- Kamran Mashayekh
NAVIGATING THE LEGAL LANDMINES OF THE FOREIGN CORRUPT PRACTICES ACT IN A GLOBAL WORLD
Updated: Jan 1, 2020
The passage of the Foreign Corrupt Practices Act ("FCPA") of 1977 was a significant inflection point in how publicly traded United States Companies and their subsidiaries worldwide, or foreign publicly traded companies and their United States based subsidiaries (hereinafter, collectively referred to as “multinationals”) conducted commerce on a global scale. 1 Prior to the enactment of the landmark legislation, the practice of proffering “anything of value” to foreign official(s) or governmental entities or state-owned entities or “political parties or political candidates,” all in whom vested decision-making authority to either grant or retain procurement contracts to the multinational companies was deemed legal. Post enactment, such practices previously deemed as “part of doing business” and regularly conducted in exchange for the grant of sizeable construction and/or infrastructure projects (or any other projects of significant import and value) were deemed illegal and subject to the stringent requirements of the FCPA “Anti-Bribery and Internal Books and Records” Provision.
This article will discuss the following: (1) the reasons for the passage of the FCPA; (2) the internal and external challenges that public issuers of securities, (public companies and/or their subsidiaries) have to address in the implementation and adherence to the provisions of the FCPA’s Anti-Bribery and Internal Books and Records Provision; and (3) the DOJ and SEC’s guidance on what constitutes “FCPA Best Practices” for companies intent on honoring the provisions of the FCPA mandates. The article will lastly, discuss “head-line grabbing” enforcement actions in 2019 and the SEC and DOJ’s intent to doggedly pursue violators of the FCPA despite their status, notoriety, brand name and ostensibly unlimited resources.
The FCPA was passed in the wake of the Richard Nixon Watergate scandal where it was discovered that a sizable number of United States companies had made admissions to paying hundreds of millions of dollars to foreign officials to either secure or obtain business. Congress recognized the business practice as a “corrupt” practice that had adverse effects on the integrity of the global commercial markets as well as having wide-ranging geopolitical effects. Notably, by engaging in corrupt practices of bribery, the practice resulted in the following: (A) Suppressing honest competition for the procurement of business in foreign lands; (B) Continuation of income inequality between the “rich” and the “poor” in foreign lands; (C) Creation of business monopolies (D) Political instability (For example, in November of 2019, Iraq has been rocked by mass demonstrations and upheaval over allegations of corruption by top governmental officials); (E) potential loss of investment; (F) A weakening of rule of law and facilitating criminal activity on a global scale; (G) Legal risk since contracts secured by bribery could be legally unenforceable; and (H) Lack of Foreign Domestic Investment due to corruption. 2
The Legal Challenges Posed By The FCPA When Navigating A Global Economy
The world of commerce, technology, and economic global interdependence is radically divergent than it was in 1977. Chief among the reasons for the increased commercial global
2 economic interdependence is the seismic changes in the geo-political spectrum across the globe. Moreover, with the advent of the internet and other technological breakthroughs in telecommunications, the world was now, metaphorically speaking, a “global village.” With the breakup of the Soviet Union and Baltic states, new nation states were formed. For example, the countries of Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Lithuania, Ukraine, Namibia and South Sudan were not in existence in 1977. The forward march of technological advances in lockstep with the geo-political movements created an inexhaustible abundance of economic opportunities for multinationals to lend their expertise in a myriad of different industrial sectors such as developing infrastructure, mine and produce energy resources and install telecommunications apparatus, in the host countries that invited US multi-nationals to tender bids for government contracts. 3
The paramount challenge for multinationals consists in overcoming the crystallized “mindset” of the host countries decision-makers that “pay-for-play” is no longer a viable and legal way of conducting business in the host countries including countries that have long standing relationships to multinationals that predate 1977.
It is common knowledge among FCPA practitioners and FCPA Compliance Officers that the overwhelming majority of the risk in violating the Anti-Bribery and Internal Books and Records provision of the FCPA, generally revolves around the multinationals’ own employees on the ground in host countries and their dealings with their "local-third party" agents and/or consultants whom in turn proffer bribes to the host countries decision-makers for the grant of the projects. Moreover, the practice of mislabeling the bribes as "commissions" or "consulting fees" in the internal books and records of the company, is common practice. 4
In 2008, DOJ brought an enforcement action against Siemens, the German industrial behemoth, and discovered that the multinational was engaged in a rampant, systemic and global scheme to bribe host countries’ officials when conducting business. Ultimately, DOJ revealed that Siemens was plagued by the improper practice of mischaracterizing payments, within the company’s internal books and records as "commissions" and "consulting fees", which simply amounted to bribery. The Siemens case acts as a warning to other companies, reflected by the record fines it was required to pay for the numerous violations committed on its part.
Fortunately, for companies seeking to adhere to the mandates of the FCPA’s Anti-bribery provision and Internal Books and Records Provision, the DOJ and SEC have issued a “Best Practices” Guidelines that provides a roadmap for companies seeking to implement a robust FCPA compliance program.
In ascertaining whether a multinational's FCPA's compliance program mirrors closely to the DOJ and SEC guidelines, the compliance officer must assess the program through the following inquiry in order to determine whether the multinational’s FCPA compliance program is robust and can withstand strict DOJ and SEC oversight:
(1) Is the Corporation’s FCPA Compliance Program well designed whereas it takes into full consideration the following:
Risk Assessment of the Country it seeks to do business within?
Whether Policies and Procedures are in place to detect violations of the Anti-Bribery and Internal Books and Records provisions?
Is the multinational committed to continuous FCPA compliance training for both foreign and domestic employees as well as third-party agents and consultants?
Has the third-party consultant or agent been thoroughly vetted and extensive due-diligence conducted as to his or her background to detect possible past criminal infractions?
Is FCPA compliance being mandated from top-down? Is Senior Management and the Board all the way down to the salesperson in the host country committed to adherence to FCPA mandates?
Are anonymous resources in place to report violations within the company?
Is the company willing to discipline its own employees and terminate third party relationships should violations of FCPA occur?
Does the company place a strong emphasis on continuous improvement, Periodic testing and audit of its own internal books and records to detect possible violations of the FCPA?
Is the company committed to an ongoing practice of investigating potential misconduct committed by its own employees and/or third-party agents and consultants? and
Is the company committed to remediation efforts upon discovery of underlying misconduct? 5
Most recently, in 2019, the DOJ and SEC settled a FCPA non-compliance case against Walmart for $282 million dollars. Also, in another case involving the commercial behemoth, Microsoft, the parties agreed to settle a FCPA non-compliance case for its Hungarian kickback scheme for $26 million dollars. These cases are notable for the mere fact that the long-arms of the enforcement arm of the DOJ and SEC will not be deterred by the size, reputation and ostensibly endless resources of any public company that violates the mandates of the FCPA. Despite significant progress in the enforcement and implementation of the anti-corruption laws, both in the US and abroad, the scourge of global corruption remains a formidable impediment to conducting “honest business practices.” The most effective antidote is to instill a culture of compliance from top-down and to be willing to enforce the companies’ adamantine FCPA compliant resolve despite the presence of the legal landmines of its own potentially corrupt employee(s) and its inability to convince the principal decision-makers in the host countries that violations of the FCPA in any phase of procurement is not an entertainable option and failure to comply will result in serious criminal and civil legal exposure. 6