Wednesday, July 8, 2009

Can You Safely Pay “Fees” to Representatives of Foreign Countries to Help Secure Business?

"Suddenly, without warning..."

Several years ago, a colleague of mine was a passenger in a car stopped at an eastern EU country’s border with another EU member country. My friend expected no trouble, but after the passports were stamped, the border guard began to give the driver an increasing amount of difficulty and walked him into the shadows away from where they were parked.

A short moment later, the driver returned to the vehicle and they drove off. After a mile or so, my colleague asked about the incident and the driver confessed that he had paid a small bribe to get them through. It turns out that the vehicle he was using to show my friend the region that weekend belonged to his father. The guard suspected as much and threatened to report some bogus charge to the revenue inspectors who might have conducted the equivalent of an extreme IRS business audit (only without the taxpayer rights we have here). To avoid the risk, the driver paid the equivalent of $40 USD and the guard allowed them on their way. And it had been his own countryman! He was returning to his own country, not entering another! Was this a bribe? You bet. Did it violate the FCPA? Let's take a look.

The anti-bribery portions of what is known as the Foreign Corrupt Practices Act (FCPA) were written to address some of the ways American businesses were participating in corruption practiced in other countries.[1] As businesses expanded into the global marketplace, they ran head-first into “traditions” and “customs” that are illegal in the United States[2].

Senators William Proxmire and Harrison Williams introduced the bill with strong support from others in both chambers and lofty goals in the wake of Watergate. In reality, corruption is not unique to developing countries or those on other continents. The FCPA is also not entirely unique. However, U.S. and European Union countries appear to be the most stringent in holding domestic organizations liable for actions by their foreign employees, agents and subsidiary organizations.

Elements of an FCPA Violation
The FCPA applies to all companies who are subject to the jurisdiction of the Securities & Exchange Commission because they “issue” publicly-traded securities, as well as all “domestic concerns” (any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States). That pretty much covers the options.

Assuming you or your organization is within one of those definitions, it is time to examine the elements of a violation and some tips for staying out of trouble. There are four elements of an FCPA charge (15 U.S.C. §78dd-1(a)):
  • corrupt intent

  • connected with a "payment"

  • to a prohibited recipient

  • for a qualified business purpose.

Corrupt Intent. The issue of intent is generally key in criminal statutes and the FCPA is no exception. Simply put, was the payment intended to influence a foreign official to act illegally, or intentionally not act when legally required to do so, or induce such official to improperly use his or her influence to accomplish indirectly an act or omission that would be illegal if done directly.

Payment. Payment can be the obvious (cash, property, etc.) as well as merely the promise to give something of value (reciprocal official misconduct, e.g.). It is a defense to prosecution if the defendant can prove that the payment is legal in the official’s country. Likewise, if the “payment” is travel expenses for a lawful trade excursion to promote or demonstrate the company’s products or services—or if “payment” is directly related to the legitimate performance of a lawful agreement with the foreign agency or government—the defendant can avoid penalties.

Prohibited Recipient. The U.S. Department of Justice has this comment on whether a recipient is a “foreign official:”

The prohibition extends only to corrupt payments to a foreign official, a foreign political party or party official, or any candidate for foreign political office. A "foreign official" means any officer or employee of a foreign government, a public international organization, or any department or agency thereof, or any person acting in an official capacity. You should consider utilizing the Department of Justice's Foreign Corrupt Practices Act Opinion Procedure for particular questions as to the definition of a "foreign official," such as whether a member of a royal family, a member of a legislative body, or an official of a state-owned business enterprise would be considered a "foreign official."[3]

Business Purpose. Finally, the corruptly intended payment to the foreign official must be for the purpose of obtaining or keeping business—even if from someone other than the foreign government. The FCPA’s primary purpose, after all, was to address the wide-spread practices by major companies of paying bribes to gain an unfair advantage over smaller rivals or Uncle Sam himself (which begs the question as to whether the issue would have garnered Congressional attention if all companies of all sizes could equally have afforded to “pay to play”).

Analysis of the Bribe
The driver in our story definitely made a payment to a government official. The payment was illegal under his country's laws, and made to influence the official to act or fail to act. We have two elements and have knocked out one affirmative defense.

But that is as far across the FCPA line as this story goes. There is a strong argument that the border guard was only dissuaded from his own illegal or improper act, but we do not know enough about that country's laws to be sure. On the other hand, the key element missing from the story is the lack of a business purpose by my colleague. Even if the payment never touched my friend's hands, had this payment been paid with the intent to obtain or keep business, then without any warning or opportunity for the American parent company to act to prevent the violation, an FCPA violation might have occurred. Without any connection to gaining or keeping business, then, my friend appears safe this time.

Compliance Begins at Home
No doubt, the FCPA crossed my colleague's mind when the driver confessed miles down the road to paying a bribe to a border guard. Had my friend been better versed on the FCPA, he might have gotten more rest that night. Here are some practical steps you can take now to sleep better yourself.

Policy. Begin with an understanding of the law and a thorough anti-corruption policy review in your U.S.-based company and all of its subsidiaries and members. If you do not already have a clear, blatant policy that prohibits all influence compensation and all efforts to directly or indirectly improperly influence government officials everywhere[4], draft one now and publish it to all staff. You must avoid any appearance of impliedly condoning that which you have not strongly discouraged.

Training. Follow that with training to all staff on why you have the policy, what actions are prohibited, the potential penalties to them individually and the company and how to report anything they feel may violate the FCPA. Keep records of the dates and attendees at each such training and be prepared to show them to auditors and potential investigators.

Safe Harbor. It is important to have a policy that encourages self-reporting and sincere efforts to comply or remediate violations. Consider a whistle-blower clause in your policy that provides reasonable protections for innocent staff who report FCPA violations. Beware the self-serving tattle-tale, however, who may want to benefit from an action he or she reports.

There are myriad scenarios that can arise when conducting business abroad or with representatives of foreign governments and businesses. This article is not intended to give legal advice or to take the place of an open, honest evaluation by a qualified attorney in your jurisdiction. The most that any post such as this can do is help you understand the questions you should ask your own legal counsel.

The risks are high: fines in the millions of U.S. Dollars and imprisonment for years for each violation. Not the kind of reward you want for your business or yourself.

[1] These sections are found at 15 U.S.C. §78dd-1 through §78dd-3.
[2] It is beyond the scope of this post to take on the relative moralities and legalities between corruption that has existed in the U.S. versus abroad.
[3] “Foreign Official” The USDOJ site has a valuable Fraud section with the text of statutes, analysis and the Attorney General guidance mandated by the FCPA.
[4] Public companies are under additional accounting and record-keeping rules designed to make assets traceable and records of asset dispositions auditable, but those are outside the scope of this post. And with ratification in 1998 of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, anti-bribery rules have risen to the level of international treaty. More on that in a subsequent post.

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