For the first time since its initial publication in 2012, the DOJ and SEC released an update to their 130-page guidance manual on the U.S. Foreign Corrupt Practices Act (“FCPA”). While not as highly anticipated as the first edition, the second edition of A Resource Guide to the U.S. Foreign Corrupt Practices Act (“Guide”) proves to be crucial and timely as there have been notable FCPA enforcement actions and other related legal and policy changes since 2012. Notably, the Second Edition continues the government’s push to have FCPA compliance embedded in each company by referencing the government’s efforts to be more transparent through its publication of guidance on how the government views compliance programs, selects monitors, and applies enforcement policies. But make no mistake, this Guide is the government’s position on what the law is – it is not the same as case law. Thus, by setting out how the government is likely to interpret and apply the law, it is very helpful for companies trying to comply with the law. It is not, however, to be taken as the final word on what the law requires.
In this alert, we highlight a few of the most noteworthy changes.
A Few Notable Changes to the Guide
Limited Recognition of the Second Circuit’s Hoskins Decision
In United States v. Hoskins, the Second Circuit conclusively held that a person who is incapable of committing an FCPA crime as a principal cannot be guilty as an accomplice or a co-conspirator. (See our previous alert here). The new Guide does acknowledge the Hoskins decision as law in the Second Circuit – but no further. Instead, it maintains that the Second Circuit is wrong and reiterates the original Guidance: “a foreign company or individual may be held liable for aiding and abetting an FCPA violation or for conspiring to violate the FCPA, even if the foreign company or individual did not take any act in furtherance of the corrupt payment while in the territory of the United States.” In fact, it cites approvingly a District Court case in another Circuit as failing to follow Hoskins. Nor does it discuss the ultimate result in Hoskins, in which the District Court in a post-trial ruling held that the government failed to present sufficient evidence that Mr. Hoskins was acting as an agent of the U.S. entity and therefore the Court dismissed all FCPA charges against him.
Clarification of FCPA Accounting Provisions
The Guide adds that the accounting provisions refer not merely to internal controls but to internal accounting controls and explicitly states that a company’s internal accounting controls are not synonymous with a company’s compliance program”; however, “an effective compliance program contains a number of components that may overlap with a critical component of an issuer’s internal accounting controls.” The SEC’s view of the overlap is the critical issue. The Guide goes on to state: “Fundamentally, the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: . . . how the products or services get to market; . . . the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption.” Thus, although it is heartening that the SEC recognizes the distinction, it does not appear that the SEC will back off its overly broad interconnection between a company’s compliance program and its internal accounting controls. This, again, is an issue that the courts have not resolved.
Updated Examples of Recent Enforcement Actions
In many places in the Guide, more recent settled cases are used as examples of behavior that violates the FCPA. In this sense, the revised Guide is useful in that it provides fresh examples of conduct that should immediately raise red flags in any company.
Clarification of the Definition of “Instrumentality”
The Guide endorses the Eleventh Circuit’s definition of “instrumentality” in United States v. Esquenazi, which defines “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” It also adopts the non-exhaustive factors that the court considered in Esquenazi in determining whether the government “controls” an entity and advises companies to consider these factors when evaluating the risk of FCPA violations and designing compliance programs.
Clarification of the Purpose of “Disgorgement”
The Guide includes a discussion of SEC v. Liu and Kokesh v. SEC, which clarified that a disgorgement remedy is subject to a five-year statute of limitations and that disgorgement is permissible equitable relief when it does not exceed a wrongdoer’s net profits and is awarded for victims.
Summarizes New DOJ Policies
The Guide incorporates discussion of polices that the DOJ has issued since 2012. For example, the Guide now includes sections on the DOJ’s FCPA Corporate Enforcement Policy, Coordination of Corporate Resolution Penalties (or Anti-Piling On Policy), the Criminal Division’s Evaluation of Corporate Compliance Programs, as well as a summary of the DOJ’s memorandum on the Selection of Monitors in Criminal Division Matters.
Of particular note is the Guide’s thorough discussion of the DOJ FCPA Corporate Enforcement Policy. Here, the Guide not only describes the Policy and how it will be applied, but provides three separate examples of real-case declinations that DOJ issued based on the policy. These factual scenarios are helpful in providing some transparency into the application of this Policy.
Provides Additional Emphasis on Successor Liability for FCPA Enforcement Involving Mergers and Acquisitions
The Guide recognizes the general principle of successor liability, but does not change the basic principle that “[s]uccessor liability does not, however, create liability where none existed before.” It adds that the government does see a potential positive benefit to M&A, “when the acquiring entity has a robust compliance program in place and implements that program as quickly as practicable at the merged or acquired entity.” Thus, it encourages companies to institute robust pre-acquisition due diligence, and when that is not possible, “the DOJ and SEC will look to the timeliness and thoroughness of the acquiring company’s post-acquisition due diligence and compliance integration efforts.” It also provided examples to shows that the DOJ and SEC will more often pursue enforcement actions for FCPA violations against predecessor companies, rather than the acquiring companies, particularly when the acquiring company uncovers and timely remediates the violations or when the government’s investigation of the predecessor company preceded the acquisition.
Correction of Mens Rea Requirement and Statute of Limitations for Criminal Violations of the Accounting Provision
The Guide now reflects that the mens rea requirement is “knowingly and willfully”, as opposed to simply “knowingly” for companies and individuals to face criminal liability for failure to comply with the FCPA’s books and records or internal accounting controls provisions. In the First Edition, it was understood that a five-year limitations period applied to both the FCPA’s anti-bribery and accounting provisions. The Guide clarified that the five-year limitations period applies only to the FCPA anti-bribery provisions, while violations of the FCPA accounting provisions have a six-year limitations period.
As with the First Edition, the updated Guide is intended to provide informal guidance and it is not binding on either industry or the government. This update, while instructional in some of the key areas identified above, does not articulate any new or different interpretations of the FCPA, nor does it prevent the DOJ or SEC from shifting its future position on key anti-bribery provisions of the statute. Although much of the substance remains the same, companies should review the updated guidance and consider these updates in ongoing evaluation of their existing compliance programs in order to ensure that they remain vigilant to changing conditions, risks, and enforcement priorities.