Last week, the former CEO of Latin Node, a now defunct Florida-based telecom, was sentenced to 46 months in prison for his role in bribing Honduran officials of a state-owned telephone company  to secure a contract.  The U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”) violation was disclosed 2 months after the closing of a $20 million share purchase of Latin Node.  Relying on representations rather than on comprehensive due diligence became costly for the third-party investor.  According to David Ahola, MFR Principal responsible for Internal Audit,  “ Due diligence should have revealed this exposure before any investment was made.”

The Securities and Exchange Commission (“SEC”) notes that there were more FCPA enforcement actions in 2010 than 2008 and 2009 combined.  Recently, Stephen Clayton, writing for a publication of the ACC (Association of Corporate Counsel), observed that “in 2010 alone, 52 individual business-people were indicted, sentenced, or were convicted and awaiting sentencing for FCPA violations…Lately the cases have been about half against companies and half against individual company managers and employees.“   

“In the post-Dodd-Frank world, where whistle-blowers can earn hefty rewards from the SEC, FCPA enforcement actions will continue to increase,” according to Ahola.  Section 922 of the Dodd-Frank Act (Pub.L. 111-203) requires the Securities and Exchange Commission to establish a new whistleblower program that will pay awards, subject to certain limitations and conditions, to whistleblowers who voluntarily provide the SEC with original information about a violation of the securities laws that leads to a successful enforcement of an action brought by the SEC that results in monetary penalties exceeding $1,000,000.  The amount of the award is required to equal 10-30% of the monetary sanction.

The U.S. government has been cashing in on penalties under the FCPA.  Businesses have complained that the rules are far from clear.  According to a recent Congressional Hearing, “The business community complains that the absence of (appellate) case law interpreting the breadth and scope of the FCPA inflates the Department’s prosecutorial discretion and confounds industries’ ability to conform to the law. For instance, there is no clear rule on what qualifies as a foreign official, or what percentage of state ownership qualifies a company as an instrumentality of the state. Companies lack guidance on how expensive a gift must be to be considered a bribe.”

Scope of the FCPA

FCPA generally prohibits U.S. businesses (incorporated or unincorporated “domestic concerns”), U.S. residents and citizens, and foreign companies listed on a U.S. stock exchange, as well as any person acting in the United States, from paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business (the “Anti-Bribery Provisions”). The FCPA requires “any company including foreign companies) with securities traded on a U.S. exchange or one required to file periodic reports with the SEC to keep books and records that accurately reflect business transactions and to maintain effective internal controls.

The FCPA’s definition of a "foreign official includes persons employed directly by a foreign government, as well as individuals employed by commercial enterprises owned or controlled by foreign governments and private persons who have responsibilities similar to those of governmental employees (e.g., private architects or engineers retained by government agencies to design or supervise the construction of governmental buildings). 

The FCPA deals only with bribes that are intended to obtain or retain business.  It excludes “grease” or facilitating payments.  A “grease” or facilitating payment is a payment made to expedite or secure the performance of a routine government action. Routine government actions are a narrowly defined exception and includes such things as obtaining permits or licenses, processing official papers, clearing goods through Customs, loading and unloading cargo and providing police protection.

The Anti-Bribery provision also contain broad third-party payment provisions under which the actions of foreign subsidiaries and other third parties (including agents, consultants, distributors, joint venture partners, etc.) can result in FCPA liability to a parent company or the entity engaging the third-party. Even without actual knowledge that an improper payment has been made, a company can be found guilty of a violation.  “It is a mistake to think that a U.S. business can avoid FCPA by willfully overlooking the activities of foreign agents and partners, and, as illustrated by the Latin Node case, implementation and execution of anti-corruption due diligence is a must before entering strategic alliances, joint ventures or partnerships with new businesses, according to Ahola.

The extra-territorial scope of the law should not be underestimated.  For example, U.S. officials could file an action against News Corp, the US-listed company that is the ultimate owner of News International (NI), which in turn owns the News of the World the company accused of bribing U.K officials and invading the privacy of British citizens in connection with its news stories. U.S. jurisdiction under FCPA can be as minimal as merely routing funds through U.S. bank accounts.  See: U.S. v. Sapsizian.

The two affirmative defenses are available under FCPA and apply to a payment to a foreign official that is: (i) lawful under the written laws and regulations of the foreign country; or (ii) a reasonable and bona fide expenditure directly related to the promotion, demonstration, or explanation of products or services or the execution or performance of a contract.  As Aaron Murphy, author of a guide on the FCPA for executives and managers recently pointed out, businesses can erroneously lull themselves into thinking that there is a routine business practices defense.

More and More Jurisdictions are Enacting Similar Legislation

When FCPA was enacted, the United States stood alone legislating against commercial bribery of foreign government officials. The U.S. position was perceived by many U.S. businesses as a competitive disadvantage to securing business in foreign markets.  What began as a peculiarity of U.S. law has now found its way into international conventions.   (For example, the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions generated implementing legislation in many states.).  This year China enacted tough anti-bribery rules, with a global reach, where an improper commercial benefit is sought. 

Mr. Ahola notes that, “Perhaps the toughest anti-bribery legislation has recently gone into force in the United Kingdom and it applies both to public and private U.K. businesses (including businesses in the Overseas Territories), U.K. persons worldwide, and foreign businesses carrying on any business in the United Kingdom. Under this law, facilitating payments are not permitted.”

Now, U.S. and foreign bribery provisions need to be seriously considered because multiple jurisdictions could apply their laws to the same violation.  In addition, growth of a business on an international level poses inherent compliance challenges because acquisitions, engagement of third-party agents, and intrusive foreign government oversight and regulations may not be thoroughly known or due diligence incomplete.

Enforcement and Penalties

The FCPA is jointly enforced by the Department of Justice (“DOJ”) and the SEC.  Many of the recent enforcement actions by the DOJ are included on the DOJ’s website.

FCPA violations can result in significant fines and penalties. For instance, a company can be criminally fined up to $2 million per violation of the Anti-Bribery provisions and culpable individuals can be subject to a criminal fine of up to $250,000 per violation as well as imprisonment for up to five years. Willful violations of the books and records and internal control provisions can result in criminal fine of up to $25 million for a company and a criminal fine up to $5 million, as well as imprisonment for up to 20 years for culpable individuals.

Fines and penalties are in addition to harsh collateral sanctions that can result from an FCPA violation, including termination of government licenses and debarment from government contracting programs. In addition, the SEC is able to seek disgorgement of a company’s profits on contracts secured with improper payments. Enforcement agencies are also increasingly seeking appointment of an independent compliance monitor over FCPA corporate violators for multi-year periods, a process which can be cumbersome and expensive for companies.

Managing FCPA Risk

According to a recent study by Deloitte, “only 29 percent of the 276 executives surveyed by the Deloitte Forensic Center were very confident their company’s anti-corruption program would prevent or detect corrupt activities. This low level of confidence indicates that many companies may need to evaluate and upgrade their anti-corruption efforts.”

 “When dealing with the FCPA, business should recognize that the most effective preventative programs are organized around a particular business’s risk points, which are usually indentified during the risk assessment phase of a project and / or an entity’s Enterprise Risk Management process,” asserts Ahola.  “Solid preventative programs include an unambiguous business policy against bribery, as well as detailed guidance for field personnel and line-management responsibility and accountability.  Regular training is also a key ingredient, as are open reporting mechanisms for possible violations and periodic compliance audits.  If a potential violation is discovered, full disclosure to the government is the best damage control technique.”