12 Days of FCPA: Useful Takeaways from the New Foreign Corrupt Practices Act Resource Guide
As noted in a prior alert, the Securities and Exchange Commission (“SEC”) and U.S. Department of Justice (“DOJ”) recently put forth a long-delayed Foreign Corrupt Practices Act (“FCPA”) Resource Guide. While the guide was preceded by years of pressure to clarify the enforcement of the FCPA, it generally does little to break new ground as a matter of policy and is not legal precedent. The guide functions best as a single-reference source of preexisting agency enforcement actions and opinion letters. In this regard, it is a useful resource for the long-held interpretations of the FCPA by the agencies tasked with enforcement and offers a single source for the ounce of prevention that may be worth a pound of cure. It is important that companies review the guide to assess whether current compliance programs or measures will pass the watchful eye of the SEC or DOJ and for insight into how the agencies are likely to view future compliance issues and potential misconduct. With that in mind, we pulled together 12 important takeaways that can be drawn from the guide. Read one per day or all at once.
The First Day: ‘Tis the Season for Enforcement
Takeaway number one is simple: the focus on FCPA enforcement is unlikely to change in the near future. The 120-page guide divides into ten chapters, ranging from a discussion of the anti-bribery provisions themselves to a description of the types of resolutions available to the SEC and DOJ. The amount of time and energy that the agencies have put into the guide make it clear that FCPA enforcement is here to stay.
The Second Day: Two Clear Defenses
Takeaway number two is that the guide will not satisfy the many observers and commentators who have pushed for additional affirmative FCPA defenses. The guide repeats only the two statutory provisions: “(1) that the payment was lawful under the written laws of the foreign country (the ‘local law’ defense), and (2) that the money was spent as part of demonstrating a product or performing a contractual obligation (the ‘reasonable and bona fide business expenditure’ defense).” The local law defense is notoriously difficult to invoke and requires more than the mere absence of criminalization – the law must actually authorize the payments. As for the reasonable and bona fide business expenditure defense, the guide offers only the few examples already recognized in the past:
travel and expenses to visit company facilities or operations;
travel and expenses for training; and
product demonstration or promotional activities, with accompanying travel and expenses for meetings.
The Third Day: Expansive Theories of Jurisdiction
Takeaway number three is that the long arm of the law isn’t going to get shorter anytime soon. One of the first hot spots touched on by the guide is the enforcement reach of the FCPA. As expected, the SEC and DOJ continue to take a broad view of FCPA jurisdiction. One communication to, from, or through the United States or one wire transfer through a U.S. bank is sufficient to establish jurisdiction. What’s more, despite recent skepticism by commentators and one court, the guide advances the theory that co-conspirators fall under the FCPA “even if they themselves” were not present and never took action in the United States.
The Fourth Day: Examples of Gifts and Travel
Takeaway number four is that finding the perfect gift this season may be a tiny bit easier. The FCPA has always been known for the principle that giving a little can cost you a lot. There’s nothing in the new guide to change this as a general principle, but the compiled guidance and new hypotheticals in the guide offer some valuable insight into which gifts are acceptable. The guide, of course, notes that “[i]tems of nominal value, such as cab fare, meals and entertainment expenses, or company promotional items . . . without more,” are not likely to result in enforcement action by the DOJ or SEC. Gifts that are more significant, i.e., ones likely to “improperly influence,” are prohibited, as are widespread smaller gifts that equal a “pattern of bribes.” As to what one should make of the many things that fall between a new sports car and a cup of coffee, there’s no hard and fast rule. In fact, the guide suggests that there could be no such rule since “a modest payment” in the United States could have more significance in a foreign setting. The hypotheticals offer some help, including one describing legitimate activities where foreign officials on a business trip are taken to a baseball game and a play and are even flown business class. Of course, the hypothetical is not comprehensive and doesn’t include the value of the tickets (or if it was a playoff game), but it is more guidance than existed prior to the guide. Given the way that examples can become fixed models in the law, you may have a harder time tracking down tickets to your favorite sporting event next year. For one final note, it is important to remember that even a proper gift can violate the books and records provisions if not properly recorded.
The Fifth Day: Legal Facilitating Payments
Takeaway number five is that while the best gift is the one for which you expect nothing in return, you can still sometimes make a payment to facilitate things. The guide recognizes the exception for one-time facilitating payments or expediting payments for routine, nondiscretionary government service, but like an unexpected relative around the holidays, such payments are heavily scrutinized and should be handled cautiously. The guide distinguishes between payments that facilitate processing of visas and providing police protection or mail service, and payment to an official to obtain or retain business. Form will not trump substance, either. Labeling a bribe a “facilitating payment” won’t make it so and only opens the door to a potential books and records violation. Also, it is notable that this exception is not recognized by some countries, and their anti-bribery laws may prohibit a gift even if the FCPA does not.
The Sixth Day: Deck Your Compliance Program with the Hallmarks of Effectiveness
Takeaway number six is that the SEC and DOJ have summarized what the agencies consider to be the attributes of an effective compliance program. Of course, the guide stresses that there are “no formulaic requirements regarding compliance programs,” but Chapter Five sets out the “hallmarks” that will be used in determining whether a compliance program is effective. The guide notes three basic questions in analyzing a compliance program:
Is it well designed?
Is it being applied in good faith?
Does it work?
In addition, Chapter Five references compliance program basic elements (although the guide notes that the elements do not guarantee mitigation credit in an enforcement action). The elements listed are:
a commitment from senior management and a clearly articulated policy against corruption;
an accessible corporate code of conduct and compliance policies and procedures;
a compliance department with oversight, autonomy, and adequate resources;
appropriate risk assessment in tailoring the program to high-corruption jurisdictions;
periodic training for personnel and continuing advice;
employee incentives, including rewards and disciplinary measures;
appropriate third-party due diligence;
a means of confidential reporting and conducting appropriate internal investigations;
continuous improvement through periodic testing and review; pre-acquisition due diligence and post-acquisition integration.
The Seventh Day: ‘Twas the Night Before . . . and Other Hypotheticals
Takeaway number seven is that the guide provides examples of how the government believes the FCPA applies (or not) to specific sets of facts. While we’ve referenced some particular hypotheticals, they’re also worth a word generally. While these hypotheticals are not legally binding, a party can reference them in future enforcement proceedings. Overall, the hypotheticals address a range of issues including liability for successor and parents, jurisdiction, gifts and other expenses, and facilitating payments. Some notable examples are Chapter Five’s compliance program case study and several situations addressing third-party vetting and joint ventures, as well as Chapter Two’s discussion of hypothetical gifts and travel payments.
The Eighth Day: Eight Red Flags About (Third) Parties
Takeaway number eight is the guide’s eight red flags to spot when dealing with third parties. Liability under the FCPA exists where payments are made while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to a foreign official. Needless to say, this can include payments made by third-party agents or business partners. What’s more, recent case law suggests that liability exists where there is “conscious avoidance” of whether a bribe will be paid or which particular foreign official it will go to. The eight red flags referenced in the guide are the following:
excessive commissions to third-party agents or consultants;
unreasonably large discounts to third-party distributors;
third party “consulting agreements” that include only vaguely described services;
the third-party consultant is in a different line of business than that for which it has been engaged;
the third party is related to or closely associated with the foreign official;
the third party became part of the transaction at the express request or insistence of the foreign official;
the third party is merely a shell company incorporated in an offshore jurisdiction; and
the third party requests payment to offshore bank accounts.
The Ninth Day: Nine Handy Safeguards
Takeaway number nine is the nine safeguards that the guide notes will help ensure payments are reasonable and bona fide. While payments to foreign officials are more likely to raise red flags, the guide notes that payments “will not give rise to prosecution if they are (1) reasonable, (2) bona fide, and (3) directly related to (4) the promotion, demonstration, or explanation of products or services or the execution or performance of a contract.” The nine safeguards that a company can follow when considering whether a payment to a foreign official is appropriate or violates the FCPA are the following:
Do not select the particular officials who will participate in the party’s proposed trip or program or else select them based on predetermined, merit-based criteria.
Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of a receipt.
Do not advance funds or pay for reimbursements in cash.
Ensure that any stipends are reasonable approximations of costs likely to be incurred and/or that expenses are limited to those that are necessary and reasonable.
Ensure the expenditures are transparent, both within the company and to the foreign government.
Do not condition payment of expenses on any action by the foreign official.
Obtain written confirmation that payment of the expenses is not contrary to local law.
Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred.
Ensure that costs and expenses on behalf of the foreign officials will be accurately recorded in the company’s books and records.
The Tenth Day: Mergers and Acquisitions Tips
Takeaway number ten is two practical suggestions from the guide to help with mergers and acquisitions. Companies can acquire significant FCPA liability following a merger or acquisition, and due diligence of potential FCPA risk is a necessary component of such transactions. The guide offers two tips to reduce FCPA risk in mergers and acquisitions. The first tip is that if there are special circumstances that limit the ability to conduct due diligence, then a company can seek an opinion from the DOJ prior to a planned acquisition. Under this situation, the DOJ offers assurances (which the SEC will honor) that it won’t apply enforcement for pre-acquisition misconduct by the acquired company if certain conditions are met by the acquiring company, e.g., “demanding standards and prescriptive timeframes” such as reporting of due diligence risk and a post-closing compliance plan. The second tip is more of an accumulation of suggested steps (with the promise that meaningful credit will be given if there is enforcement following a merger or acquisition):
conduct thorough risk-based FCPA and anti-corruption due diligence on potential new business acquisitions;
ensure that the acquiring company’s code of conduct and compliance policies and procedures regarding the FCPA and other anti-corruption laws apply as quickly as is practicable to newly acquired businesses or merged entities;
train the directors, officers, and employees of newly acquired businesses or merged entities (and, when appropriate, train agents and business partners) on the FCPA and other relevant anticorruption laws and the company’s code of conduct and compliance policies and procedures;
conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable; and
disclose any corrupt payments discovered as part of its due diligence of newly acquired entities or merged entities.
The Eleventh Day: Old Acquaintance May Sometimes Be Forgot
Takeaway number eleven is that the guide provides certain situations where the SEC and/or DOJ declined prosecution or enforcement. While enforcement proceedings and settlements work their way into the public eye, there is always less certainty or insight as to situations where investigations result in no enforcement or prosecution. Each hypothetical in the guide is unique, of course, but several shared factors that emerge are that the companies typically had a functioning compliance program, implemented significant remedial actions, and voluntarily disclosed to the government. The last of these is of significant interest, given that one ongoing criticism of the agencies in recent years has been that defendants do not receive sufficient, or even any real, credit for voluntarily disclosing. Unfortunately, the guide provides no concrete discussion of credit for voluntary disclosure other than offering this handful of examples and a few generic references to other sources, such as the DOJ’s Principles of Federal Prosecution.
The Twelfth Day: A Few Other Resources
Takeaway number twelve is that while the guide is an accumulation of past guidance, you may still want to go back and review the past guidance. Doing so now is easier than ever. The DOJ now provides a helpful index to its FCPA releases that is organized by subject. The index runs through numerous topics, including everything from Audit Rights and Charitable Contributions to Third-Party Agents and Written Laws Affirmative Defense.