International Legal Affairs: Volume 2, Number 3
On Tuesday, January 19, 2010, the U.S. Department of Justice issued a press release announcing the arrest of 22 individuals on allegations of violating the Foreign Corrupt Practices Act. Within the press release, the Department of Justice alleges that, “the defendants engaged in a scheme to pay bribes to the Minister of Defense for a country in Africa.” The Department of Justice further alleges that the defendants agreed to pay a 20 percent “commission” to a sales agent representing the Minister of Defense in order to win a piece of a $15 million deal to outfit the country’s presidential guard. As we now know, the transaction was actually an undercover operation, with U.S. Federal Bureau of Investigation (FBI) agents acting as the fictitious Minister of Defense and sales agent.
Introduction to the FCPA
In the mid-1970s, the U.S. Securities and Exchange Commission conducted an investigation regarding questionable or illegal payments to foreign government officials, politicians, and political parties. Following the investigation, more than 400 U.S. companies admitted to engaging in a wide variety of activities, from bribery of foreign officials, to making payments to foreign officials to facilitate and expedite clerical duties to avoid bureaucratic log jams. All told, U.S. companies admitted to making more than $300 million dollars in questionable payments to foreign officials.
In response, Congress enacted the FCPA in 1977, making future actions of a similar nature illegal. In simple terms, the FCPA makes it illegal for U.S. persons to bribe a foreign government official for the purpose of obtaining or retaining business. The impact upon U.S. business in international trade was immediate and wide spread, as most other countries did not regulate similar activity, nor treat the bribery of foreign government officials as illegal.
In the early 1980s, it became clear that U.S. companies were at a disadvantage to foreign companies that routinely paid bribes to foreign officials. Concerned that U.S. business would suffer within the international trade arena, in 1988 Congress directed the Executive Branch to negotiate an agreement to enact legislation similar to the FCPA with major trading partners to the United States. In 1997, the United States and thirty-three other countries signed the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The agreement was ratified by Congress in 1998, making the terms of the FCPA apply to foreign firms and persons who perform any act in furtherance of an FCPA violation while in the United States.
Application of the FCPA
The FCPA makes it illegal to bribe foreign government officials to obtain or retain business. There are two aspects of the FCPA – the performance of illegal acts, and an accounting requirement to prevent or discourage covert payments. This article will only cover the performance of illegal actions, and will not delve into the complexities of accounting requirements imposed by the FCPA.
As applied to illegal or improper acts, there are five required elements to the FCPA: the parties involved, the intent to make an improper payment, the payment itself, the foreign party receiving the payment, and the purpose of the payment.
The parties: The FCPA applies to any individual, firm, officer, director, employee, or agent acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the anti-bribery provisions of the FCPA, or if they conspire to violate the FCPA. The FCPA also extends jurisdiction over foreign companies and persons if an act takes place within the territory of the United States that violates the provisions of the FCPA. In some instances, a U.S. parent company may be liable for the acts of a foreign subsidiary that performs acts outside the United States.
The intent: The party making the payment must have the intent to encourage the foreign official to misuse an official position.
The payment: There must be a payment, offer to pay, or a promise to pay money, or something of value. Again, the FCPA does not require that the actual payment be made. The offer or promise of a corrupt payment is sufficient to constitute a violation of the FCPA. The payment need not be made in cash. The payment need only be something of value, whether tangible or intangible. Examples of tangible items of value may be an expensive piece of jewelry, a 15th century Ming vase, or a Rolex watch. Examples of intangible items of value may include a family vacation to Disneyland for the foreign government official that is paid by the party seeking preferential treatment, a “donation” to the government official’s political party, or the transfer to government bonds to an off-shore account held by the government official. Recall that the FCPA prohibits any improper payment intended to influence the official actions of a foreign official, to induce the official to violate a lawful duty, to obtain any improper advantage, or to induce a foreign official to use improper influence. Acts through third parties are unlawful where there is knowledge, conscious disregard, or deliberate ignorance that payments made to a third party will go directly (or indirectly) to a foreign official.
The recipient: The person receiving the payment must be a foreign official, a foreign political party or party official, or any candidate for foreign political office. While this may appear to only apply to “official” government positions, bear in mind State-owned or State-operated companies are common in foreign countries. Prior U.S. Department of Justice enforcement actions have deemed all employees of State-owned or State-operated companies to be foreign officials subject to the provisions of the FCPA.
The purpose: The FCPA prohibits payments made to obtain or retain business. The FCPA also prohibits payments made to a foreign official for the purposes of directing business to any person. The business sought or retained does not need to be with a foreign government. Payments made to a foreign official in exchange for improperly referring non-government business would be a violation of the FCPA. Readers should be aware that the Department of Justice interprets “obtaining or retaining business” broadly, and that the term (as interpreted by the Department of Justice) encompasses more than the mere award or renewal of a contract.
Loopholes, Exemptions and Affirmative Defenses
There are (of course) loopholes, exemptions, and affirmative defenses to the FCPA. One must recognize that in many parts of the world, a governmental clerk is paid pennies per day for performing an important governmental function. The salary disparity can often be ascribed to third world and developing nations where traditional government systems have been outpaced by global business. In some countries, (India, Pakistan, and Italy come to mind) it may be virtually impossible to receive foreign government action without some form of payment. Often, the amount to be paid is not an official fee, as one would expect when renewing a drivers license or vehicle registration within the United States. Instead, the unofficial fee is charged by the government clerk as a means of supplementing the official income paid to the clerk by the foreign government. This concept may seem foreign and alien to many Americans, and yet without some type of remuneration, it would be impossible for the foreign government clerk to maintain a livable wage. Refusing to pay the fee requested by the clerk is simply not a viable option if one desires quick and efficient action on a pending request.
As a result of practical realities, the FCPA allows payments to facilitate or expedite performance of routine government actions, and lists examples of permissible payments. The examples include “obtaining permits, licenses, or other official documents, processing governmental papers, such as visas and work orders, providing police protection, mail pick-up and delivery, providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products, and scheduling inspections associated with contract performance or transit of goods across country.” Clearly, the examples have no (overt) bearing to influence to foreign government official to act improperly, or to improperly direct business to the party making the payments.
Similarly, a person alleged to have violated the FCPA’s anti-bribery provisions may assert that the payment was lawful under the written laws of the foreign country, that the money was spent as part of demonstrating a product or that the money was spent performing a contractual obligation. Presumably, if payments made to foreign officials are legal (and codified within that country’s laws) the FCPA would allow the payments to take place. Bear in mind however that this is an affirmative defense that must be proven by the individual charged with violating the FCPA. The U.S. Department of Justice is not required to prove that the payments made to a foreign official were legal within the foreign country.
Finally, the wording of the FCPA is very specific. The FCPA deals only with bribes made to foreign officials. If payments were made to private parties to obtain business, presumably the payments would be legal as a referral fee. If a payment were made to a foreign official that was NOT intended to obtain or retain business, or not intended for the foreign government official to act improperly, the payment may not be covered by the FCPA – and may instead fall under the exemption for facilitating or expediting performance of routine government action.
Violation of the Foreign Corrupt Practices Act carries significant criminal and civil penalties. Corporations and other business entities are subject to a fine of up to $2,000,000, while officers, directors, stockholders, employees, and agents may face a maximum fine of $100,000 and imprisonment of five years. Fines imposed upon individuals may not be paid by their employer or other third party that may have benefitted from the alleged FCPA violation.
Civil penalties are equally severe. The U.S. Attorney General or the Securities and Exchange Commission my bring a civil action seeking a fine of $10,000 against any firm, officer, director, employee, or agent acting on behalf of the firm that violates the anti-bribery provisions of the FCPA. In both criminal and civil enforcement actions, the fines may be adjusted upwards by the Courts to reflect the amount of financial gain resulting from the violation.
Allegations of improper activity can have a lasting impact upon the right to do business, whether with the U.S. Government, or through the U.S. Government. An indictment for violating the FCPA may be enough to exclude the party from interacting with Federal agencies. As an example, an indictment for violating the FCPA may place a Federal Firearms License in jeopardy of being suspended, or may lead to a suspension with the Directorate of Defense Trade Controls, thereby preventing the export of any defense articles from the U.S. An indictment under the FCPA can have long lasting and painful side effects.
As a final warning, the U.S. DOJ cautions “U.S. firms seeking to do business in foreign markets must be familiar with the FCPA. In general, the FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business. In addition, other statutes such as the mail and wire fraud statutes, 18 U.S.C. § 1341, 1343, and the Travel Act, 18 U.S.C. § 1952, which provides for federal prosecution of violations of state commercial bribery statutes, may also apply to such conduct.”
The FCPA is real, and carries significant penalties for violations. The realities of international trade and business must fit within the requirements of the FCPA if parties wish to avoid legal scrutiny and expensive litigation. The purpose of this article is to inform the reader of the practical realities of the FCPA, and should not be construed as legal advice. When in doubt, seek competent legal advice from a competent legal professional versed in this area of the law.