Chapter 20

• Jurisdiction: United States

Chapter 20 The Foreign Corrupt Practices Act

First, an explanation. The Foreign Corrupt Practices Act (FCPA) is not technically speaking a part of the federal scheme of securities regulation or enforcement. However, for reasons that are explained below, the FCPA is enforced against issuers by the SEC and the Department of Justice and against non-issuers only by the DOJ. For that reason, it is necessary to understand the basic framework of the FCPA when studying securities regulation and enforcement.

Background

After more than two years of study and debate, the U.S. Congress, in 1977, passed this country's and the world's first attempt to regulate business conduct with foreign governments in foreign markets, the Foreign Corrupt Practices Act.

The passage of the FCPA was brought about by the revelations of corporate bribery that surfaced during the Watergate scandal and the publicity accompanying some high-profile bribery cases, including the Lockheed scandal in which Lockheed made payments to the Prime Minister of Japan, the husband of the Queen of the Netherlands, and various Italian political parties. The perception in Congress was that such payments were an embarrassment to the United States and, to quote Senator Frank Church, "[W]e cannot close our eyes to this problem. It is no longer sufficient to simply sigh and say that is the way business is done. It is time to treat the issue for what it is: a serious foreign policy problem."¹

The FCPA had its genesis in the work of the Watergate Special Prosecutor, followed up by the SEC and the Church Committee, a Senate subcommittee on multinational corporations headed by Senator Church. The SEC said in its "Report of the SEC on Questionable and Illegal Corporate Payments and Practices" that it found that "falsification of corporate financial records [was] designed to disguise or conceal the source and application of corporate funds misused for illegal purposes as well as the existence of secret 'slush funds' disbursed outside the normal financial accountability system."² The Church subcommittee found that Gulf Oil, Northrop, Mobil Oil, and Lockheed, among others, had made "questionable payments to foreign government officials in connection with a business purpose." Senator William Proxmire said that "I fear that . . . many companies will continue paying bribes if they can get away with it because the potential rewards are so great and the risks are minimal. . . . And so we come to the need for a remedy."

Finding the remedy, however, did not prove easy. Somewhat surprisingly, "the SEC wanted no part in policing the morality of American business or in determining what is an improper foreign corporate payment. Rather the SEC, true to its mission, was focused on ensuring disclosure of material foreign corporate payments to investors by companies subject to its jurisdiction."³ SEC Chairman Roderick Hills testified before the Senate that "[The SEC] would prefer not to be involved in civil enforcement of such prohibitions . . . [T]he enforcement of such provisions does not easily fit within the Commission's mandate."⁴ The State Department was similarly reluctant: "We need to move carefully. . . . [W]e believe it would not be advisable for the United States to try to legislate the limits of permissible conduct by our firms abroad . . . It would be not only presumptuous but counterproductive to seek to impose our specific standards in countries with different histories and cultures. The Deputy Legal Advisor of the State Department, Mark Feldman, told a House committee, "[W]e would be opposed to any legislation that would be directed to conduct of U.S. citizens abroad in their relations with foreign officials which is based on a general proposition that U.S. citizens should behave well abroad."⁵ The Defense Department was concerned about America's competitive position. General Howard Fish, director of the Defense Security Assistance Agency, testified, "I think it is important that any legislation protect the rights of all concerned. You have to make sure that you protect the competitive position of the U.S. firms and the workingman, who is working in these industries."⁶ The chair of the Association of the Bar of the City of New York, Robert Von Mehren, testified, "We oppose criminalization." A 1976 report by a Ford administration task force opposed criminalization and favored "systematic and informative reporting" instead. Senator Church summarized the problem as follows: "Our Government has initiated no real concern with this problem. . . . It prefers to stick its head in the sand and hear no evil, see no evil, and pretend there is no problem."⁷

However, the various U.S. government agencies with relevant responsibility took very different positions on the desirability of such a statute. Secretary of Commerce Elliot L. Richardson testified that "in the bribery area we are moving into uncharted national and international waters in which legislative remedies may be capable of achieving only part of the objectives we seek."⁸

As a result, passage of the FCPA, including both the prohibition of bribery provision and the books and records provision, did not come about until after President Gerald Ford established a "Task Force on Questionable Corporate Payments Abroad" in 1976 (which ultimately rejected the proposal that in addition to full disclosure there should be criminal sanctions) and until after Jimmy Carter, who campaigned against the recommendations of the Ford Task Force, was elected president.

The long legislative history of the FCPA makes it hard to ascertain the precise motivation for the law. Clearly, it was seen as a foreign policy initiative that would in part rectify the damage done by scandals such as the Lockheed scandal. But it was also seen in purely moral terms. This is how Representative Steven Solarz put it: "What is at stake here is really, in a number of significant respects, the reputation of our own country, and I think that we have an obligation to set a standard of honesty and integrity in our business dealings not only at home but also abroad which will be a beacon for the light of integrity for the rest of the world."⁹

Others believed that a strong statute would make it easier for U.S. companies to resist pressures to pay bribes. According to James Weldon, Acting Director, Bureau of Enforcement, the Civil Aeronautics Board, "U.S. corporations may have more success in resisting requests for such payments if such payments are unlawful under U.S. law and if there exists some reasonable likelihood of detention and prosecution in the United States."¹⁰

There is also a strain in the legislative history, especially in the comments made by Senator William Proxmire, that such a law would create an example that other countries "would perforce be constrained to follow" although there does not appear to be a powerful argument that the true motivation of the law was to eliminate bribery entirely in the foreign countries.

The U.S. business community was decidedly mixed. As noted above, some companies thought that such a law would make it easier for them to resist bribery requests, while others thought that the law would put them at a competitive disadvantage.¹¹

In any event, the law was passed shortly after Jimmy Carter became president. It criminalized bribery of foreign officials and required full disclosure of the bribe under a "books and records" amendment to the federal securities laws. Although prosecution under the law had a slow beginning, lately it has picked up steam. From 1977 to 1998, there were only twenty-five corporate foreign bribery cases brought. However, from 2000 to 2011 there were 324 violations prosecuted, the vast bulk of which were in 2010.

In May 2010, U.S. Attorney General Eric Holder said that "[s]ince 2004, we have prosecuted 37 different...