SPECIAL REPORT — Much attention recently has been paid to the Foreign Corrupt Practices Act (FCPA) in the wake of the high-profile investigation into the activities of Wal-Mart in Mexico, where it is alleged to have bribed foreign officials to expedite permits for its stores. Yet, the Wal-Mart situation is but one example of a long-term trend towards FCPA enforcement under novel theories of liability.

Because corporations are nearly always choosing to settle such actions for reasons of expediency, this expansion of FCPA jurisdiction has gone largely untested by the courts. These changes mean that many companies have had FCPA training that is already out of date. Some of the major developments in FCPA enforcement are outlined below, enabling companies to adjust their FCPA monitoring and procedures accordingly.

The FCPA sets forth certain required elements, including that the bribe or attempt to bribe be made to a foreign official, foreign political party or candidate or an official of a public international organization, or to someone else who passes it on. It must have occurred as a corrupt act for the purpose of influencing an official act or decision of that person or inducing them to do or omit any act in violation of their duty, or to secure any improper advantage, or to induce them to use their influence with a foreign government to affect or influence any government act or decision. Finally, the goal must have been to obtain, retain or direct business.

The courts have held that the FCPA incorporates willful blindness and conscious disregard, so ‘not wanting to know’ is no defense. The Act also includes accounting provisions requiring companies listed on the stock exchange to maintain certain record-keeping standards and internal accounting controls, in order to fight off-books accounts and slush funds which might otherwise be used for such bribes. Thus, the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) share enforcement authority for the FCPA’s anti-bribery and accounting provisions.

Just because an investigation is commenced, however, does not mean that it will move towards an indictment. Recently, the DOJ and SEC have made extensive use of deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs).

In a deferred prosecution agreement, an enforcement action is deferred for a set period of time if the company cooperates with the investigation, and if cooperation proves satisfactory the action is ultimately dismissed. An NPA is undertaken when there has been no indictment, and provides that no enforcement action will be taken if the company cooperates and pays disgorgement of illegally obtained profits and/or penalties.

As enforcement of the FCPA has increased exponentially over the last few years, the use of DPAs and NPAs has become routine. In 2012, DPAs and NPAs were used to resolve one hundred percent of corporate FCPA actions.

The trend to resolve such matters away from the courts is likely, at least in part, a result of the SEC and DOJ pushing the boundaries of what is considered to be an FCPA violation. When the courts have tried FCPA matters, prosecutors have racked up losses when advancing such novel theories. Companies that choose to resolve their cases instead of taking their chances with the courts is hardly surprisingly, given that a criminal indictment is something that most corporate executives would rather avoid. They often view resolving the matter through an NPA or DPA as the most cost-efficient alternative, even if they have legitimate defenses.

In May 2013, Wal-Mart forecast its FCPA investigation costs by mid-year to be in the range of $300 million, with no end in sight.

Even if the matter is resolved through an NPA or DPA, settlement involves the payment of huge fines (a total of $260 million in 2012 for 12 enforcement actions) and the conduct of company-wide investigations, which can last several years and run into the millions of dollars. In May 2013, Wal-Mart forecast its FCPA investigation costs by mid-year to be in the range of $300 million, with no end in sight. Thus, it is expedient for companies to appreciate the new FCPA risks they face and prevent potential violations before they occur.

The first major change has been in the expansion of who is considered to be a ‘foreign official’. An employee of a state-owned enterprise is now considered to be a government official for FCPA purposes.

Five of the 2012 enforcement actions involved such employees of state-owned enterprises. Usually such state-owned enterprises need to be majority owned to fall under the definition of foreign official, but the guidance document issued last year by the DOJ and SEC (A Resource Guide to the U.S. Foreign Corrupt Practices Act) mentions that there are circumstances whereby an entity would fall within the definition even if less than 50 percent owned by the government, for example if the government had veto power.

In the past, whether an individual had control over the levers of government was seen as relevant to whether he was a ‘foreign official’. However, recently such low-level, non-decision making employees such as doctors in state hospitals have been the basis for FCPA enforcement action.

In the 2012 Resource Guide, it is specifically stated that the FCPA “covers corrupt payments to low-ranking employees and high-ranking employees alike.” Thus, corporations need to avoid payments to officials of both governmental and quasi-governmental entities, regardless of the rank of such officials.

The second major trend has been enforcement actions against companies with very little if any connection to the United States, wherein the FCPA has been applied because the companies in question were listed as issuers on a New York stock exchange and routed payment through U.S. correspondent accounts (the accounts of foreign banks who require the ability to pay and receive U.S. currency).

In 2006, Statoil, a Norwegian company listed on the New York Stock Exchange, agreed to pay $21 million to settle charges relating to the bribing of an Iranian official to win oil and gas contracts; the payments were made by a foreign company to a foreign official, but routed through a New York bank. In 2008, Siemens AG and three of its subsidiaries pleaded guilty to FCPA violations and agreed to pay $1.6 billion; the SEC in its complaint against Siemens alleged that its jurisdiction was predicated upon Siemens’ status as an issuer and because the illegal payments were funneled through U.S. correspondent accounts.

The DOJ and SEC have been targeting U.S. companies for the actions of their foreign subsidiaries.

Third, the DOJ and SEC have been targeting U.S. companies for the actions of their foreign subsidiaries, where the conduct of the subsidiary occurred completely outside the U.S. and without any knowledge or involvement of the parent corporation. In 2010, the SEC pursued a Dutch company called Snamprogetti Netherlands B.V., owned by an Italian company which itself was owned by was a wholly-owned subsidiary of another Italian company ENI, S.p.A. which was a U.S. issuer.

The SEC and DOJ asserted jurisdiction for bribes paid in Nigeria based upon Snamprogetti’s acting as an agent of ENI. However no facts demonstrating an agency relationship beyond merely being a subsidiary were alleged in the complaint. Snamprogetti and EPI entered into a two-year DPA and paid $240 million in penalties. 

In April 2013, the SEC and DOJ announced that they had concluded an investigation of Ralph Lauren and resolved the matters through NPAs. The NPAs revealed that Ralph Lauren’s Argentine subsidiary paid bribes to customs officials to clear goods through customs that either lacked the proper paperwork or were prohibited by Argentine law. At the time, Ralph Lauren did not have any FCPA controls in place. Ralph Lauren agreed to pay a criminal fine of $882,000 and disgorgement and pre-judgment interest of $734,846, toll the criminal and civil statutes of limitations, and submit periodic self-monitoring reports.

All of the bribes were authorized by Ralph Lauren Argentina’s general manager and over a four-year period. The bribery was uncovered in an internal review undertaken by the company and promptly reported to the SEC. Both agencies characterized the general manager as Ralph Lauren’s ‘agent,’ apparently based solely on his position as general manager of the subsidiary and the fact that Ralph Lauren had appointed him to that position, without any allegation of any authorization, direction, control or even knowledge by Ralph Lauren of its subsidiary’s corrupt conduct. Thus, the agencies’ latest position appears to be that a corporation is strictly liable for the acts of its employees and agents when acting within the scope of their duties and at least in part for the corporation’s benefit.

Fourth, the agencies’ interpretation of the FCPA seems to have been expanded to cover situations that would traditionally have been considered a ‘grease payment’ rather than a bribe. The legislative history for the FCPA notes Congress’ intention to specifically exempt such grease payments and payments to secure permits, licenses and other duties of a ministerial or clerical nature which does not involve discretion, recognizing that it was impossible to do business in some countries without such grease payments.

Thus, the FCPA contains an exception for facilitation payments to “expedite or secure the performance of a routine governmental action.” However, the Guidance now states that payments to secure favorable treatment regarding taxes, customs and licensing or to prevent competitors from entering a market, satisfy the ‘obtain or retain business’ element. This means that payments that are made, not to procure business but rather to obtain a more nebulous advantage, such as reducing operating costs, may be caught by the FCPA. The Wal-Mart investigation is an excellent example, since that investigation involves payments for accelerated permits, licensing and inspection.

The DOJ and SEC have previously brought several other enforcement actions based on payments to obtain foreign licenses and permits. However, some have argued that the bringing of enforcement actions, which are ultimately settled, in cases where it could be argued that the payments are facilitation payments means that the facilitation exception is now illusory. Therefore, a prudent company should avoid making such facilitation or ‘grease’ payments.

Modifying company FCPA policies and procedures accordingly will go far in avoiding potential FCPA violations.

Fifth, for years the status of distributors was unclear, but in 2012 there were several FCPA enforcement actions (Smith & Nephew, Oracle, Eli Lilly) which demonstrated that distributors will be treated that same as a sales agent or reseller. Since distributors often purchase large quantities of goods, they can demand significant discounts; in the Eli Lilly matter, one particular distributor demanded and received a particularly large discount which it used for bribes, but Eli Lilly did not have measures in place to flag such unusual discounts. Therefore, prudent companies should have a mechanism to monitor and standardize such discounts, and perform due diligence on their distributors.

The U.S. FCPA is not the only regime with a recently expanding scope. For example, the 2010 U.K. Bribery Act allows jurisdiction over any company that has conducted a business or part of a business in the U.K., and has a blanket ban on facilitation payments.

FCPA enforcement is almost certain to stay at a high level, as the SEC can now pay up to 30 percent of its recovery to whistleblowers when the recovery exceeds $1 million. Awareness of the enforcement trends noted above, and modifying company FCPA policies and procedures accordingly, will go far in avoiding potential FCPA violations, and the large penalties and expenses that go with them.


Helena Sullivan
About The Author Helena Sullivan
Helena D. Sullivan, an attorney with Barnes, Richardson & Colburn, LLP., concentrates on the representation of importers who have issues of compliance with U.S. Customs law, exporters who have issues relating to U.S. export control laws, and other international regulatory issues relating to trade. A former Law Clerk to Judge Thomas Aquilino at the U.S. Court of International Trade, she is admitted to practice law both in the State of New York and in the province of Alberta, Canada.

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