stage, and extension, which can lead to opportunities for FCPA violations.
Agents and Joint Ventures. Companies may find the need for a third-party agent to provide a local presence or help understand a tendering process. Some countries may require the use of a local agent in order for a company to be eligible for certain contracts. Many foreign governments or government-owned companies, such as the NNPC in Nigeria, maintain joint ventures with foreign companies. It is imperative that companies understand and audit relationships and transactions involving agents and joint ventures.
Customs & Freight Forwarding Issues. One area for extraction industries that often triggers FCPA risk relates to the transfer of equipment into and out of foreign countries. Companies typically hire third-party agents to handle customs and import issues and the nature of this work requires that agents working on a company’s behalf will come into contact with foreign government officials. Companies must constantly monitor these agent relationships and transactions to ensure a third party does not subject the company to FCPA risk.