Foreign Corrupt Practices Act.

• Author: Eisenberg, Gary
• Position: Annual white collar crime survey

1. INTRODUCTION

   Congress enacted the Foreign Corrupt Practices Act ("FCPA")(1) in 1977 to criminalize illicit payments to foreign public officials by U.S. businesses and individuals.(2) Since then, however, U.S. businesses have been forced to compete in international markets against foreign business competitors unconstrained by laws proscribing bribery.(3) In 1988, Congress amended the FCPA and directed the Executive Branch to urge America's trading partners to pass anti-corruption laws in order to level the playing field.(4)

   That effort resulted in the Organization of Economic Cooperation and Development ("OECD") Convention on Combating Bribery of Foreign Public Officials in International Business Transactions ("OECD Convention"), signed in December 1997.(5) Congress ratified the OECD Convention and enacted implementing legislation in 1998.(6)

   These changes amended the FCPA to broaden the scope of potential FCPA violations and to allow greater enforcement efforts by U.S. prosecutors.(7) Along with recent SEC and DOJ efforts to increase enforcement of the FCPA,(8) the 1998 amendments indicate a step forward in the battle against corruption in foreign business practices.(9)

   The FCPA's provisions deal with accounting procedures and anti-bribery efforts. Section II of this Article reviews the accounting provisions of the FCPA, addressing parties covered, requirements imposed, the scope of affirmative defenses to violations of these provisions, and recent enforcement activity. Section III then examines the FCPA's anti-bribery provisions in the same way. Section IV discusses the range of penalties for violations of these provisions, and Section V outlines guidelines and resources for creating an effective FCPA compliance program. Finally, Section VI summarizes anticipated developments in the crusade against business corruption.

2. ACCOUNTING PROVISIONS

   The FCPA amends the Securities Exchange Act of 1934 ("Exchange Act")(10) by adding record-keeping and disclosure requirements for certain entities already subject to the Exchange Act's provisions.(11)

   1. Covered Parties

      The accounting or "books and records" provisions apply only to "issuers" under the Exchange Act.(12) Issuers are those companies that have issued securities registered with the SEC under [sections] 12(13) or are required to file reports under [sections] 15(d) of the Exchange Act.(14) The accounting provisions are broad and apply to all business undertaken by the issuer, domestic or foreign, legitimate or corrupt.(15) An issuer that controls more than 50 percent of a foreign subsidiary's stock must also ensure that the books and records provisions are adhered to by the subsidiary.(16)

   2. Elements of the Accounting Provisions

      1. Record-keeping

         The first major requirement 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."(17) "Reasonable detail" is assessed against a standard that requires a "level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs."(18)

         In practice, the record-keeping provisions are designed to prevent three types of improprieties--(1) the failure to record illegal transactions; (2) the falsification of records to conceal illegal 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.(19) In short, records must include information that would alert the SEC to any possible impropriety.(20) 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.(21)

      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.(22) "Reasonable assurances" are measured against the same standard discussed above for reasonable detail.(23) The internal controls provision is designed to prevent unauthorized and/or unrecorded transactions.(24)

         The SEC considers several factors to determine the adequacy of a system of internal controls,(25) including: (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.(26) The SEC has also insisted that an audit committee set up by the board of directors is required to exercise appropriate control.(27)

   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"(28) to be found criminally liable under either of the accounting provisions. This intent requirement is designed to reduce the potential for liability resulting from inadvertent accounting violations.(29) In addition, "knowing" may include willful blindness or conscious attempts not to know.(30)

   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.(31) Further, [sections] 78m(b)(6) provides a good faith defense for issuers who own fifty percent or less of a business concern.(32) If the larger corporate entity acted in good faith to encourage compliance with the FCPA accounting controls, it is "discharged" from responsibility for a subsidiary's violations.(33)

   5. Enforcement

      The FCPA's accounting provisions, which are codified under the Exchange Act,(34) are enforced by the SEC.(35) The SEC has brought enforcement actions based on violations of the accounting provisions in cases involving foreign bribery as well as in purely domestic actions.(36) 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.(37)

3. ANTI-BRIBERY PROVISIONS

   The FCPA makes it illegal to bribe foreign government officials for the purpose of obtaining or retaining business or for directing business to another person.(38) It prohibits individuals or 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 of candidate, or any agent of those entities.(39) The provisions forbid direct or indirect bribes.(40)

   1. Covered Persons

      The 1998 amendments closed a gap in the original FCPA(41) by implementing the OECD Convention requirement that bribery by "any person" be illegal.(42) The anti-bribery provisions now cover any person who commits bribery on U.S. territory.(43) Previously, the FCPA covered only issuers and "domestic concerns."(44) The SEC and DOJ can also convict individual corporate employees under the FCPA, regardless of whether the corporation itself is found guilty of violating the FCPA.(45)

      However, foreign officials who receive bribes from American companies remain outside the reach of the FCPA.(46) Similarly, foreign officials cannot be prosecuted for conspiracy to violate the FCPA.(47)

   2. Elements of the Offense

      A violation of the anti-bribery provisions of the FCPA contains the following elements:(48) (1) a domestic or foreign company or any U.S. citizen or alien(49) (2) acts in furtherance of an offer, payment, promise to pay, or authorization of the payment of something of value(50) (3) to a foreign official, official of a public international organization, political candidate, or political party(51) (4) inside the territory of the United States or, for any U.S. personality, outside the United States (5) to corruptly(52) induce or influence the official to act or refrain from acting, or to gain any improper advantage,(53) (6) to assist the company in obtaining, retaining, or directing business to any person.(54)

      The 1998 amendments removed the requirement of a territorial nexus between the corrupt act and the United States.(55) Thus, any U.S. person or entity pursuing a corrupt scheme outside the United States is subject to prosecution.(56)

      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 Act.(57) The "knowing" standard in the anti-bribery provisions includes "conscious disregard" or "willful blindness"(58) and is intended to cover those corporate officials who fail to take action when reasonable signs of an FCPA violation arise.(59) 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 demonstrate evidence of a conscious disregard or deliberate ignorance of known circumstances that should reasonably alert one to ... violations of the Act."(60) "[S]imple negligence" or "mere foolishness" should not be sufficient to trigger the Act.(61)

   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 Exception

         The FCPA expressly permits "facilitating" or "grease" payments to foreign officials to "expedite or to secure the performance of a routine governmental action."(62)...