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Criminalizing the second oldest profession, part 1: Foreign Corrupt Practices Act (FCPA)

In 1977, the United States Congress passed the Foreign Corrupt Practices Act (FCPA) following a series of corruption scandals highlighted by the Watergate investigation and the resulting resignation of President Richard Nixon

I.          Introduction

 The demand for bribes from politicians and the attendant temptation to succumb to those demands has been an ever-present reality for businesses since antiquity. As observed by former President Ronald Reagan: “It has been said that politics is the second oldest profession.” For centuries, bribing public officials has been a curse on governments and businesses alike. 

In response, many countries began enacting anti-corruptions laws in the late 1970s and 1980s. In 1977, the United States Congress passed the Foreign Corrupt Practices Act (FCPA) following a series of corruption scandals highlighted by the Watergate investigation and the resulting resignation of President Richard Nixon (See John Ashcroft & John Ratcliffe, The Recent and Unusual Evolution of An Expanding FCPA, 26 Notre Dame J.L. Ethics & Pub. Pol’y 25 (2012); and Carolyn Lindsey, More Than You Bargained For: Successor Liability Under the U.S. Foreign Corrupt Practices Act, 35 Ohio N.U. L. Rev. 959, 961 (2009).) While Watergate highlighted political corruption, as noted by many commentators, the investigation also shed light on corporate corruption and bribery in America. (Id. ) The Watergate investigation uncovered more than 400 American companies engaged in making bribes and other corrupt payments to officials in foreign governments around the world. (Id. See also U.S. Dep’t of Justice, Criminal Division & U.S. Sec. & Exchange Comm’n, Enforcement Div., A Resource Guide to the U.S. Foreign Corrupt Practices Act (2012), (last accessed August 3, 2015).) The first few decades of the FCPA existence saw very few enforcement actions; however, the post-financial-crisis period has seen a significant increase in both political and regulatory expectations, resulting in a growing number of enforcement actions by regulatory agencies.

This post-crisis environment has caused many companies all over the world to re-assess their policies, programs and procedures for evaluating risks and establishing effective risk management parameters. The risk oversight function of the board of directors continues to take center stage in this re-assessment, and investor and public expectations for board engagement and mitigation of risk continues to be high; the reputational damage to boards of companies that fail to properly manage risk is a major threat.

 Among the many changes in the legal and business landscape in the wake of the Enron scandal and Sarbanes-Oxley Act 2002 there has been a dramatic increase in the number of enforcement actions brought under the FCPA. Enforcement officials at the Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) are pursuing more and more cases and securing settlements that include criminal fines and penalties, disgorgement of ill-gotten gains, prison terms for individual wrongdoers, and ongoing compliance monitoring obligations. Further, while the DOJ and SEC enforce the FCPA, section 162(c) of the Internal Revenue Code, which predates the FCPA, also prohibits the deduction of bribes, including payments that violate the FCPA, as business expenses. 

In the post-Enron and post-financial crisis era, anti-corruption compliance programs have been a key focus for boards of directors, audit committees and senior management of many multi-national companies. Recent FCPA cases have been closely followed in the press, boardrooms, and sales meetings, and prompted many companies to redouble their anti-corruption compliance efforts. This trend of increased enforcement of the U.S. FCPA that began five years ago has continued in the U.S.

There have also been increased enforcement efforts in Europe and in the UK, where the UK Bribery Act of 2010 was recently passed. (See UK Bribery Act 2010.) With the weakened global economy and increasing competition in emerging economies, the risk to companies continues to grow. Consequently, U.S. public companies and issuers subject to the FCPA’s books and records provisions remain particularly at risk given the ease of prosecution for any small payment, regardless of materiality, and the broad interpretation of the statute by regulators to include any type of improper payment, including commercial bribery. 

The FCPA and UK Bribery Act are generally the most expansive in terms of proscribed activities and jurisdictional reach. The FCPA is also the most aggressively enforced by several orders of magnitude and, therefore, these are the laws that most global companies use as the standards for their anti-corruption compliance programs.

The next section of this column builds on the introduction and provides a brief overview of the FCPA. It provides a broad overview of the FCPA’s individual provisions and outlines the potential penalties. The second installment in this series, examines ways in which FCPA exposure may be limited and underscores the need for corporations and corporate officers to examine their current compliance programs and implement an effective FCPA compliance and ethics program.

 

 

II.        Brief Overview of the FCPA

            There are restrictions on U.S. firms doing business abroad that disallows payments to foreign government officials for getting business from their governments. (David P. Twomey & Marrianne Moody Jennings, Business Law Principles for Today’s Commercial Environment (Thomson West, 2008).) The FCPA is a federal criminal statute that applies to businesses whose principal offices are in the United States; it is an anti-bribery and anti-corruption statute covering these companies’ international operations. (15 U.S.C. § 78dd-1 et seq. For U.S. domestic bribery laws see 18 U.S.C. § 201.) 

            The FCPA has two principal parts: the anti-bribery provisions and the accounting provisions. The anti-bribery provisions prohibit the authorization, offer, promise to pay, or payment of anything of value to a foreign official for a corrupt purpose. The elements of an anti-bribery violation are: 

  • an act by a covered person (including U.S. and foreign issuers of U.S. securities, non-public U.S. companies and U.S. residents, and some foreign non-residents) (To qualify as an issuer under the FCPA an entity must be required to file reports with the SEC under section 15(d) of the Exchange Act of 1934 or must have securities registered with the SEC under section 12(g) of the Exchange Act.);
  • in furtherance of an offer, payment, promise to pay, or authorization of payment of anything of value (The FCPA does not define the term "anything of value," nor is there any legislative history or case law that defines exactly what this term means. However, as noted in the FCPA Resource Guide, courts have interpreted the phrase broadly and look at the subjective value the defendant placed on the payment. See e.g. Complaint, SEC v. RAE Sys. Inc., No. 10-cv-2093 (D.D.C. Dec. 10 2010) (ECF No. 1) (Complaint) (noting fur coat); SEC v. Daimler AG, No. 10-cv-473 (D.D.C. Apr. 1, 2010), ECF No. 1 (armored Mercedes Benz worth 300,000).);
  • directly or indirectly; 
  • to a foreign official (As noted in the FCPA Resource Guide, foreign officials under the FCPA include officers or employees of a department, agency, or instrumentality of a foreign government. 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. Moreover, the FCPA covers corrupt payments to low-ranking employees and high-level officials alike. The term “instrumentality” is broad and can include state-owned or state-controlled entities. Whether a particular entity constitutes an “instrumentality” under the FCPA requires a fact-specific analysis of an entity’s ownership, control, status, and function.  See FCPA Resource Guide n.3 at 20.); 
  • corruptly (FCPA anti-bribery provisions differ from most other fraud statutes in that they require that the intent be corrupt. See e.g., United States v. Kozeny, 582 F. Supp. 2d 535, 541 (S.D.N.Y. 2008) (citing S. REP. No. 114, 9th Cong., 1st Sess. 10(1977), reprinted in 1977 U.S.C.C.A.N. 4098). For a leading case on the definition of “corrupt” see United States v. Liebo, 923 F.2d 1308 (8th Cir. 1991) (“The offer, promise to pay, payment, or authorization of payment, must be intended to induce the recipient to misuse his official position or to influence someone to do so and that an act is “corruptly” done if done voluntarily and intentionally, and with a bad purpose of accomplishing either an unlawful end or result, or lawful end or result by some unlawful method or means.”); see also Stichting v. Schreiber, 327 F.3d 173 (2d Cir. 2003).); 
  • for the purposes of influencing official action or decision, inducing an unlawful act, inducing official influence over government action, or securing any improper advantage (For a discussion of improper advantage, see United States v. Kay, 359 F.3d 738, 754-55 (5th Cir. 2004).); and 
  • in order to obtain or retain or redirect business (15 U.S.C. § 78dd-1 et seq. As for corrupt intent, it is important to recognize that FCPA anti-bribery provisions differ from most other fraud statutes in that they require that the intent be corrupt. See e.g., United States v. Kozeny, 582 F. Supp. 2d 535, 541 (S.D.N.Y. 2008) (citing S. REP. No. 114, 9th Cong., 1st Sess. 10(1977), reprinted in 1977 U.S.C.C.A.N. 4098). For a leading case on the definition of “corrupt” see United States v. Liebo, 923 F.2d 1308 (8th Cir. 1991) (“The offer, promise to pay, payment, or authorization of payment, must be intended to induce the recipient to misuse his official position or to influence someone to do so and that an act is “corruptly” done if done voluntarily and intentionally, and with a bad purpose of accomplishing either an unlawful end or result, or lawful end or result by some unlawful method or means.”).

  

These prohibitions also apply to payments or gifts designed to influence official acts of foreign officials, parties, party officials, candidates for office, non-governmental organizations (NGOs), or any person who transmits the gift or money to these types of persons. (See FCPA Resource Guide, n.2 at 1,14 and 19.) A criminal conviction under the FCPA requires that the defendant have acted willfully. (Id. at 1 and 14 (citing 15 U.S.C. §§§ 78dd-2(g)(2)(A), 78dd-3(e)(2)(A), 78ff(c)(2)(A)). For a definition of willful in the criminal context, see Bryan v. United States, 524 U.S. 184, 191-192 (1998) (construing ‘willful’ in the context of 18 U.S.C. § 924(a)(1)(A)) (“a willful act is one undertaken with a ‘bad purpose.’ In other words, in order to establish a ‘willful’ violation of a statute, ‘the Government must prove that the defendant acted with knowledge that his conduct was unlawful.”); and United States v. Kay, 513 F.3d 432 (5th Cir. 2007) (defining corruptly and willfully).)

The FCPA further requires U.S. and non-U.S. companies with securities listed in the U.S. (i.e. issuers) to meet its accounting provisions. (15 U.S.C. § 78m(b)(2) (2002) (applying accounting provisions to “[e]very issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title.”) ) These accounting provisions, which were designed to operate in tandem with the anti-bribery provisions of the FCPA, require issuers to make and keep detailed books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. In practice, these accounting provisions have been interpreted very broadly to include false accounting or record keeping for any illegal act, including but not necessarily limited to, commercial bribes paid both within and outside the U.S. (See FCPA Resource Guide, n.3 at 41.) The FCPA does not apply to payments made to low-level officials for expediting the performance of routine government work. (id.)

 The FCPA does not prohibit grease or facilitation payments. (id.) These are payments made only to get officials to perform their normal duties or to perform then in a timely manner. Facilitation payments are those made to: (1) secure a permit or a license, (2) obtain paper processing, (3) secure police protection, (4) provide phone, water, or power services, or (5) obtain any other similar action. (id.) The FCPA’s anti-bribery provisions provide two affirmative defenses: (1) that the payment was lawful under the written laws of the foreign country, or (2) that the payment was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, and directly related to the demonstration or explanation of a product or service or performance of a contract with a government agency. (id. at 23.) Additionally, the Act includes an exception in cases of extortion. (id. at 27.)

 Violations of the FCPA carry significant penalties, including criminal liability (including terms of imprisonment for individual officers, directors, or stockholders), civil fines, substantial loss of goodwill, and other meaningful consequences, including the potential loss of government licenses. Moreover, the individuals involved may be responsible for damages as a result of civil actions brought by competitors under federal and state anti-racketeering acts. (PL 95-213, 94 Stat 1494, 15 U.S.C. § 78a nt.)

Contributing Author

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Arkady Bukh, Esq and Nicholas Wooldridge, Esq

 Arkady Bukh, Esq and Nicholas Wooldridge, Esq of LV Criminal Defense, 520 S 4th Street, Las Vegas, NV 89101, 702-623-6362. Nick is a veteran criminal...

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