U.S.-related capital and business activities are increasingly being moved to foreign destinations, in pursuit of ever greater investment returns. Important and challenging regulatory risks, however, accompany those sought-after returns. The Foreign Corrupt Practices Act (FCPA) of 1977, although not new, has become prominent recently. It creates substantial reputation and economic risks for transnational business activities and cannot be ignored.
In April 2007, the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) cases against Baker Hughes, Inc., a Texasbased oil field products and services company, set a new record in financial penalties. The company was ordered to pay penalties and disgorgement, etc., exceeding U.S.$44 million. Beyond the penalties, however, Baker Hughes reportedly also spent more than U.S.$50 million on a five-year internal probe, with all the associated disruptions to its operations. It now has a compliance monitor and has replaced virtually every member of senior management involved with the conduct in question. The case is a lesson in the danger to both companies and individual executives that the FCPA now clearly represents.
FCPA, Then and Now
U.S. Congress enacted the FCPA in the wake of the Abscam bribery scandal 30 years ago, in order to criminalise and prevent the payment of bribes to foreign government officials. The FCPA was designed to enforce criminal violations through the DOJ, and civil regulatory violations (of mandatory corporate financial disclosures and internal controls) through the SEC. For years, other countries declined to follow this anti-corruption regime that the United States had unilaterally imposed on its own businesses (to their competitive disadvantage). Thus, the FCPA remained something of a legal backwater and was only sporadically enforced. This began to change in 1999. Following changes to the FCPA itself, the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Overseas Public Officials in International Business Transactions effectively prodded numerous other governments to enact their own anticorruption laws, similar to the FCPA. This levelling of the anti-corruption playing field, along with the accelerating pace of global business transactions, has led to a recent and noteworthy spike in FCPA enforcement cases. During the past four years, there have been more FCPA enforcement actions than during the prior 26-year period since the FCPA’s enactment.
The FCPA goes beyond just criminalising corrupt payments; it has three arms that make it an effective antibribery tool. First, the anti-bribery provisions prohibit bribery of foreign government officials with the aim of improperly securing business. Second, U.S. or foreign companies with securities traded publicly in the United States are required to keep financial records that accurately reflect their assets and transactions. This “books and records” provision may be violated even if no bribery is recorded in the accounts. The third arm requires issuers to maintain internal controls to prevent FCPA violations. The second and third arms create extensive obligations for companies and are the most frequently violated.
FCPA Impact Outside U.S. Borders
Among other things, the FCPA applies to issuers, defined to include foreign issuers that list their stock on a U.S. securities exchange and their officers, directors, employees or agents. Foreign companies that list American Depository Receipts on a U.S. stock exchange are thus caught by the FCPA. A large number of non-U.S. companies have listed U.S. securities; approximately 153 European companies are presently listed on the New York Stock Exchange alone. These “foreign issuers” and their personnel (which can include non-U.S. citizens and residents), are subject to the FCPA, even where there is no other territorial nexus to the United States. U.S. parent companies can be liable vicariously for FCPA violations by their foreign subsidiaries, agents and business partners, and turning a blind eye can lead to liability, even when the company has no direct knowledge of a violation. The accounting/internal controls provisions of the FCPA apply only to issuers, but, because the term “issuers” encompasses all companies with securities listed in the United States and their personnel, it is a wide group. Wholly owned foreign subsidiaries also must comply with the books and records provision.
Enforcement Against Non-U.S. Companies
In recent years, the DOJ has increased its enforcement efforts outside U.S. borders and appears increasingly willing to bring cases against foreign issuers. However, foreign corporations that are not issuers have also been prosecuted. In February 2007, three wholly owned subsidiaries of the UK-based Vetco International Limited pleaded guilty to violation of the antibribery provisions of the FCPA and were fined a total of U.S.$26 million. The DOJ commented, in relation to the earlier Vetco Gray prosecution, that the DOJ “will continue its efforts to assure a level playing field for businesses operating abroad”.
Public Versus Private— Where Is the Line?
The anti-bribery provisions of the FCPA criminalise payments to foreign government officials, political party officials and candidates for public office. However, in some countries there is no sharp delineation between public officials and private companies or individuals. In China, for example, many large companies are state owned or controlled, and government officials play an active role in commerce. The difficulty of distinguishing “public” from “private” increases the risk that a payment or gift to an individual in connection with business may be regarded as a violation of the FCPA. Local cultural and legal knowledge are critical to avoiding such problems.
Transparency International’s 2007 Corruption Perception Index suggests that corruption is perceived to be unacceptably tolerated amongst countries which are well established important trading partners for U.S. companies. Examples include Russia, Brazil, China and Saudi Arabia.
The supply side of corruption is also highly important. Traditionally, European businesses have been more tolerant of overseas bribery payments, which were legal and tax deductible in many European countries until relatively recently. The OECD’s efforts notwithstanding, outdated attitudes may linger amongst employees who regard payments to overseas public officials as merely a cost of doing business. Re-education of business executives as to the new rules is critical to any effective compliance program.
Avoiding Liability in M&A, Investments and Business Transactions
A careful assessment of potential FCPA violations and the robustness of internal accounting controls is now a critical part of due diligence before any acquisition, joint venture or equity investment involving transnational activities. Liability may arise from either acquiring a company with past violations, or by acquiring or jointventuring with a company without an effective compliance program and which commits violations before the acquirer/partner can institute appropriate controls over the business.
Equity investors such as hedge funds, which may at times have no interest in company management, are also at risk. In July 2007, New Yorkbased Omega Partners Inc. reached a criminal settlement arising from an investment in the privatisation of an Azerbaijani state-owned company. Omega’s liability arose merely from the knowledge of one of its former employees that corruption was taking place. Omega agreed to a civil penalty of U.S.$500,000.
The FCPA should be considered in all equity investments, even of minority interests, although the degree of risk will vary depending on several factors. The key to avoiding liability is to identify and thoroughly understand potential weaknesses, immediately implement a robust and effective compliance program, and very carefully consider self-reporting where necessary.