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Business people should be aware of the consequences for violating the Foreign Corrupt Practices Act (FCPA) | Spotts Fain
April 22, 2010 by Brian T. Chase
On April 19, 2010 a Virginia resident was sentenced to the longest prison term imposed against an individual for violating the Foreign Corrupt Practices Act ("FCPA" or the "Act"). U.S. District Court Judge Henry E. Hudson of the U.S. District Court for the Eastern District of Virginia sentenced a Virginia resident to eighty seven months in prison, three years of supervised release, and a $15,000 fine. In their press release, the U.S. Department of Justice officials emphasized the seriousness of the crime and the fact that the U.S. government is intent on enforcing the laws against bribery.[1] Officials noted their intent to prosecute violators to the maximum extent and their position that this sentence should serve as a warning to those engaging in corrupt business dealings. Id.
The lengthy prison sentence underscores the importance of compliance with the FCPA. In the modern business environment, it is increasingly more common for businesses to conduct activities in foreign countries. However, as U.S. Attorney Neil H. MacBride aptly stated, "[b]ribery isn't just a cost of doing business overseas." Id. United States citizens and businesses should be mindful of the provisions of the FCPA in their dealings with foreign governments and officials. The FCPA prohibits payment of anything of value by United States citizens and businesses (and in certain situations, foreign nationals or corporations) intended to obtain or retain business. Violations of the FCPA carry the potential for stiff criminal and civil penalties.
I. Elements of a FCPA Violation
The FCPA, 15 U.S.C. §§ 78dd-1, et seq., prohibits any person or company, subject to jurisdiction in the United States, from bribing an official of a foreign government in order to obtain or retain business or to secure an improper advantage. With respect to the basic prohibition above, there are five elements that must be met in order to constitute a violation of the FCPA.
The FCPA contains three sections that apply to different types of violators. The FCPA makes it illegal to bribe foreign government officials if you are defined as an "issuer" (§ 78dd-1), a "domestic concern" (§ 78dd-2), and in certain situations, a foreign national or business (§ 78dd-3). An issuer is defined as a corporation that has issued securities that are registered in the United States or one who is required to file reports with the Securities and Exchange Commission (SEC) under 15 U.S.C.S. § 78o(d). 15 U.S.C. §78dd-1(a). The Act also imposes further accounting and record keeping obligations on issuers.[2] The account and record keeping requirements do not apply to domestic concerns or foreign nationals.
Domestic concerns are addressed in the second section of the FCPA. A domestic concern is defined as,
any individual who is a citizen, national, or resident of the United States; and any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principle place of business in the United States, or which is organized under the laws of a State of the United States or a territory, possession, or commonwealth of the United States.
15 U.S.C.S § 77dd-2(h)(1).
Domestic concerns are a very broad group that includes most individuals and businesses found in the United States. The FCPA applies to any officer, director, employee or agent of an issuer or domestic concern. 15 U.S.C. § 78dd-1(a) and § 78dd-2(a).
The 1998 amendments expanded the FCPA to assert territorial jurisdiction over foreign nationals or foreign corporations who cause an act in furtherance of a corrupt payment to take place within the United States. See, 15 U.S.C. §78dd-3.
Issuers and domestic concerns can be held in violation of the FCPA based on territorial or nationality jurisdiction principles. Any action taken by an issuer or domestic concern that involves the U.S. mails or other instrumentalities of interstate commerce and that is in furtherance of making a corrupt payment to an official of a foreign government can trigger a violation under the FCPA under territorial jurisdiction principles. 15 U.S.C. § 78dd-1(a) and § 78dd-2(a). In addition, issuers and domestic concerns may be held liable for actions taken by employees or agents completely outside the territory of the United States and without regard to the use of interstate mails or commerce under nationality jurisdiction principles (i.e. simply by reason of being a United States citizen). 15 U.S.C. § 78dd-2(i). Under nationality jurisdiction the suspect payment can be in violation of the FCPA without the involvement of any personnel located in the United States. Foreign nationals and companies are only liable for actions taken on U.S. soil. 15 U.S.C. § 78dd-3(a). Finally, U.S. parent companies can be held liable for corrupt payments their foreign subsidiaries make but only where the parent company authorized, directed, or controlled the activity in question.[3]
2. Corrupt Intent
The person or entity authorizing the payment must have corrupt intent, which means that the payment must have an evil purpose or motive and be intended to induce the recipient to misuse his official position to direct business to or retain business for the payor or a designated third party. H. Lowell Brown, Avoiding Bribery When Doing Business Overseas: A Primer on the Foreign Corrupt Practices Act, 20 Maine Bar J. 78, 80 (2005). The FCPA does not require the bribe to succeed or even to be completed. An offer or promise of a corrupt payment is enough to constitute a violation. Id. The FCPA prohibits any corrupt payment intended to influence any act or decision of a foreign official in his or her official capacity, to induce the official to do or omit to do any act in violation of his or her lawful duty, to obtain an improper advantage, or to induce a foreign official to use his or her influence improperly to affect or influence any act or decision. Id. There must be a quid pro quo of some kind (i.e. a specific intent to give or receive something of value in exchange for an official act). Brown at 80.
The FCPA prohibits corrupt payments by intermediaries as well. It is unlawful to make a payment to a third party, while knowing that all or a portion of the payments will be directed to a foreign government official for corrupt purposes.[4] In this context, the term knowing includes conscious disregard or deliberate ignorance. Id. U.S. companies are required to exercise due diligence and take all necessary precautions when entering into business dealings or joint partnerships with foreign companies.
The FCPA prohibits paying, offering, promising, or authorizing payment of money or anything of value. 15 U.S.C. § 78dd-1(a), § 78dd-2(a), and § 78dd-3(a). The Act is not limited to cash payments and anything of value could be deemed an improper payment. "Anything of value" has included: employment of officials as a consultant, expense-paid travel, loans with favorable interest rates and repayment terms, golf outings, sports equipment, charitable contributions, transportation of goods, and scholarships. Brown at 80. It is not necessary that the bribe that is given or promised have a definite value. The focus will be on the value the defendant subjectively attaches to the items. Id.
The FCPA prohibits payments to foreign officials, foreign political parties or party officials, and to any candidate for foreign political office. For the purposes of the Act, a "foreign official" means any officer, employee, or any person acting in an official capacity or on behalf of a foreign government or any department, agency, subdivision or instrumentality thereof, or of a public international organization. 15 U.S.C. §§ 78dd-1(f)(1)(A), 78dd-2(h)(2)(A), and § 78dd-3(f)(2)(A). The FCPA prohibits payments to any public official, regardless of rank or position.[5] The FCPA focuses on the purpose of the payment rather than who the payment was directed towards. Id. It should be noted that employees of state-owned enterprises have been considered "foreign officials" as well. Brown at 80.
Payments to officers, employees or agents of public international organizations are also prohibited. Public international organizations include: the Asian Development Bank, the International Committee of the Red Cross, the United Nations, the World Trade Organization, the International Monetary Fund and similar groups. Id.
5. Business Purpose Test
The FCPA prohibits corrupt payments by an individual or company to foreign government officials in an effort to secure or retain business for the payor or a third party. Brown at 80. Courts have called this element the business purpose test or the business nexus test. U.S. v. Kay, 359 F.3d 738, 740 (5th Cir. 2004). There must be some degree of "quid pro quo" for a conviction under the FCPA. Id. at 743. The payment must be intended to secure future business, an improper advantage for the payor or a designated third party. The Department of Justice and courts have interpreted "obtaining or retaining" business very broadly.[6] The Court of Appeals for the Fifth Circuit has held, "that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly, in obtaining or retaining business for some person." Kay at 755. The business to be obtained or retained does not need to be with the foreign government, but rather can be part of a transaction or deal that requires authorization or action by a foreign government. Id.
II. Permissible Payments and Affirmative Defenses
The FCPA contains an explicit exception to the bribery prohibition for "facilitating payments". Facilitating payments are those made to expedite the performance of "routine governmental actions." See, 15 U.S.C. § 78dd-1(b). The Act states that the prohibition of corrupt payments, "shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official." Id. The phrase "routine governmental action" is limited to ministerial action and is defined as: obtaining permits or licenses, processing governmental papers such as visas or work orders, providing police protection, mail pick-up or delivery, scheduling inspections associated with contract performance, providing utility service, loading or unloading cargo, or actions of a similar nature. 15 U.S.C. §78dd-1(f)(3)(A). The Act stresses that "routine governmental action" does not include, "any decision by a foreign official whether, or on what terms, to award new business to or to continue business with a particular party." 15 U.S.C. § 78dd-1(f)(3)(B). These exceptions are narrowly defined in the Act and have been narrowly interpreted by the courts as well. See, Kay at 756. While facilitating (or grease) payments are allowed under the FCPA, any payment intended to influence a foreign official in the decision-making process would be a violation. Id.
The FCPA provides several affirmative defenses for those charged with violating the Act. The first defense is that the payment was lawful under the written laws and regulations of the foreign official's country. 15 U.S.C. § 78dd-1(c)(1). Another affirmative defense for those charged under the FCPA is to assert that the payment was a reasonable and bona fide expense related to the promotion, demonstration, or explanation of products or services; or related to the execution or performance of a contract with a foreign government. 15 U.S.C. § 78dd-1(c)(2). An example of a "reasonable and bona fide" expense would be travel and lodging expenses incurred by a foreign official. Id. Any defense proffered must be directly related to the promotion of services or goods or related to the performance of the contract. Id.
Violations of the FCPA carry stiff criminal penalties. Violations of the prohibition against corrupt payments to foreign officials by corporations and other business entities are subject to a fine of up to $2,000,000. 15 U.S.C. § 78dd-2(g)(1)(A). Officers, directors, employees, agents, or stockholders acting on behalf of a domestic concern are subject to fines of up to $100,000 and five years imprisonment. 15 U.S.C. § 78dd-2(g)(2)(A). Similar criminal provisions are in place for foreign entities that violate the FCPA while in U.S. territory. See, 15 U.S.C. § 78dd-3(e).
In addition to the criminal penalties above, the Attorney General or SEC may bring civil actions against issuers who violate the FCPA.[7] Civil penalties can apply to any domestic concern and to any officer, director, employee, agent, or stockholder who acts on behalf of the entity that violates the FCPA. Id. SEC prosecutions can lead to additional civil fines based on the pecuniary gain to the defendant as a result of the violation. Id. When it appears to the Attorney General or SEC that a domestic concern is about to or continuing to make illegal payments, they may bring a civil action to enjoin the domestic concern from making such payments. Id. and 15 U.S.C. § 78dd-2(d)(1). A business or person found in violation of the FCPA can also be barred from doing business with the federal government, lose the ability to receive export licenses, and have their SEC licenses suspended, among other penalties.[8]
IV. Guidance from the Government
The Department of Justice ("DOJ") has established a Foreign Corrupt Practices Act Opinion procedure whereby any U.S. company or individual may request a statement from the DOJ regarding present enforcement intentions under the antibribery provisions of the FCPA. Id. Domestic concerns can verify that a proposed course of business conduct will or will not run afoul of the FCPA as it is presently enforced. While a favorable DOJ opinion will not preclude all prosecution under the FCPA, it will be entitled to a presumption of conformity in any subsequent enforcement action. Id.
[1] Press Release, U.S. Department of Justice, Virginia Resident Sentenced to 87 Months in Prison for Bribing Foreign Government Officials (April 19, 2010) available at http://www.justice.gov/PrintOut2.jsp (last visited on April 22, 2010).
[2] Issuers must "make and keep books, records, accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. 15 U.S.C. § 78M(b)(2)(A).
[3] DOJ-DOC Brochure, Foreign Corrupt Practices Act - Antibribery Provisions, available at, http://www.justice.gov/criminal/fraud/docs/dojdocb.html (last visited on March 12, 2010).
[4] DOJ-DOC Brochure, Foreign Corrupt Practices Act - Antibribery Provisions, available at, http://www.justice.gov/criminal/fraud/docs/dojdocb.html (last visited on March 12, 2010).
[5] DOJ-DOC Brochure, Foreign Corrupt Practices Act - Antibribery Provisions, available at, http://www.justice.gov/criminal/fraud/docs/dojdocb.html (last visited on March 12, 2010).
[6] Id; see also, U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) (holding that a bribe for the reduction of import taxes could be a violation of the FCPA).
[7] DOJ-DOC Brochure, Foreign Corrupt Practices Act - Antibribery Provisions, available at, http://www.usdoj.gov/criminal/fruad/fcpa/dojdocb.htm (last visited on March 12, 2010).
[8] DOJ-DOC Brochure, Foreign Corrupt Practices Act - Antibribery Provisions, available at, http://www.justice.gov/criminal/fraud/docs/dojdocb.html (last visited on March 12, 2010).