The Foreign Corrupt Practices Act (FCPA), launched 30 years ago as the first piece of US legislation seeking to eliminate the bribery of foreign officials, continues to be a potent challenge for American companies doing business on foreign shores.
The act, which prohibits companies from making improper payments to foreign officials, political parties or political candidates for purposes of obtaining, retaining or directing business to any person, was derided by US business as a barrier to success in the global market. It wasn’t until the late 1990s, when foreign governments began adopting the view held by the US government – that foreign bribery and corruption curtail economic growth and development and destabilize world markets – that the act gained credibility as a means to protect US business interests.
But just as the appetite for global business continues to grow, so does the scrutiny of US business abroad by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC).
Both have demonstrated an increasingly voracious appetite for prosecuting FCPA violations, and this appears to be especially true of the chemical and energy industries.
Domestically, the act’s four provisions – three prohibiting bribery and one requiring accurate books and records and internal controls – are enforced both civilly and criminally. The SEC has the exclusive authority to bring a civil case against "issuers" (public companies whose securities are traded on the US stock exchanges) as well as officers, directors, employees, shareholders and agents acting on the issuer’s behalf. For all other companies and individuals – domestic or foreign – the DOJ has authority to bring a civil enforcement action and the sole authority to bring a criminal case. It may do so against any entity or individual subject to the act’s prohibitions.
In October 2006, the DOJ declared enforcement of the act as a “high priority.” Assistant Attorney General Alice Fisher, chief of the DOJ’s Criminal Division, told the American Bar Association (ABA)’s National Institute that enforcing the act was key “to root out global corruption and preserve the integrity of the world’s markets.”
Recent prosecutions by the DOJ and the SEC demonstrate the government’s intent to enforce the Act. For example, last February three subsidiaries of Houston-based Vetco International Ltd. pleaded guilty and a fourth entered into a deferred prosecution agreement that resulted in fines totaling US$26 million – the largest ever collected under the FCPA. The four oil and gas companies had hired an international freight forwarding and customs clearing firm and authorized it to pay customs officials in Nigeria a total of US$2.1 million over a three-year period through at least April 2005.
The bribes were coordinated through Vetco’s office in Houston. The DOJ sought the record fines in part because Vetco failed to follow through on prior promises to implement a rigorous antibribery compliance program.
No Safe Harbor for Individuals
Individuals are not immune from criminal prosecution. Charles Martin, Monsanto’s former government affairs director for Asia, agreed to pay a US$30,000 civil fine to settle SEC charges that he authorized a US$50,000 bribe to an Indonesian official and concealed the payment in a bogus invoice. According to the SEC, the bribe was part of an unsuccessful effort to persuade the Indonesian Ministry of Environment to reverse a decree that required additional testing of genetically modified organisms that Monsanto wanted to market in Indonesia. Monsanto reached a separate settlement with the SEC and the DOJ for its role in the scandal.
The US government’s anticorruption efforts are not limited to US-based companies and individuals. At the ABA National Institute, Fisher said, “I want to send a clear message today that if a foreign company trades on US exchanges and benefits from US capital markets, it is subject to our laws. The department will not hesitate to enforce the FCPA against foreign-owned companies just as it does against American companies.”
Foreign Firm Scrutinized
The DOJ for the first time took a criminal enforcement action against a foreign issuer for violating the act when it accused Statoil, a Norway-based international oil company listed on the New York Stock Exchange, of entering into an improper multi-million dollar “consulting” agreement with an official in Iran to earn oil and gas contracts. Statoil entered into a three-year deferred prosecution agreement in which it agreed to hire a compliance consultant. It also paid a US$10.5 million criminal penalty and acknowledged its criminal conduct. Norwegian authorities investigated Statoil and levied an additional US$3 million penalty for the same conduct.
Given the government’s action, corporations involved in foreign business transactions must consider how government cooperation and voluntary disclosures can significantly benefit their company. For example, on February 13, the SEC settled a case against Dow Chemical Company after extensive corporate cooperation. A Dow subsidiary doing business in India was required to register its products in India prior to selling them. The subsidiary was accused of making improper and off-record payments of more than US$200,000 and providing gifts to Indian government officials. Dow conducted an internal investigation, voluntarily disclosed its findings to the SEC and took extensive remedial steps including disciplining and training employees, retaining auditors and consultants and expanding compliance initiatives. These efforts helped the US parent obtain a lighter civil penalty.
Before the government comes knocking, companies should revisit their compliance plans, audit their strengths and weaknesses, update and improve any deficiencies, and educate and train employees, agents, distributors and local foreign counsel on the FCPA’s mandates. In addition, companies can consider obtaining a government FCPA opinion before undertaking a proposed transaction. By statutory mandate, companies can seek a formal opinion from the DOJ regarding proposed business conduct. If the DOJ opines that the proposed transaction does not violate the FCPA, the DOJ’s opinion can serve as a rebuttal presumption against future challenges against the transaction.
Considerations in an M&A Context
FCPA due diligence is critical when a company is contemplating a merger or acquisition. Although spotting FCPA violations can be a little like finding a needle in a haystack, buyers should attempt to identify potential exposures.
The first step is to check the rating of the country in which the target is active against the Corruption Perception Index (CPI) of Transparency International. These scores can help guide the degree of due diligence required.
Effective diligence includes requesting FCPA or anticorruption policies of the target along with records demonstrating situations where the policy has been enforced. An absence of an active compliance program coupled with high CPI scores should be a red flag. Targeted sampling of the candidate’s books and records for unusual or inconsistent entries can be revealing. Additional diligence might include exploring affiliations with foreign officials, political parties and candidates and consulting thirdparty sources about the potential candidate’s reputation for honest dealing.
The target’s key employees should be educated on and provided with your company’s compliance policies on the FCPA and be required to execute an agreement showing their intent to comply. Once the merger or acquisition is complete, the buyer should provide broad training on FCPA compliance within the acquired company, audit that compliance and continue to document enforcement of the entity’s FCPA compliance program.
The important efforts outlined above can reduce a company’s exposure to the government’s rapidly increasing investigations and prosecutions.