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Article Excerpt
I. INTRODUCTION
II. ACCOUNTING PROVISIONS A. Covered Parties B. Elements of the Accounting Provisions 1. Record-keeping 2. Internal Controls C. Criminal Liability III. ANTI-BRIBERY PROVISIONS A. Covered Persons B. Elements of the Offense C. Permissible Payments and Affirmative Defenses 1. Routine Governmental Action Exception 2. Affirmative Defenses D. Enforcement 1. Prosecution 2. Attorney General's Guidelines and Opinions IV. PENALTIES A. U.S. Sentencing Guidelines 1. Individuals 2. Corporations B. Additional Penalties V. GLOBAL ANTI-CORRUPTION EFFORTS VI. FCPA CORPORATE COMPLIANCE PROGRAMS VII. RECENT AND ANTICIPATED DEVELOPMENTS
I. INTRODUCTION
In 1977, Congress amended the Securities Exchange Act of 1934 ("Exchange Act") by enacting the Foreign Corrupt Practices Act ("FCPA"). (1) The FCPA criminalized the bribery of foreign officials by U.S. corporations and individuals pursuing business in other countries and required that companies with publicly-traded stock meet certain standards regarding their accounting practices, books and records, and internal controls. (2) U.S. businesses were then at a competitive disadvantage in international markets, because foreign competitors were unconstrained by laws prohibiting bribery. (3) Consequently, the FCPA was amended in both 1988 and 1998. (4)
In 1988, Congress added two affirmative defenses and directed the executive branch to urge America's global trading partners to pass anti-corruption laws to promote international parity with regard to business corruption. (5) In 1998, the FCPA was again amended to implement the Organization of Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions ("OECD Convention"). (6) Congress ratified the OECD Convention and enacted implementing legislation. (7) These new amendments broadened the reach of potential FCPA bribery violations by expanding the scope of persons covered by the Act to include some foreign nationals. (8) Additionally, the 1998 amendments extended the FCPA's jurisdiction beyond America's borders to allow greater enforcement efforts by U.S. prosecutors. (9) In sum, the 1998 amendments increased enforcement by the Securities and Exchange Commission ("SEC") and the Department of Justice ("DOJ") of the FCPA (10) and indicated a step forward in the battle against corruption in foreign business practices. (11) Despite this, the impact of corruption remains a potent and debilitating force (12) affecting numerous industries in the international economic arena. (13)
Currently, the FCPA requires companies to maintain accurate records and a system of internal controls, (14) and outlaws the practice of bribing foreign officials and other categories of recipients for the purpose of obtaining a business benefit. (15)
This article will review both the accounting and anti-bribery provisions and the range of penalties for their violations. The article will then review global anti-corruption efforts as well as guidelines and resources for creating an effective compliance program. Finally, the article will conclude with a discussion of developments in the battle against business corruption.
II. ACCOUNTING PROVISIONS
The FCPA amended the Exchange Act by adding record-keeping and internal control requirements for certain entities already subject to the Exchange Act's provisions. (16) As a result, even non-material payments not recorded accurately could constitute a violation of U.S. law. (17) The principal accounting provisions are contained in 15 U.S.C. [section][section] 78m(b)(2) and b(5), which state the record-keeping and internal control requirements, as well as the necessary standard to impose criminal liability for a failure to meet these requirements. (18)
A. Covered Parties
The FCPA accounting provisions generally apply to publicly-held companies that are considered "issuers" in the United States under the Exchange Act, (19) including those companies that hold American Depository Receipts ("ADR"). (20) The term "issuer" refers to those companies that either have securities registered with the SEC under Section 12 of the Exchange Act (21) or are required to file reports under Section 15(d) of the Exchange Act. (22) The accounting provisions are broad and apply to all dealings undertaken by the issuer, regardless of whether the business actually engages in foreign operations or whether the transaction is considered a bribe. (23) In addition, an issuer that controls more than fifty percent of the stock of a foreign subsidiary must ensure that the subsidiary adheres to the books and records provisions. (24)
B. Elements of the Accounting Provisions
1. Record-keeping
The first substantial requirement of the accounting provisions (25) requires all issuers to "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." (26) "Reasonable detail" requires a "level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs." (27)
The record-keeping provisions are designed to prevent three types of improprieties: (i) the failure to record illegal transactions; (ii) the falsification of records to conceal illegal transactions; and (iii) the creation of records that are quantitatively accurate, but fail to specify qualitative aspects of the transaction. (28) In sum, records must include information that would alert the SEC to any possible impropriety. (29) These provisions allow the SEC to discover improprieties that would not normally be apparent under existing accounting systems and prevent issuers from claiming certain defenses, such as a lack of materiality for the undisclosed activity. (30)
2. Internal Controls
The accounting provisions also require issuers to create a system of internal accounting controls that provide reasonable assurances that transactions are properly authorized. (31) "Reasonable assurances" are measured against the reasonable detail standard. (32) The purpose of the internal controls provision is to ensure that issuers use accepted methods of accounting when recording economic transactions. (33)
The SEC considers several factors in determining the adequacy of a system of internal controls: (34) (i) the role of the board of directors; (ii) communication of corporate procedures and policies; (iii) assignment of authority and responsibility; (iv) competence and integrity of personnel; (v) accountability for performance and compliance with policies and procedures; and (vi) objectivity and effectiveness of the internal audit function. (35) If a board of directors creates an audit committee, the SEC requires that the committee must exercise appropriate internal accounting oversight as a means of reasonably assuring that FCPA provisions are followed. (36)
C. Criminal Liability
To be criminally liable under either of the accounting provisions, an individual must "knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record or account." (37) Although the intent requirement is designed to reduce potential liability for inadvertent accounting violations, (38) the "knowing" requirement is met by willful blindness. (39)
The FCPA includes several provisions designed to ensure that commonplace accounting deficiencies do not violate the Act. Under [section] 78m(b)(4), criminal liability is not imposed for technical or insignificant accounting errors. (40) Moreover, a good faith exception applies to issuers who own fifty percent or less of a business concern. (41) A parent corporation is thereby "discharged" from responsibility for violations by its subsidiary as long as the parent acted in good faith to encourage compliance with the FCPA's accounting controls. (42)
The SEC generally enforces the accounting provisions, while the DOJ prosecutes criminal violations for FCPA accounting violations. (43) The SEC has brought enforcement actions based on violations of the accounting provisions in cases involving both foreign bribery and purely domestic conduct. (44) Penalties imposed by the SEC range from the imposition of a fine to prohibiting the defendant from serving as an officer or director of a public company. (45)
III. ANTI-BRIBERY PROVISIONS
The anti-bribery provisions of the FCPA, found in 15 U.S.C. [section][section] 78dd-1, 78dd-2, and 78dd-3, criminalize bribery of a foreign official to influence any official act, induce any unlawful action, induce any action that would assist in obtaining or retaining business, or secure any improper advantage. (46) These provisions prohibit individuals or businesses from directly or indirectly offering, paying, promising, or authorizing to pay (47) money or anything of value to any foreign official. (48)
A. Covered Persons
The bribery provisions are much broader than the accounting provisions, which only apply to issuers. (49) Prior to the 1998 amendments, the FCPA covered only "issuers" (50) and "domestic concerns." (51) As a result of the 1998 amendments, which closed a gap in the original FCPA (52) by implementing the OECD Convention requirement criminalizing bribery by "any person," (53) the anti-bribery provisions now also cover "any person" who commits bribery on U.S. territory regardless of whether the accused is a resident or does business in the United States. (54) In addition, the SEC and DOJ can now successfully prosecute individual corporate employees and agents under the FCPA even if their employer is not prosecuted for violations under the FCPA or is found not guilty of such violations. (55) However, foreign officials who receive bribes from U.S. companies cannot be prosecuted under the FCPA. (56) Similarly, foreign officials cannot be prosecuted for conspiracy to violate the FCPA. (57)
B. Elements of the Offense
A violation of the anti-bribery provisions of the FCPA requires proof of the following elements: (58) (i) a U.S. "issuer," "domestic concern," or "any person," including the officers, directors, employees, agents, or shareholders acting on behalf of the issuer, domestic concern, or person, (59) (ii) makes use of the mails or any means or instrumentality of interstate commerce, (60) (iii) in furtherance of an offer, payment, promise to pay, or authorization to pay anything of value, (61) (iv) to any foreign official, any foreign political party or official thereof, or any candidate for foreign political office, or other person, knowing that the payment to that other person would be passed on to a foreign official, foreign political party or official thereof or candidate for foreign political office, (62) (v) inside the territory of the United States or, for any United States personality, outside the United States, (63) (vi) to corruptly (64) (vii) influence any official act or decision, induce an action or an omission to act in violation of a lawful duty, or to secure any improper advantage, (viii) or induce any act or decision that would assist the company in obtaining, retaining, or directing business to any person. (65)
In addition to adding the category of "any person," the 1998 amendments removed the requirement of a territorial nexus between the corrupt act and the United States. (66) Consequently, the FCPA now permits prosecution of U.S. issuers and persons for any act regardless of whether any means of interstate commerce are used. (67) This suggests that the FCPA can reach foreign agents and employees of domestic concerns, and U.S. nationals living anywhere in the world who have very little contact with the United States. (68)
The fourth element of the FCPA bans payments to third parties made "while knowing" that some portion or all of the payments will be used by the third party for a bribe or for any purpose contrary to the intent of the Act. (69) The "knowing" standard in the anti-bribery provisions is intended to capture corporate officials who fail to take action when reasonable signs of a FCPA violation arise. (70) The "knowing" standard thus encompasses:
[B]oth prohibited action taken with 'actual knowledge' of intended results as well as other actions that, while falling short of what the law terms 'positive knowledge,' nevertheless demonstrate evidence of a conscious disregard or deliberate ignorance of known circumstances that should reasonably alert one to high probability of violations of the Act. (71)
Therefore, simple negligence or mere foolishness should not be sufficient to trigger the Act. (72)
C. Permissible Payments and Affirmative Defenses
The FCPA does not prohibit all payments to foreign officials. An exception permits payments for routine governmental actions. In addition, the FCPA provides for two affirmative defenses, removing liability for payments that are (1) legal in the country in which they were made or (2) that are considered "reasonable and bona fide expenditures." (73)
1. Routine Governmental Action Exception
The FCPA expressly permits "facilitating" or "grease" payments to foreign officials to "expedite or to secure the performance of a routine governmental action" (74) as long as the payments are not used to encourage a foreign official to award new business or to continue business with a particular party. (75) "Routine governmental actions" are non-discretionary actions that a foreign official ordinarily performs in his daily business. (76)
There is no statutory cap on the amount of grease payments to public officials, although all those allowed have been less than $1,000. (77) There have been no court decisions interpreting this exception, but it has been suggested that a court's interpretation of the exception would focus on the "intent of the payer and the purpose of the payment." (78)
2. Affirmative Defenses
The FCPA provides two affirmative defenses to the anti-bribery provisions. (79) The first allows a "payment, gift, offer or promise of anything of value" to a foreign official, political party, or candidate's country, provided that such offerings are in accordance with the written laws of that country. (80) The second affirmative defense encompasses payments, gifts, offers, or promises of anything of value that constitute a "reasonable and bona fide expenditure." (81) This defense is only available if the defendant can show that the bona fide expenditures lack a corrupt purpose. (82) However, the expenditure must be either "directly related" to the promotion, demonstration, or explanation of products and services, or to the execution or performance of a contract with a foreign government or agency. (83) The burden of establishing whether a payment meets these requirements rests with the defendant. (84)
D. Enforcement
1. Prosecution
The DOJ and the SEC are responsible for enforcement of the FCPA. (85) The DOJ is solely responsible for all criminal investigation and enforcement and may also initiate civil proceedings under the FCPA. (86) The SEC is responsible for civil investigations of issuers but may refer a case to the DOJ for prosecution if criminal matters arise during the course of the investigation. (87) Courts have also allowed both agencies to work together in "parallel investigations." (88) While individuals cannot bring private actions under the FCPA, some courts have allowed private parties to bring FCPA civil claims under the civil provisions of RICO. (89) Private parties may also bring violations of the FCPA to the attention of these agencies. (90)
2. Attorney General's Guidelines and Opinions
The 1988 amendments to the FCPA (91) expanded the enforcement role of the DOJ by authorizing the Attorney General to issue guidelines and advisory opinions in response to specific business inquiries. (92) In September 1992, the DOJ issued a revised advisory opinion procedure enabling issuers and domestic concerns to obtain an official government opinion as to whether prosecution under the FCPA would result from proposed activities. (93) The DOJ will issue advisory opinions on the FCPA anti-bribery provisions only. (94) DOJ opinion letters are comparable to SEC no-action letters that provide guidance to the business and investment communities. (95) To date, the DOJ has issued fifty FCPA opinion letters. (96)
If the government determines that a party's specified activities conform to the DOJ enforcement policy, any subsequent action brought under the anti-bribery provisions is subject to a rebuttable presumption that the party's conduct complies with the FCPA. (97)
IV. PENALTIES
The FCPA provides criminal and civil penalties for violations of its accounting and anti-bribery provisions by corporations or individuals. (98) In addition to the...
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