The Foreign Corrupt Practices Act

Beware. As more U.S.--based companies seek to do business in foreign markets, they need to know that what is acceptable and commonplace elsewhere may be a violation of U.S. law. The Foreign Corrupt Practices Act (FCPA or the Act), § 15 U.S.C. 78, *et seq.*, makes it unlawful for U.S. persons and businesses, and certain foreign issuers of securities, to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. The U.S. Department of Justice is the Act's chief enforcement agency, with a coordinating role played by the Securities and Exchange Commission (SEC).

Beware. As more U.S.–based companies seek to do business in foreign markets, they need to know that what is acceptable and commonplace elsewhere may be a violation of U.S. law. The Foreign Corrupt Practices Act (FCPA or the Act), § 15 U.S.C. 78, et seq., makes it unlawful for U.S. persons and businesses, and certain foreign issuers of securities, to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. The U.S. Department of Justice is the Act’s chief enforcement agency, with a coordinating role played by the Securities and Exchange Commission (SEC).

The FCPA was enacted in 1977 as a result of SEC investigations in the mid-1970s of more than 400 U.S. companies that had made questionable or illegal payments in excess of $300 million to foreign government officials, politicians and political parties. The abuses ran the gamut from “grease” payments to ensure that government functionaries discharged certain ministerial or clerical duties (issuance of business licenses, for example), to outright bribery of high-ranking foreign officials to secure favorable action by a foreign government. Congress reacted by enacting the FCPA to bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system.

The penalties for violation of the Act can be stiff. Several firms that paid bribes to foreign officials have been the subject of criminal and civil enforcement actions, resulting in large fines and suspension and debarment from federal procurement contracting, and some of their employees and officers have paid significant fines and gone to prison. To avoid such consequences, companies should enact detailed compliance programs intended to detect and prevent improper payments by employees and agents.

This article provides a short overview of the provisions of the Act and measures that can be taken to avoid prosecution under the FCPA.

To Whom is the Act Applicable?

The FCPA applies to any individual, firm, officer, director, employee or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms also may be penalized if they order, authorize or assist someone else to violate the anti-bribery provisions of the Act or if they conspire to violate those provisions. Since 1998, the FCPA also applies to foreign firms and persons who take any act in furtherance of a corrupt payment while in the United States. The Act therefore applies not only to individuals acting on behalf of a business entity, such as officers, directors and employees, but also to foreign persons subject to the jurisdiction of the United States courts. Parent companies located in the United States are liable for violations by foreign subsidiaries.

Payments Made With Corrupt Intent

In order to constitute a prohibited payment under the FCPA, a person or entity making or authorizing the payment must have the intent to induce its recipient to misuse his official position to provide an improper advantage. A payment is made with the requisite intent if it was done voluntarily and intentionally, and for the purpose of accomplishing an unlawful result or a lawful result through unlawful means. Knowledge of the Act is not required before an actor can be deemed to possess the requisite intent to violate the FCPA. Also, the intent required for violation of the FCPA does not have to be directly proven, but can be inferred from the evidence.

What Constitutes a Payment?

The FCPA prohibits paying, offering, promising to pay, or authorizing to pay, or authorizing another to pay or offer, money or anything of value. Actual payment of a bribe is not required; the offer of a bribe alone constitutes a violation of the Act. Bribes violating the Act go beyond monetary payments; gifts, samples, interests in business enterprises, loans on favorable terms, offers of employment, tuition payments, payments to third parties and the like can all be violative of the Act. The Act does not clearly define the line between proper and improper payments. In light of the lack of guidance, it is advisable to act conservatively, for even making a payment of $100 or less may well constitute a violation of the FCPA.

Foreign Officials

The FCPA criminalizes payments to “foreign officials.” The definition of foreign official is exceedingly broad and includes any officer or employee of a foreign government, or of a department, agency or other instrumentality of a foreign government. Besides obvious “foreign officials,” such as government employees and members of the military, less obvious persons, such as government advisors and others acting in an official capacity for a government, even though not directly employed by it, are covered by the Act. For example, payments or gifts made to physicians working at a foreign municipal or state university hospital may well violate the FCPA.

Payments Through Intermediaries

The Act casts a wide net, prohibiting unlawful payments through intermediaries, joint ventures or agents. It is a violation of the Act to make a payment to a third party knowing that such payment will influence a foreign official. The payor does not have to know with certainty that his payment will reach a foreign official; rather, awareness that the improper payment may reach a foreign official suffices as a violation of the Act.

And willful ignorance is no defense. The Act’s prohibition against payments through third parties addresses the inclination to “stick one’s head in the sand.” A business cannot avoid violating the Act by ignoring signals that should have alerted it to an FCPA violation by an intermediary. Businesses are advised to conduct due diligence about their business relations and payment patterns to reduce the risk of violating the Act.

Affirmative Defenses

The FCPA does contain an exception for “facilitating payments” for “routine governmental action,” colloquially known as “grease” payments, gifts or tips. Congress intended a defense for payments made in facilitation of non-discretionary acts of lower-level officials. Facilitating payments, however, are never legal when a foreign official has discretion to award or continue business with a party.

The FCPA further provides two affirmative defenses. First, a defendant may assert that a payment was lawful under the laws of the foreign country in which the payment was made. However, as anti-corruption legislation has spread throughout the world, this defense is not often available. Second, a defendant may allege that a payment was a reasonable and bona fide expenditure made to a foreign official directly related to promotion, demonstration, or explanation of products or services. Limited travel expenses, for example, likely would be permissible under the Act, while unnecessary and lavish expenditures almost certainly violate it. Similarly, travel expense reimbursements for an official to evaluate a product would likely be permissible, but travel expense reimbursements for his accompanying family would likely violate the Act.

Penalties

Penalties for violations of the FCPA are strict, and the federal government has shown its willingness to impose them. Through the criminal process, corporations and other business entities are subject to fines of up to $2 million and their directors, officers, stockholders, employees and agents are subject to fines of up to $100,000 and imprisonment for up to five years. These fines are imposed per occurrence, and individuals fined for violations of the Act may not be indemnified by their employer.

The attorney general or the SEC may also bring a civil action for violation of the FCPA resulting in fines of up to $10,000 per violation against any firm, its directors, officers, employees, agents and stockholders. In addition, the SEC may seek to impose fines not to exceed (1) the gross amount of the pecuniary gain to the defendant as a result of the violation, or (2) an amount of up to $100,000 for individuals and $500,000 for business entities.

Finally, companies found to have violated the FCPA are bound to receive negative publicity. News reports about FCPA-related investigations are embarrassing and may negatively impact a company’s ability to do business in the United States and abroad. Good will is one of the most valuable assets a company can have, and FCPA violations can seriously damage a company’s reputation and brand image.

A business cannot avoid violating the Act by ignoring signals that should have alerted it to an FCPA violation by an intermediary.

Complying with the FCPA

It is important to establish an FCPA compliance program, since even an unwitting violation of the FCPA can lead to penalties and loss of reputation that can seriously damage a company. Indeed, the Federal Sentencing Guidelines acknowledge the importance of a compliance program and “reward” companies who have such a program in place with reduced penalties if nevertheless found in violation of the Act.

A well-designed compliance program addresses internal and external actions of the company. A business should issue to its officers, directors and employees FCPA compliance guidelines that outline the provisions of the FCPA, corporate policies regarding payments to foreign officials, and what should be done if questionable payments are suspected or discovered. Employees should receive periodic training on FCPA compliance, highlighting the risk to the employee and
company if violations of the FCPA are found. Where possible, employment agreements should contain covenants of the employee to comply with the FCPA. Management-level employees should be required to complete FCPA compliance questionnaires on an annual basis. To support employees in complying with the Act, open and easily accessible lines of communication should exist to report suspicious payments or to seek an advance determination as to whether a proposed payment might violate the Act. To ensure effective FCPA compliance, we recommend appointment of an internal FCPA compliance officer to manage the compliance program and to conduct periodic compliance audits.

Good will is one of the most valuable assets a company can have, and FCPA violations can seriously damage a company’s reputation and brand image.

International business practice often requires using consultants or doing business through joint ventures or partnerships with foreign business entities. U.S. companies should ensure that these business partners are in compliance with the FCPA. Ignorance of a business partner’s violations of the Act will not insulate a company from being deemed in violation itself. Because a company may be liable for the acts of its business partners, a company should conduct due diligence to establish FCPA compliance of potential business partners before entering into business relationships. We suggest that potential business partners be asked to complete a questionnaire soliciting information suggestive of violations of the Act. Requesting this information from potential business partners should not be viewed as embarrassing and consequently avoided; rather, a potential business partner who runs an honest business should not hesitate to supply the requested information and should be interested to know that its future partners likewise maintain ethical business practices. If businesses enter into a long-term relationship, the initial due diligence should be updated periodically to ensure continued compliance. In addition, any time a company memorializes in writing a business relationship with a foreign partner, we recommend that the company protect itself by including provisions requiring compliance with the FCPA.

Whether observed internally by an FCPA compliance officer or externally in the actions of a business partner, the following circumstances raise flags that should trigger an investigation into whether the FCPA is implicated:

  • Unusually large commissions, retainers or fees
  • Information suggesting questionable reputation
    of business partner
  • Refusal to make FCPA-related representations
  • Unusual methods of payments
  • Promises of business by or from a government official
  • Family or business relationship with a government
    official
  • Business partner lacking adequate facilities or ability
    to provide promised results
  • Payment of contingent fees
  • Making of political contributions
  • Conduct prohibited under local law

Armed with a thorough understanding of the Act, businesses should find it easy to establish and maintain an effective FCPA compliance program.

The author wishes to thank SGR visiting attorneys Tiziana Rondena, Avvocato (Milan, Italy) and Janos Burai-Kovacs, LLM (Budapest, Hungary) for their assistance in the preparation of this article