Foreign Corrupt Practices Act.

• Author: Diersen, Kari Lynn
• Position: Fourteenth Survey of White Collar Crime

1. INTRODUCTION

   The Foreign Corrupt Practices Act ("FCPA")(1) was enacted in 1977 in response to a series of corporate bribery scandals involving foreign government officials during the 1970s.(2) Following inquiries by the United States Senate(3) and the Securities and Exchange Commission ("SEC"),(4) Congress became concerned that disclosures of corrupt corporate practices seriously undermined public confidence in the business community and tarnished America's image abroad. It responded by enacting the FCPA.(5) Since then, however, few actions have been brought under the FCPA's anti-bribery provisions.(6) Still, increased domestic and international efforts to battle corruption in foreign business practices have resulted in more aggressive enforcement by the SEC and the Department of Justice ("DOJ").(7)

   The FCPA is organized around two types of provisions: accounting and anti-bribery. 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 these provisions. Section V outlines guidelines and resources for creating an FCPA compliance program. 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 that must register with the SEC under [sections] 12(11) and file reports under [sections] 15(d) of the Exchange Act.(12) The accounting provisions apply regardless of whether the issuer engages in foreign activities.(13)

   2. Elements of the Provisions

      1. Record-keeping

         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" uses a "prudent man" standard,(15) which requires 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 that are quantitatively correct, but fail to specify the qualitative aspects of a transaction that might reveal the true purpose of a particular payment.(17) In short, records must include information that would alert the SEC to any possible impropriety.(18) These provisions prevent issuers from claiming certain defenses, such as a lack of materiality of the undisclosed activity, and allow the SEC 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 that provide reasonable assurances that transactions are properly authorized.(20) "Reasonable assurances" utilizes 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 in order to determine the adequacy of a system of internal controls,(22) including: the (1) 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.(23) The SEC has insisted that, in some cases, only an audit committee set up by the board of directors can exercise "appropriate control."(24)

   3. Criminal Liability

      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) to be found criminally liable under either of the accounting provisions. The 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 mundane accounting deficiencies would not violate the Act. Under [sections] 78m(b)(4), no criminal liability is 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 "discharged" from responsibility for the violations of a subsidiary.(30)

   5. Enforcement

      The FCPA's accounting provisions, which are codified under the Exchange Act,(31) are enforced by the SEC.(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 imposing fines to barring a respondent from serving as an officer or director of a public company.(34)

3. ANTI-BRIBERY PROVISIONS

   The FCPA makes it illegal to bribe foreign government officials for the purpose of obtaining or retaining business, directing business to another person or securing any improper advantage.(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, officer of a public international organization, foreign political party or political candidate, or any person acting on behalf of any of these entities.(36) The provisions forbid direct bribes and bribes made through intermediaries.(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 SEC and DOJ can now convict individual corporate employees, under the FCPA, regardless of whether the corporation itself is found guilty.(41)

      Though a foreign subsidiary of a U.S. corporation is not subject to the FCPA, its U.S. parent may be held liable under the Act.(42) In addition, if an employee of the foreign subsidiary fits within the definition of a domestic concern, or is a U.S. national employed by the subsidiary, the employee may also be subject to the FCPA.(43) However, foreign officials who receive bribes from American companies remain outside its reach.(44) Similarly, foreign officials cannot be prosecuted for conspiracy to violate the FCPA.(45) Foreign corporations are also beyond the Act's authority,(46) but 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

      A violation of the anti-bribery provisions of the FCPA contains five elements:(48) (1) any issuer or person of the United States who either uses an instrumentality of interstate commerce or performs an act outside the United States(49) to further (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 or securing an improper advantage.(55)

      The FCPA bans payments made to third parties "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 Act.(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 of a conscious 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)

   3. Permissible Payments and Affirmative Defenses

      The FCPA does not prohibit all payments to foreign officials. An explicit exception permits payments for routine governmental actions. Furthermore, two affirmative defenses allow a defendant to claim a payment is legal.

      1. Routine Governmental Action

         The FCPA permits facilitating or "grease" payments(61) to foreign officials 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) including obtaining permits, licenses, or documents that allow one to do business in a foreign country;(64) 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, unloading, or protecting perishable products or commodities.(65) So-called grease payments are only allowed to facilitate nondiscretionary actions routinely performed...