What You Need to Know About the FCPA

A lot of attention is being paid to the Foreign Corrupt Practices Act (FCPA) these days, and for good reason: prosecutions by the U.S. Department of Justice (DOJ) and U.S. Securities Exchange Commission (SEC) have nearly doubled in the past few years. Not only is enforcement at an all time high, but the criminal and civil fines imposed last year were the highest ever recorded. Siemens AG settled its FCPA troubles for a criminal fine of $450 million to the DOJ, and disgorged $350 million in illicit profits to the SEC. The government has sent a clear message that the FCPA is an enforcement priority, and those who should be paying attention include all publicly traded companies (including those that expect to or want to become publicly traded) and all businesses that do business outside the United States.

The FCPA has two provisions - the well known "bribery" provision and less well known but equally important "books and records" provision, which only applies to "U.S. issuers." The bribery provision, which is enforced by the DOJ, prohibits giving anything of value to a foreign government official to obtain or maintain business or gain a business advantage. The books and records provision, which is enforced by the SEC, requires public issuers to: (1) maintain their books and records in sufficiently reasonable detail that they accurately and fully reflect transactions; and (2) maintain effective internal accounting controls.

The bribery provision of the FCPA prohibits a broader scope of activity than just the suitcase of cash that the term suggests. Gifts, entertainment, favors to relatives or favorite charities can all be considered bribes, because they meet the "anything of value" test. The definition of "government official" includes political candidates, employees of state-controlled companies and employees of quasi-governmental agencies (like the United Nations). The FCPA has certain exceptions and affirmative defenses, so not all payments to government officials are prohibited. Facilitating ("grease") payments are allowed if the purpose of the payments is to facilitate or expedite a routine government action (e.g., stamping a passport). However, this defense is only available if the payment is allowed under local law. Additionally, a company can defend a payment as a "bona fide business expense" - not every steak dinner has strings attached, and some level of entertainment is expected and allowed. Typically, the government will look at the amount of money spent and the type of entertainment paid for, as well as the "quid pro quo" element of the law, which requires that the thing of value that has been given be reasonably expected to influence the recipient's behavior.

In addition to the bribery provisions, public companies are also subject to the books and records provisions of the FCPA. The books and records provisions were written to make enforcement of the bribery provisions possible, but violations have been found to exist for failure to keep accurate records even when a bribe can't be proven. If a prosecutor looks at your books and can't see that a payment was NOT a bribe, then you are potentially in violation of this provision. Additionally, the second requirement of maintaining effective internal accounting controls is a constant responsibility. In a post-Sarbanes-Oxley world, this requirement is marginally less onerous than before. If you are publicly traded, then you already have extensive accounting controls in place to comply with Section 404. It is very easy, and very important, to monitor those controls to ensure that preventing FCPA violations is part of the controls.

The first step in assessing a company's FCPA risk is to think about its use of third party sales agents or facilitators, the controls and training in place at foreign subsidiaries, and whether any customers could fit into the "government official" category. Additionally, consider the specific countries in which you do business. India, China, Brazil and Mexico are all considered "hot spots" in terms of bribery and corruption (Transparency International monitors corruption around the world, and publishes its corruption index at www.transparency.org). If you find that your company has some exposure, consider the appropriate compliance program to put in place. Not only do compliance programs reduce the risk of violations, they are also a key factor in getting potential penalties mitigated during settlement negotiations with the DOJ if a violation does occur. If your risk is minimal, consider an FCPA policy. If your risk is higher, you should have an FCPA policy, a training program and an anonymous reporting mechanism for your employees. The law allows businesses to create compliance procedures that are appropriate for their situations, and the key is to tailor your compliance program to your risk level and your business operations.

For more information about the FCPA, contact Dale Stackhouse.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.