by Stephen Kohn
Consistent with the requirements of this Convention, the FCPA permits the United States to exercise broad extraterritorial jurisdiction to target bribes paid by non-U.S. citizens to foreign officials in countries outside the United States. This has made the FCPA the most effective transnational anticorruption law in the world.
The law also requires corporations who trade on U.S. stock exchanges, or whose stock is traded on international markets open to investment by U.S. citizens, to have strong internal controls, prohibiting off-the-books accounting. These record-keeping requirements are a key enforcement method; they require an accurate accounting of all assets, thereby forcing a company to admit on paper that it has paid a bribe, or face harsh sanction.
Under the “books and records” provision, publicly traded companies (known in the law as “issuers”) must maintain detailed “books, records and accounts” that “accurately and fairly reflect” the company’s “transactions” and how it spends its money. Additionally, the law requires publicly traded companies to have a “system of internal accounting controls” capable of accounting for all corporate assets, spending money as intended by company management, and “recorded” in “conformity with generally accepted accounting principles,” assuring that monies are lawfully spent as intended.
Wharton School professor Philip M. Nichols aptly described the FCPA as a law designed to regulate “transnational business firms” that operate in the “global market.” He warned against viewing the FCPA as a law that applies only to U.S. businesses, instead explaining that “the reality of transnational business activity, often labeled globalization, consists of networks of relationships that take little notice of national borders and which cannot be siloed.” He explained that Congress “intended the Act to be part of a global regime to control bribery. . . . [The] Act is concerned with bribery that occurs outside the United States or that relates to a transaction that extends beyond the United States.” According to Professor Nichols, those responsible for passing the Foreign Corrupt Practices Act “viewed bribery as presenting an existential threat to international business.”
Congress’s official report discussing the purpose of the FCPA backed up this view:
The payment of bribes to influence the acts or decisions of foreign officials, foreign political parties or candidates for foreign political office is unethical. It is counter to the moral expectations and values of the American public. But not only is it unethical, it is bad business as well. It erodes public confidence in the integrity of the free market system. It short-circuits the marketplace by directing business to those companies too inefficient to compete in terms of price, quality or service, or too lazy to engage in honest salesmanship, or too intent upon unloading marginal products. In short, it rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business.
The two agencies with responsibility for prosecuting Foreign Corrupt Practices Act cases, the Department of Justice (DOJ) and the SEC, further explained the important goals of the FCPA and why these agencies have made these prosecutions a priority: “Corruption impedes economic growth . . . it undermines democratic values . . . and weakens the rule of law . . . it threatens stability and security . . . and impedes U.S. efforts to promote freedom and democracy, end poverty, and combat crime and terrorism across the globe. Corruption is also bad for business. Corruption is anti-competitive, leading to distorted prices and disadvantaging honest businesses that do not pay bribes.”
For thirty years the Foreign Corrupt Practices Act lacked a whistleblower rewards provision. That changed in 2010, when Congress passed the Dodd-Frank Act. Dodd-Frank required the SEC to establish a Whistleblower Office to accept confidential and anonymous complaints and mandated that the Commission pay whistleblowers monetary rewards if their “original information” resulted in sanctioning a corporation $1 million or more. Moreover, the law required that the Commission award any qualified whistleblower a minimum of 10 percent and a maximum of 30 percent of the sanctions obtained by the U.S. government as a result of the whistleblower’s disclosures. As explained in Rule 8, the SEC has published the criteria it uses in setting the award amount.
These rights are not limited to U.S. citizens. A citizen of any country in the world can provide “original information” and qualify for a reward. The office accepts complaints from non-U.S. citizens alleging violations of the FCPA.
The passage of the Dodd-Frank Act for the first time allowed whistleblowers from foreign countries to report bribes paid to their leaders by foreign corporations and obtain monetary rewards under a U.S. whistleblower law. As of 2015 whistleblowers have obtained well over $30 million in rewards. In granting its first FCPA award, the Commission noted that “it makes no difference whether . . . [the whistleblower] was a foreign national, resides overseas, the information was submitted from overseas, or the misconduct comprising the U.S. securities violation occurred entirely overseas.”
The Director of the SEC’s Division of Enforcement, Andrew Ceresney, explained the critical role international whistleblowers play in reporting foreign bribery:
[I]nternational whistleblowers can add great value to our investigations. Recognizing the value of international whistleblowers, we have made . . . awards to whistleblowers living in foreign countries. In fact, our largest whistleblower award to date—$30 million—went to a foreign whistleblower who provided us with key original information about an ongoing fraud that would have been very difficult to detect. In making this award, the Commission staked out a clear position that the fact that a whistleblower is a foreign resident does not prevent an award when the whistleblower’s information led to a successful Commission enforcement action brought in the United States concerning violations of the U.S. securities laws.
International whistleblowers are required to file their claims under the same rules as those that apply to U.S. citizens. These rules are spelled out in Rule 8. The scope of the FCPA is very broad. As implied by its name, the law covers the bribery of foreign officials in order to obtain a business advantage. Most people think of the FCPA as an antibribery law. Although this is true, the law’s other requirements are far broader in scope and coverage. The FCPA requires publicly traded corporations to keep accurate financial records and have proper internal controls over the company’s finances. These record-keeping requirements are strict, and violators are subject to large fines and penalties.
“In issuing [a $30 million USD] award, the Commission specifically noted that allowing foreign nationals to receive awards under the program best effectuates the clear Congressional purpose underlying the award program.”
Securities and Exchange Commission Report
The FCPA and whistleblowers are a near-perfect fit. How else could the U.S. government learn about these secret payments, especially when these payments happen in foreign countries? Corporate insiders play a key role in enabling the government to obtain proof of a bribe, proof that a company’s books are inaccurate, or proof that a company lacks internal controls over some of its business activities. This point was driven home in a joint publication authored by the DOJ and the SEC. In their Resource Guide, these agencies described whistleblowers as “among the most powerful weapons in the law enforcement arsenal.” Whistleblower disclosures are used to “swiftly hold accountable those responsible for unlawful conduct.”
FCPA cases can be big. The DOJ and SEC have pursued numerous high-profile FCPA cases that have resulted in billions of dollars in fines and “disgorgement” penalties. The list of companies prosecuted under the FCPA, and the amount of monies they paid in fines and penalties, is impressive. It includes corporate giants such as Alcalel-Lucent ($137 million), BAE Systems ($400 million), Chevron Corp. ($30 million), ENI, S.p.A./Snamprogetti Netherlands ($125 million), Kellogg Brown & Root (now KBR) and three other companies (collectively paid $1.28 billion in fines and penalties), and Siemens ($800 million). As reflected in Checklist 8, some of the successful prosecuti
ons in 2016 include:
• VimpelCom. The Dutch-based telecommunications provider agreed to a $795 million global settlement to resolve its violations of the FCPA to win business in Uzbekistan.
• GlaxoSmithKline. The U.K.-based pharmaceutical company agreed to pay a $20 million penalty to settle charges that it violated the FCPA when its China-based subsidiaries engaged in pay-to-prescribe schemes to increase sales.
• Och-Ziff. The hedge fund and two executives settled charges related to the use of intermediaries, agents, and business partners to pay bribes to high-level government officials in Africa. Och-Ziff agreed to pay $412 million in civil and criminal penalties.
• Anheuser-Busch InBev. The Belgium-based global brewery agreed to pay $6 million to settle charges that it violated the FCPA by using third-party sales promoters to make improper payments to government officials in India and chilled a whistleblower who reported the misconduct.
• LAN Airlines. The South American–based airline agreed to pay more than $22 million to settle parallel civil and criminal cases related to improper payments authorized during a dispute between the company and union employees in Argentina.
• Novartis AG. The Swiss-based pharmaceutical company agreed to pay $25 million to settle charges that it violated the FCPA when its China-based subsidiaries engaged in pay-to-prescribe schemes to increase sales.
FCPA whistleblowers (who may face particularly harsh treatment in their home countries) can file their reward claims with the SEC both confidentially and anonymously. Rules governing Dodd-Frank rewards are set forth in Rule 8 and Checklist 7.
Here is an overview of the FCPA’s major provisions:
Who is covered? First, “issuers” (companies that sell stock to U.S. citizens) and their officers, directors, employees, and agents are subject to prosecution under the FCPA. An issuer does not have to be a U.S. company. Issuers are broadly defined to include companies that trade on U.S. stock exchanges and foreign companies that trade in American Depository Receipts (ADRs). Most foreign corporations that sell securities to U.S. investors use ADRs and are thus covered under the statute. Persons acting on behalf of an issuer are also personally liable under the FCPA, including corporate officers, directors, employees, agents, or “coconspirators.” Between companies that trade on Wall Street and foreign companies that utilize ADRs, most major corporations in the world are subject to the FCPA, and their employees are eligible for rewards under the Dodd-Frank Act. The SEC publishes lists of these companies on its website.
Second, all “domestic concerns” are also covered. A domestic concern is defined as any citizen, national, or resident of the United States or any corporation, partnership, association, business trust, sole proprietorship, or other association “organized” under the laws of the United States. The law also covers foreign nationals who, directly or indirectly, commit “any act in furtherance of a corrupt payment” while in the United States.
Third, issuers or domestic concerns that work with foreign companies in joint ventures are also covered. Joint ventures can be particularly high risk. Daniel Grimm, an attorney with a major FCPA defense firm (Sullivan & Cromwell), explained that companies can be liable for FCPA violations under a “willful blindness, deliberate ignorance,” or “conscious disregard” standard. Thus the failure to exercise “due diligence” over the actions of a non-U.S. joint venture partner can trigger liability, even if the U.S. partner did not pay or authorize any bribes.
To determine whether your company is an issuer subject to the FCPA, you should determine whether it is listed on a national securities exchange in the United States (either stock or American Depository Receipts) or whether the company’s stock trades on the “over-the-counter market.” The SEC publishes the reports filed by issuers, which can be accessed at www.sec.gov/edgar/searchedgar/webusers.htm. If a company is listed, it is covered under the FCPA.
Jurisdictional triggers: The FCPA covers conduct that occurs inside the United States or in a foreign country. The Act broadly defines the interstate commerce necessary to trigger jurisdiction for foreign nationals or companies under the law. The DOJ/SEC Resource Guide puts it this way: “Placing a phone call or sending an e-mail, text message, or fax from, to, or through the United States involves interstate commerce—as does sending a wire transfer from or to a U.S. bank or otherwise using the U.S. banking system, or travelling across state borders or internationally to or from the United States.” As for U.S. persons and corporations, the interstate commerce requirement was removed in the 1998 amendments, and such persons are subject to the FCPA “even if they act outside the United States.”
What is a prohibited bribe? The law covers payments intended to influence foreign officials to use their positions “in order to assist . . . in obtaining or retaining business for or with, or directing business to, any person.” The FCPA prohibits paying a bribe to gain a business advantage. The DOJ/SEC Resource Guide lists the following actions as prime examples of when corporations are often induced to pay bribes to foreign officials: (1) “winning a contract”; (2) “influencing the procurement process”; (3) violating “rules for importation of products”; (4) “gaining access to non-public tender information”; (5) “obtaining exceptions to regulations”; and (6) “avoiding contract termination.”
What types of payments constitute a bribe? Paying “anything of value” to a foreign official in order to obtain a business advantage can constitute a bribe. The law is very broad and, as explained in the DOJ/SEC Resource Guide, “bribes come in many shapes and sizes.” This would include any 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, such as “consulting fees,” “commissions,” “travel expenses,” and “expensive gifts.”
These payments must be made with “corrupt intent” (i.e., the purpose behind the payment is to secure an improper business advantage or improperly influence foreign government officials in order to gain such an advantage). In determining what constitutes a bribe, whistleblowers need to apply common sense. Small gifts or paying something of nominal value, such as covering a taxi ride, will not be actionable. However, as DOJ/SEC warns in their Resource Guide, “the larger or more extravagant the gift, . . . the more likely it was given with an improper purpose.” DOJ and SEC enforcement cases have “involved single instances of large, extravagant gift-giving (such as sports cars, fur coats, and other luxury items).” Companies can pay “reasonable expenses associated with the promotion of their products” and can make payments to facilitate “routine governmental action.”
What is “aiding and abetting”? Persons or companies that aid or abet in a bribery scheme are guilty under the law to the same degree as those who pay a bribe. As explained in the DOC/SEC Resource Guide, “a foreign company or individual may be held liable for aiding and abetting an FCPA violation . . . even if the foreign company or individual did not take any act in furtherance of the corrupt payment while in the territory of the United States.” Both Japanese and European companies have been charged with FCPA violations, despite having no contacts with U.S. territory.
What is a business purpose? Like other provisions in the law, the “business purpose” test is very broad and includes payments to obtain or keep a contract or lease, influence the procurement process, eliminate customs duties, prevent competitors from entering the market, avoid permit requirements, circumvent importation rules, gain access to nonpublic information to help obtain a contract or government tender, evade taxes, or obtain exemptions for regulations.
Who is a public official? The foreign officials covered under the Act include “any officer or employee of a foreign government, or any department, agency, or instrumentality.” Instrumentalities include state-owned or state-controlled entities. Foreign political parties are also included in the definition, as are candidates for foreign political office. In 1998 the FCPA was amended to include “public intern
ational organizations” within the definition of foreign officials, including entities such as the World Bank, International Monetary Fund, and the Organization of American States.
Books and records violations: The “books and records” provision prohibits off-the-books accounting. Companies can be prosecuted for books and records violations independent of a prosecution for paying a bribe. The law requires publicly traded companies to accurately account for all assets, and forms the “backbone” of most SEC and DOJ accounting fraud cases. In the context of the FCPA, its significance is obvious. Bribes are not accurately recorded in corporate books. When a company pays a bribe, it does not admit the purpose of the payment in its financial records.
Congress included the bookkeeping requirements in the FCPA, recognizing that “corporate bribery has been concealed by the falsification of corporate books and records.” By mandating large civil and criminal penalties for falsifying financial records, Congress intended to “strengthen the accuracy of the corporate books and records and the reliability of the audit process, which constitute the foundations of our system of corporate disclosure.”
The accounting provisions of the FCPA have two major requirements. The first mandates that issuers “keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer’s transactions and dispositions of an issuer’s assets.” The second provision requires that issuers “devise and maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the firm’s assets.”
Although these requirements are not strictly tied to foreign bribery, it is evident how the accounting provisions can be used to prove violations of the Act. As explained in the DOJ/SEC Resource Guide, “Bribes, both foreign and domestic, are often mischaracterized in books and records. . . . Bribes are often concealed under the guise of legitimate payments, such as commissions or consulting fees.” If, for a technical reason, the government cannot meet the standard to prove a bribe, companies can still be held liable under the books and records provision if the improper payments were not accurately recorded in the company’s books. Given the large fines associated with an internal controls violation, this prosecutorial tool can be used to close potential loopholes in the bribery provisions.