Yoon & Yang LLC has been publishing a series of newsletters on the provisions and application of the anti-corruption regulations including the Foreign Corrupt Practices Act ("FCPA") of the U.S. and the Act on Combating Bribery of Foreign Public Officials in International Business Transactions of Korea (the “ACB”).
In the previous issue, Persons and Entities Covered by the FCPA and the Applicability of the FCPA to Korean Companies , we addressed some frequently asked questions related to the applicability of the FCPA. In this issue, in connection with what types of payment are covered the anti-bribery provisions of the FCPA, we address some questions related to who qualifies as a foreign official and what constitutes a corrupt payment.
Q. Are Officers and Employees of Government Invested Organizations "Foreign Officials" under the FCPA?
The anti-bribery provisions of the FCPA prohibit offering corrupt payment to any foreign official, foreign political party or official thereof, or candidate for foreign political office. The term "foreign official" is defined broadly as "any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization."
In general, it is widely acknowledged that a state-owned company or a government-invested company in which a government holds a majority of the shares will likely qualify as an instrumentality of a government under the FCPA. But would a company in which a government has less than 50% stake also potentially be deemed a state instrumentality? The U.S. Federal Court stated that, in making such a determination, one needs to consider various factors in totality, including, but not limited to, the following:
- whether the company provides services to the citizens or residents of the relevant foreign state;
- whether the relevant foreign state appoints the key officers or directors;
- the extent of the relevant foreign state's control of the company, including whether the foreign state is the largest shareholder; whether the entity receives financial support from the foreign state, such as a special tax treatment;
- whether the company has special obligations or privileges under the relevant foreign state's law, such as being selected as the sole authorized enterprise in the relevant industry; and
- hether there is a general perception that the company is performing functions of a government.
Not all of the foregoing factors need to be met to find that a company is an instrumentality, and none of the factors individually is dispositive. In this regard, whether the government owns the majority of shares of a company is not an absolute criterion or bright line test, but only one of the factors to be considered in determining whether the officers and employees of such entity would qualify as foreign officials under the FCPA.
For example, SEC brought a case against three subsidiaries of a France-based multinational company that listed its shares through American Depository Receipts, asserting that such subsidiaries paid bribes to employees of a Malaysian telecommunications company in which the Ministry of Finance of Malaysia held about 40% of shares. In that case, despite the Malaysian government not being a majority shareholder, the Malaysian telecommunications company was found to be an instrumentality of the Malaysian government considering, inter alia , the fact that the telecommunications company's key officers and directors were appointed by the Malaysian government, and that the Malaysian government was involved in the material expenditures and business decisions of the telecommunications company in practice.
Q. Can Charitable Contributions Qualify as Corrupt Payment?
The FCPA provides that giving "anything of value" could constitute a corrupt payment and does not specify what "anything of value" precisely encompasses. Therefore, whether providing any benefit would constitute a corrupt payment mustbe determined based on the totality of circumstances, considering the value of the benefit offered, the purpose of offering the benefit, the relationship between the offeror and the recipient, and the circumstances at the time of offering the benefit. In general, provision of cash or gifts as well as various forms of hospitality, such as those offering drinks or entertainment, may constitute corrupt payment. In certain cases, even providing seminars and training to foreign officials may qualify as a corrupt payment.
In this regard, whether a charitable contribution would qualify as a corrupt payment would be determined by considering various factors, including the value and purpose of the charitable contribution, the period in which the charitable contribution is made, and the circumstances at the time of making the charitable contribution. In general, bona fide charitable contributions would not likely be considered as corrupt payments under the FCPA. However, it should be noted that, in certain cases, it is possible that US regulatory agencies would consider charitable contributions as corrupt payments under the FCPA. For example, the SEC brought a case under the FCPA against a wholly owned Polish subsidiary of a U.S. pharmaceutical company, for contributing about 76,000 US dollars to a Polish charitable organization from 1999 to 2002. In that case, the company eventually settled with the SEC by paying about half million US dollars to the SEC, since issues were raised as (i) the head of the charitable organization was a government official involved in the pharmaceutical industry, (ii) the contributions were continuously made thirteen times in three years, (iii) the funds from which the contributions were made could not be properly traced in the company's books, and (iv) the contributions were made in violation of the company's internal policies and operational guidelines.