Foreign Corrupt Practices Act

A Practical Resource for Managers and Executives

Aaron G. Murphy

• Publisher: Wiley
• Year: 2010
• ISBN:
  9780470939635
• Edition: 1
• Topic: Commerce
• Subtopic: Droit des affaires

A thoroughly pragmatic guide to the U.S. Foreign Corrupt Practices Act (FCPA)

This is a critical FCPA training resource for executives, managers, sales, marketing, finance and accounting personnel, as well as high level professionals.

• The ideal resource for any business that takes FCPA compliance seriously and truly desires to foster a deep understanding of real-world corruption issues in their employees
• A great resource for business school courses on international business or business ethics and anyone interested in understanding these issues for their own professional growth
• Includes in-depth analysis of all major FCPA risk areas, including discussions of how FCPA issues arise in real-world business situations
• Covers all aspects of bribery and FCPA compliance issues to ensure that your business is not exposing itself to financial scandal or criminal prosecution

FCPA compliance is mandatory for nearly all international businesses operating in today's global economy. This book serves as the perfect training tool to mitigate your organization's risk to FCPA violations, which is one of the top enforcement priorities for the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC).

Chapter 1

Basics of the Foreign Corrupt Practices Act

In its most basic formulation, the Foreign Corrupt Practices Act (FCPA) prohibits bribery of foreign government officials. But, as with most things legal, it is far more complex than that.

The notion of foreign bribery conjures up an image of a briefcase full of cash being handed off at the edge of a dusty airstrip in some vaguely tropical locale, or handing over a passport with a folded sheaf of bills tucked inside to an armed member of a militia or police organization that may or may not have any real authority. In truth, the vast majority of foreign bribes are far more mundane (although I once was held at gunpoint in Indonesia, resulting in a payment that will be discussed in Chapter 9).

Under the FCPA, a “bribe” is the offer or promise of anything of value, made to a foreign official, with the intent to obtain or retain business or to secure an unfair business advantage. As you will see, that sentence is far more complex than you might imagine. We'll go over all of these concepts in great detail in this book, but at the outset let's focus on the idea of obtaining or retaining business or securing an advantage. When you think about it, virtually everything you do in your business life is intended to obtain or retain business or an advantage of some kind. Everything. The implications of this can be startling.

What this means is that FCPA violations often involve actions that, in a private commercial context, are not only permissible but commonplace. You take your best customer out for an expensive dinner, complete with a nice bottle of wine and port for dessert, just to hammer out the final details of a new contract. You fly potential customers to a resort for a company conference to talk about your latest products and, between rounds of golf and spa treatments, you try to convince them that your product is better than your competitor's. You give a donation to the favorite charity of the CEO of a huge potential customer, just to build a relationship that may bear fruit in the future. You remember to send customers cases of wine during the holidays, anniversary presents, tokens of congratulations upon the graduation or wedding of their children. Use of the company's skybox during the playoffs. Concert tickets. The list goes on and on. The only reason you do any of these things is to obtain or retain business.

All of these things, done in the normal course of business with regular customers, can be crimes if done with foreign government officials under the right conditions. They are not always FCPA violations, but they certainly could be, depending on the circumstances. The point of this book is not to conclusively resolve whether specific examples are violations—leave that analysis (and the liability for getting it wrong) to your legal or corporate compliance departments. The point of this book is to ensure that you see the potential problems before it is too late and get the help you need.

“Anything of Value” Can Be Considered a Bribe

Under the FCPA, you cannot give foreign government officials “anything of value” if you intend to influence them in connection with obtaining or retaining business. If you do, it might be a bribe under the FCPA.

A bribe can take many forms. Cash is obvious, concert tickets less obvious, a meal that's perhaps a little too nice even less obvious, and a slightly excessive salary to an employee who is the spouse of a government official who might help your business crosses the line in a way that very few managers would spot.

Beyond these kinds of direct payments and gifts, there is the whole universe of payments made by third-party consultants and advisors. Ask yourself if you really know where all the money went that you paid the consultant who helped you get the permits and business licenses you needed for your new factory; or the local tax advisor who managed to straighten out the issue you had with the local authorities; or your freight forwarder and customs agent who told you about a special permit that would miraculously allow your goods to clear customs within a day of arrival (or without being subject to the normal, time-consuming inspections).

Think about every line item on every invoice from every third-party service provider, every expense approved for reimbursement to your sales team, and every use of petty cash, and ask yourself if you really understand what those charges and expenses were and where the money went. Do that and you will have a sense of the endless places FCPA violations can hide.

Worse yet, imagine what you would say to someone like me—a very cynical lawyer—who questioned you, two, three, or five years later, about a certain line item on a certain invoice that you (or your staff) approved. I have had a hundred of these conversations, and they are all pretty much the same: The description on the invoice is vague and the amount fairly large, the managers do not remember anything about it, although they plainly see their initials or signature on the approval line. Yes, they attended an FCPA training, but it never occurred to them that this could be a problem. They trusted their people. “Hey, I rely on my finance guy to check this stuff.” But the audit committee always has the same reaction: “Why didn't they catch this? It's obvious.”

The problem is that the FCPA is all-inclusive. The actual text of the statute uses the phrase “anything of value,” and it truly means anything. Any economic benefit of any kind whatsoever whether paid directly or through an agent on the company's behalf. Anything. Any amount, no matter how small.

In the United States, many government agencies have strict ethics rules that forbid their employees from receiving even the most minimal gifts. In fact, when I have met with lawyers from the Securities and Exchange Commission (SEC) at my office, I generally schedule the meetings so they do not overlap with lunch. The reason is to avoid the uncomfortable situation where the SEC lawyers try to pay for the sandwiches that are often ordered for lunch meetings. The SEC has strict rules prohibiting its staff from accepting almost anything. The sandwiches are obviously of trivial value, and I would never think for a second that the SEC would have mercy on my client because we gave them a turkey sandwich (were it only that easy!), but they decline them nonetheless.

I tell you this only because I find that many managers simply cannot believe that providing something as small as a meal or a few cocktails could possibly constitute a federal crime. But if the SEC honestly believes that a mediocre conference room sandwich worth, at most, a couple of dollars might compromise the ethics of its own agents, you'd better believe it will take the view that a steak dinner at the Four Seasons in Hong Kong or a spot of 25-year Macallan could compromise the integrity of a Chinese government employee who makes only a few hundred dollars per month.

I often hear clients tell me that a particular expense was “reasonable” or “modest,” or that it was not “unreasonable,” as if such a determination resolves the question of whether the FCPA has been violated. I am not sure how those concepts made their way into so many heads, but they gloss over the realities of the FCPA. Anything means anything. The statute's focus is not on the value of the gift but the intent of the giver.

The Corrupt Motive Problem: Don't Assume—Run It Up the Chain

To violate the FCPA, offers or gifts of anything of value must be made “corruptly.” This “corrupt motive” requirement—generally understood to mean a payment made with the intent to influence the government official in some way—should not cause too much heartburn. When an issue arises, a prudent manager should raise it to the appropriate personnel and let them deal with the difficult questions surrounding corrupt motive. As I discuss later on in Chapter 10 about books and records, this is rarely a stumbling block for the government, and it shouldn't be for a manager either.

When clients use a term like “reasonable” or “unreasonable” to describe the size of a gift or payment, they use it as a proxy for a much more complex set of concepts: knowledge and intent. If the value is small, they seem to be saying, it couldn't possibly be intended as a bribe. That may be true (certainly the low value of the gift or payment could be evidence of lack of corrupt intent on the part of the giver), but it is not conclusive.

As discussed, giving a sandwich to an SEC lawyer is extremely unlikely to be seen as a bribe by any reasonable person, but the SEC's flat prohibition on such “gifts” is designed to avoid any difficult questions asked after the fact. That is really how a manager should think about the concepts of knowledge and intent. Avoid the appearance of impropriety. If something looks bad, it is assumed to be bad, and explaining it away after the fact can be extremely challenging.

Although the FCPA requires the “corrupt motive” to exist in the mind of the giver, the more important notion of corruption is often in the mind of the beholder. What would the company's compliance officer, general counsel, or audit committee members think the gift or payment was for? How would the company's outside counsel view it? How would the Department of Justice (DOJ) view it?

Viewing even innocuous transactions through hindsight complicates the analysis because these issues do not arise in isolation. Small payments, gifts, meals, and the like tend to occur in clusters or patterns. When resolving a regulatory issue, making a large sale, or getting the necessary licenses, certifications, or permitting issues resolved, there is generally a series of meetings. When those meetings include meals, entertainment, or small gifts, and the end result is favorable to the company, the entire series of transactions can look suspicious. While it is true that the U.S. government is unlikely to bring a criminal case over a single steak dinner, there is rarely a single instance.

The fundamental question for FCPA purposes—whether these gifts, meals, and so on—were made with a corrupt motive becomes a nearly impossible question to resolve. Of course the employees in question will always say they never intended to influence anyone. Yet, when asked why the meeting took place in a nice restaurant instead of a conference room at the office, they will just as often say that they need to “maintain a good relationship” with the government officials in question. So what exactly was the motive, and was some or all of it corrupt? Hard to say.

As the value of what is given increases, the question generally gets easier to resolve. Having the business meeting on the company yacht over a long weekend is more problematic than drinks at a club. Flying the official and his family to the United States to attend the meeting and then footing the bill for them all to take a weeklong vacation is even more problematic. But even relatively small amounts pose thorny questions that can be time consuming and expensive to address once they come under the microscope.

Detailed examples of these gift and entertainment problems are discussed in their own chapters later in this book. But for now, the basic message is this: Don't be fooled by small amounts. There is no exception for “reasonable” expenses, and you often won't be able to see the larger pattern of gifts and expenses that may exist because those generally only come out after the lawyers or accountants start digging through your books.

Be cynical and assume a corrupt motive unless you have a compelling reason not to. Don't assume the responsibility for deciding that a small transaction is fine. Transactions always look worse later when the context is lost and all that remains is the cryptic language on a receipt and a reimbursement form. There are people in your company whose job it is to make these judgment calls. Let them do it.

Foreign Officials and Discretionary Authority

The FCPA outlaws payments to foreign officials that are intended to get them to do (or not do) some official act that is within their discretion.

Acts that are not within their discretion (like stamping your passport at the airport when there is no legitimate reason not to) are the kind that may be “facilitated” by a payment, which leads to the much-overused and little-understood FCPA exception for “facilitating” payments. Facilitating payments are discussed in detail in Chapter 9, but the bottom line is that extremely few payments are actually facilitating payments, and no manager should make that call on his or her own.

The FCPA is further complicated by the fact that it defines foreign official in the broadest possible terms, such that it can be difficult to figure out who counts as one. Specifically, the FCPA defines “foreign official” as any employee of a foreign government “or instrumentality thereof.” This extremely broad language brings employees at what are commonly called state-owned enterprises under the reach of the law. Thus, the purchasing manager at a state-owned shipping company in China would be a foreign official under the FCPA. So would a doctor at a state-owned hospital in Poland.

To make matters worse, the state-owned entity need not be fully owned by the foreign government. Indeed, I have heard DOJ prosecutors say that it is not official ownership that they care about but rather the degree of control exerted by the government over the entity in question. Thus, a fully privatized entity in the Kazakhstan oil industry that used to be a government entity could still be a state-owned entity for FCPA purposes. This is especially true if the government still appoints the board or effectively runs the company even though it is technically owned by a private citizen (often a retired or former government official who still has close ties to the government). These are difficult, if not outright impossible, relationships to uncover. The incestuous and often extremely opaque nature of commerce in many foreign countries means that a U.S. business can never really be certain about the nature of its customers, consultants, or business partners in certain parts of the world.

The payments to this very broad and ill-defined group that are prohibited are those intended to get the officials to exercise authority in your favor. That is, to do or refrain from doing, something that is within their discretion as part of their official capacity. This is a slippery definition because, in truth, very little that a foreign official does falls outside of this definition. As the next examples show, there are relatively few things a foreign official does that are fully and clearly nondiscretionary in nature.

Consider this: A foreign official in charge of awarding a contract for a major new public works project issues a request for proposals that are not subject to a public bid process. During the bid period, he calls you into his office and informs you that if you will agree to refund 5 percent of the contract price to him, he can guarantee that you will be awarded the contract. You agree and, sure enough, you are awarded the contract.

This is an obvious example of a prohibited transaction. The decision to award the contract rests solely within the discretion of the official, and the official has asked for a direct quid pro quo. You give him 5 percent; he gives you the contract. Enough said.

But what about this: You plan a business trip to Indonesia to negotiate a new contract with your distributor there. You request and receive a proper business visa from the Indonesian consulate in the United States. Yet, when you arrive at the airport in Jakarta, the customs officer inspects your passport, looks you over, spends a several minutes at the computer, asks you a few questions about the purpose of your visit, and generally seems to drag out the process. Finally, she tells you there are some issues with your papers that must be resolved before you can enter the country, and she takes you to a small room. Once inside, she tells you that the official who can resolve the issues is not there, and that you might have a long wait. Perhaps you ask if there is anyone else who can resolve it. Perhaps you just sit a little while. But eventually she tells you that she may be able to expedite things for $20.

Variations on this one are common. Here you have a low-level official who is simply refusing to do her job in the hope of shaking you down. You have a properly issued visa from the Indonesian government obtained before you left the United States. You know it and she knows it. Her job is merely to ensure that everyone entering the country has proper paperwork; if they do, she is supposed to stamp their passports and let them in. She has no discretionary authority to determine whether to stamp a properly presented passport containing a proper visa. Under this scenario, if you pay her the $20, it is not considered a bribe under the FCPA.

There is a big gap between these two examples, but almost every example that falls into that gap is a potential FCPA violation because it contains some element of discretion on the part of the foreign official.

Try this common problem: A key piece of equipment is broken in your factory in India, effectively shutting down production. The equipment is large and heavy and expensive to ship, but the cost of a two-week shutdown outweighs the cost of air freight, so you pay an outrageous sum to have new equipment flown overnight to Bangalore.

In the rush to get the equipment there right away, certain customs paperwork was not properly filled out and filed. When the equipment arrives at the airport, you are told it will take two weeks to clear customs while the paperwork is properly routed through the various offices and the necessary inspections are performed. You rant and rave to the customs officer, who then takes you aside and tells you that there is a way to expedite clearance, but it's expensive. He tells you that a special permit, or “intervention,” “evacuation,” or some other official sounding thing can be arranged. “It's common in these situations,...