Foreign Corrupt Practices Act.

Author:Baker, Rollo C.
Position::Twenty-Fifth Edition of the Annual Survey of White Collar Crime
  1. INTRODUCTION II. ACCOUNTING PROVISIONS A. Covered Parties B. Elements of the Accounting Provisions 1. Record-keeping 2. Internal Controls C. Criminal Liability D. Related SEC Rules III. ANTI-BRIBERY PROVISIONS A. Elements of the Offense 1. Covered Parties 2. Territorial Nexus Not Required 3. Anything of Value 4. Knowledge 5. Foreign Official 6. Corruptly/Willful 7. Obtaining or Retaining Business B. Permissible Payments and Affirmative Defenses 1. Grease Payments Exception 2. Affirmative Defenses C. Enforcement 1. Civil and Criminal Prosecution 2. Attorney General's Advisory Guidelines and "No-Action" Letters IV. PENALTIES A. U.S. Sentencing Guidelines 1. Individuals 2. Corporations B. Additional Penalties V. GLOBAL ANTI-CORRUPTION EFFORTS VI. IMPORTANCE OF CONSISTENT INTERNAL COMPLIANCE PROGRAMS VII. RECENT AND ANTICIPATED DEVELOPMENTS I. INTRODUCTION

    The Foreign Corrupt Practices Act ("FCPA"), (1) enacted by Congress in 1977 as an amendment to the Securities Exchange Act of 1934, was the result of an extensive Securities and Exchange Commission ("SEC") investigation and voluntary disclosure program during the 1970s in which it was discovered that U.S. companies were making millions of dollars in bribes to foreign officials to secure business. (2) Seeking to restore public confidence in the business community, Congress enacted the FCPA to preclude the bribery of foreign officials and require those qualifying as issuers to comply with certain book keeping requirements. (3) Upon realizing that U.S. businesses faced a competitive disadvantage in international markets when operating with foreign businesses unrestrained by FCPA prohibitions, (4) Congress, in 1988 and then again in 1998, amended the FCPA to provide affirmative defenses (5) and encourage international anti-corruption efforts to foster a level business playing field. (6) Generally, the "Anti-bribery Provisions" prohibit U.S. companies and citizens, foreign companies listed on the U.S. stock exchange, and any person acting within U.S. territory, from corruptly paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business. (7) The "book-keeping" provisions require domestic and foreign issuers trading on the U.S. stock exchange and other entities required to file periodic reports with the SEC to maintain financial records that accurately reflect business transactions and to implement internal compliance controls. (8)

    For those entities and individuals subject to the FCPA, a comprehensive understanding of the FCPA provisions is critical for three basic reasons. First, over the last few years, we are seeing rapidly increased enforcement. Between 1978 and 2000, the SEC and the U.S. Department of Justice ("DOJ") averaged only three prosecutions per year combined. (9) As of October 2009, the SEC and DOJ brought over thirty enforcement actions in 2009 alone. (10) Put simply, corporations and individuals are increasingly finding themselves in the sights of DOJ prosecution and SEC enforcement for behavior formerly ignored. Second, the FCPA does not require a U.S. territorial nexus: (11) the FCPA governs prohibited conduct of individuals and corporations while acting entirely outside U.S. territory. (12) Thus, business leaders must be cognizant of business activity both domestic and abroad. Third, the penalties for conviction are severe. (13) When coupled with prosecutorial power and the attractiveness of voluntary disclosure and pleas, it becomes even more important for corporations and individuals to avoid FCPA violations. (14) Corporate employees should take note as well, for the FCPA does not require employer conviction subsequent to employee conviction and the benefits obtained by corporations through voluntary disclosure encourage reporting on employees. (15)

    This Article outlines the development of the FCPA, as well as its elements, defenses, and civil and criminal penalties for violations. Because of the rise in enforcement activity and the severity of penalties, this Article will discuss effective FCPA corporate compliance programs and provide resources for in-house counsel seeking advisement from FCPA compliance consultants. Finally, the Article ends with a brief discussion of recent and anticipated developments in FCPA enforcement.


    The FCPA amended the Exchange Act by adding record keeping and internal accounting requirements for statutorily covered parties. (16) The FCPA book-keeping provisions treat inaccurately recorded non-material payments as potential violations. (17) The accounting provisions are codified at 15 U.S.C. [section][section] 78m(b)(2) and (b)(5), which provide the record-keeping and internal control requirements, as well as the standard for imposing criminal liability. (18) Traditionally, most FCPA enforcement proceedings have been through SEC civil actions for violations of the accounting provisions. (19) Thus awareness of and adherence to the FCPA accounting requirements is essential to covered parties.

    1. Covered Parties

      The FCPA accounting provisions apply to publicly-held companies that are "issuers" under Exchange Act, (20) including companies that hold American Depository Receipts. (21) "Issuer" refers to companies that either have securities registered with the SEC under Section 12 of the Exchange Act (22) or are required to file periodic reports under Section 15(d) of the Exchange Act. (23) The accounting provisions are therefore not as widely applicable as the anti-bribery provisions. However, to those whom the accounting provisions are applicable, the requirements apply to all dealings undertaken by the issuer, regardless of whether the business actually engages in foreign operations or whether the transaction is legal or illegal. (24) Additionally, issuers owning more than fifty percent of foreign subsidiary stock are required to ensure that the subsidiary complies with the accounting provisions. (25)

    2. Elements of the Accounting Provisions

  3. Record-keeping

    The record-keeping provisions (26) require all issuers to "make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." (27) "Reasonable detail" requires a "level of detail and degree of assurance that would satisfy prudent officials in the conduct of their own affairs." (28) Thus, the "prudent person" standard governs analysis of potential record-keeping violations and the materiality of the improperly reported or unreported transaction is irrelevant. (29)

    These provisions have three main goals: (i) affirmatively require that illegal transactions are reported; (ii) prevent the falsification of records to conceal illegal transactions; (iii) and ensure the correct characterization of all transactions. (30) The provisions therefore create affirmative duties designed to facilitate the SEC's detection of business improprieties. (31)

    1. Internal Controls

    The FCPA accounting provisions also require issuers to create a system of internal controls that provide reasonable assurances that transactions are properly authorized. (32) Internal controls are considered in terms of reasonableness. (33) Congress designed the internal controls provision to ensure that issuers use accepted methods of accounting when recording economic transactions. (34)

    The SEC considers several factors in determining the adequacy of a system of internal controls: (35) (i) the role of the board of directors; (ii) communication of corporate procedures and policies; (iii) assignment of authority and responsibility; (iv) competence and integrity of personnel; (v) accountability for performance and compliance with policies and procedures; and (vi) objectivity and effectiveness of the internal audit function. (36) If a board of directors creates an audit committee, the SEC requires that the committee must exercise appropriate internal accounting oversight as a means of reasonably assuring that FCPA provisions are followed. (37)

    1. Criminal Liability

      To be criminally liable under either of the accounting provisions, an individual must "knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record or account." (38) Although the intent requirement is designed to reduce potential liability for inadvertent accounting violations, (39) the "knowing" requirement is met by willful blindness. (40)

      The FCPA includes several provisions designed to ensure that commonplace accounting deficiencies do not violate the Act. Under [section] 78m(b)(4), criminal liability is not imposed for technical or insignificant accounting errors. (41) Moreover, a good faith exception applies to issuers who own fifty percent or less of a business concern. (42) A parent corporation is thereby "discharged" from responsibility for violations by its subsidiary as long as the parent acted in good faith to encourage compliance with the FCPA's accounting controls. (43)

    2. Related SEC Rules

      The SEC has promulgated two FCPA related rules. Rule 13b2-1 provides that "[n]o person shall, directly or indirectly, falsify or cause to be falsified, any book, record, or account subject to" the FCPA provisions. (44) Under Rule 13b2-1, the SEC can reach in addition to the "issuers" subject to the FCPA book-keeping provisions, any person or employer that causes the fraudulent corporate accounting. (45) Rule 13b2-2 prohibits directors and officers from making materially false statements to accountants in connection with SEC reports and audits. (46) Unlike the FCPA book-keeping provisions--for which materiality is irrelevant--the related Rule 13 only applies to statements that are material. (47)


    The anti-bribery provisions of the FCPA, codified at 15 U.S.C. [section][section] 78dd-1. 78dd-2, and 78dd-3, prohibits specified parties from (1) corruptly paying...

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