The United States Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") recently released the long awaited joint guidance on the Foreign Corrupt Practices Act ("FCPA") in the form of a 130 page publication titled "A Resource Guide to the US Foreign Corrupt Practices Act" (the "Guide"). The Guide provides a detailed analysis of the FCPA and closely examines the SEC and DOJ's approach to FCPA enforcement.
The Guide addresses a wide variety of topics under both the anti-bribery and the accounting provisions of the FCPA including, the definition of a "foreign official," gifts, travel and entertainment expenses, facilitating payments, successor liability in mergers and acquisitions, and effective compliance programs. On these and other topics, the Guide takes a multi-faceted approach toward setting forth the statute's requirements and providing insights into the SEC and the DOJ enforcement practices. It uses hypotheticals, examples of enforcement actions and matters that the SEC and DOJ have declined to pursue and summaries of applicable case law and DOJ opinion releases.
Although the Guide is not legally binding and could not answer every fact specific question, it does offer helpful information to companies transacting business in foreign countries. This Practice Update highlights several key takeaways from the Guide.
The Definition of a Foreign Official
The FCPA prohibits the giving (or offering to give) money or anything of value to a "foreign official" in order to obtain or retain business. "Foreign official" is defined broadly to cover any person acting in an official capacity for or on behalf of any foreign government, department, agency, or instrumentality. Uncertainty sometimes arises in determining whether or not an entity, most often a state-owned or state-controlled company, is an "instrumentality" of a foreign government. The Guide provides a non-exhaustive list of factors to review in determining if an entity is an instrumentality of a foreign government which includes (i) the foreign government's amount of control over the entity and ownership interest in the entity and (ii) the entity's functions and activities, obligations and privileges under the foreign government's law and level of financial support by the foreign government.
While the Guide states that no one factor is dominant, it notes that as a practical matter an entity is unlikely to qualify as an instrumentality, if the government does not own a majority of its shares. However, the Guide notes that there can be circumstances in which an entity with minority government ownership would qualify as an instrumentality if the government had “substantial control,” such as veto power and operational control. As a result, the determination of whether an entity constitutes an "instrumentality" under the FCPA will always be a fact-based analysis and the degree of a foreign government's control over a company will always trump a 50% ownership threshold.
Gifts, Travel, and Entertainment Expenses
The Guide discusses the government's view of permissible and impermissible gifts, travel, and entertainment expenses. It provides confirmation that certain gifts, entertainment, and travel are a legitimate part of conducting business. It suggests that corrupt intent is what causes hospitality to cross the line from proper to improper. While offering no de minimis exception for gifts and meals, the Guide states that "it is difficult to envision any scenario in which the provision of cups of coffee, taxi fare or company promotional items of nominal value would ever evidence corrupt intent, and neither the DOJ nor the SEC has ever pursued an investigation on the basis of such conduct." However, the Guide points out that the DOJ and the SEC have pursued enforcement cases involving single instances of large extravagant gift giving (such as sports cars, fur coats, and other luxury items), as well as widespread gifts of smaller items as a pattern of bribes. In these instances, it is more likely that these extravagant gifts were given with an improper purpose.
The Guide provides several examples of permissible gifts, including a moderately priced crystal vase given to a foreign official as a wedding gift and small gifts (such as free pens, hats, t-shirts and similar promotional items with a company's logo) which a company provides to foreign officials and other customers at a booth at a trade show. To avoid the risk of violating the FCPA, the Guide recommends that any gifts should be given openly and transparently, properly recorded in the company’s books and records, provided only to reflect esteem or gratitude, and permitted under local law.
The Guide also offers specific guidance on permissible travel expenditures. Travel expenditures should be for a clear and “legitimate business purpose” (such as trainings or facility or goods inspections) and to a location that meets the needs of the legitimate business purpose (such as the location of company facilities or personnel). Companies are allowed to provide meals and entertainment during these legitimate business trips, but meals and entertainment should be reasonable and only a small component of the business trip.
The Guide describes the following as a legitimate business trip: a company pays for a foreign official to travel to Michigan to inspect the company's facilities in connection with the performance of the contract. The Guide notes that it would be permissible for the company to pay for business class travel for the foreign official because the company's own employees are entitled to fly business class on lengthy international flights. The Guide also notes that the company can provide reasonable entertainment to the foreign official during his visit, which includes taking the official to a moderately priced dinner, a baseball game, and a play because the expenses are only a small component of the entire trip.
On the other hand, an impermissible trip is where a company pays for a foreign official and his wife to fly first class to Las Vegas where there is no business purpose for the trip (the company has no facilities in Las Vegas). The Guide states that this trip almost certainly violates the FCPA because it evidences a corrupt intent, is not designed for any legitimate business purpose, and it appears to be designed to secure favor with the foreign official.
The Guide makes clear that charitable contributions are often a hallmark of legitimate community outreach and are not prohibited by the FCPA. Such contributions, however, may trigger scrutiny by regulators if they are used to funnel bribes to government officials. The Guide recommends that companies perform due diligence and implement controls to ensure that donations are not made to disguise improper payments. The Guide also includes a list of a five questions to consider for charitable contributions in a foreign country:
- What is the purpose of the payment?
- Is the payment consistent with the company's internal guidelines on charitable giving?
- Is the payment at the request of a foreign official?
- Is the foreign official associated with the charity and one who can make decisions affecting the company's business?
- Is the payment conditioned upon receiving business or other benefits?
The Guide also calls for on-going monitoring of any charitable contributions.
Liability for the Acts of Third Party Agents
The Guide recognizes that third parties are "commonly used to conceal the payment or bribes to foreign officials in international business transactions" and recommends that companies conduct thorough due diligence on their business partners. The FCPA prohibits payments when the payee "knows" that the payment or a portion of the payment will be offered, given or promised to a foreign official, either directly or indirectly.
The Guide emphasizes that companies will be deemed to have knowledge of a FCPA violation if they demonstrate willful blindness or deliberate indifference to certain red flags which indicate that there is a high probability of a FCPA violation. The red flags listed in the Guide include excessive commissions to agents, unusually large discounts to third party distributors, vague consulting agreements that do not clearly describe the services to be provided, the agent is related to or closely associated with a foreign official, and the agent requests that payments be made to an offshore bank account.
The Guide notes that any due diligence conducted on third party agents should be "risk-based" and that risks vary by industry, country, the nature of the transaction, and the historical relationship with the third party. However, the Guide provides several guiding principles applicable to all third-party due diligence, which includes (i) understanding the qualifications and associations of the business partners, including any relationships with foreign officials; (ii) understanding the business rationale of including the third party in the transaction and (iii) monitoring the third party-relationship on an ongoing basis.
Although the FCPA permits "facilitating payments" (also known as "expediting" or "grease" payments) that are for the purpose of securing the performance of routine governmental action that involve non-discretionary acts, the DOJ and the SEC seem to discourage use of this exception in the Guide. Examples of routine governmental action include processing visas, providing police protection, or mail services and supplying utilities like phone service, power and water. The Guide notes that a permissible facilitating payment is paying an official a small amount to have the power turned on at a factory; where paying an inspector to ignore the fact that the company does not have valid permit to operate a factory would not be a permissible facilitating payment.
The Guide notes that "although true facilitating payments are not illegal under the FCPA, they still might violate the local law in the countries where the company is operating, and the OECD's Working Group on Bribery recommends that all countries encourage companies to prohibit or discourage facilitating payments, which the United States has done regularly." As such, many companies have banned facilitating payments or only allow them if they are approved in writing by a company's general counsel or other compliance officer.
Payments Made under Duress or Extortion
The Guide recognizes that businesses often operate in high-risk countries and may face real threats of violence or harm to their employees. It notes that payments made in response to a threat to demolish a company facility or arrest an employee cannot violate the FCPA because they are not made with corrupt intent. For this defense to apply, the threat must be true extortion or duress and not merely economic coercion. To illustrate the difference, the Guide points out making a payment to a foreign official to prevent an oil rig from being dynamited constitutes true extortion, whereas making a payment to a foreign official in order to gain entry to a new market or obtain a new contract is only economic coercion.
M&A Due Diligence and Successor Liability
The Guide emphasizes the role of due diligence in mitigating the risk of successor liability for pre-merger FCPA violations. The DOJ and the SEC expect companies considering mergers and acquisitions to:
- Conduct thorough risk-based due diligence on potential acquisitions.
- Ensure that the acquiring company’s code of conduct and policies regarding anti-corruption laws quickly apply to the newly acquired businesses or merged entities.
- Train directors, officers, and employees of newly acquired businesses or merged entities on anti-corruption laws and the company’s code of conduct and compliance policies.
- Conduct an FCPA-specific audit of all newly acquired or merged businesses as soon as practicable.
- Disclose corrupt payments uncovered during due diligence of newly acquired or merged entities.
According to the Guide, the DOJ and SEC have only taken actions against successor companies in limited circumstances in cases involving egregious and sustained violations or where the successor company failed to stop the conduct from continuing after the acquisition.
Elements of an Effective Compliance Program
The Guide emphasizes the importance of an effective anti-corruption compliance program and sets forth useful and practical advice for companies seeking to implement an effective compliance program. The Guide notes that “there is no one-size-fits-all” program and companies must tailor policies to suit their specific needs. To be effective, a compliance program must be tailored to the size and nature of a company's business and the particular risks associated with its global operations. In this regard, the Guide notes that the DOJ and SEC employ a "common-sense and programmatic approach to evaluating compliance programs," focusing on whether a compliance program is (i) well designed, (ii) applied in good faith and (iii) whether the program works.
The Guide identified the following hallmarks of an effective anti-corruption program:
- A commitment from senior management and a clearly articulated policy against corruption;
- A code of conduct and compliance policies and procedures;
- Oversight of the program by senior executives who have autonomy, resources, authority, and direct access to the organization’s governing authority, such as the board of directors and committees of the board of directors; A process for conducting risk assessments;
- Training and mechanisms for providing continuing advice;
- Incentives for compliance-oriented employees and disciplinary measures for employees that violate the company’s policies or the FCPA;
- Procedures to assess and monitor third parties, such as due diligence in hiring third parties, scrutiny over payments to third parties, and ongoing monitoring of third party relationships;
- Confidential reporting mechanisms (e.g., whistleblower hotlines) and internal investigations; and,
- Continuous improvement through periodic testing and review.
Because each compliance program should be tailored to an organization's specific needs, risks and challenges, these "hallmarks" should not be considered a substitute for a company's own assessment of the corporate compliance program that is most appropriate for its particular business organization.
The long-awaited guidance provided by the DOJ and the SEC in the Guide is useful in providing insight into the agencies' interpretations of several key aspects of the FCPA and to understanding the agencies' approaches to enforcing the statute. The Guide reaffirms the value of having an effective FCPA compliance program that is customized to a company's business structure and operations. Companies should continuously monitor the effectiveness of their FCPA compliance programs and take remedial action, if necessary. For additional information about the newly issued FCPA Guide, please contact your Akerman advisor.