Foreign Corrupt Practices Act.

AuthorBarta, James A.
PositionTwenty-Seventh 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. Nexus with Interstate Commerce 3. Anything of Value 4. Knowingly/Corruptly/Willfully 5. Foreign Official 6. 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 NETWORK VI. IMPORTANCE OF CONSISTENT INTERNAL COMPLIANCE PROGRAMS VII. RECENT AND ANTICIPATED DEVELOPMENTS I. INTRODUCTION

    Congress enacted the Foreign Corrupt Practices Act ("FCPA") (1) in 1977, amending the Securities Exchange Act of 1934 ("Exchange Act"). The FCPA's passage followed an extensive Securities and Exchange Commission ("SEC") investigation and voluntary disclosure program during the 1970s that revealed millions of dollars in bribes made by U.S companies to foreign officials to secure business. (2) Seeking to restore public confidence in the business community, Congress passed the FCPA to prevent such bribery and imposed accounting requirements on certain securities issuers. (3) Because these restrictions competitively disadvantaged U.S. businesses operating in international markets against foreign businesses unrestrained by any similar provision, (4) Congress twice amended the FCPA, first in 1988 ("1988 Amendments") and then again in 1998 ("1998 Amendments"). (5) The amendments created affirmative defenses (6) and expanded the FCPA's reach to include some foreign nationals in order to encourage international anti-corruption efforts to foster a level business playing field. (7)

    Today, the FCPA covers two situations. First, the accounting provisions require regular reports to the SEC, mandate accurate record maintenance, and require the creation of internal compliance controls. (8) These provisions apply to domestic and foreign companies traded on U.S. stock exchanges. (9) Second, the FCPA's anti- bribery provisions criminalize the transfer of money or other gifts to foreign officials and political actors for purposes of influence to obtain or retain business. (10) The anti-bribery prohibitions apply to activity by securities issuers, U.S. citizens and entities, and certain foreign nationals and entities. (11)

    For those subject to the FCPA, understanding the law is increasingly important. Over the last few years, enforcement has increased dramatically. Between 1978 and 2000, the SEC and the U.S. Department of Justice ("DOJ') together averaged only three prosecutions per year. (12) In 2010 alone, the SEC and DOJ brought seventy-four enforcement actions--an 85% increase over the previous year. (13) Fines have also risen in recent years with penalties totaling $1.7 billion in 2010. (14) Regulators show no intent of relenting. The SEC recently unveiled a new FCPA Unit in order to become "more proactive" in FCPA enforcement. (15) The head of the DOJ's criminal division remarked, "[W]e are in a new era of FCPA enforcement; and we are here to stay." (16) Recent developments in the substantive law have also created incentives to comply. For instance, regulators continue to interpret the FCPA's jurisdiction broadly to encompass conduct occurring entirely outside U.S. territory. (17) More robust international cooperation regarding anti-bribery action has aided domestic enforcement efforts. (18) Finally, companies face incentives to disclose employee violations, likely resulting in the prosecution of individuals, to obtain favorable treatment. (19)

    This Article outlines the development of the FCPA, its elements, available defenses, and possible civil and criminal penalties. Additionally, the Article discusses effective FCPA corporate compliance programs and provides resources for in-house counsel seeking advisement from FCPA compliance consultants. Finally, the Article surveys recent and anticipated developments in FCPA enforcement.


    The FCPA amended the Exchange Act by imposing record-keeping and internal control requirements on securities issuers. (20) This represented a major shift in securities law by treating inaccurately recorded payments as potential accounting violations regardless of materiality. (21) The accounting provisions and accompanying standard for imposing criminal liability are codified at 15 U.S.C. [section] 78m(b)(2) and (b)(5). (22) Traditionally, however, most enforcement of the accounting provisions has been through civil actions filed by the SEC. (23)

    1. Covered Parties

      The FCPA accounting provisions apply to publicly held companies that are "issuers" under the Exchange Act, (24) including companies that hold American Depository Receipts. (25)( Issuers either have securities registered with the SEC under section 12 of the Exchange Act (26) or are required to file periodic reports under section 15(d) of the Exchange Act. (27) Additionally, issuers owning more than fifty percent of foreign subsidiary stock are required to ensure that the subsidiary complies with the accounting provisions. (28) If classified as an issuer, a corporation must satisfy the accounting provisions whether or not it engages in foreign operations or offers bribes. (29)

    2. Elements of the Accounting Provisions

      1. Record-keeping

        The record-keeping provisions 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." (30) The requirement applies to records in a variety of forms, (31) regardless of their materiality to investor decisions. (32) "Reasonable detail" is a "level of detail and degree of assurance that would satisfy prudent officials in the conduct of their own affairs." (33)

        The record-keeping provisions serve three primary goals: (i) ensuring that illegal transactions are reported; (ii) preventing the falsification of records to conceal illegal transactions; and (iii) promoting the correct characterization of all transactions. (34) By creating affirmative duties in all transactions, the regulations facilitate the SEC's detection of business improprieties. (35)

      2. Internal Controls

        The FCPA accounting provisions also require issuers to create internal controls that reasonably ensure transactions are properly authorized. (36) Congress intended the internal controls provision to ensure issuers use accepted accounting methods when recording economic transactions. (37)

        Compliance with the regulation depends on the overall reasonableness of the internal controls. (38) The SEC considers several factors in evaluating such systems: (39) (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. (40) If a board of directors creates an audit committee, the committee must reasonably assure through internal accounting oversight that FCPA provisions are followed. (41)

    3. 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." (42) Although the mens rea is designed to reduce potential liability for inadvertent accounting violations, (43) willful blindness (i.e., conscious avoidance) satisfies the intent requirement. (44)

      Recent enforcement actions indicate individuals designated "control persons" may be liable for accounting violations that occurred without their knowledge or participation. (45) This theory surfaced in a settled civil enforcement action against corporate officers at Nature's Sunshine Products, Inc. (46) Under the control person theory, individuals with "supervisory responsibilities for the senior management and policies" are liable for failing to "adequately supervise" personnel overseeing record-keeping and internal controls. (47) Regulators, however, have not yet used the control person theory to establish criminal liability.

      The FCPA accounting provisions contain two exceptions to criminal liability. First, under [section] 78m(b)(4), criminal liability is not imposed for technical or insignificant accounting errors. (48) Second, a good faith exception applies to issuers who own fifty-percent or less of a business concern. (49) A parent corporation is thereby "discharged" from responsibility for violations by its subsidiary, if the parent encouraged FCPA compliance in good faith. (50)

    4. 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. (51) The regulation allows the SEC to prosecute individuals causing accounting fraud. (52) Rule 13b2-2 prohibits directors and officers from making materially false statements to accountants in connection with SEC reports and audits. (53) Unlike the FCPA accounting provisions, for which materiality is irrelevant, Rule 13 only applies to statements that are material. (54)


    The anti-bribery provisions of the FCPA, codified at 15 U.S.C. [section][section] 78dd-1, 78dd-2 and 78dd-3, prohibit specified parties from (1) corruptly paying or offering to pay, (2) directly or indirectly, (3) money or anything of value (4) to a foreign official, a foreign political party or party official, or candidate for...

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