DOJ and SEC Issue Long-Awaited Resource Guide to the Foreign Corrupt Practices Act
On November 14, 2012, the Department of Justice and the Securities and Exchange Commission published their much anticipated Resource Guide to the U.S. Foreign Corrupt Practices Act.1 There is little new in the Guide to clarify the circumstances under which the government will charge companies or individuals with FCPA violations. Instead, the Guide reiterates previous government pronouncements that the FCPA should be construed broadly, and cites its own charging decisions as “authority” for what the statute proscribes. Basically, the Guide is a comprehensive compilation of “authority” formerly found only in various Government press releases, settlement agreements and guilty pleas. Thus, the guidance is somewhat of a disappointment for the experienced FCPA practitioner and for companies that already have robust compliance programs. In a few areas – notably in its discussion of gifts, travel and entertainment – theGuide does offer a few practical compliance tips for companies still trying to find their compliance footing in the challenging business conditions that prevail in many foreign countries. Some key points made in the Guide are highlighted below.
The FCPA outlaws bribes for purposes beyond winning or retaining government contracts.
The Guide advances the Government’s view that the FCPA is not limited merely to bribes paid to obtain or retain government contracts, but also covers payments made to foreign officials for any business purpose. For instance, the Guide states that payments to foreign officials to reduce or eliminate customs duties, to enable the release of goods or equipment from customs, to lower tax assessments, to obtain government action to prevent competitors from entering a market, or to circumvent a licensing or permit requirement would all be unlawful. See Guide at 12-13. The bulk of the “authority” cited by the Guide in support of this unduly broad interpretation are civil complaints and criminal informations filed by the government in connection with negotiated settlements, and even a handful of SEC and DOJ press releases. See id. at 107, nn. 66 & 68. The only caselaw cited by the government for this expansive view of the FCPA is the decision of the Fifth Circuit in United States v. Kay, 359 F.3d 738 (5th Cir. 2004). Yet, despite the suggestion in the Guide to the contrary, Kay held that to support an FCPA charge the government must prove the defendant made an offer or payment with the intent to bring about a specific result “that would assist (or is meant to assist) in obtaining or retaining business.” Id. at 740 (emphasis in original).
Who is a foreign official?
The Guide reminds that the FCPA prohibits payments to foreign officials, i.e., individuals, and not payments to foreign governments. (In this respect, the FCPA differs from the Medicare and Medicaid Anti-Kickback Statute, which does regulate remuneration provided to a hospital, nursing home or other institution.) The Guide further advises, however, that something of value given to a foreign government institution may violate the FCPA if made for a corrupt purpose of personally benefiting individual foreign officials. Thus, a U.S. manufacturer of law enforcement equipment can give a patrol car to the police force of a foreign municipality for official use, but that manufacturer cannot give the vehicle to the municipality at the request of the chief of police for his personal use, understanding that he will assist the manufacturer in obtaining or retaining municipality business.
What is an instrumentality of a foreign government?
The Guide addresses the controversial issue of how much foreign government involvement is required before a hospital, airline, bank or other entity is considered an “instrumentality” of the foreign government for purposes of the FCPA. The Guide advises that resolution of this issue requires a fact-specific analysis of the entity’s ownership, control, status, and function, and identifies 11 factors that courts have found relevant to consider (e.g., “the foreign state’s extent of ownership of the entity” and “the general perception that the entity is performing official or governmental functions”).
The Guide states that “as a practical matter, an entity is unlikely to qualify as an instrumentality if a government does not own or control a majority of its share.” An exception to this general rule would arise, the Guide advises, where a foreign government owned a minority interest in a company, but held the status of “special shareholder” with veto power over major expenditures, controlled important operational decisions, and appointed most senior company officers and directors.
Gifts, Travel and Entertainment Expenses.
As noted, the discussion of permissible gifts, travel and entertainment provides some guidance, albeit with caveats. While cautioning that giving a substantial gift, or a pattern of giving small gifts, could trigger enforcement, the Guide acknowledges that a “small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other.” TheGuide offers four “hallmarks of appropriate gift-giving”: (1) the gift is given openly and transparently; (2) the gift is properly recorded in the giver’s books and records; (3) the gift is provided to reflect esteem or gratitude; and (4) the gift is permitted under local law.
In what will likely prove to be an oft-quoted sentence, the Guide elaborates: “Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.”
The Guide also describes a number of permissible and impermissible gift, travel and entertainment hypothetical examples. Permissible examples include:
- At a trade show, Company A may invite a dozen current and prospective customers out for drinks, and pay the moderate bar tab, even though some of the current and prospective customers are foreign officials under the FCPA
- Two years ago, Company A won a long-term contract with a state-owned Electricity Commission. Company A executives may give a “moderately priced crystal vase” to the recently-married General Manager of the Electricity Commission as a wedding gift and token of esteem.
- Company A’s contract with the state-owned Electricity Commission requires it to pay for airfare, hotel, and transportation of the Commission’s senior officials to travel to Michigan to inspect Company A’s facilities and for training. The legitimate business trip to Michigan lasts several days. Company A may agree to pay for business class tickets, to which its own employees would be entitled for lengthy international flights. In addition, Company A may take the executives to a moderately priced dinner, a baseball game, and a play.
Finally, the Guide comments favorably on the practice of setting clear company-wide gift-giving clearing processes, which eliminate discretion on the part of individual employees: “As part of an effective compliance program, a company should have clear and easily accessible guidelines and processes in place for gift-giving by the company’s directors, officers, employees, and agents. Though not necessarily appropriate for every business, many larger companies have automated gift-giving clearing processes and have set clear monetary thresholds for gifts along with annual limitations, with limited exceptions for gifts approved by appropriate management. Clear guidelines and processes can be an effective and efficient means for controlling gift-giving, deterring improper gifts, and protecting corporate assets.”
Pointing out that an illegal bribe may take the form of a charitable contribution made at the behest of a foreign official, the Guide sets out five questions to consider for charitable contributions in a foreign country: (1) what is the purpose of the payment? (2) Is the payment consistent with the company’s internal guidelines on charitable giving? (3) Is the payment at the request of a foreign official? (4) Is the foreign official associated with the charity and one who can make decisions affecting the company’s business? (5) Is the payment conditioned upon receiving business or other benefits?
Payments to Third Parties.
The Guide advances the familiar position that one can violate the FCPA by paying an agent or intermediary, “knowing that all or a portion of” the payment will be passed along to a foreign official. The Guide offers eight “common red flags” indicating that part of the payment may be passed along to a foreign official.2 Companies engaged in risk assessments, internal compliance reviews, and vetting third-party agents should take these red flags into account.
“Reasonable and Bona Fide Expenditures.”
The FCPA permits (technically, it creates a defense for) payments that are reasonable, bona fide, and directly related either to the promotion, demonstration, or explanation of products or services, or to the execution or performance of a contract. Thus, a company may pay for a foreign official’s reasonable and bona fide travel and lodging expenses for a legitimate product demonstration or where the contract with the foreign government entity provides for the expenditure. The Guide sets out nine safeguards to help businesses evaluate whether an expenditure is permissible.3
Effective Remedial Actions.
The Guide gives six examples in which the DOJ and/or SEC declined to enforce apparent FCPA violations against companies that had taken effective remedial action. Although the facts vary from example to example, some common actions include voluntary disclosure to the DOJ and SEC (in the case of public companies), thorough investigation, immediate cessation of apparently unlawful activity, termination of foreign agents and law firms involved in the apparent illegal conduct, termination and/or discipline of involved employees, and upgrading anti-corruption training, policies and procedures, and other internal controls. These examples provide no assurance that a government investigation or enforcement action will be avoided but do make the common sense point that prompt remedial actions will mitigate the risk of these consequences.
1 The Guide is available online a thttp://www.justice.gov/criminal/fraud/fcpa/guide.pdf and http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf.
2 The red flags identified in the Guide are: (1) excessive commissions to third-party agents or consultants; (2) unreasonably large discounts to third-party distributors; (3) vague “consulting agreements” that do not clearly describe services to be provided; (4) the third-party consultant is in a different line of business than that for which it has been engaged; (5) the third party is closely associated with the foreign official; (6) the third party became part of the transaction at the request of the foreign official; (7) the third party is merely a shell company incorporated in an offshore jurisdiction; and (8) the third party requests payment to an offshore bank account.
3 The nine safeguards are: (1) the company does not select the particular officials who will participate in the trip or program, or the officials will be selected on a pre-determined, merit-based criteria; (2) costs will be paid directly to travel and lodging vendors, or costs reimbursed only upon presentation of a receipt; (3) no advancement of funds or cash reimbursement; (4) expenses are kept reasonable; (5) expenditures are transparent both to the company and to the government entity; (6) payment of expenses must not be conditioned on any action by the foreign official; (7) obtain written confirmation that the payment is not contrary to local law; (8) no additional compensation is made beyond what is necessary for actual expenses incurred; and (9) incurred expenses are accurately recorded and described in company’s books and records.