With corruption a global problem within the world's economy, the Resource Guide to U.S. Foreign Corrupt Practices Act (Guidelines) (A copy of the 104 page Guidelines is available at: http://www.sec.gov/spotlight/fcpa/fcparesource- guide.pdf), provides clarity by the United States Department of Justice (DOJ) as to how the DOJ and the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) will addresses international corruption.
The new Guidelines confirm the DOJ's position as to the anti-bribery and accounting provisions imposed on companies and individuals and the record keeping and internal control requirements established by the FCPA. The Guidelines clearly illustrate that the Government will be utilizing the expansive definition of business advantage and that an illicit payment does not have to be made to find businesses and individuals liable. Moreover, the Guidelines reiterate that the FCPA further prohibits individuals and companies from knowingly falsifying records or, for companies, failing to establish and implement internal controls to prevent such conduct 1 . The Guidelines also further promote the use of the SEC whistleblower office2 for not only individuals but companies as well.
The new Guidelines provide more clarity on how far reaching the FCPA can be. The 1998 amendment to the FCPA added the "alternative jurisdiction" provision that removed the interstate commerce requirement (mail, wire, telephone, etc.) for an act in furtherance of a corrupt payment to a foreign official. As such, U.S. companies and persons can be liable under the FCPA for acts occurring wholly outside the United States. The Guidelines clarify that the "business purpose test" is utilized, with broad interpretation, to determine whether a bribe has been made or attempted to obtain or gain a business advantage or to retain government contracts.
As explained by the U.S. Court of Appeals for the Fifth Circuit:
The congressional target was bribery paid to engender assistance in improving the business opportunities of the payor or his beneficiary, irrespective of whether that assistance be direct or indirect, and irrespective of whether it be related to administering the law, awarding, extending, or renewing a contract, or executing or preserving an agreement.
United States v. Kay, 359 F.3d 738, 750 (5th Cir. 2004).
The Guidelines provide the following examples of types of actions taken to obtain or retain business:
- Winning a contract
- Influencing the procurement process
- Circumventing the rules for importation of products
- Gaining access to non-public bid tender information
- Evading taxes or penalties
- Influencing the adjudication of lawsuits or enforcement actions
- Obtaining exceptions to regulations
- Avoiding contract termination3
- Exerting influence over customs
As discussed herein, the Guidelines clearly provide further warning that the failure to implement adequate compliance protocols can lead to an FCPA investigation.4
While many companies believe they have effectively shielded themselves from potential liability under the FCPA because the FCPA requires corruption, the Guidelines specify that "the word "corruptly" in the FCPA means an intent or desire to wrongfully influence a recipient."5 The House Report states in full, the following:
The word "corruptly" is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, wrongfully to direct business to the payor or his client, to obtain preferential legislation or regulations, or to induce a foreign official to fail to perform an official function. The word "corruptly" connotes an evil motive or purpose such as that required under 18 U.S.C. 201(b) which prohibits domestic bribery. As in 18 U.S.C. 201(b), the word "corruptly" indicates an intent or desire wrongfully to influence the recipient. It does not require that the act [be] fully consummated or succeed in producing the desired outcome.6
Therefore, "as long as the offer, promise, authorization, or payment is made . . . [to wrongfully influence], the actor need not know the identity of the recipient; the attempt is sufficient."7
The FCPA imposes criminal and civil penalties when an individual or company acts "willfully." However, "proof of willfulness is not required to establish corporate criminal or civil liability, though proof of corrupt intent is."8 Moreover, even though the term "willfully" has not been defined in the FCPA, this term "has generally been construed by courts to connote an act committed voluntarily and purposefully, and with a bad purpose, i.e., with 'knowledge that [a defendant] was doing a 'bad' act under the general rules of law.'"9
Because the expansive definition of bribes includes the phrase "anything of value", an improper benefit can take virtually any form. The FCPA does not contain a minimum threshold amount for corrupt gifts or payments though the Guidelines do clarify that there must be corrupt intent.10
While the FCPA regulates payments made to "foreign officials," the Guidelines further clarify that "the FCPA broadly applies to corrupt payments to "any" officer or employee of a foreign government and to those acting on the foreign government's behalf."11 Because of this broad FCPA language, the FCPA "covers corrupt payments to lowranking employees and high-level officials alike." 12 Furthermore, while it is true that the FCPA only prohibits payments to foreign officials, not foreign governments, companies and individuals should be cautious "to ensure that no monies are used for corrupt purposes, such as the personal benefit of individual foreign officials."13
As was previously the case, the FCPA contains few defenses, and these defenses require the defendant to bear the burden of proof. Both defenses, the so-called "local law" defense and the "reasonable and bona fide expenditures" defense can be difficult to prove and are fact sensitive. The following general guidance should be used to ensure a particular expense is reasonable and bona fide:
- Do not select the particular officials who will participate in the party's proposed trip or program or else select them based on pre-determined, merit-based criteria;
- Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of a receipt;
- Do not advance funds or pay for reimbursements in cash;
- Ensure that any stipends are reasonable approximations of costs likely to be incurred and/or that expenses are limited to those that are necessary and reasonable;
- Ensure the expenditures are transparent, both within the company and to the foreign government;
- Do not condition payment of expenses on any action by the foreign official;
- Obtain written confirmation that the payment of the expenses is not contrary to local law;
- Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred;
- Ensure that costs and expenses on behalf of the foreign officials will be accurately recorded in the company's books and records.14
As a general rule, "certain expenditures are more likely to raise red flags, . . . [though] they will not give rise to prosecution if they are (1) reasonable, (2) bona fide, and (3) directly related to (4) the promotion, demonstration, or explanation of products or services or the execution or performance of a contract."15 An effective compliance program that can verify its success provides protection to the company, and the company’s agents.
The FCPA is not limited to anti-bribery regulations. Companies and individuals must be aware of the FCPA provisions on the accounting of public companies. At its core, the FCPA prohibits off-the-books accounting practices. The accounting provisions of the FCPA also known as the "books and records" provision16 requires issuers to "make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer."17 Moreover, the reasonable detail required by the FCPA is such detail that is "in conformity with accepted methods of recording economic events and effectively prevent offthe- books slush funds and payments of bribes."18
The reasonable detail also highlights potential red-flags that are indicative of violations of the anti-bribery provisions of the FCPA. Examples of bribes and how they are often classified on a company's books and records include ledger entries for the following:
- Commissions and Royalties
- Consulting Fees
- Sales and Marketing Expenses
- Scientific Incentives and Studies
- Travel and Entertainment Expenses
- Rebates and Discounts
- After Sales Service Fees
- Misc. Expenses
- Petty Cash Withdrawals
- Free Goods
- Intercompany Accounts
- Supplier/Vendor Payments
- "Custom Intervention" Payments.19
Enforcement and Compliance Program Safe Harbor
Pursuant to the Guidelines, the DOJ has emphasized that it will rely upon the Principles of Federal Prosecution of Business Organizations, set forth as Chapter 9-28.000 of the U.S. Attorney's Manual, when the DOJ conducts an investigation to determine whether to charge a company, or whether to negotiate a plea or other agreement. The following factors are considered:
- The nature and seriousness of the offense, including the risk of harm to the public; The pervasiveness of wrongdoing within the company, including the complicity in, or the condoning of, the wrongdoing by company management;
- The company's history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it;
- The company's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents;
- The existence and effectiveness of the company's pre-existing compliance program;
- The company's remedial actions, including any efforts to implement an effective company compliance program or improve an existing one, replace irresponsible management, discipline or terminate wrongdoers, pay restitution, and cooperate with the relevant government agencies;
- Collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution;
- The adequacy of the prosecution of individuals responsible for the company's malfeasance; and
- The adequacy of remedies such as civil or regulatory enforcement actions.20
As stated above, a significant factor in the Government's decision on whether to bring charges against a company is the existence and implementation of a company's pre-existing compliance program. In addition to the above referenced factors, the DOJ and SEC place significant emphasis on whether the company self-reports, cooperates, and takes remedial measures to deal with FCPA violations.
The Principles of Federal Prosecution of Business Organizations prepared by the DOJ, grants broad discretion to prosecutors to consider the extent a violating company cooperates. The United States Sentencing Guidelines makes similar accommodations when considering the conduct of an individual violator.
Without question, aside from self-reporting and cooperating with the DOJ and the SEC, the most significant factor that provides safe harbor protection at the company level is the effective compliance program. The DOJ and SEC "have no formulaic requirements regarding compliance programs. Rather, they employ a common-sense and pragmatic approach in evaluating compliance programs" 21 , making inquiries as to the overall design of the compliance program, whether it is being applied in good faith, and whether or not it works.22
What is clear from the Guidelines and other regulations and discussion on the FCPA is that compliance programs are substance over form (i.e., lip service will not provide protection if efforts have not been undertaken to evaluate risks and implement good faith protocols to address these risks). As stated by Lanny A. Bruer, Assistant Attorney General for the DOJ Criminal Division:
You don't get a free pass by saying 'We're doing business in a country where we believe bribery is rampant,' . . . If you're in a country that . . . poses greater challenges, I'm going to want to know what did your compliance program do to deal with that . . . If it's state-of-the-art and you truly were prepared for the environment you were in, that will be helpful to you.
See "DOJ Warns of Heightened Fraud Enforcement," Compliance Week.
The following map provides guidance on the amount of corruption found in countries throughout the world. The more corrupt a country is, the more important an effective compliance program is.
Click here to view map.
Lanny Bruer’s statement could not be more perfectly demonstrated than in the recent FCPA case involving Morgan Stanley and one of its executives, Garth Peterson. Because of an effective compliance program implemented at all levels of the organization, the DOJ and SEC opted not to bring an enforcement action Morgan Stanley over FCPA violations. The DOJ and SEC cited the company's robust compliance program as the reason for declining to prosecute. Morgan Stanley frequently trained its employees on its internal policies, the FCPA, and other anticorruption laws. In fact, between 2002 and 2008, the company trained various groups of Asia-based personnel on anti-corruption policies on at least 54 occasions. Rather than pursue action against Morgan Stanley, the DOJ and SEC pursued Mr. Peterson exclusively.
"This case illustrates the SEC's commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company's internal controls" – SEC's Division of Enforcement Director Robert Khuzami.
Compliance programs can provide a safe harbor to companies who properly implement them. In fact, the failure to establish and implement a compliance program may be viewed as a per se willful violation of the FCPA when a company operates in a county identified as being corrupt. While time will tell whether this prognosis is accurate, the only certainty is that enforcement actions under the FCPA are only increasing and that with the severe civil and criminal penalties in place for violations of the FCPA23, few, if any, companies can risk an enforcement action. In order to safely navigate the global marketplace, compliance programs are mandatory and proper internal investigations utilizing the Guidelines are imperative when evaluating potential exposure to the FCPA and whether to self-report as recommended by the Guidelines. With whistleblowing at an all-time high, a company can never be too sure who may be reporting suspicious conduct to the DOJ and the SEC.