Companies Face Scrutiny and Penalties Under FCPA
Reprinted with permission from The Connecticut Law Tribune (January 19, 1998) [pp.12-13.]
As public companies expand into international business markets, the Securities and Exchange Commission its use of the Foreign Corrupt Practices Act.
The SEC alleged that two Triton officers paid bribes to Indonesian government officials through a business agent in order to obtain favorable governmental decisions. The SEC further alleged that the two officers concealed these payments by documenting them as ordinary business expenses.
The company was charged with violating the internal control provisions of the FCPA based on its failure to create and maintain a system of internal accounting controls to detect and prevent improper payments to foreign government officials. Without admitting or denying the charges, Triton agreed to pay a penalty of $300,000, and one of the two officers agreed to pay a penalty of $50,000.
As public companies expand into international business markets, the SEC is likely to increase its scrutiny of foreign transactions. William McLucas, the SEC's enforcement director, commented to the Washington Post that "[t]his type of activity has crept back into the way some companies do business and we have to address that." Companies with foreign operations should ensure that they are in compliance with the FCPA's internal controls requirement, and should be conscious of the FCPA's antibribery provisions when developing an overall compliance program to prevent and detect wrongdoing. This article provides an overview of both the antibribery and accounting provisions of the FCPA and outlines suggested components to consider when drafting and implementing a successful compliance program.
The FCPA's antibribery provisions make it unlawful to bribe a foreign government official in order to obtain or retain business. The FCPA applies to bribes made directly by a party and to bribes paid by intermediaries on behalf of a party. An examination of the text of the statute reveals that there are seven basic elements to an FCPA violation.
The FCPA sets forth parallel sections that prohibit both "issuers" (e.g., publicity traded companies) and "domestic concerns" (any business entity with its principal place of business in the United States), or any officer, director, employee, agent or stockholder acting on behalf of such issuer or domestic concern, from making corrupt payments to foreign officials.
The FCPA applies once any activity related to a corrupt payment occurs in "interstate commerce." The term "interstate commerce" is broadly defined and includes any "trade, commerce, transportation, or communication" between any state or between the United States and foreign country.
'In Furtherance Of'
The use of interstate commerce "in furtherance of" making any payment covered under the statute is prohibited. This phrase broadens the reach of the FCPA to include payments not directly transmitted through interstate commerce. All that is required for liability under the statute is that some conduct occur interstate commerce, which facilitates or carries forward the prohibited activity.
Paying, or offering or promising to pay, money or anything of value is prohibited under this act. The FCPA prohibits payments made "directly" by a company and also prohibits business entities from offering or giving anything of value to "any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official." The FCPA does not require actual knowledge; a person is deemed to have knowledge with respect to prohibited conduct if a person is aware that a third party is engaging in such conduct, or if such person has a firm belief that circumstances exist that may result in a violation. Simple negligence or mere foolishness is insufficient for liability under the FCPA. However, a business cannot escape liability under the FCPA by keeping it head in the sand as to the activities of its foreign partners. For a payment to violate the FCPA, it must be made with a corrupt intent. The act states that the payment must be made for the purpose of:
- influencing any act or decision of a foreign official in his official capacity;
- inducing a foreign official to do or omit to do any act in violation of his lawful duty; or
- inducing a foreign official to use his position to affect any decision of the government.
It is important to note that there is no bright-line test used when deciding whether a particular activity has the requisite corrupt intent to state an FCPA violation. Analogous case law demonstrates that a gift provided with the intent to receive a quid pro quo from a government official would be corrupt. What is less clear is when no quid pro quo exists. Courts have indicated that corrupt intent is not present for mere "good will" expenditures. However, certain activity that falls between a quid pro quo and a "good will" gift may be corrupt.
The FCPA defines a foreign official to include any "officer or employee of a foreign government or any department, agency, or instrumentality thereof, or any person acting in an official capacity for or on behalf of any such government or department, agency or instrumentality."
For an FCPA violation to arise, the purpose of any corrupt payment made to a foreign official must be for assisting a company in "obtaining or retaining business to, any person." The business to obtained or retained does not need to be with the foreign government. The act left the term "obtaining or retaining business" undefined. As a result, some confusion arose as to the meaning of this clause. Although this language was unchanging by the 1988 amendments, the Conference Report accompanying the 1988 amendments attempted to clarify the following provision:
[T]he reference to corrupt payments for 'retaining business' in present law is not limited to the present law is not limited to the renewal of contracts or other business, but also includes a prohibition against corrupt payments related to the execution or performance of contracts or the carrying out of existing business, such as a payment to a foreign official for the purpose of obtaining more favorable tax treatment. The term should not, however, be construed so broadly as to include lobbying or other normal representations to government officials.
The FCPA provides three limited exceptions to the prohibitions set forth above. First, the facilitating payment exception of the FCPA allows payments to be made to foreign officials to expedite the performance of "routine governmental actions." The act lists five categories of activities that constitute a "routine governmental action":
- obtaining permits, license, or other official documents to qualify a person to do business in a foreign country;
- processing governmental papers;
- providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods;
- providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; or
- actions of a similar nature.
Second, even if a payment violates the FCPA, it is an affirmative defense that the payment was lawful under the written laws and regulations of the foreign country. The mere absence of written laws prohibiting corrupt payments is not sufficient to establish this affirmative defense.
Finally, the FCPA also provides an affirmative defense for "reasonable and bona fide expenses" incurred on behalf of a foreign official and directly related to:
- the promotion or demonstration or a product or service; or
- the performance of a contract with a foreign government.
Accounting and Record-keeping
The FCPA imposes two sets of "accounting" requirements on all U.S. companies with registered securities, regardless of whether the company has any business abroad. First, issuers are required 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." Second, issuers are required to create and maintain a system of internal accounting controls that are sufficient to provide "reasonable assurances" that:
- transactions are executed in accordance with management's general or specific authorization;
- transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets;
- access to assets is permitted only in accordance with management's general or specific authorization; and
- the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
The FCPA does not mandate any particular internal accounting structure that a business must establish. Rather, the act prescribes a "reasonable" standard for assessing the adequacy of a business' accounting and record-keeping procedures. The FCPA requires businesses to keep records in "reasonable detail" to reflect transactions and maintain a system of internal accounting controls sufficient to provide "reasonable assurance" that assets are properly accounted for.
Under the FCPA, both the business entity and its officials, employees and agents may be subject to liability for violating the FCPA's antibribery provisions. Domestic concerns or issuers that "violate" the FCPA's antibribery provisions can be subject to criminal fines of up to $2 million and civil penalties of up to $10,000. In addition, a firm that violates the FCPA may be suspended from participation in various activities with U.S. government agencies. Officers, directors, stockholders, employees or agents, acting on behalf of a business entity, who "willfully violate" the FCPA's antibribery provisions are subject to criminal fines up to $100,000 and imprisonment of up to five years. In addition, individuals that "violate the FCPA are subject to civil penalties up to $10,000. Fines imposed on company officials or employees may not be paid, directly or indirectly, by the company.
An issuer that violates any of the FCPA's accounting provisions is subject to the penalties that apply to most securities law violations. The SEC may initiate a civil injunctive action or seek monetary penalties. Civil penalties range from $50,000 to $500,000 for business entities. In addition, criminal sanctions may be imposed against any person who knowingly violates the FCPA's accounting provisions. Individuals that violate these provisions are subject to $1 million in fines and 10 years' imprisonment. Businesses may be fined up to $2.5 million.
An important element of any FCPA compliance program is the establishment of internal controls adequate to ensure compliance with both the antibribery and accounting provisions of the act. Ideally, such controls should be designed with the aim of:
- educating all employees as to what type of activity the FCPA prohibits;
- identifying potential situations where an FCPA issue may arise; and
- addressing any issue may arise; and
- addressing any FCPA issue before a statutory violation occurs.
The following are suggested components to a successful internal control system.
- Assign a corporate officer or establish a committee that will be responsible for overseeing FCPA compliance.
- Develop a compliance procedure that covers both the antibribery and accounting provisions of the FCPA. Such a procedure should detail what an employee should do if a situation arises that may involve an FCPA violation.
- Draft and distribute an FCPA compliance manual to all employees. This manual should include a summary of the FCPA, examples of transactions or circumstances that may raise FCPA issues, examples of activity that violates the statute and procedures that employees should follow once a potential FCPA issue is discovered.
- Conduct special FCPA training programs for in-house counsel, auditors, managers and employees working on overseas projects.
- Develop an annual FCPA review procedure that documents and summarizes the efforts taken by the company to comply with the act. Such a review procedure should also provide a mechanism (for example, an FCPA questionnaire to management) that will detect FCPA problems that were not previously discovered.
- Review existing accounting and record-keeping procedures with internal auditors and outside accounting firms to ensure compliance with the FCPA's accounting provisions. In particular, review the accounting procedures of all foreign operations.
- A successful FCPA compliance program should also contain external controls and procedures that will ensure that all transactions and relationships between a company and any corporation, agent, supplier or individual adequately comply with the FCPA. The following are recommendations for external controls that a company should include in any FCPA compliance program:
- Investigate any foreign agent with whom the company proposes to have a business relationship.
- If any business is to be conducted in a foreign country, the company should review that country's business laws and practices to identify any potential FCPA issues.
- Advise all parties involved in foreign business relationships about the existence of the FCPA. Explain what the FCPA forbids and how the statute will affect business conducted with the company.
- Include FCPA covenants and representations in contracts with foreign agents or companies. Have all parties to any agreement represent that they understand the provisions of the FCPA and that they will not undertake any action that would violate the act.
- Develop a periodic FCPA compliance review procedure to ensure that all companies, agents or individuals engaged in business with the company are continuing to comply with the FCPA. Such a program should include having foreign business partners provide yearly certificates of continued FCPA compliance.