FCPA Overview

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  • Hello, Jim. I reviewed your slide show quickly. From slide 27, this stood out: 'Also, US company may expose itself to non-FCPA liability if its FCPA compliance efforts cause it to exert too much control over a foreign subsidiary.
    Not sure what you mean. You mean you should not tell your foreign subsidiary not to pay certain kinds of payments that may be legal in their country? Or that they should not tell foreign employees what to do in general? After all the law only applies to U.S. citizens, even those who may be working in a foreign country, does it not?
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  • 1. Guide to the FCPA Jim Chester JD, LL.M, CCS, CHB Chester/Associates, PLLC Dallas, Texas 3/28/08 1
  • 2. US Trade Laws Implicated by Global Sales and Marketing - Foreign Corrupt Practices Act - Anti-Boycott Laws - Export Laws 3/28/08 2
  • 3. Part I Foreign Corrupt Practices Act (FCPA) 3/28/08 3
  • 4. Who is covered by the FCPA? • Nearly any U.S. business with foreign contact will be legally obligated under the FCPA, as will foreign subsidiaries of U.S. businesses, and some foreign companies and individuals. 3/28/08 4
  • 5. Issuers of Securities • Generally, “Issuers” are publicly traded companies with 500 or more shareholders and more than $1,000,000 in total assets. • Additional responsibility for FCPA accounting/reporting provisions. • Issuers are subject to more penalties. 3/28/08 5
  • 6. Domestic Concerns • A “Domestic Concern” is any business organized in the US, as well as any U.S. citizen or resident, even if living abroad. • Domestic Concerns are subject anti- bribery rules, but not reporting requirements. 3/28/08 6
  • 7. Both Issuers & Domestic Concerns • Are responsible for the acts of their officers, employees, agents, etc. • Also responsible for acts of subsidiaries, even where they have less than a 50% interest in a subsidiary 3/28/08 7
  • 8. Others • As of 1998, the FCPA contains a “catch all” provision that applies the anti-bribery rules to “any person” who commits bribery on U.S. territory. 3/28/08 8
  • 9. What does the FCPA require? Issuers must keep detailed records. • The FCPA’s accounting provisions are designed prevent illegal conduct by publicly traded companies by requiring them to keep records that would reveal illegal payments. • Issuers are required to keep records that “accurately and fairly” reflect all of the issuer’s transactions and assets and must be kept in “reasonable detail.” 3/28/08 9
  • 10. Bribery of Foreign Officials • Issuers of securities, domestic concerns, and others all fall under the FCPA’s anti-bribery provisions. • All U.S. nationals and businesses, including their foreign subsidiaries, are prohibited from bribery anywhere in the world. • Foreign nationals and businesses also fall under the anti-bribery requirements when they are in the United States or its territory. 3/28/08 10
  • 11. Bribery of Foreign Officials • “Payments” include offers, promises, and authorizations to make payments as well as actual payments. • Anything of value that is offered, authorized, promised, or given is a payment. ____________________ 3/28/08 11
  • 12. Bribery of Foreign Officials • “Foreign officials” does not just mean a public official in foreign governments. • Political parties, their officials, and all candidates for public office also count. • Employees of state-owned corporations, such as PEMEX, have been deemed foreign officials. • Officers and employees of “public international organizations” are specifically covered by the FCPA. • Any organization whose employees enjoy diplomatic treatment are public international organizations, (e.g., the United Nations) 3/28/08 12
  • 13. Bribery of Foreign Officials • Moreover, the FCPA prohibits payments to any person the payor knows will use any portion of the payment to bribe a foreign official. • Payor does not need detailed knowledge of how the payment will be used. “Conscious disregard of suspicious circumstances” or “deliberate ignorance” of an illegal payment will not protect a company. 3/28/08 13
  • 14. Bribery of Foreign Officials • The FCPA does not define “corruptly,” but U.S. courts have interpreted it as creating an intent requirement. Payors must intend “to induce the recipient to misuse his official or to influence someone else to do so.” • Payors must voluntarily, intentionally, and with a “bad purpose” seek an illegal result (judged by the host country’s law) or use an illegal method to achieve a lawful result. This intent requirement only applies to improper payments and not to the FCPA’s accounting requirements. • Improper advantage is any advantage that is not available under the host country’s written laws. 3/28/08 14
  • 15. Bribery of Foreign Officials • Any payment made with the intent to secure an unfair advantage or with a conscious disregard of circumstances likely to lead to a violation of the FCPA is illegal, regardless of whether it is made at the suggestion or request of a foreign official. • However, payments made by victims of actual extortion are not covered by the FCPA. 3/28/08 15
  • 16. Bribery of Foreign Officials • Previously, the FCPA only prohibited payments for the purpose of obtaining, keeping, or directing business to any person or entity. Thus, company could make a payment to a foreign official to obtain a lower customs rate or favorable tax treatment. • This is no longer the case. • 1998 amendments to the FCPA broadened the scope of what is considered an illegal purpose. • Nearly any advantage may now be considered improper. 3/28/08 16
  • 17. What the FCPA Allows • The FCPA explicitly allows three types of payments. • However, each of these exceptions is narrow in scope and should be interpreted conservatively by companies seeking to use them. 3/28/08 17
  • 18. What the FCPA Allows • First, payments to “expedite or to secure the performance of a routine governmental action” are not covered by the FCPA. • These “grease” payments are generally only allowed for expediting non-discretionary actions by minor officials. • Second, payments that are explicitly allowed under the host country’s written laws are not improper. 3/28/08 18
  • 19. What the FCPA Allows • Third, “reasonable and bona fide expenditures” that are directly related to the promotion or demonstration of products or the performance of a government contract are allowed. • These payments are designed to cover things “such as travel and lodging expenses” incurred by government officials as part of normal business operations. 3/28/08 19
  • 20. FCPA Penalties & Enforcement • The FCPA is enforced by the SEC and the Department of Justice. • SEC responsible civil suits and enforcement of the FCPA’s accounting requirements. • DOJ handles all criminal prosecutions. • Significant overlap between these roles. • SEC may refer cases to DOJ for criminal prosecution and the two agencies may work together on some cases. • Additionally, private parties may bring FCPA issues to the attention of either agency. 3/28/08 20
  • 21. Penalties for Organizations • Publicly traded companies face a wide range of penalties, including some not explicitly mentioned in the FCPA itself. • May be barred from doing business with government agencies or contractors. • May be debarred from government agencies such as the Commodity Futures Trading Commission or have export licenses suspended. • Investigation triggered by the FCPA can spread to other areas if it turns up problems not covered by the FCPA. 3/28/08 21
  • 22. Penalties for Organizations The penalties for FCPA violations can be substantial: • A willful violation of the FCPA can result in fines up to: – $25,000,000 for accounting violations and – $2,000,000 for a violation of the anti-bribery provisions. • Further, civil penalties of up to $10,000 per violation may be assessed. • Taken together with the cost of defending a FCPA case, companies face severe economic consequences for failure to comply with the FCPA. 3/28/08 22
  • 23. Penalties for Individuals • Willful violators of the accounting provisions may be: • fined up to $5,000,000 for each violation, and • sentenced up to twenty years in prison for each violation • Criminal penalties for willful violations of the anti-bribery provisions – • fines up to $100,000 per violation and • up to five years in prison per violation • Plus civil penalties up to $10,000 per violation. • Corporations are forbidden from paying any portion of fines levied against their employees or agents under the FCPA. 3/28/08 23
  • 24. FCPA Compliance • The safest approach to compliance with the FCPA’s anti- bribery provisions is to refrain from making any payments to foreign officials. • In addition, U.S. companies should: • Take active steps to prevent improper payments • Thoroughly check out any overseas business contacts • Include FCPA compliance provisions in all contracts with foreign actors • Demand a right to review foreign partners’ books and audit them for FCPA compliance • Reserve a right to terminate any contract with a party that is violating the FCPA and immediately exercise that right if a breach of the FCPA is discovered • Make all payments transparent (no cash) and reasonable for goods delivered or services rendered. 3/28/08 24
  • 25. FCPA Compliance • U.S. companies must start at home. Any company with significant foreign contacts should ensure its internal FCPA compliance by: • Creating a code of conduct • Educating employees about the code of conduct and the FCPA • Creating channels for employees to safely report suspected FCPA violations • Establish and enforce penalties for violating the code of conduct • Screen potential employees, especially those who will work abroad. 3/28/08 25
  • 26. FCPA Compliance Pitfalls • The biggest pitfall facing U.S. companies is foreign affiliates/agents. • U.S. companies can be held vicariously liable for breaches of the FCPA, and should seek to extend their normal compliance regime to their subsidiaries. • Integrate accounting practices where feasible. • Consistency in compliance will increase transparency and help spot irregularities so that they may be corrected. 3/28/08 26
  • 27. FCPA Compliance Pitfalls • A second pitfall is the increasing number of foreign anti-bribery laws. • Also, US company may expose itself to non-FCPA liability if its FCPA compliance efforts cause it to exert too much control over a foreign subsidiary. 3/28/08 27
  • 28. FCPA Compliance Pitfalls • Finally, a “yes” answer to any of the following questions should send up a red flag that a particular arrangement may be improper: 1. Is your foreign agent also a government official or related to one? 2. Is the agent’s company owned by a political party, official, or the family of an official? 3. Is the agent’s fee more than your company would normally pay that type of service? 4. Is the payment excessive for the local market or under local law? 5. Are an agent’s services really necessary or are they a pretext? 6. Is corruption endemic in the local country? 7. Is your agent reputable and respected? 8. Are the foreign agent’s books and records in order? 3/28/08 28