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Guide to the FCPAGuide to the FCPA

Jim ChesterJD, LL.M, CCS, CHB

Chester/Associates, PLLCDallas, Texas

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US Trade Laws Implicated byUS Trade Laws Implicated byGlobal Sales and MarketingGlobal Sales and Marketing - - Foreign Corrupt Practices ActForeign Corrupt Practices Act - Anti-Boycott Laws - Anti-Boycott Laws - Export Laws - Export Laws

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Part IPart IForeign Corrupt Practices ActForeign Corrupt Practices Act

(FCPA)(FCPA)

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Who is covered by the FCPA?Who is covered by the FCPA?

• Nearly any U.S. business with foreigncontact will be legally obligated underthe FCPA, as will foreign subsidiariesof U.S. businesses, and some foreigncompanies and individuals.

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Issuers of SecuritiesIssuers of Securities

• Generally, “Issuers” are publiclytraded companies with 500 or moreshareholders and more than$1,000,000 in total assets.

• Additional responsibility for FCPAaccounting/reporting provisions.

• Issuers are subject to more penalties.

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Domestic ConcernsDomestic Concerns• A “Domestic Concern” is any

business organized in the US, aswell as any U.S. citizen or resident,even if living abroad.

• Domestic Concerns are subject anti-bribery rules, but not reportingrequirements.

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Both Issuers & Domestic ConcernsBoth Issuers & Domestic Concerns• Are responsible for the acts of their

officers, employees, agents, etc.• Also responsible for acts of

subsidiaries, even where they haveless than a 50% interest in asubsidiary

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OthersOthers• As of 1998, the FCPA contains a

“catch all” provision that appliesthe anti-bribery rules to “anyperson” who commits bribery onU.S. territory.

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What does the FCPA require?What does the FCPA require? Issuers must keep detailed records. Issuers must keep detailed records.

• The FCPA’s accounting provisions aredesigned prevent illegal conduct bypublicly traded companies by requiringthem to keep records that would revealillegal payments.

• Issuers are required to keep records that“accurately and fairly” reflect all of theissuer’s transactions and assets and mustbe kept in “reasonable detail.”

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Bribery of Foreign OfficialsBribery of Foreign Officials

• Issuers of securities, domestic concerns, andothers all fall under the FCPA’s anti-briberyprovisions.

• All U.S. nationals and businesses, includingtheir foreign subsidiaries, are prohibitedfrom bribery anywhere in the world.

• Foreign nationals and businesses also fallunder the anti-bribery requirements whenthey are in the United States or its territory.

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Bribery of Foreign OfficialsBribery of Foreign Officials

• “Payments” include offers, promises,and authorizations to make paymentsas well as actual payments.

• Anything of value that is offered,authorized, promised, or given is apayment.

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Bribery of Foreign OfficialsBribery of Foreign Officials• “Foreign officials” does not just mean a

public official in foreign governments.• Political parties, their officials, and all

candidates for public office also count.• Employees of state-owned corporations, such as

PEMEX, have been deemed foreign officials.• Officers and employees of “public international

organizations” are specifically covered by theFCPA.

• Any organization whose employees enjoydiplomatic treatment are public internationalorganizations, (e.g., the United Nations)

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Bribery of Foreign OfficialsBribery of Foreign Officials• Moreover, the FCPA prohibits payments to

any person the payor knows will use anyportion of the payment to bribe a foreignofficial.

• Payor does not need detailed knowledge ofhow the payment will be used. “Consciousdisregard of suspicious circumstances” or“deliberate ignorance” of an illegal paymentwill not protect a company.

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Bribery of Foreign OfficialsBribery of Foreign Officials• The FCPA does not define “corruptly,” but U.S.

courts have interpreted it as creating an intentrequirement. Payors must intend “to induce therecipient to misuse his official or to influencesomeone else to do so.”

• Payors must voluntarily, intentionally, and with a“bad purpose” seek an illegal result (judged by thehost country’s law) or use an illegal method toachieve a lawful result. This intent requirementonly applies to improper payments and not to theFCPA’s accounting requirements.

• Improper advantage is any advantage that is notavailable under the host country’s written laws.

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Bribery of Foreign OfficialsBribery of Foreign Officials• Any payment made with the intent to secure an

unfair advantage or with a conscious disregard ofcircumstances likely to lead to a violation of theFCPA is illegal, regardless of whether it is made atthe suggestion or request of a foreign official.

• However, payments made by victims of actualextortion are not covered by the FCPA.

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Bribery of Foreign OfficialsBribery of Foreign Officials

• Previously, the FCPA only prohibited payments forthe purpose of obtaining, keeping, or directingbusiness to any person or entity. Thus, companycould make a payment to a foreign official toobtain a lower customs rate or favorable taxtreatment.

• This is no longer the case.• 1998 amendments to the FCPA broadened the scope of

what is considered an illegal purpose.• Nearly any advantage may now be considered improper.

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What the FCPA Allows What the FCPA Allows

• The FCPA explicitly allows threetypes of payments.

• However, each of these exceptions isnarrow in scope and should beinterpreted conservatively bycompanies seeking to use them.

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What the FCPA Allows What the FCPA Allows• First, payments to “expedite or to secure the

performance of a routine governmental action” arenot covered by the FCPA.• These “grease” payments are generally only allowed for

expediting non-discretionary actions by minor officials.

• Second, payments that are explicitlyallowed under the host country’s writtenlaws are not improper.

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What the FCPA Allows What the FCPA Allows

• Third, “reasonable and bona fideexpenditures” that are directly related to thepromotion or demonstration of products orthe performance of a government contractare allowed.• These payments are designed to cover things

“such as travel and lodging expenses” incurredby government officials as part of normalbusiness operations.

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FCPA Penalties & EnforcementFCPA Penalties & Enforcement• The FCPA is enforced by the SEC and the

Department of Justice.• SEC responsible civil suits and enforcement of

the FCPA’s accounting requirements.

• DOJ handles all criminal prosecutions.• Significant overlap between these roles.• SEC may refer cases to DOJ for criminal prosecution and

the two agencies may work together on some cases.

• Additionally, private parties may bring FCPAissues to the attention of either agency.

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Penalties for OrganizationsPenalties for Organizations• Publicly traded companies face a wide

range of penalties, including some notexplicitly mentioned in the FCPA itself.• May be barred from doing business with

government agencies or contractors.• May be debarred from government agencies

such as the Commodity Futures TradingCommission or have export licenses suspended.

• Investigation triggered by the FCPA can spreadto other areas if it turns up problems notcovered by the FCPA.

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Penalties for OrganizationsPenalties for OrganizationsThe penalties for FCPA violations can be substantial:

• A willful violation of the FCPA can result in finesup to:– $25,000,000 for accounting violations and– $2,000,000 for a violation of the anti-bribery provisions.

• Further, civil penalties of up to $10,000 perviolation may be assessed.

• Taken together with the cost of defending a FCPAcase, companies face severe economicconsequences for failure to comply with the FCPA.

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Penalties for IndividualsPenalties for Individuals• Willful violators of the accounting provisions may be:

• fined up to $5,000,000 for each violation, and• sentenced up to twenty years in prison for each violation

• Criminal penalties for willful violations of the anti-briberyprovisions –

• fines up to $100,000 per violation and• up to five years in prison per violation

• Plus civil penalties up to $10,000 per violation.

• Corporations are forbidden from paying any portion offines levied against their employees or agents under theFCPA.

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• The safest approach to compliance with the FCPA’s anti-bribery provisions is to refrain from making any payments toforeign officials.

• In addition, U.S. companies should:• Take active steps to prevent improper payments• Thoroughly check out any overseas business contacts• Include FCPA compliance provisions in all contracts with

foreign actors• Demand a right to review foreign partners’ books and audit

them for FCPA compliance• Reserve a right to terminate any contract with a party that is

violating the FCPA and immediately exercise that right if abreach of the FCPA is discovered

• Make all payments transparent (no cash) and reasonable forgoods delivered or services rendered.

FCPA ComplianceFCPA Compliance

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• U.S. companies must start at home. Any company withsignificant foreign contacts should ensure its internal FCPAcompliance by:

• Creating a code of conduct• Educating employees about the code of conduct and the

FCPA• Creating channels for employees to safely report

suspected FCPA violations• Establish and enforce penalties for violating the code of

conduct• Screen potential employees, especially those who will

work abroad.

FCPA ComplianceFCPA Compliance

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FCPA Compliance PitfallsFCPA Compliance Pitfalls• The biggest pitfall facing U.S. companies

is foreign affiliates/agents.• U.S. companies can be held vicariously liable

for breaches of the FCPA, and should seek toextend their normal compliance regime to theirsubsidiaries.

• Integrate accounting practices where feasible.• Consistency in compliance will increase

transparency and help spot irregularities so thatthey may be corrected.

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FCPA Compliance PitfallsFCPA Compliance Pitfalls• A second pitfall is the increasing

number of foreign anti-bribery laws.

• Also, US company may expose itselfto non-FCPA liability if its FCPAcompliance efforts cause it to exerttoo much control over a foreignsubsidiary.

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FCPA Compliance PitfallsFCPA Compliance Pitfalls• Finally, a “yes” answer to any of the following questions should

send up a red flag that a particular arrangement may be improper:1. Is your foreign agent also a government official or related to one?2. Is the agent’s company owned by a political party, official, or the

family of an official?3. Is the agent’s fee more than your company would normally pay

that type of service?4. Is the payment excessive for the local market or under local law?5. Are an agent’s services really necessary or are they a pretext?6. Is corruption endemic in the local country?7. Is your agent reputable and respected?8. Are the foreign agent’s books and records in order?