The Foreign Corrupt Practices Act [15 U.S.C. § 78dd-1, 15 U.S.C.
§§ 78m(b)(2)(A) and (B) of 1977 is a well-established US law which impacts every US company
which does business outside the USA. The Obama Administration has set a goal of
doubling US exports in the next five years, so FCPA compliance will become important
to many small and mid-size US companies.
The FCPA has
two provisions - Anti-Bribery and Accounting. In essence, the Anti-Bribery
Provisions make it a crime for any US individual, business entity or employee
of a US business entity to offer or provide, directly or through a 3rd party,
anything of value to a foreign government official with corrupt intent to
influence an award or continuation of business or to gain an unfair advantage. The Accounting Provisions basically make
it illegal for a company that reports to the SEC to have false or inaccurate
books or records or to fail to maintain a system of internal accounting
The standard of intent and knowledge in the Anti-Bribery cases is minimal - intent
and knowledge are usually inferred from that fact that bribery took place. The Accounting
Provisions do not require intent. The SEC brings Accounting cases as civil
actions so its burden of proof is a mere preponderance of the evidence. The
government does not lose FCPA cases. Below are ten FCPA basics small legal
departments need to be aware of to stay compliant.
1. Corruption in international business is common and frequently ignored.
Managers and lawyers in most companies want to believe they work for clean, ethical
organizations that hire law-abiding employees. This positive bias often blinds US
business people to the reality of international business, where bribes, kickbacks,
and false or unrecorded transactions are common. Corrupt activity also exists in
the US of course, but it is more difficult to understand what is going on in foreign
countries when your US managers have little or no language ability or cultural
Some US business people believe and frequently say "Everyone knows you
can't do business in (Mexico, China, India, Russia - pick a
country) without paying bribes. It is part of their culture. It is crazy to
have a US law that makes paying bribes in foreign countries illegal in the USA." Even
if that were true, the FCPA is part of the legal environment for international business.
Compliance is not optional because American management has a low opinion of foreign
2. Investigation, Prosecution and Punishment under the FCPA are Common.
In 2010 alone,
52 individual business people were indicted, sentenced, or were convicted and awaiting
sentencing for FCPA violations. Ten years ago FCPA prosecutions were rare.
Since 2008, the government has had around 150 FCPA investigations going on at
any one time and has been bringing about 40 cases each year. Lately the cases
have been about half against companies and half against individual company
managers and employees. The government has stated that individuals will not
believe the FCPA has any teeth until they see business people going to jail.
They are doing a good job in making that happen.
The Department of Justice, SEC and FBI have well staffed units dedicated to
FCPA investigations and prosecutions and are steadily building expertise. FBI
agents are assigned overseas to investigate specific industries and countries. In
2010 the SEC established a dedicated FCPA Enforcement Unit with offices in
Washington, DC and San Francisco.
years a high percentage of the total fines imposed by the Department of Justice
have come from FCPA cases. Total penalties imposed by the DOJ and SEC for violations
of the FCPA:
2011 $161M (first quarter)
3. Understand your company's risk of being involved in international bribery.
Companies must assess the risk of FCPA violations in their international
business. The FCPA’s definition of “Government Official” is extremely broad and
includes even low-level employees of government owned companies. Understand
every way in which your business has contact with government customers or
government employees. Some questions to consider:
- What kind
of business does you company do outside the US?
- Do you conduct foreign business through your own employees, through agents,
distributors and intermediaries, through joint ventures - all of the above?
- Do you need to get permits or qualify products for sale in foreign countries?
- Do you ship through freight forwarders and use customs agents? - Do you
deal with universities, or use professors in an advisory capacity, or deal with
doctors or hospitals? In many
countries education and healthcare are government run and all employees, including
doctors and professors, are government officials under the FCPA.
- Are you
involved in litigation? In some countries lawyers routinely bribe court
officials and judges.
Some countries expose US companies to very high risk of corruption. For example, China,
Brazil, India and Mexico are well known corruption risks. There is a lot
of corruption in each of those countries, but it pales in comparison to
the pervasive illegal activity in countries such as Russia, Vietnam, Nigeria,
and Pakistan. The Transparency International Corruption Perception Index is an
accurate, useful tool you should know and use: (www.transparency.org/policy_research/surveys_indices/cpi/2010/results)
You can also
hire outside firms to do risk assessment. If you don’t understand your
company's specific risk, you may fail to spend your scarce compliance resources
in a cost effective manner. For most companies 80% of the FCPA risk will come
from less than 20% of your business.
4. Your Program requires a Standalone International Anti-corruption Compliance
policy, and an Executive who is Accountable and Tone at the Top.
Any company that is doing international business should enact a standalone
FCPA Compliance Policy. Do not rely on having a few paragraphs about
international corruption buried in your general Standards of Business
Conduct; it is not sufficient.
A member of
the senior management team of the company must be designated as responsible for
FCPA compliance and be accountable for the program. It may be best if this is not the general counsel. An
FCPA Compliance Program is more a “cost of doing international business” than a
normal part of the legal department budget. Legal has a key role assisting the
business team, but imposing the FCPA compliance program on the already
overworked general counsel may be a mistake.
management team sets the company’s tone at the top. If your Board has never
mentioned the value of FCPA Compliance to the management team, and the CEO, CFO
and other responsible executives have never addressed employees about the
company’s commitment to FCPA Compliance – your company’s tone at the top is
poor and employees may not believe the company is really committed to FCPA compliance.
5. Train your board, management, employees and third parties who distribute
If you have a constrained budget, at least train your board, managers and employees.
Most of them have had no experience with “on the ground” international
business, and those who have international experience will likely be out of
date with FCPA compliance.
training should familiarize your managers and employees with the actual
corruption risks in your industry, the countries where you do business and the
business model your company is using. Your trained employees should be able to
recognize the Red Flags of corruption that are most likely in your business,
and to know what to do when they see them.
On-line training is better than no training. But skilled in-person training is
superior. A mixture of the two seems to be current best practice, and the
proper mix depends on you company's size, geographic disposition and risk
profile. In-person training for your board and senior management team is
Many US companies do not train the third parties who facilitate their international
distribution, even though these third parties represent their highest FCPA risk.
Smaller companies may think they are safer if they use third parties who also represent
major US and multi-national companies. They assume those companies have done proper
vetting and provided training, but that may be wishful guessing that may or may
not be true. Major US and multinational companies often have weak FCPA compliance
programs and do not vet or train their 3rd parties.
6. Know all the 3rd parties your company uses in business outside the USA and conduct
In FCPA jargon,
an "intermediary" is a third party who assists the company in some
aspect of its foreign business. The government assumes you have conducted
reasonable due diligence background investigations on your intermediaries and
have determined they are not involved in corruption. It is important to
understand who your intermediaries are, how many you have, why you are using them,
and who in your company has authority to enter into a contract with them.
Understand that intermediaries do not shield your company from liability – they
create liability. 90% of FCPA cases brought by the US government involve
conduct by 3rd parties[MSOffice2] . In most cases employees of the US company knew their foreign
intermediaries were involved in illegal payments, and frequently company employees worked with and directed the
intermediaries to circumvent company policy and violate the law.
Some intermediaries represent vastly more risk than others. Sales agents, lobbyists
and joint ventures are at the top of the risk list. Distributors or resellers
who receive variable pricing or variable discounts also represent very high risk.
Obviously an intermediary who is also a government employee (or is a close relative
of a government official) or an intermediary company that is owned or managed
by a foreign government official represents high risk.
7. Establish a set of internal controls over company expenditures
Finance management in many US companies may have barely heard of the FCPA, and
their existing processes will not be tuned to FCPA issues.
THERE IS NO CONCEPT OF MATERIALITY IN THE FCPA. Companies have been prosecuted
for vary small bribes and for inaccurate books and records or failures to set
up systems of controls - which arguably have no monetary value. The FCPA is a
criminal statute. Criminal activity by your employees that impacts your company
should always be seen as material.
Your company can have fine GAAP accounting and still fail to detect bribery
or false or inaccurate records. You do not hire dumb employees. The employees in
your company who are involved in corruption, kickbacks and creating false transactions
are smart. Employees in your finance department may be involved in corrupt
schemes - they know how the company makes and keeps records and how it
audits, so they know how to keep the books looking clean and hide evidence
Making sure your company is keeping books and records which accurately document
all transactions can help you prevent and detect corrupt payments. If your
company has good control over its books
and records, it should have no problem accurately controlling and accounting for
gifts, meals, entertainment and travel for government officials.
Finance executives may have individual liability for an FCPA violation if the company
fails to establish adequate record keeping and a system of controls. Read the
terrifying 2009 Nature’s Sunshine Products case
in which both a CFO and COO were charged for FCPA violations as “control persons”
and paid fines. (SEC v. Nature's Sunshine Products,
Inc., Douglas Faggioli and Craig D. Huff, Case No. 09CV672)
8. Do not permit facilitating payments.
Amazingly the FCPA contains an exception for "facilitating payments,”
small bribes to secure the performance of routine government action. Many companies,
on their own, have established a policy against paying facilitating payments.
A) Facilitating payments are actually bribes and are always illegal in the country
where your employees pay them.
B) The definition of a facilitating payment under the FCPA is technical. It
would be folly to delegate the decision on whether a specific payment is a
facilitating payment or a bribe to your sales people on the ground.
Facilitating payments are transactions and have to be recorded accurately on
the company's books and records, i.e., as “A facilitating payment of $X to
government official Y of country Z to provide (a specific service).” So your
company is required to create an accurate financial record, and that record
is written proof your company intentionally violated the law of the country where
you made the payment - Catch 22?
facilitating payment exception has never been used in a reported case.
9. Plan for the likelihood you will have to conduct high quality
international internal investigations.
Most small to
mid-size companies have very little experience conducting international internal
investigations. Learning on the job and repeating all the common mistakes can be
In an FCPA investigation a company is looking for evidence of criminal behavior
and very serious fraud among its employees and business associates. In many
cases, you may find your own employees working in concert with 3rd
parties and government officials. Perhaps your employees are personally
receiving kickbacks. If you are lucky, you will “only” find private corruption
- payments between commercial companies with no government officials involved. Private
corruption still costs your company, and you have to deal with the FCPA issue
of intentionally falsified corporate records made by your employees tot cover
up the private corruption.
It is very likely you will not be
comfortable trusting anyone in your local country management, and you will not
want to let your local management know you have suspicions before you actually
start your investigation. Even if they are not involved, local managers may not
appreciate the danger to the US parent company. They may try to conduct their
own amateur investigation – or simply call a meeting of their managers and ask
them what happened. In either case they will alert the perpetrators and
evidence will be destroyed, documents fabricated or stories aligned so an
actual professional investigation will be much longer, more difficult, and expensive.
If you have
no experience conducting international internal investigations, engage
10. Include clear FCPA
terms in every international contract.
This is inexpensive
and reinforces the message that your company will not tolerate corruption with both
your foreign partners and your own sales staff. Your contracts should specifically
mention the importance of FCPA compliance and require your partners to represent
that they know the elements of the law and will comply with it. You should have
a clearly worded audit clause that requires the partner to provide documents and
assistance in an investigation. Finally, you must have the ability to terminate
the contract if your partner is in violation of the FCPA.
terms are not negotiable. If a potential partner refuses to execute the
contract unless you remove your anti-corruption terms, find another partner.
Conclusion: Get your company’s FCPA compliance program in place.
The FCPA is not
mysterious. The biggest problem is the failure of US business mangers and in-house
counsel to focus on what needs to be done and to dedicate the resources necessary
to protect the company. From the government’s point of view, if a US company is
doing business outside the US, it is obligated do that business in compliance
with the law. The DOJ and SEC have stated the required elements of a reasonable
compliance program and expect every company to establish and run an adequate FCPA
to General Counsel: If your company
is unwilling to put in place an adequate FCPA Compliance Program, strongly recommend
that it refrain from doing business in high risk environments. If you personally
believe your company cannot do business in Russia, China, Argentina, etc.,
without paying bribes, and the company will not expend resources to put a
robust FCPA compliance program in place - why would you allow your company to
do any business in those countries?
Aside from the danger to the company, you may have personal
responsibility as a control person and be subject to prosecution for failure
to put in place a system of controls. The Nature’s Sunshine Products case could
easily apply to a GC.