Foreign Corrupt Practices Act.

• Author: Baum, Lynne
• Position: Thirteenth Survey of White Collar Crime

1. INTRODUCTION

   The Foreign Corrupt Practices Act ("FCPA")(1) was enacted in 1977 as a response to a series of corporate bribery scandals involving foreign government officials during the 1970's.(2) Following inquiries by the United States Senate(3) and the Securities and Exchange Commission ("SEC"),(4) Congress, expressing concern that disclosures of corrupt corporate practices seriously undermined public confidence in the business community and tarnished America's image abroad, enacted the FCPA.(5) To date, relatively few actions have been brought under the FCPA.(6) However, several recent high profile cases suggest that the SEC and the Department of Justice ("DOJ") are investigating and prosecuting under the FCPA more aggressively.(7)

   The FCPA is organized around accounting and anti-bribery provisions. Violators of the FCPA are subject to criminal and civil penalties. Following this Introduction, Section II reviews the accounting provisions of the FCPA, addressing affected parties, requirements imposed, the scope of affirmative defenses to violations of these provisions, and recent enforcement activity. Next, Section III examines the FCPA's anti-bribery provisions in the same manner. Section IV then discusses the range of penalties for violations of the FCPA's accounting and anti-bribery provisions. Section V outlines guidelines and resources for creating a compliance program to avoid FCPA violations. Finally, Section VI summarizes recent developments in the crusade against business corruption.

2. ACCOUNTING PROVISIONS

   The FCPA amends the Securities Exchange Act of 1934 ("Exchange Act")(8) by adding record-keeping and disclosure requirements for certain entities already subject to the Exchange Act's provisions.(9)

   1. Affected Parties

      The accounting provisions apply only to issuers under the Exchange Act.(10) "Issuers" are those companies which must register with the SEC under [sections] 12 of the Exchange Act(11) and file reports under [sections] 15(d) of the Exchange Act.(12) The accounting provisions apply regardless of whether or not the issuer engages in foreign activities.(13)

      1. Record-keeping

   2. Elements of the Offense

      The first major requirement of the accounting provisions is that all issuers must 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."(14) "Reasonable detail" establishes a "prudent man" standard,(15) which is a "level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs."(16)

      In practice, the record-keeping provisions are used to prevent three types of improprieties: (1) a failure to record improper transactions; (2) the falsification of records to conceal improper transactions; and (3) the creation of records which are quantitatively correct, but which fail to specify the qualitative aspects of a transaction which might reveal the true purpose of a particular payment.(17) In short, records must include information which would alert the SEC to any possible impropriety.(18) These provisions thus allow the SEC both to avoid defenses such as a lack of materiality of the undisclosed activity, and to intervene where existing accounting systems are inadequate.(19)

      2. Internal Controls

      The accounting provisions also require issuers to create a system of internal accounting controls which provide reasonable assurances that transactions are properly authorized.(20) "Reasonable assurances" is defined with the same "prudent man" standard discussed above. The internal controls provision is designed to prevent unauthorized and/or unrecorded transactions.(21)

      The SEC considers several factors when determining the adequacy of a system of internal controls.(22) These include:(1) the role of the board of directors. (2) communication of corporate procedures and policies; (3) assignment of authority and responsibility; (4) competence and integrity of personnel; (5) accountability for performance and compliance with policies and procedures; and (6) objectivity and effectiveness of the internal audit function. One commentator has noted that the SEC has insisted in some cases that only an audit committee set up by the board of directors can exercise "appropriate control."(24)

   3. Intent

      To be found 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.(25) This intent requirement--added in 1988--is an attempt to reduce the potential for unlimited liability as a result of accounting violations.(26) In addition, "knowing" may include willful blindness or conscious attempts not to know.(27)

   4. Affirmative Defenses

      The drafters of the FCPA included several provisions to ensure that munane accounting deficiencies would not violate the Act. Under [sections] 78m(b)(4), no criminal liability will be imposed for technical or insignificant accounting errors.(28) Further, [sections] 78m(b)(6) provides a defense for issuers who own less than 50 percent of a business concern.(29) If the larger corporate entity used good faith in its attempts to encourage compliance with the FCPA accounting controls, the issuer is said to be discharged from responsibility for the violations of a subsidiary.(30)

   5. Enforcement

      Because the accounting provisions are codified in the Exchange Act.(31) the SEC is responsible for their enforcement.(32) The SEC has brought enforcement actions of the accounting provisions both in cases involving actual foreign bribes and in domestic transactions.(33) Penalties imposed by the SEC have ranged from sizable fines to barring a respondent from serving as an officer or director of a public company for a specified term of years.(34)

3. ANTI-BRIBERY PROVISIONS

   The FCPA makes it illegal to bribe foreign government officials for the purpose of obtaining or retaining business or directing business to another person.(35) it prohibits individuals and businesses from offering, promising, or authorizing (either directly or indirectly) the payment of anything of value to any foreign official, government employee, foreign political party or political candidate, or any person acting on behalf of any of these entities.(36) The provisions forbid bribes made by an intermediary in addition to direct bribes.(37)

   1. Affected Parties

      The anti-bribery provisions affect issuers(38) and domestic concerns(39) as well as their individual officers, directors, stockholders, agents or employees.(40) The FCPA allows for individual convictions against corporate employees regardless of whether the corporation is found guilty.(41)

      While a foreign subsidiary of a U.S. corporation will not be subject to the FCPA, its U.S. parent may be held liable.(42) Additionally, if an employee of the foreign subsidiary fits within the definition as applied to a domestic concern, or is a U.S. national employed by the subsidiary, she may also be subject to the FCPA.(43)

      Foreign officials who receive bribes from American companies, however, remain outside the reach of the FCPA.(44) Furthermore, foreign officials cannot be prosecuted for conspiracy to violate the FCPA.(45) Foreign corporations are also beyond the reach of the FCPA.(46) Notwithstanding the fact that foreign officials and corporations are not liable under the FCPA, foreign individuals acting as agents for a domestic concern or issuers, and over whom U.S. courts have personal jurisdiction, can be prosecuted under the FCPA.(47)

   2. Elements of the Offense

      In order to constitute a violation to the anti-bribery provisions of the FCPA, the following five elements must be present:(48) (1) the use of an instrumentality of interstate commerce(49) in furtherance of (2) a payment or an offer to pay(50) something of value,(51) (3) to a foreign official, political party, or political candidate,(52) (4) for the corrupt(53) purpose of inducing the official to act or refrain from acting,(54) (5) to assist the company in obtaining, retaining or directing business.(55)

   3. Intent

      The FCPA bans payments to third parties made "while knowing" that a portion or all of the payments will be used by the third party as bribes or for the purposes contrary to the intent of the FCPA.(56) As discussed above, the "knowing" standard in the anti-bribery provisions includes "conscious disregard" or "willful blindness"(57) and is intended to cover those corporate officials who fail to take action when reasonable signs of an FCPA violation exist.(58) The "knowing" standard thus encompasses "both prohibited action taken with `actual knowledge' of intended results as well as other actions that, while falling short of what the law terms `positive knowledge,' nevertheless evidence disregard or deliberate ignorance of known circumstances that should reasonably alert one to . . . violations of the Act."(59) Acts of "simple negligence" or "mere foolishness" are not included.(60)

   4. Permissible Payments and Defenses

      The FCPA does not prohibit all payments to foreign officials. There is an explicit exception to the FCPA which permits payments for routine governmental actions. Furthermore, there are two affirmative defenses that allow a defendant to claim a payment is legal.

      1. Routine Governmental Action

         Facilitating (or "grease") payments(61) to foreign officials are permissible under the FCPA if their purpose is "to expedite or to secure the performance of a routine governmental action."(62) "Routine governmental actions" are those a foreign official ordinarily performs(63) and include obtaining permits, licenses, or documents which allow one to do business in a foreign country.(64) They also include processing governmental papers (such as visas and work orders); scheduling inspections; providing police protection; mail pick-up or delivery; phone, power and water service; and loading...