THE U.S. FOREIGN
CORRUPT PRACTICES ACT
IMPLICATIONS FOR
INTERNATIONAL DISTRIBUTORS
One Commerce Plaza
Albany, New York 12260
P 518.487.7600
F 518.487.7777
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Leslie K. L. Thiele
Partner
International Practice Group
Overview of the FCPA
Enacted in 1977 as an “anti-bribery” law – but both broader and narrower
▪ Applies to activities outside US or using “interstate commerce”
- Cannot give or offer to give “anything of value”, even indirectly
- to a foreign official, a candidate for office or a political party;
- for “corrupt purpose” of causing a person to act or not act or to
otherwise secure an improper advantage;
- to obtain or retain business or direct it to particular persons
▪
Both accounting & anti-bribery components
- Accounting rules designed to identify bribery / concealment /
mischaracterization
▪ Single statutory exception: “routine governmental actions”
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Scope of the FCPA
Expanding in scope & application: significant enforcement since 2007
▪ 1998 amendments: incorporated OECD Anti-Bribery Convention
Extended to foreign citizens/businesses “while in territory of the US”
▪ Payments must have a “corrupt purpose”
- “Corrupt purpose” not defined in law: broadly defined by courts
- Mere PROMISE of benefits enough
▪ “Foreign official” broadly interpreted: wider than OECD Convention
- “any officer or employee of a foreign government, or any
department, agency or instrumentality thereof”
- China, Middle East: substantial state or ruling family ownership
- Management of nationalized companies? (General Motors?)
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Implications of the FCPA
Why should foreign lawyers / clients worry about the U.S. FCPA?
▪ Accounting rules apply to US public companies only
Sarbanes-Oxley Act of 2002 raised level of accounting controls
▪ Bribery / “corrupt practices” prohibitions apply to
- any issuer with stock traded on US exchange
- U.S. citizens & residents
- all businesses located in US or organized under US law
- all persons within the territory of the US (since 1998)
▪ Results are far-reaching:
 US subsidiaries/branches of foreign entities bound by FCPA
 Overseas management visiting the US can violate the law
 US citizens working overseas can violate the law
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More Implications of the FCPA
Other aspects of FCPA affect foreign businesses involved with US
▪ Actions of contractual parties imputed to the principal: includes U.S.
agents, distributors, consultants, contractors, subsidiaries, etc.
- US-based agent with “North American” territory may violate FCPA
bribery rules in Mexico
- US-based agent may seek reimbursement of mischaracterized
expenses, violate accounting rules
▪ Increasing international cooperation on corruption issues
- KBR: US, France, Italy, Switzerland, UK
- Siemens: Germany, US, Italy, China, Hungary, Indonesia, Norway
▪ Expect ‘trickle-down’ of FCPA requirements from affected companies
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Broad Application of FCPA
Examples show breadth of FCPA in practice
▪ Pharmaceutical & medical device companies’ marketing practices
under investigation: payments to MDs or employees of state-owned
hospitals in China were to “foreign officials”
▪
Donations to legitimate charitable organizations prohibited if made
at request of govt. official. Considered “indirect payment” to official
▪ Conviction of 2 American Rice executives who knew that it is illegal
to bribe foreign officials, even though unaware of specific FCPA
directives. US v. Kay, 513 F.3d 461 (5th Cir. 2008)
▪ Expansive jurisdiction: December 2008 Siemens settlement
- Home office & conduct overseas; fined by Germany.
- US still exerted jurisdiction under FCPA
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Enforcement
Increasing enforcement - both in quantity and magnitude
▪ SEC focuses on accounting/reporting violations, SOX
DOJ lead enforcer on anti-bribery provisions
▪ 2008: highest number of enforcement actions ever
82 corporations with open investigations with SEC/DOJ in 2008
▪ Increase in SEC, DOJ, FBI staff dedicated to FCPA enforcement
Enforcement Focus: 2008,continuing into 2009
▪
▪
Identified industries w/ problematic track records
Energy, technology, medical devices, defense contracting,
infrastructure
Individual offenders: increased enforcement against individuals
FBI stated emphasis is to “convict individuals”
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Penalties
Penalties ramped up significantly in wake of Enron & other financial
disasters
▪ Civil fines: $10,000 against firm, officers, directors, employees,
agents or shareholder acting on behalf of the firm
▪ Criminal:
$2 million for corporations/businesses;
$100,000 + 5 years’ jail for officers, directors, employees, agents
Actually higher under Alternate Fines Act
▪ Debarment: no federal contracts, no export licenses, no OPIC funds
▪ SEC fines of $500,000 for entities, $100,000 for natural persons
▪ Generally, no private cause of action under the FCPA but violation
of Travel Act may  action for treble damages under RICO
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Red Flags
Prohibition on payments “knowing” this will violate FCPA
▪
FCPA requires actual knowledge of both the act of making payment
and circumstances under which payment is made
▪
Includes conscious disregard or ‘willful blindness’ to purpose of
payment
Common ‘red flags’ DOJ uses to measure ‘knowledge’
▪ Unusually high commission/margins for product in country
Special attention in targeted industry or sensitive countries
▪ Atypical financial arrangements, in new or existing relationships
▪ Relative lack of qualifications/experience in an agent, joint venture
partner, consultant measured against success or promises
▪ New intermediaries with family connections to ruling families or
government officials
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Achieving Compliance – Preparation
Focus on PREVENTION and EARLY DETECTION
▪ Focus here on contractual relationships: Acquisition needs higher
level of due diligence, preventative reps & warranties, exclusions
First: Get own house in order
▪ Written anti-corruption / anti-bribery / ethics policies IN HOUSE
▪ Training of corporate employees
Policies without implementation worthless
▪
Internal accounting controls to detect oddities which could = bribes
▪
Targeted industries exercise special care
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Achieving Compliance – Due Diligence
Second: Due diligence before transaction
▪ Who IS this new partner?
Research dictated by size/experience of new partner, transaction
▪ New intermediary understands FCPA or related OECD standard?
▪
Does ownership of partner make improper use of connections likely?
▪
Prior track record in country, particularly in countries with high
corruption levels
Resources: banks, embassy reports, financial references, customer
references
Paid research: private background research
▪
▪
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Achieving Compliance – Contract Issues
Third: Contractual provisions to assure compliance / contain damages
▪ Simple prohibition: intermediary will comply with FCPA and relevant
local anti-corruption legislation. Specificity depends on partner
▪ TRAINING of new intermediary or subsidiary
▪ Require intermediary to have OWN anti-corruption policy binding staff
▪ Approval of subagents, subcontractors; right to monitor payments
▪ Provisions for when improper payment made by intermediary
- Should contract be void? Voidable? Neither?
- Immediate termination for cause: specify standards, notice;
payments for goodwill or indemnity
- Claim for damages against agent for fines/defense costs
Maintaining Compliance
DOJ FCPA Opinion procedures useful (28 CFR Part 80)
▪ Request ruling whether proposed conduct would violate anti-bribery
provisions
▪ Answer within 30 days (once DOJ has all needed information)
▪ Process: www.usdoj.gov/criminal/fraud/fcpa/opinproc.htm
Fourth: Due diligence during contract
▪ Make sure contractual commitments by intermediary are kept
▪ Review background of orders to high-risk countries
▪ No unusual payments, high commissions w/o clear justification
▪ Monitor payments to subagents; T&E
▪ Changes in partner during contract: political involvement, changes in
ownership, etc.
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And When Things Go Wrong
And if it blows up?
▪ Consider voluntary self-reporting to DOJ of any violations
▪ Limits criminal & civil exposure, particularly when coupled with strong
remedial action by company and cooperation
▪ Guidance on relevant factors in DOJ “Filip Memorandum” (August
2008): lists criteria for determination whether corporation deserves
credit for cooperation
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Contact Information
The information in this presentation is intended as general background information on legal
issues arising in international business transactions in the U.S.. It is not to be considered as
legal advice with regard to any particular business relationship or transaction. U.S. and foreign
laws affecting international operations change often and information becomes rapidly outdated.
Businesses considering international transactions or investments should consult legal counsel
for advice on their particular issues.
Leslie K. L. Thiele, Esq.
International Practice Group
Tel: (518) 487-7636
Fax: (518) 487-7777
[email protected]
WHITEMAN OSTERMAN & HANNA LLP
One Commerce Plaza
Albany, New York 12260
USA
© 2009 Whiteman Osterman & Hanna LLP
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