22 June 2007
The Stealthy Foreign Corrupt Practices Act
What constitutes "bribery?" How is it different from "making grease payments?" For what "corrupt practices" performed abroad can companies and businessmen be prosecuted for in the US?
The Stealthy Foreign Corrupt Practices Act
by Bruce Bean
Lecturer in Global Corporate Law at Michigan State University Law School
Among lawyers the Foreign Corrupt Practices Act or FCPA is one of America's least-loved exports. Enacted under President Jimmy Carter, it is a lasting legacy of our Watergate scandal. This federal statute aims to eliminate offshore bribery by American companies and requires that a company's books and records accurately reflect all transactions.
U.S. companies initially complained that the FCPA gave foreign competitors not subject to the Act a competitive advantage. Two decades of U.S. diplomatic efforts eventually led to the "OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions." This Convention first became effective in 1999 and has now led to the adoption of legislation comparable to the FCPA in the 36 signatory nations.
While each of the national laws implementing the OECD Convention is distinctive, understanding some of the fine points of the FCPA will give you a good start at dealing with similar laws in other jurisdictions which may apply to your next transaction.
The American common law system leaves it to the courts to interpret, elaborate and occasionally expand upon laws as enacted by the Congress. In the 30 years since the law was enacted, very few cases have been litigated in the courts. There is, therefore, a dearth of definitive guidance on how the FCPA should be interpreted and applied. This regularly presents difficult questions for a lawyer advising a client on how to deal with problematic situations.
Enforcement of the FCPA is shared by the Securities and Exchange Commission and the Justice Department. The SEC handles civil enforcement matters relating to the requirement of the FCPA that books and records be accurate, properly identify expenditures and protect the company's assets. There have been hundreds of books and records matters resolved by the SEC over the 30 year life of the FCPA. The Department of Justice prosecutes the comparatively few criminal foreign bribery cases which actually go to trial. There have been fewer than 50 of these cases, some of which have developed out of SEC books and records investigations.
While we lawyers tend to focus on the "corrupt practice" known as bribery of foreign officials, the books and records provisions of the FCPA can be even more troublesome, and the economic impact on clients can be severe. This is especially true today when the SEC and Justice have implemented a newly aggressive enforcement agenda.
FCPA - Bribery of Foreign Officials
Jurisdiction. Establishing whether a person or company is subject to the bribery provisions of the FCPA is not complicated. The bribery provisions of the Act apply to
"Issuers." These are companies registered or required to file reports under the Securities Exchange Act of 1934. This means most U.S. public companies and Level 2 and 3 ADR issuers.
"Domestic concerns." These include any legal entity organized in the U.S. or which has its principal place of business in the U.S.
Any individual deemed a U.S. "national" under U.S. law. This includes all U.S. citizens, wherever they live, as well as "resident aliens." This is one of the extremely rare instances in which a U.S. law has been drafted to apply on the basis of "nationality," rather than our more traditional "territorial" basis.
In addition, the FCPA applies to anyone (officer, director, employee, agent, consultant, lawyer) who does an act in furtherance of an FCPA violation, either (i) within the territory of the U.S. or (ii) by utilizing the "means of interstate commerce."
"Territory" of the US has always been broadly interpreted and certainly includes ships and airplanes registered in the U.S.
In American federal jurisprudence the term "means of interstate commerce" has been interpreted so broadly that it is almost impossible to avoid.
Please note that there are prosecutors in the U.S. who would be eager to bring an FCPA case against someone who has never set foot in the U.S. but who used the Internet, bank wire transfer system or perhaps, or made a cell phone call while seated in a U.S. registered airplane (also "U.S. territory") even when that aircraft was not in the U.S. And what about the satellite which relays a telephone call? A U.S. satellite is certainly a "means of interstate commerce."
All of which suggests that even though you and your client are in Baku and have never contemplated traveling to the U.S., the FCPA (and the similar laws in other jurisdictions) is worth thinking about. This is not the place to argue about whether this is "right." My purpose is simply to remind you of the elements of an FCPA offense so that you can protect yourselves and your clients from inadvertent violations of the FCPA and similar acts in other jurisdictions.
Once FCPA bribery jurisdiction has been established, to secure a conviction under the FCPA the Government must prove that each of the following elements is present.
Payment. The action taken by the defendant may include merely authorizing the payment or action in question. An actual payment is not required, an offer or promise to pay is sufficient. Thus, it is not a defense that nothing was actually paid or received.
? Who is an "official" can be an interesting question if an enterprise has been privatized but is still owned in part by the government, e.g., Gazprom - 50+ per cent government owned and Rosneft - 90% government owned.
? State owned airlines in many countries are engaged in non-governmental, purely commercial activities, but an aggressive prosecutor may argue that such an entity's employees are "officials" for purposes of the FCPA.
? Government officials serving, for example, on the board of a privately owned commercial entity may also trigger the Act.
? What about members of a "royal family?"
Value. The "bribe" may involve anything of "value." In addition to cash, we have cases in the U.S. where airplane tickets, gifts to charities and the promise or suggestion of sex were found to be of "value."
? Here the defendant's "intention" is important. The fact that the foreign official did not or could not ever "deliver" on the intended purpose is irrelevant.
? The term "assist" is very broad and ambiguous, and this will only aid the prosecutor.
Actions which do not trigger prosecution under the FCPA include what are called "grease" payments. These are "small," facilitating payments made to expedite or secure "routine governmental actions," such as securing permits, licenses, visas and the like. There is no guidance on how much "small" is in this context. This exception has been criticized since such a payment would not be legal if made in the U.S. and almost certainly would not be legal under the laws of the country where it was made. The OECD Convention has no explicit exception for "grease."
There are also defenses to alleged FCPA violations for acts which are either (i) lawful under the written laws of the foreign country or (ii) reasonable, bona fide expenditures directly related to promotion, demonstration or explanation of products or services or execution or performance of a contract.
There are no cases where someone has claimed that a "bribe" to a government official was legal under the written laws of a country. On the other hand, promotional expenditures, such as trips to other facilities or the headquarters of a company, are common. So long as such expenditures are "reasonable" and "directly related" to the business, they are fine. Side trips to Disney World or for shopping in New York or Los Angeles are not likely to be viewed by Justice Department prosecutors as "direct!"
FCPA Accounting Provisions – Neither "Foreign" Nor "Corrupt"
While many lawyers find that the word "accounting" triggers instant boredom, massive headaches and judicious page skipping, the books and records provisions of the FCPA are particularly important because they are very broad and, in the present prosecutorial environment, surprisingly severe. Disarmingly, these books and records requirements, unlike the broad applicability of the bribery provisions, apply only to "issuers" registered with the SEC under section 12 of the Securities and Exchange Act of 1934. While some would take comfort from that narrower applicability, in fact the accounting aspects of the FCPA are stealthy, dangerous and in some ways broader than the bribery provisions.
This is because the accounting and record keeping provisions of the FCPA are not limited to payments which are "foreign." Similarly, they are not directed at payments which might be denominated as "bribery." They apply to all activities, domestic and foreign, and they deal with all recorded transactions. Unlike the bribery section of the FCPA the accounting provisions have no exception for small "grease" payments. In addition, the accounting provisions apply to acts of foreign subsidiaries in which the "issuer" holds only a minority interest, while the bribery provisions do not.
The U.S. securities laws have as a key element the concept of "materiality." Thus, for example if IBM has a $10,000 problem somewhere, it is logically not "material to IBM's overall $90 billion turnover and therefore need not be disclosed. "Materiality," however, is completely irrelevant for FCPA books and records violations. The law requires that an issuer's accounting and control system be designed to record all disbursements accurately and maintain appropriate control of all assets. And because these provisions are enforced as a civil and not a criminal matter, the standard of proof which the SEC must meet is much lower than that which the Justice Department must meet to establish an FCPA bribery charge in a criminal case. Thus, if anywhere in a large company an employee decides not to comply with the rules, the accounting control system needs to be able to detect this. If such a "bad entry" is found, there can be strict liability both for the company and its senior executives, regardless of their "knowledge" or the impracticality of their being able to have discovered the problem.
The infamous Sarbanes Oxley Law, enacted in 2002 following the Enron, WorldCom and other financial scandals, focused attention on the requirements for establishing a highly reliable accounting system. In fact, however, for 30 years the FCPA has required that an issuer's internal control system be designed to insure accurate books and records. Under Sarbanes Oxley senior executives of U.S. reporting companies must certify that the issuer's internal control system is effective. This has increased the attention paid to all of the accounting aspects of the FCPA.
As I have mentioned, FCPA enforcement has increased significantly in recent years, no doubt in large part because of the press attention given to Enron and similar matters. There have been more actions initiated and the penalty amounts collected in settled actions have increased dramatically. The highest amount paid to date is $44 million, which Baker Hughes agreed to pay this past April for its activities in Russia, Kazakhstan, Uzbekistan, Nigeria, Angola and Indonesia. FCPA actions against non-U.S. parties have also increased. For example Norway's Statoil paid $15 million in 2005 to settle FCPA violations. In 2006 ABB paid $16.5 million to settle its matter. In February of this year Vetco Gray UK paid criminal fines of $26 million to settle FCPA violations arising out of business done in Nigeria.
This brief overview of the FCPA highlights issues you should be keep in mind as you handle international business transactions. In addition, you must also consider
The OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions;
The Inter-American Convention Against Corruption;
The African Union Convention on Preventing and Combating Corruption;
The Council of Europe's Criminal and Civil Law Conventions on Corruption; and
The United Nations Convention Against Corruption.
The national enabling laws in the nations which have been enacted to comply with the obligations imposed by these Conventions are only generally similar to the FCPA. An understanding of how the FCPA is being applied by the people who began this campaign 30 years ago, however, should help insure that you do not miss this issue.
This article was orginally prepared for the 2nd CIS Local Consel Forum. The CIS Local Counsel Forum is the first ever wide-scale informal network of the international legal community and the Local Counsel law firms of the CIS economic region (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan). The Forum represents non-political and non-partisan gatherings of lawyers who share the Mission of the Forum and wish to expand their practices and business opportunities through new personal contacts.
Professor Bean lived and practiced law in Russia from March 1995 until August 2003, eight formative years for the New Russia. He was Managing Partner of Coudert Brothers' Moscow office from July 1996 until June 1998 when he became Head of Corporate and Foreign Direct Investment for Clifford Chance - Moscow. He was also active with the Gore-Chernomyrdin Commission and served as Chairman of The American Chamber of Commerce in Russia from 1998 to 2000 during Russia's Financial Crisis. He is now Lecturer in Global Corporate Law at Michigan State University Law School.