THE FOREIGN CORRUPT PRACTICES ACT Presented to UPMC Legal Staff February 22, 2006 Dale Hershey
FCPA Basics • Prohibits making improper payments to foreign officials, parties or candidates, in order to assist a company in obtaining or retaining business for, or directing business to, any person • Imposes record keeping and internal control requirements on companies subject to SEC jurisdiction
Who Is Bound? • “Issuers” – companies whose securities are registered or are required to file periodic reports with the SEC • “Domestic concerns” – US citizens and business entities having their principal place of business in the United States • Other persons who act in furtherance of a corrupt payment while in a territory of the United States • Note liability for acts of non-US citizens
Enforcers • US Department of Justice: criminal and civil prosecutions of companies having their principal places of business in the US • Securities and Exchange Commission: civil enforcement actions against registered issuers (SEC v Diagnostic Products)
Targets of Enforcement • US companies and their subsidiaries • Officers, directors, employees, conspirators (US v. King, 8th Cir., 2003) • Shareholders • Agents • Foreign corporations and foreign nationals in a US territory
Five Elements • “Corrupt” payment (or offer to pay) money or anything of value, directly or indirectly • To a foreign official, a foreign political party or party official, a candidate for foreign political office, an official of a public international organization, or anyother person while “knowing” that the payment or promise will be passed to one of these.
Five Elements • Using an instrumentality of interstate commerce (telephone, etc.) by any person (US or foreign) or an act outside the US by a domestic concern or US person, or an act in the US by a foreign person in furtherance of the offer or promise to pay
Five Elements • To influence an official act or decision of the bribed person or to get that person to use influence • In order to assist the company in obtaining or retaining business or to direct business to any person, or to secure an improper advantage.
Examples – “Anything of Value” • Cash or cash equivalents • Tangible and intangible property • Useful information • Promise of future employment • College scholarship • Sports equipment
Corrupt Intent • Payment must be intended to influence the recipient to “misuse his official position” in order to wrongfully direct, obtain, or retain business • Done voluntarily and intentionally and with the bad purpose of accomplishing an unlawful end or an action by unlawful means. US v. Liebo, 8th Cir, 1991.
“Knowing” Conduct • Knowing that a violation will occur or is substantially certain to occur • Firmly believing that a circumstance exists or that a result is substantially likely to occur • No “willful blindness,” “deliberate ignorance,” or “head in the sand.”
Liability for Acts of Third Parties • Company authorized payment or “knew” it would be made • Company consciously disregarded a high probability that the payment would be made
Some Red Flags • Agent refuses to agree in writing to FCPA compliance • Unusual payment arrangements or large sums • Country or official reputed to be corrupt • Official or agent with poor books or records • Involvement of undisclosed or unnecessary third parties • Agent is also an official or closely related to one
Exception for Facilitating Payments • Statutory exception for facilitating (“grease”) payments to low-level foreign officials who perform “routine governmental actions” • Examples: permit processing, licenses, visas, police protection, power supply, cargo handling, inspection scheduling • Reflect payments in accounts
Two Affirmative Defenses • Payment permitted by written laws of the foreign country (But what country has written laws permitting bribery?) • Reasonable and bona fide expenditures • Travel for promotion or demonstration of products • Travel for execution or performance of a contract • (But not a large, unaccountable expense account)
“Necessity” Is Not a Defense It is not a defense to argue that business cannot be done in the foreign country without bribing officials, or that competitors from other countries are engaging in bribery.
Record Keeping • Maintain accounts and controls so that • All transactions have management’s general or specific authorization • Transactions are recorded in conformity with GAAP and assets are accounted for (even petty cash) • Access to assets is only in accordance with management’s authorization • Recorded assets are found periodically to conform to existing assets
Penalities • Criminal penalities • $2 million for companies • $100,000 per violation for individuals (not reimbursed by company), plus up to 5 years in prison • Alternative Fines Act: twice the gain or loss from the offense • Civil penalty: $10,000 per violation for companies and individuals • SEC action: gain to defendant or fine of $5-100,000 for individuals and $50-500,000 for businesses • Debarment for companies
Recent Fines • Titan Corporation - $28.4 million • Monsanto - $1.5 million • ABB - $10.5 million penalty and $5.9 million disgorgement • InVision - $800,000 penalty and $600,000 disgorgement • Fines are highest for companies without effective compliance programs.
Best Practices - 1 • FCPA compliance program and training • Contracts requiring FCPA compliance, with periodic certification • Payments by check or wire transfer, not cash or bearer instruments • No use of unnumbered or offshore bank accounts • Detailed, accurate books, records, and accounts, which are periodically audited
Best Practices - 2 • Prior approval for travel, meals, and entertainment • Screening applicants for jobs in foreign offices to exclude those who are public officials or are closely associated with a foreign government • Due diligence in mergers and acquisitions • Country research (through Transparency International, etc.) • Avoidance of grease payments (none to get business; proper accounting)
Formal Opinion Procedure • Written request for DOJ Formal Opinion under 28 CFR 80.1 – 80.16 • Only for future transactions (for past transactions rely on leniency procedures) • No hypotheticals
Anti-Corruption Measures • OECD Convention (36 signatories) • Inter-American Convention (46 signatories) • Council of Europe Criminal Law Convention (46 signatories) • Council of Europe Civil Law Convention (2003) • UN Convention Against Corruption (118 signatories)
Transparency International 2005 Index 1 Iceland 9.7 12 United Kingdom 8.6 14 Canada 8.4 17 United States 7.6 28 Israel 6.3 41 Italy 5.0 78 China 3.2 112 Palestine 2.6 128 Russia 2.4 159 Nigeria 1.9