October 24, 2014
October 23, 2014
Key Takeaways from the Federal Government’s Newly Issued Guide to the FCPA
The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have jointly released long-anticipated guidance on the Foreign Corrupt Practices Act (FCPA). In announcing the release of this 120 page publication, aptly entitled, A Resource Guide to the U.S. Foreign Corrupt Practices Act (Guide), these two federal agencies responsible for enforcement of the 1977 statute proclaimed that not only does the Guide set forth a detailed analysis of key provisions of the FCPA, but the document is also “an unprecedented undertaking by DOJ and SEC to provide the public with detailed information about our enforcement approach and priorities.”
The FCPA broadly prohibits paying or providing things of value to foreign officials with the intent to influence the official in his or her official capacity or to secure any other improper advantage. The Guide comes in the wake of wide-spread criticism of the government’s aggressive enforcement campaign which has prompted highly publicized settlements totaling billions of dollars in corporate fines and an upswing in criminal cases against corporate executives and other individuals. Pressure for more detailed guidance has been voiced by the business community, defense bar, and academia alike, over what is perceived to be lack of clarity in key provisions of the FCPA along with the government’s broad interpretation of these provisions. Even the judiciary has weighed in through critical court opinions and dismissal of recent government cases.
While the Guide addresses a variety of topics in some detail, the publication primarily recites legal opinions advocated by the government in its enforcement cases. In other words, the Guide does not contain any new substantive positions or interpretations and therefore provides few revelations for seasoned FCPA practitioners. For example, the publication does not give bright line tests or definitive answers to many of the most important questions in play, nor does it prescribe a safe harbor or affirmative defense for an adequate compliance program, as lobbied for by the business community and which is included in the recently enacted UK bribery law.
Even with these omissions, however, the Guide should be viewed as a useful compilation of pre-existing enforcement pronouncements and opinion procedure releases. Perhaps most noteworthy is the Guide’s insight into DOJ and SEC enforcement practices by the use of hypotheticals and case studies explaining the government’s rationale for pursuing or not pursuing enforcement actions. Topics highlighted include the definition of a foreign official; jurisdictional issues, such as who is and is not covered by the statute; what constitutes proper and improper gifts, travel and entertainment expenses; the nature of facilitating payments; the use of third parties; how successor liability applies in the mergers and acquisitions context; the hallmarks of an effective corporate compliance program; and guiding principles of enforcement.
Some of the key takeaways from the Guide follow.
Foreign Official Defined
The FCPA applies broadly to payments to any person acting in an official capacity for or on behalf of any foreign government, department, agency, or instrumentality. While government ministers, agency employees, and elected members of government are clearly foreign officials, as the Guide notes, most difficulties in interpreting whether an individual falls within the scope of the FCPA have come from state-owned or controlled companies. The Guide, therefore, provides a non-exclusive list of factors that may be used to determine if an entity is an instrumentality of a foreign government:
- the foreign state’s extent of ownership of the entity;
- the foreign state’s degree of control over the entity (including whether key officers and directors of the entity are, or are appointed by, government officials);
- the foreign state’s characterization of the entity and its employees;
- the circumstances surrounding the entity’s creation;
- the purpose of the entity’s activities;
- the entity’s obligations and privileges under the foreign state’s law;
- the exclusive or controlling power vested in the entity to administer its designated functions;
- the level of financial support by the foreign state (including subsidies, special tax treatment, government-mandated fees, and loans);
- the entity’s provision of services to the jurisdiction’s residents;
- whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government; and
- the general perception that the entity is performing official or governmental functions.
No single factor is dispositive, and companies should be aware that the degree of ownership by the foreign government may be less important than the degree of governmental control. Companies should also remember that even if an entity is not an instrumentality of a foreign government, corrupt payments may still violate the Travel Act, anti-money laundering laws, or local laws.
Gifts, Travel and Entertainment Expenses
Contrary to the hopes of many in the legal and business community, the Guide does not provide any specific guidelines as to what gifts, travel, and entertainment expenses violate the FCPA when provided to government officials. Instead, the Guide simply reiterates the basic principles that the DOJ and SEC have emphasized in previous releases and opinions: small gifts or modest entertainment are permissible, but lavish hospitality and extravagant gifts are more likely to be considered to have corrupt intent. According to the Guide, a gift is more likely to be considered appropriate if it is:
- given openly and transparently;
- properly recorded in the giver’s books and records;
- provided only to reflect esteem or gratitude; and
- permitted under local law.
Entertainment and travel should be modest and emphasize training or company inspections, rather than sightseeing. Consistent with prior pronouncements and practice, the Guide confirms that “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 emphasizes that companies should have clear and transparent policies and reporting guidelines for gifts to and entertainment of government officials which should include procedures for approval and clear monetary thresholds.
The Guide emphasizes that the FCPA’s exception for “facilitating or expediting payments” made in furtherance of routine governmental action is a narrow exception. Routine government action must be non-discretionary, and may include processing visas, providing police protection or mail service or supplying utilities. Facilitation payments do not include payments intended to obtain some benefit that the payer is not entitled to receive, nor do they include payments intended to influence a decision to award new business.
The Guide does not provide any bright-line rules for determining if a payment falls within the exception, though it does state that a large payment is more “suggestive of corrupt intent to influence a non-routine governmental action.” The Guide reminds companies that facilitation payments must be properly reported and points out that even if a payment is a proper facilitation payment under the FCPA, it may be a violation of local law or other countries’ foreign bribery law (such as the UK Bribery Act, which does not contain a facilitation payment exception).
Use of Third-Party Agents
Given the number of FCPA cases in recent years involving agents or other third parties, it is not surprising that the Guide discusses the FCPA’s prohibition on corrupt payments made through intermediaries. The Guide emphasizes that the FCPA imposes liability not only on those with actual knowledge of bribes, but those who are willfully blind to the likelihood that an agent retained on their behalf is engaging in corrupt practices. While the Guide does not provide any new insight on the use of third-party agents, it does include a list of common red flags associated with third parties:
- excessive commissions to third-party agents or consultants;
- unreasonably large discounts to third-party distributors;
- third-party “consulting agreements” that include only vaguely described services;
- the third-party consultant is in a different line of business than that for which it has been engaged;
- the third party is related to or closely associated with the foreign official;
- the third party became part of the transaction at the express request or insistence of a foreign official;
- the third party is merely a shell company incorporated in an offshore jurisdiction; and
- the third party requests payment to offshore bank accounts.
The Guide emphasizes the need for due diligence to reduce the risks associated with using third-party agents.
Successor Liability in the M&A Context
The Guide emphasizes the role of thorough due diligence in mitigating the risk of successor liability for pre-merger FCPA violations. According to the Guide, the DOJ and SEC expect companies considering mergers or acquisitions to:
- conduct thorough risk-based FCPA and anti-corruption due diligence on potential new business acquisitions;
- ensure that the acquiring company’s code of conduct and compliance policies and procedures regarding the FCPA and other anti-corruption laws apply as quickly as is practicable to newly acquired business or merged entities;
- train the directors, officers, and employees of the newly acquired business or merged entities, and when appropriate, train agents and business partners, on the FCPA and other relevant anti-corruption laws and the company’s code of conduct and compliance policies and procedures;
- conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable; and
- disclose any corrupt payments discovered as part of its due diligence of newly acquired entities or merged entities.
According to the Guide, if an acquiring company promptly remedies and reports violations uncovered in due diligence, the DOJ and SEC are much less likely to pursue enforcement actions against the acquiring company, although they may still prosecute the predecessor company. An acquirer’s failure to stop misconduct from continuing after an acquisition, however, can be grounds for successor liability under the FCPA.
Hallmarks of an Effective Corporate Compliance Program
The Guide emphasizes the importance the SEC and DOJ places on a strong compliance program noting that “an effective compliance program is a critical component of a company’s internal controls.” According to the Guide, the government will often consider the adequacy of the program in determining whether to bring an enforcement action and/or mitigate sanctions in an FCPA case. Acknowledging that “there is no one size fits all” compliance program, and that each program “should be tailored to an organization's specific needs, risks, and challenges,” the Guide sets forth the hallmarks of an effective program:
- a commitment from senior management and a clearly articulated policy against corruption;
- a code of conduct and compliance policies and procedures that are clear, concise and accessible to all employees;
- oversight of the compliance program by one or more specific senior executives who have appropriate authority within the organization, adequate resources to ensure implementation and direct access to the organization’s governing authority, such as the board of directors;
- tailoring of the compliance program to the risks that the company faces;
- means to communicate the relevant anti-corruption policies and procedures throughout the organization, including through periodic training and certification for all directors, officers, relevant employees, agents and business partners;
- appropriate disciplinary procedures and incentives;
- appropriate, risk-based due diligence for third parties;
- a mechanism for employees to report confidentially any suspected or actual misconduct and a process for investigating and documenting the company’s response;
- continuous auditing, review and updating of the compliance policies to address new risks; and
- pre-acquisition due diligence and post-acquisition integration for mergers and acquisitions.
While having a well-constructed and consistently enforced compliance program is not a total defense against prosecution, the DOJ and SEC will consider the adequacy of the program in determining what action to take in the event a violation is discovered. In particular, according to the Guide, the adequacy of the compliance program will help determine whether the matter can be resolved through a deferred or non-prosecution agreement, the length of a deferred prosecution agreement, the need for a monitor, and the need for or term of probation.
Guiding Principles of Enforcement
The Guide reiterates prior guidance contained in SEC and DOJ releases detailing the factors the two governmental bodies consider in determining whether to bring an enforcement action and/or mitigate sanctions in connection with an FCPA investigation. In addition to a robust compliance program, these factors emphasize the nature of the alleged wrongdoers response to the discovery of a potential problem, including a thorough internal investigation and, where appropriate, self-reporting, and cooperation with any ensuing government inquiry and remediation.
Generally, neither the SEC nor the DOJ publicizes a decision not to prosecute a company that it has been investigating. But, in one of the most interesting sections of the Guide, the DOJ and SEC provide six anonymous examples of instances where the agencies declined to pursue cases and list the factors that influenced their decision. Every one of the six examples included some version of the following factors:
- the company discovered the violation or potential violation on its own and promptly self-reported to the SEC and DOJ;
- the company conducted a robust internal investigation;
- the company disclosed all other red flags discovered during the internal investigation to the SEC and DOJ;
- all employees involved in the misconduct were terminated or disciplined;
- the company immediately severed ties with any third-party agent, construction firm, or local law firms involved; and
the company immediately took substantial steps to improve its compliance. Examples of the type of improvements that were considered substantial include:
- reorganizing the compliance department;
- appointing new compliance officer dedicated to anti-corruption;
- reviewing or auditing all international third-party relationships;
- providing comprehensive FCPA training to all employees;
- instituting internal audits of customs payments; and
- enhancing internal controls and record-keeping policies.
Additionally, in certain instances, the following factors were a consideration in the DOJ or SEC’s decision not to pursue a case against a company:
- payments were uncovered by the company’s internal controls before payment was actually made and management blocked the payment and immediately reported the issue to the General Counsel and Audit Committee;
- the total amount of improper payments was small, as was the potential profit;
- the potential bribe was an isolated incident involving a single employee;
- small bribes were wrongly approved by the company’s local law firm;
- the company began using a more lengthy and costly permit process, using lawyers rather than customs agents; and
- in an acquisition, the acquiring company had a robust compliance program and internal controls, identified potential improper payments during pre-acquisition due-diligence, implemented a comprehensive remedial plan, and ensured that the new subsidiary was promptly incorporated into the acquirer’s internal controls and compliance environment.
These factors are consistent with the instances where Andrews Kurth has been able to persuade the SEC and DOJ not to bring FCPA cases against our clients. For instance, the SEC and DOJ credited our client’s culture of compliance, its compliance policies, programs, and controls, its high level of cooperation in the investigation, and the thoroughness of the internal investigation conducted by Andrews Kurth in determining not to bring an enforcement action relating to our client’s use of a freight-forwarding company in West Africa, while other oilfield services and oil and gas companies who used the same freight forwarding company were fined hundreds of millions of dollars in connection with alleged bribes.
Given the gravity of the potential consequences of FCPA violations, companies and their management should be particularly mindful of these governmental expectations when confronted with a potential FCPA violation.
Applicability of the Guide
The Guide is not legally binding, nor does it change the law in any way. Despite the hopes of many in the legal and business community, it does not provide a safe harbor for companies with compliance programs meeting certain criteria. The Guide should, instead, be viewed as a helpful resource that gathers into one document guidance that had been scattered through multiple cases, opinions, speeches, fact sheets, and releases. While it does not provide any clear answers, it does provide an overview of the questions that should be asked and the factors that should be considered in designing and implementing an anticorruption program.
The Guide demonstrates that there are no one-size-fits-all approaches to FCPA compliance. The Guide confirms that the SEC and DOJ expect companies to customize their due diligence and compliance programs to the nature of their business, the type of interactions with government officials, and the countries in which they operate. Companies should continuously monitor the effectiveness of their programs, promptly address any potential problems, and ensure that any changes in business structure or operations are accounted for in compliance policies and procedures.