"Better safe than sorry." This overused phrase is exactly what springs to mind when reviewing the recent enforcement of the Foreign Corrupt Practices Act (FCPA). For example, more FCPA prosecutions were concluded during the past four years than during the previous 28 years. With recent fines in the hundreds of millions of dollars, the U.S. Department of Justice (DOJ) has made clear that the upward enforcement trend will continue. Beyond the staggering monetary fines levied on corporations, in 2009 the DOJ prosecuted more individuals for violations of the FCPA than during any previous year. And juries have shown they are willing to convict. Lanny A. Breur, assistant attorney general for the DOJ's Criminal Division, recently outlined the DOJ's anti-corruption aspirations, warning that "the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations."1 The increase in FCPA subpoenas, soaring civil penalties and imprisonment of individuals highlights the necessity of a rigorous FCPA compliance program and ongoing due diligence.
One example of a U.S. corporation that ended up sorry, rather than playing it safe, is Wright Medical Group, who paid millions of dollars to exonerate itself from the allegations alleged under the FCPA. Wright Medical Group's SEC investigation focused on direct or indirect payments the companies may have made to government-employed doctors to influence them to use their products. Although the SEC's Division of Enforcement ended up dropping its informal investigation of the Arlington-based medical-device maker, Wright Medical Group spent more than $15 million dollars in just two years in order to cooperate with the SEC investigation. The company said further expenses related to the inquires "may continue to be significant." With a proper FCPA compliance program in place, these costs could have been substantially avoided altogether.
U.S. firms seeking to do business in foreign markets must be familiar with the FCPA. The FCPA, enacted in 1977, prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business. The FCPA stems from Securities and Exchange Commission (SEC) investigations conducted in the mid-1970's, where over 400 U.S. companies admitted making questionable or illegal payments in excess of $300 million to foreign government officials. The abuses ran the gamut from bribery of high foreign officials to securing some type of favorable action by a foreign government to facilitating payments that allegedly were made to ensure government functionaries discharged certain ministerial or clerical duties. Congress enacted the FCPA to bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system.
The FCPA makes it unlawful to bribe foreign government officials to obtain or retain business. With respect to the basic prohibition, there are five elements which must be met to constitute a violation. First is to whom the FCPA applies. The FCPA potentially applies to any individual, firm, officer, director, employee or agent of a firm and any stockholder acting on behalf of a firm. Under the FCPA, U.S. jurisdiction over corrupt payments to foreign officials depends upon whether the violator is an "issuer," a "domestic concern," or a foreign national or business. An "issuer" is a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC. A "domestic concern" is any individual who is a citizen, national or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession or commonwealth of the United States. Issuers and domestic concerns may be held liable for any act in furtherance of corrupt payment taken outside the United States. Thus, a U.S. company or national may be held liable for a corrupt payment authorized by employees or agents operating entirely outside the United States, using money from foreign bank accounts, and without any involvement by personnel located with the U.S. Additionally, U.S. parent corporations may be held liable for the acts of foreign subsidiaries where they authorized, directed or controlled the activity in question, as can U.S. citizens or residents, themselves "domestic concerns," who were employed by or acting on behalf of such foreign-incorporated subsidiaries.
Second, the person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person. Note that the FCPA does not require that a corrupt act succeed in its purpose. The offer or promise of a corrupt payment can constitute a violation of the statute. The third element is payment. The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value. Fourth is the requirement of a specific recipient. The prohibition extends only to corrupt payments to a foreign official, a foreign political party or party official or any candidate for foreign political office. A "foreign official" means any officer or employee of a foreign government, a public international organization, or any department or agency thereof or any person acting in an official capacity. Last is the element of the "business purpose test." The FCPA prohibits payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person. It is important to know that the DOJ interprets "obtaining or retaining business" broadly.
Moreover, the FCPA prohibits corrupt payments made through intermediaries. It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official. What really gives this provision teeth is that the term "knowing" includes conscious disregard and deliberate ignorance. To avoid being held liable for corrupt third party payments, U.S. companies are encouraged to exercise due diligence and take all necessary precautions to ensure that they have formed a business relationship with reputable and qualified partners and representatives. Such due diligence may include investigating potential foreign representatives and joint venture partners to determine if they are in fact qualified for the position, whether they have personal or professional ties to the government, the number and reputation of their clientele, and their reputation with the U.S. Embassy or Consulate and with local bankers, clients and other business associates. In addition, in negotiating a business relationship, the U.S. firm should be aware of so-called "red flags," such as:
- unusual payment patterns or financial arrangements;
- a history of corruption;
- a refusal by the foreign joint venture partner or representative to provide a certification that it will not take any action in furtherance of an unlawful offer;
- promise or payment to a foreign public official and not take any act that would cause the U.S. firm to be in violation of the FCPA;
- unusually high commissions;
- lack of transparency in expenses and accounting records;
- apparent lack of qualifications or resources on the part of the joint venture partner or representative to perform the services offered; and
- whether the joint venture partner or representative has been recommended by an official of the potential governmental customer.
The FCPA has had an enormous impact on the way American firms do business. Several firms that paid bribes to foreign officials have been the subject of criminal and civil enforcement actions, resulting in large fines and suspension and debarment from federal procurement contracting, and their employees have gone to jail.
As you can see, compliance with the FCPA is daunting for both corporations and individuals. The escalating civil and criminal penalties, coupled with the sheer volume of FCPA cases brought by the DOJ in recent months, have fostered an atmosphere of fear and anxiety in corporate boardrooms throughout the world.
Why not spend the money to implement a FCPA compliance program in place to demonstrate compliance now, rather than paying $15 million or more down the road and enduring a complex governmental investigation that could take years? Not to mention the benefits of avoiding a menacing headache, terrible publicity and the fear of incarceration by your employees.