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Enforcing the Foreign Corrupt Practices Act: Guidance through a Glass, Darkly

The much-anticipated Department of Justice guidance on the Foreign Corrupt Practices Act finally arrived late in 2012, but the guidance fails to address many outstanding questions and these issues are unlikely to be addressed any time soon.

On Nov. 8, 2011, in a presentation to the American Conference Institute’s National Conference on the Foreign Corrupt Practices Act (FCPA), then-Assistant Attorney General Lanny Breuer made a significant pronouncement.  He said, “In 2012, in what I hope will be a useful and transparent aid, we expect to release detailed new guidance on the Act’s criminal and civil enforcement provisions.”

Those words drew a lot of attention from industry trade groups, lobbyists, commentators, and members of the FCPA defense bar, who waited with bated breath for the Justice Department’s comments and to assess the impact of the promised guidance on the striking trend toward aggressive FCPA enforcement during the last five to ten years.  Over time, the anticipation turned to frustration and skepticism as the days and weeks wore on and—more than a year after Breuer’s announcement—still no guidance had been issued.  Commentators who once believed the department might narrow or clarify the FCPA in ways that would significantly help global businesses navigate the minefield of risks presented by the government’s ever-expanding interpretation of the statute began to speculate that the guidance, if it ever came to fruition, would prove cold comfort.  Now the long-awaited guidance has finally arrived, and we can ask ourselves what it will mean—if anything at all—in the years to come.

Enforcement Trends

To determine what enforcement trends now exist we look first to the history of the FCPA and what led us to where we are now. President Jimmy Carter signed the FCPA into law in 1977 in the wake of Watergate.  While investigating illegal payments to the Nixon campaign, investigators collected evidence establishing that hundreds of United States corporations had participated in the rampant bribery of foreign officials. Congress studied the issue and, upon considering multiple bills targeted at putting an end to foreign bribery, ultimately passed what became the first iteration of the FCPA.

Protests against the new law began almost immediately.  At that time, the United States was the only leading nation in the world to have enacted a law against foreign bribery.  American businesses justifiably argued that the FCPA put them at a competitive disadvantage against companies from other countries that faced no similar risk of prosecution for their participation in corrupt transactions. The mounting political pressure from the business lobby resulted in statutory reform through amendments to the FCPA enacted in 1988.

The 1988 amendments to the statute dramatically narrowed the law. They established the two affirmative defenses embedded in the FCPA today, for transactions that are lawful under the written laws of the foreign government and reasonable business expenditures related to product promotion or the performance of a foreign government contract.  The amendments also created an explicit exception for facilitating payments and modified the requisite level of intent for third-party bribes from the “reason to know” standard applicable to negligence claims to the somewhat less draconian “actual knowledge” or “deliberate ignorance” standard that applies now.  By establishing the opinion procedure process, they provided a mechanism for businesses to obtain specific guidance from the Department of Justice.  Finally, through a change with perhaps the greatest long-term significance, the amendments imposed a mandate on the president to negotiate with the international Organization for Economic Cooperation and Development (OECD) for an agreement targeted at leveling the playing field by requiring other member nations to enact similar anti-bribery laws.

The negotiation process took almost a decade, but in 1997 the OECD anti-bribery convention was signed.  Because the convention included requirements not imposed by the FCPA, the statute was amended in 1998 to bring the United States into compliance.  The new provisions expanded the law in a number of ways.  While the original statute required a connection to either U.S. mail or interstate commerce to prove jurisdiction, the law now applies to all U.S. nationals and companies wherever and however the corrupt transaction takes place.  The amendments also expanded the statute’s coverage to foreign nationals and businesses for acts committed while in the United States, broadened the definition of “foreign official” to include employees of public international organizations, and made criminal penalties applicable to non-U.S. nationals who are employed by or agents of U.S. businesses.

Notwithstanding the effort expended by the U.S. government on enacting and amending the FCPA, the law essentially languished as a paper tiger for the first 25-30 years of its existence.  From 1977 until the mid-2000s, the government brought only a few isolated cases per year.  In or around 2005, however, the Department of Justice and the Securities and Exchange Commission (SEC) began making the FCPA a priority:  A marked upswing in FCPA enforcement actions took place at a time when global expansion had become a key development strategy for many U.S. businesses. The business community took notice and—once again—began clamoring for reform.

Although the United States no longer stands as the only nation among its peers to have a strong law against foreign corruption, it remains by far the world’s most aggressive anti-corruption enforcer.  Businesses governed by the FCPA that participate in foreign bribery are far more likely than others to be penalized for their transgressions.  To manage this risk, they have had to expend substantial amounts of money developing anti-corruption compliance programs, performing due diligence on acquisitions and third-party agents, and conducting internal investigations when potential violations are reported. The playing field thus remains tilted against U.S. companies seeking to branch into lucrative but risky foreign markets, such as China and India.

Demands for Reform

The recent upswing in FCPA enforcement has, therefore, predictably led to concerted lobbying efforts both to narrow the statute and to make its enforcement more predictable.  Most notably, the U.S. Chamber Institute for Legal Reform (ILR) published a report during October 2011 calling for amendments to the law that would:

  • add an affirmative defense for corporations that have implemented adequate anti-corruption compliance programs;
  • limit successor liability against corporations that engage in sufficient due diligence before an acquisition takes place;
  • add a “willfulness” intent requirement to prove corporate criminal liability;
  • limit parent company liability for the acts of their subsidiaries; and
  • clarify when a government-owned business qualifies as an “instrumentality” of a foreign government, such that its employees are “foreign officials” within the meaning of the law.

These efforts began to gain traction among certain members of Congress, who appeared poised to support reform legislation, until Breuer made his November 2011 announcement about the forthcoming Department of Justice guidance.  Legislators unwilling to expend political capital addressing concerns that the department itself might voluntarily address adopted a “wait and see” approach to the promised guidance.  The department’s announcement effectively (some say intentionally) stalled the FCPA reform effort, and it has progressed no further.

The ILR and a long list of other trade groups responded to this development by sending a letter on Feb. 21, 2012, addressed to Breuer and Robert Khuzami, at the time the SEC’s director of enforcement, requesting that the forthcoming guidance address each of the concerns raised by the five amendments proposed in the ILR’s October 2010 report.  In addition, the letter asked the government to provide guidance concerning:

  • de minimis business hospitality and gifts;
  • business relationships with relatives of foreign government officials;
  • donations to charities with foreign government ties; and
  • secondment arrangements where employees are assigned to work with a foreign customer.

The letter also asked the government to publish information about cases in which it closes an investigation without enforcement and raised questions about the extent to which maintaining a robust compliance program might influence a declination decision.

The Department of Justice responded by inviting industry lobbyists to participate in closed-door meetings to discuss the guidance in Spring 2012, but in public statements made clear it had no intention of taking any position that might weaken the FCPA or the government’s strong stance against global corruption.  The government’s position became all the more entrenched in April 2012, when the New York Times published a lengthy exposé alleging a widespread pattern of corruption against a Walmart subsidiary in Mexico, which reportedly was furthered by a complete abdication of responsibility for the misconduct by the U.S. parent corporation.  The report resulted not only in lengthy investigations brought by the Department of Justice, the SEC, and agencies of the Mexican government, but also in a congressional inquiry led by Representatives Elijah Cummings and Henry Waxman, who pointedly observed that Walmart had been an active participant in the ILR.  In light of these developments, some commentators pronounced FCPA legal reform efforts to be completely dead.

What followed was a lengthy period of deafening silence from the Department of Justice, which refused to comment with any specificity on the content of the promised guidance or when it might be released.  In the meantime, divided courts continued their struggles to interpret the FCPA’s more puzzling provisions.  Businesses and the defense bar continued to build compliance plans, unsure of whether, and to what extent, their efforts would shield them should the department place them in its sites.

Guidance Released

Finally, on Nov. 14, 2012, the Department of Justice and SEC released the long-awaited guidance in the form of a 130-page document entitled: “A Resource Guide to the U.S. Foreign Corrupt Practices Act (Guide),” which may be found at http://www.justice.gov/criminal/fraud/fcpa/guide.pdf.  While the guide is an obvious effort to respond to the multitude of calls for FCPA legal reform, its attempts to clarify the government’s interpretation of key provisions and to provide concrete guidance for industry are a mixed bag of success and failure.  In short, the guide is as notable for what it lacks as for what it contains.

Moreover, the guide will be of limited use to defendants hoping to use its contents as admissions against the government in court.  While it provides needed clarification of the government’s positions on several important issues, the government has hedged its bets.  According to the “fine print” (which appears immediately after the guide’s cover page):  “[This Guide] is non-binding, informal, and summary in nature … . As such, it is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, that are enforceable at law by any party, in any criminal, civil, or administrative matter.”  Bottom line: User Beware!  The guide creates no safe harbors from FCPA liability.  While businesses cannot bank on the government’s statements or examples as a defense to prosecution, it is safe to assume that reliance on the guide will result in a significantly lower likelihood of being targeted for inquiry.

Points of Clarification

Gifts and Entertainment:  Evaluating when gifts and entertainment cross the line between hospitality and corruption is the FCPA compliance issue businesses struggle with the most. The FCPA prohibits a corrupt “offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to” a foreign official.  While the guide alerts its readers that there is no de minimis exception to what constitutes an illegal payment under the FCPA, it also clarifies, through a series of examples, that the provision of reasonable gifts and entertainment for legitimate business and promotional purposes is not a violation.

In one example, an executive with a company based in the United States gives a moderately priced crystal vase to a government official—the general manager of a foreign government energy agency—as a wedding gift and token of esteem.  According to the guide, reasonable gifts to foreign officials as tokens of esteem or gratitude are acceptable, as long as they are properly recorded in the company’s books and comply with local laws.  In another example, a company based in the United States sponsors several senior foreign officials to inspect the company’s facilities in the United States over a period of several days.  The company pays business-class airfare and treats the officials to a moderately priced dinner, as well as a baseball game and a play.  The guide notes that reasonable promotional expenditures that coincide with a legitimate business purpose, such as facility inspections, do not violate the FCPA as long as they are not the main focus of the trip.

While these examples appear to give companies a little breathing room in establishing their FCPA compliance policies, companies still should exercise caution as there is room for debate about the proper balance of time spent in business endeavors versus entertainment/promotional events, or what constitutes “moderately priced” gifts and entertainment.  The historical record is replete with accounts of officials being treated to exorbitant gifts, trips, and events so excessive as to create a basis for FCPA liability.  Moreover, companies should be wary that the government will not view individual gifts to a single official in a vacuum, but will consider all of the benefits provided to that official over time when evaluating whether an intent to bribe can be inferred.  Nevertheless, the examples provide some concrete guidance about the type of behavior that might be deemed acceptable, in an area that has been riddled with significant uncertainty.

Successor Liability:  One area of consistent concern for companies that merge with or acquire other companies engaged in international business is whether the successor company assumes the predecessor’s liability for any FCPA violations.  Here, the guide provides some needed direction.  Starting from the basic legal principle that a successor company does assume the liabilities of a predecessor (a pro-government stance that remains subject to legitimate challenge in the courts), the guide advises companies to conduct thorough due diligence prior to an acquisition and implement hearty post-acquisition compliance programs and internal controls.  If any FCPA compliance issues are discovered during or after the merger, the guide advises prompt voluntary disclosure to the Department of Justice (and SEC, as applicable).  While the guide stops short of guaranteeing that successor companies that follow this guidance will escape prosecution, the message is clear that those who perform careful due diligence, promptly institute compliance programs, and report improper activities are much more likely to avoid serious consequences, such as the imposition of exorbitant fines, debarment, or criminal penalties.

The guide offers three pages of hypothetical scenarios to demonstrate potential government enforcement against successor companies, in some circumstances where the acquired company was not previously subject to the FCPA, and in others where it was.  The scenarios emphasize the guide’s points about the necessity of due diligence, the implementation of compliance programs, and the importance of reporting. But they also emphasize one other point: If the improper behavior by the predecessor continues after acquisition, “successor liability” is not the issue, and the Department of Justice will charge the successor with improper bribery for its own post-acquisition misconduct.

Accomplice Jurisdiction:  Traditionally, federal jurisdiction to prosecute FCPA violations applies to: (1) U.S. issuers and domestic concerns by virtue of nationality; or (2) foreign entities that are subject to liability, through territorial principles, for acts committed domestically in furtherance of a violation.  According to the guide, however, the government can proceed against “a foreign national or company … [that] aids and abets, conspires with, or acts as an agent of an issuer or domestic concern, regardless of whether the foreign national or company itself takes any action in the United States.”  The government’s position on this issue is an aggressive one that could fail a legal challenge.  While assertions of jurisdiction over foreign entities in civil conspiracy cases are relatively common under state long-arm statutes, the applicability of this jurisdictional principle in federal criminal cases is tenuous.  Regardless of how an
objective court might rule, the Justice Department’s insistence on asserting this basis for jurisdiction is a signal to foreign companies without direct U.S. dealings that they cannot expect to avoid prosecution when conspiring with companies based in the United States to bribe foreign officials.

Compliance Programs:  The guide provides some direction to businesses regarding appropriate due diligence and the elements of an effective compliance program.  Most importantly, companies should document their risk assessments and the reasons for decisions at all levels of due diligence and compliance.  It is not enough to put sound compliance measures in place—in the event of a government inquiry, a company must be able to demonstrate how those measures were enforced and applied in the particular situation under scrutiny.  A reasonable decision that is wrong in the government’s view may be defensible as long as it is well-documented, especially when paired with openness and the use of self-reporting channels for violations.

Missed Opportunities

Corporate Mens Rea:  The FCPA provides that individuals are criminally responsible only for “willful” violation of its provisions.  Before the guide was published, industry groups sought clarification that willfulness is a requirement for corporate liability as well.  Instead, the guide states that proof of “corrupt intent” is all that is required for corporate liability.  But this raises a point of confusion: What, exactly, distinguishes “willfulness” and “corrupt intent”?  According to the guide, corrupt intent is “an intent or desire to wrongfully influence the recipient.”  The term “willfully,” however, has been construed by courts to include acts committed “intentionally and purposefully, and with intent to do something the law forbids, that is, with the bad purpose to disobey or to disregard the law.”  Bryan v. United States, 524 U.S. 184 (1998).  The guide does nothing to explain how, in the government’s view, these two standards are different or in what circumstances a corporation could be held liable for acts for which an individual would not be prosecuted.

Declinations:  The defense bar and legal commentators have long advocated that the Justice Department should release information about cases they decline to prosecute, because it would be an excellent source of guidance for compliance lawyers about the government’s enforcement priorities.
Although the guide touches on the topic of declinations, it merely cites to general principles that federal prosecutors use when making such decisions, reiterates the department’s “long-standing policy” not to provide non-public declination information, and mentions that the department has declined several dozen FCPA cases in the past two years.  While some sense of the Justice Department’s position can be garnered from the examples given throughout the guide, detailed information about what factors are most important, examples of actual declinations with company-specific information redacted, and general statistics about rates of declinations (particularly in cases of voluntary disclosure) would have been helpful for companies and counsel alike.  Only one specific example—a case in which a former employee was charged but the corporate employer was not charged—is cited in the guide.

Foreign Official:  The FCPA’s anti-bribery provisions prohibit corrupt payments made to “any foreign official,” among other persons.  A foreign official includes, “any officer or employee of a foreign government or any department, agency or instrumentality thereof … .”  What constitutes an “instrumentality” is one of the most debated issues in FCPA jurisprudence.  Although the guide includes a relatively lengthy discussion regarding the term “foreign official,” it does little to clarify who, among the very broad range of possible candidates for bribery, the government deems to be employees of government “instrumentalities”—especially in countries where many industries are partially or completely government-owned or controlled.  Instead, the guide simply lists 11 factors that courts have used when making such determinations.  Since the case law currently is far from settled, the guide fails to offer companies any real guidance on who qualifies as a foreign official.

The guide does offer one small point of clarification, stating that: “While no factor is dispositive or necessarily more important than another, as a practical matter, an entity is unlikely to qualify as an instrumentality if a government does not own or control a majority of its shares.”  But there are exceptions even to this rule.  The guide provides an example of a Department of Justice/SEC enforcement action where the alleged “instrumentality” was less than half government-owned.  In that case, the “instrumentality” was a Malaysian telecommunications company owned 43 percent by Malaysia’s Ministry of Finance.  The issuer’s three subsidiaries were convicted of paying bribes to employees of the telecommunications company.  Because the Ministry held the status of a “special shareholder.” had veto power over all major expenditures, controlled important operational decisions, and had company officers who were political appointees, the Justice Department considered the telecommunications company to be an “instrumentality” of a foreign government under the FCPA.  See, United States v. Esquenazi, No. 09-cr-21010 (S.D. Fla. Aug. 5, 2011).

The resulting guidance is, at best, muddled and confusing.  In a guide filled with approximately 30 hypotheticals and vignettes, it is remarkable that the section discussing the definition of “foreign officials” does not include more specific examples.

Implications for Industry

While the guide contains a number of helpful examples and policy statements, it does little to relax the strict interpretation of the law applied in recent enforcement actions, and leaves enough important answers unwritten or ambiguous that it is unlikely to satisfy the repeated calls for FCPA reform.  For instance, it pointedly ignores calls for an affirmative defense for companies with sound compliance programs—such as that available under the recently enacted U.K. Bribery Act.  It also fails to address some of the areas of uncertainty raised by industry lobbyists, including the propriety of business relationships with relatives of foreign officials, and secondment arrangements where company employees work directly with a foreign (official) customer.  In addition, the guide has not addressed requests for: (1) a “safe harbor” for successor corporations that engage in meaningful due diligence prior to an acquisition or merger; (2) the addition of a willfulness intent requirement for corporations; and (3) formal limits on parent company liability for the acts of their subsidiaries.

These issues are unlikely to be addressed anytime soon.  Ongoing FCPA investigations targeting Walmart and other companies that have been the most vocal lobbyists for change have dramatically weakened political leverage for reform during the last few years.  Until the political winds change—or the meaning of the FCPA is further illuminated by the courts—the guide offers industry the best roadmap available of the FCPA and how it will be enforced.

Dulce Foster is a shareholder at Fredrikson & Byron, P.A.  She practices in the areas of white collar criminal and regulatory defense; anti-corruption compliance, healthcare fraud compliance, and corporate internal investigations. She can be reached at dfoster@fredlaw.com.

Lousene Hoppe is a senior associate at Fredrikson & Byron practicing in areas of white collar & regulatory defense, commercial litigation, and health care fraud & compliance. She can be reached at lhoppe@fredlaw.com.

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