The Foreign Corrupt Practices Act: unbridled enforcement and flawed culpability standards deter SMEs from entering the global marketplace.

Author:Laudone, Stephen S.
Position:Small and medium sized enterprises
 
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TABLE OF CONTENTS INTRODUCTION I. THE FOREIGN CORRUPT PRACTICES ACT A. History: The Original Problem and Congressional Action B. The Prohibitions and Elements of a Prima Facie Case II. PROBLEMS CREATED BY THE FCPA STATUTE AND CURRENT ENFORCEMENT PRACTICES WITH REGARD TO THE MENTAL STATE REQUIREMENT A. The Courts Interpret the Mental State Requirements B. A Trap for Unsuspecting Smaller Businesses III. THE DEPARTMENT OF JUSTICE'S UNCHECKED AND UNCHALLENGED HISTORY OF ENFORCEMENT A. The Enforcement Environment Outside the Court System B. The Problems Associated With Insufficient Litigation 1. The Government's Enforcement Regime is not Interchangeable with Case Law and Perpetuates the Lack of Case Law 2. The Enforcement Regime's Negative Impact on SMEs 3. Examples of the DOJ's Over-Enforcement Against SMEs IV. PROPOSED SOLUTIONS A. Existing Proposals B. New Solutions CONCLUSION INTRODUCTION

The management of a hypothetical Alabama-based agriculture irrigation utility company (AIC) receives a request from a regional government entity in an African country (Country Z) looking to increase farming production through enhanced irrigation systems to address its food shortage and import-export imbalance. (1) AIC has never engaged in an international project but sees this as an incredible opportunity to grow its business, currently consisting of 140 employees and grossing $15 million a year in revenue. (2) AIC representatives work with a regional official from Country Z over the terms of the contract which include a provision for an initial down payment of 35% of the estimated project costs and the remaining 65% at the conclusion of the work. AIC agrees to employ local workers to the extent possible and will send American employees to evaluate the region's needs, manage the project, and provide the requisite expertise throughout. Towards the end of negotiations, the official introduces the AIC representatives to a local consultant who is "familiar with the agricultural production and irrigation needs of the region" and will "represent the government throughout the process and assist in dealing with local entities." AIC representatives agree to these terms and begin work on the project to assist with upland storage of rainfall runoff, develop well and surface/groundwater processes, and promote effective water management, all of which was to be completed in eight months. (3)

Six months into the project, Country Z's immigration officials inform AIC that several of their American employees in the country lack the requisite documentation and are facing fines, jail, or deportation unless AIC pays cash fines to rectify the situation. Too far into the project to back out and concerned for their safety, AIC encourages the targeted employees to pay the fines and reimburses them through their next paycheck. (4) At the conclusion of the eight-month project period, AIC requests payment from Country Z officials for the remaining balance under the contract. Months go by and finally AIC gets a response from a Country Z official requiring AIC to pay a "service fee" to a government official in order to obtain the remaining balance on the contract and close the account. Based on its financial position and the need for these proceeds for continued investment in future projects, AIC representatives agree to pay the fees to facilitate final payment for services rendered. (5)

After completion of the project, the U.S. government opens an investigation as either the result of a tip or regularly scheduled audit of companies doing business in regions of the world considered particularly prone to corruption. During this investigation, the government requests information regarding the work done by the local consultant and an itemization justifying the fees said consultant charged. When AIC is unable to sufficiently assuage the U.S. government's concerns based on Country Z's propensity for corruption, further investigation reveals the local consultant was the relative of a government official and sent a portion of the fees to said official as a kickback. Suddenly, AIC faces civil penalties for violating the accounting provisions of the FCPA and criminal charges for the alleged briberies made to the foreign government in the form of consultant fees and the "service fees." The company is at risk of fines and disgorgement potentially in the millions, and any directors, officers, employees, or agents found to be culpable face prison time as well. (6)

This hypothetical situation encompasses several common pitfalls that small- and medium-sized enterprises (SMEs) face as they enter the global marketplace. (7) Companies that are unable to hire sophisticated legal representation for the purpose of developing a thorough compliance program due to insufficient financial means, or a lack of knowledge of the extraordinary risks associated with international business, are left at the mercy of a vigorous and strict governmental enforcement regime. When carrying out the FCPA enforcement regime, the government often ignores, or chooses not to view as mitigating, the fact that companies regularly face extortion from foreign governments, companies, and individuals. (8) The government also often ignores the size and sophistication of the company when investigating and making prosecutorial determinations even when it is clear the entity and its leadership lacked intent to violate the FCPA and engage in bribery or foreign corruption. (9)

After almost forty years and several congressional amendments, the existing case law on the FCPA, coupled with a sharp increase in DOJ and SEC enforcement measures, have resulted in two trends, both of which operate to the detriment of SMEs. The first trend is a narrowing of vital statutorily-created exceptions and affirmative defenses to FCPA liability, and the second trend is a broadening of the mental states required for conviction under the statute. Looking forward, Congress should amend the statute to require a mental state equivalent to specific intent, and account for differences between sophisticated, multi-national corporations and SMEs. The "willfulness" requirement should also apply to SMEs as it does to individuals. (10) Additionally, Congress should act to reinvigorate the "greasing the wheels" (hereinafter "facilitating payments") and "local law or customs" exceptions while also establishing mandatory Article III jurisdiction over proposed settlements by requiring the filing of civil and criminal complaints.

Part I of this Comment provides a history of the FCPA and a discussion of the functional effect of the statute and a prima facie case under the anti-bribery provisions. Part II outlines some of the problems that have developed around what little FCPA case law exists and provides examples of how many small- and medium-sized enterprises find themselves in situations of potential liability under the current system without a clear understanding of the government's burden regarding mental states and the statutory exceptions that should be available to them. Part III describes these problems in more detail by discussing the enforcement regime that the DOJ and SEC have developed outside of the court system and the problems with insufficient litigation surrounding the FCPA. Finally, Part IV discusses both existing proposed solutions to some of the problems outlined in Parts II and III as well as some new solutions specifically designed to aid small- and medium-sized enterprises as they navigate the global marketplace while also trying to avoid crippling liability under the FCPA.

  1. THE FOREIGN CORRUPT PRACTICES ACT

    1. HISTORY: THE ORIGINAL PROBLEM AND CONGRESSIONAL ACTION

      Bribery has been a crime for millennia and punishable under the common law for centuries. The first British statute criminalizing bribery was passed in the 1300s and the first references to bribery cases in Britain appear in the Star Chamber records around 1550." The United States expanded the term "bribery" well beyond its common law meaning to include all government officials, as well as commercial bribery of individuals acting in a private capacity. (12) The United States continued this expansion by becoming the first nation to criminalize international bribery through the passage of the Foreign Corrupt Practices Act in 1977. (13)

      In the wake of the Watergate Scandal, which exposed a variety of corporate (foreign bribery) as well as political abuses (slush funds for domestic politicians), the SEC conducted its own investigation, which culminated in an extensive "Report on Questionable and Illegal Corporate Payments and Practices" (SEC report). (14) The SEC report detailed the widespread misuse of corporate funds and questionable or illegal corporate payments which "represented a serious breach in the operation of the Commission's system of corporate disclosure and, correspondingly, in public confidence in the integrity of the system of capital formation." (15) Specifically, over 400 corporations had admitted making questionable or illegal payments exceeding "$300 million in corporate funds to foreign government officials, politicians, and political parties." (16) According to the House Report created by Congressman Harley O. Staggers Sr., Chairman of the Committee on Interstate and Foreign Commerce, companies were engaging in everything from bribing high-ranking foreign officials for favorable action on behalf of the company, to making facilitating payments to encourage government agents to discharge certain ministerial or clerical functions. (17) The volume of these domestic and foreign corrupt payments posed a danger to the integrity of the United States' elections and foreign policy goals, including the goals of promoting democracy and a free market system where companies should be able to honestly and ethically compete in areas like price and quality of product. (18) Thus, the FCPA contained anti-bribery provisions, as well as accounting...

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