Friday, February 29, 2008

The Foreign Corrupt Practices Act Overview (Part II), the Antibribery Provisions

The Foreign Corrupt Practices Act (15 U.S.C. §§ 78dd-1, et seq.) is a U.S. federal law that is comprised of two primary provisions: (1) the accounting record keeping and internal control provision, and (2) the antibribery provision. This overview discusses the antibribery provision.

Generally, the antibribery provision makes it unlawful for (1) U.S. firms and persons, and certain foreign issuers of securities, to make a corrupt payment (e.g., a bribe) to a foreign official for the purpose of obtaining or retaining business, and (2) foreign firms and persons to act in furtherance of a corrupt payment while in the United States.

The Department of Justice is responsible for criminal and civil enforcement with respect to domestic concerns, foreign companies and nationals. The SEC is responsible for civil enforcement of the antibribery provisions with respect to issuers.

Basic Elements to Establish a Violation of the Antibribery Provision:

Establishing a violation of the antibribery provision involves five basic elements.

1. To Whom the Act Applies.

The Act applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the antibribery provisions, or if they conspire to violate those provisions.

United States jurisdiction over improper payments to foreign officials depends on whether the violator is an "issuer," a "domestic concern," or a foreign national or business.

An "issuer" is a corporation that has issued securities that have been registered on a U.S. exchange, or that is required to file periodic reports with the SEC.

A "domestic concern" is any person who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State, territory, possession or commonwealth of the United States.

For acts that occur within the territory of the United States, issuers and domestic concerns are liable if they perform an act in furtherance of a corrupt payment to a foreign official using the U.S. mails or other means of interstate commerce, including, for example, telephone calls, faxes, wire transfers, and interstate or international travel.

Issuers and domestic concerns may also be liable for acts performed in furtherance of a corrupt payment made outside the United States. Thus, a U.S. company or national may be held liable for a payment authorized by employees or agents operating outside the United States, using money from foreign bank accounts, and without any involvement by a person located in the United States.

The FCPA was expanded in 1998 to include jurisdiction over foreign companies and people who cause, directly or through agents, an act in furtherance of the corrupt payment to take place in the territory of the United States, whether or not the act makes use of the U.S. mails for other means of interstate commerce.

U.S. parent companies also may be held liable for the acts of foreign subsidiaries, the activities of which they authorize, direct, or control, as can U.S. citizens or residents ("domestic concerns) who were employed by or acting on behalf of the foreign subsidiary.

2. Wrongful Intent or Purpose.

The person making or authorizing the payment, offer, promise or inducement must have a wrongful or corrupt intent or purpose, and the payment must be intended to induce or influence the foreign official who is receiving the payment to misuse his or her official position, to breach his or her lawful duty, to make a decision, or to otherwise act to direct business wrongfully to the payer or to any other person, or to obtain any improper advantage, or to induce the foreign official to use his or her influence improperly to affect or influence any act, event or decision.
However, the intended corrupt act does not have to actually succeed in purpose for a violation to occur. Thus, an offer or promise alone can be a violation.

3. Payment.

The Act prohibits paying, offering, promising to pay (or authorizing to pay or offer) money, or anything of value.

The Act also prohibits corrupt payments made through an “intermediary,” also referred to as third party payments. The “intermediary” is the recipient who is making the payment to the foreign official. It is unlawful to make a payment to a third party, while “knowing” that all or a portion of the payment will go directly or indirectly to a foreign official. The term "knowing" includes conscious disregard and deliberate ignorance. In other words, it is not necessary to show actual knowledge for there to be a violation. Thus, U.S. companies should exercise due diligence, investigate other entities and persons with whom they interact, react to and investigate “red flags,” and establish proper and prudent compliance staffing, procedures and processes. See also the overview of the FCPA accounting record keeping and internal control provision.

4. The Recipient.

The Act applies only with respect to corrupt payments to a foreign official, a foreign political party or party official, or any candidate for foreign political office.

A "foreign official" means any officer or employee of a foreign government, a public international organization, or any department or agency thereof, or any person acting in an official capacity, regardless of rank or position. The Act focuses on the purpose of the payment, not the duties of the recipient (see however, the “facilitating” payment exception discussed below). Whether or not a person is a “foreign official” can be difficult to determine. Consider, for example, royal family members, an official of a state-owned business, or members of a legislative body.

5. The Business Purpose Test.

The Act prohibits payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person. You should be aware that the term "obtaining or retaining business" is broadly interpreted for enforcement purposes. Additionally, the business to be obtained or retained does not need to be with a foreign government or foreign government instrumentality.

The Facilitation Payments for Routine Governmental Actions Exception:

The Act provides that there is no violation of the antibribery provision for payments made to facilitate or expedite performance of a "routine governmental action." The Act lists the following examples: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country. Other similar actions might also be excluded. However, the “routine governmental action" exclusion does not include or apply to any decision made by a foreign official to award new business or to continue business with a particular party.

Possible Affirmative Defenses Available to a Person Charged with a Violation:

In addition to being able to prevail on one or more of the five basic elements discussed above, there are a couple of affirmative defenses that an accused defendant may be able to argue and establish for the payment or action:

-The payment was lawful under the written laws of the foreign country. Obviously, prior to making a potentially improper payment you should seek the advice of counsel regarding the “legality” of the payment under the laws of the foreign country; and

-The money was spent as part of demonstrating a product or performing a contractual obligation.

Criminal Sanctions, Penalties and Jail Time:

Criminal punishment for violation of the FCPA antibribery provisions are as follows: corporations and other business entities may be fined up to $2,000,000; and officers, directors, stockholders, employees, and agents may be fined up to $100,000 and imprisonment for up to five years. Additionally, under the Alternative Fines Act the fine may increased up to twice the benefit that the defendant sought to obtain by making the corrupt payment. Fines imposed on individuals cannot be paid by the individual’s employer or principal.

Civil Fines and Injunctive Remedies:

The Attorney General or the SEC may bring a civil action seeking a fine up to $10,000 against any firm, officer, director, employee, or agent of a firm, or any stockholder acting on behalf of the firm, for violation of the antibribery provisions. Additionally, in an action brought by the SEC, the court may impose an additional fine not to exceed the greater of the gross amount of the monetary gain to the defendant as a result of the violation, or a specified dollar limitation based on the egregiousness of the violation, ranging from $5,000 to $100,000 for a natural person and $50,000 to $500,000 for any other person.

The Attorney General or the SEC may also bring a civil action to enjoin (i.e., stop or prevent) any act or practice of a firm whenever it appears that the firm, or an officer, director, employee, agent, or stockholder acting on behalf of the firm, is in violation, or about to be, in violation of the antibribery provisions.

Private Cause of Action:

A private cause of action may also be brought against the wrongful firm or person, such as by an aggrieved business competitor, for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO), and under various other federal or state laws.

Additional Possible Penalties and Sanctions:

A person or firm found in violation of the FCPA may be barred from doing business with the Federal government. An indictment can lead to the suspension of the right to do business with the government.

A person or firm that is guilty of violating the FCPA can be held ineligible to receive export licenses.

The SEC may suspend or bar a person or firm from the securities business and impose civil penalties on firms or persons in the securities business for violation of the FCPA.

The Commodity Futures Trading Commission and the Overseas Private Investment Corporation may suspension or debarment a person or firm from agency programs for violation of the FCPA.

And, a payment made to a foreign government official that is unlawful under the FCPA cannot be deducted for tax purposes.

Dave Tate, Esq. (and CPA)

CalCPA Financial Leadership Forum Advisory Panel member,
AICPA CPA Ambassador,
AccountingWeb Blogger,

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