Type: Law Bulletins
Date: 11/15/2012

SEC and Department of Justice Issue Long-awaited FCPA Guidance

On November 14, 2012, the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) released their long-anticipated guidance on the Foreign Corrupt Practices Act (“FCPA”) in a joint publication titled “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (the “Guide”). The FCPA, a Carter-era statute intended to prevent U.S. companies from bribing foreign officials, has been a high priority of the current administration, and the SEC and DOJ have been very aggressive in both their enforcement tactics and in their interpretation of the law. The FCPA is a source of great anxiety to U.S. businesses that operate abroad, in part because many of the key terms and concepts in the statute are vaguely defined or not defined at all. While some had hoped that the Guide would provide much needed clarity in these areas, as many practitioners feared, it has proved to be little more than a collection of the government’s existing aggressive enforcement positions.

With the stated purpose of helping businesses of all sizes comply with the law, the Guide addresses many of the key areas of uncertainty in the law, including whom the FCPA covers; what conduct the FCPA prohibits; the definition of “anything of value” and what constitute proper and improper gifts, travel, and entertainment expenses; the definitions of  “foreign official" and “instrumentality” of a foreign government; how successor liability applies in the context of mergers and acquisitions; the hallmarks of an effective corporate compliance program; the considerations of the DOJ and SEC when determining to undertake an investigation or initiate an enforcement action; and the different types of civil and criminal resolutions available in the FCPA context.

While the Guide provides scant information beyond what most FCPA practitioners already know and is not binding on the DOJ or SEC, it is useful as a single source of the government’s stances on FCPA enforcement and compliance. Of particular interest is the array of hypothetical situations included in the Guide. Below are some of the highlights of the Guide.

An Overview of the FCPA

The FCPA has two main parts: the anti-bribery provisions and the accounting provisions. The anti-bribery provisions apply to three main groups: companies with securities listed on a U.S. stock exchange or required to file periodic reports with the SEC (“Issuers”); U.S.-based companies and citizens, residents, and nationals of the U.S. (collectively, “Domestic Concerns”); and foreign nationals and foreign companies doing business in the U.S. The anti-bribery provisions prohibit corrupt payments of anything of value to a foreign government official in order to obtain or retain a business advantage. The accounting provisions require Issuers to maintain accurate books and records and to have internal accounting controls. The accounting provisions also impose criminal liability on any person who knowingly falsifies any records or circumvents internal accounting controls.

What is “Anything of Value”?

The FCPA prohibits the corrupt “offer, payment, promise to pay, or authorization of payment of any money or offer, gift, promise to give, or authorization of the giving of anything of value” to a foreign official. The Guide acknowledges that the FCPA does not contain a minimum threshold amount for corrupt gifts and payments, and it is quick to point out that “bribes can come in many shapes and sizes.” Most often, people think only of cash when it comes to bribes. However, under the FCPA, bribes can also include travel expenses, excessive daily stipends on trips labeled as trips for business purposes, excessive entertainment expenses (including large bar or dinner tabs), large gifts and even charitable donations made to legitimate charitable organizations. The Guide points out that even paying for something for a relative of a government official can violate the FCPA.

However, the Guide takes pains to note that not all gifts to foreign officials violate the FCPA. Small gifts or tokens of esteem are often appropriate in business settings. Items of nominal value, such as cab fares, reasonable travel and entertainment expenses, or company promotional items given to foreign officials have not resulted in enforcement actions by the DOJ. For example, paying for business class travel and lodging for foreign officials for an official site visit may be proper when employees of the company paying the expenses are entitled to the same accommodations. The Guide recommends that as part of an effective compliance program, companies implement clear and accessible gift-giving guidelines and processes.

Who is a “Foreign Official”?

According to the Guide, a “foreign official” generally falls into one of three categories: an officer or employee of a department, agency, or instrumentality of a foreign government; a foreign political party or official thereof; or a candidate for foreign political office. While “instrumentality” is broad, whether a particular entity is an instrumentality is fact-specific. The Guide provides a non-exclusive list of the factors, such as an entity’s ownership, control, status and function within a government, that the DOJ and SEC will consider in determining whether an entity is an instrumentality of a foreign government. The Guide observes that, while no one factor is dispositive, an entity is unlikely to be an instrumentality if a majority of its shares are not owned by a government.

Successor Liability

One of the more useful sections of the Guide discusses corporate liability and, more specifically, successor liability in mergers & acquisitions. In doing so, the Guide provides two hypothetical acquisitions, one in which the target company was previously subject to the FCPA and one in which it was not.

The overriding theme the Guide sets forth with regard to successor liability is that the acquirer’s behavior over the course of the acquisition is what will determine whether the acquirer will bear liability for the target’s violations. Accordingly, the Guide cautions acquirers to have a comprehensive due diligence plan in place prior to any merger or acquisition, to improve the target’s compliance programs and internal controls promptly, and to disclose any discovered violations in a timely manner. The Guide adds that the DOJ’s Opinion Procedure can provide acquirers with additional comfort in difficult situations but points out that in most cases a thorough risk-based FCPA and anti-corruption due diligence review, followed up with appropriate training, remediation and disclosure, is an acquirer’s best strategy for mitigating FCPA risk.

Companies disclosing FCPA violations to the DOJ and SEC discovered during the due diligence process are less likely to face enforcement actions than those that do not self-report. This is true even when the disclosures are made post-merger or acquisition. Additionally, successor companies that fail to implement a comprehensive due diligence plan, participate in, or fail to stop the misconduct are much more likely face liability than successor companies that stop the misconduct, integrate the company committing the violations into its comprehensive compliance program, and disclose the violations.

Accounting Provisions

The Guide notes that bribes are often mischaracterized on the books of a company as commissions, royalties, consulting fees, sales and marketing expenses, travel and entertainment expenses, free goods, petty cash withdrawals, write-offs, rebates or discounts.

The Guide also points out that the key to complying with the accounting provisions is having effective internal controls and policies. This often starts with a company’s compliance program. The FCPA does not specify a particular set of controls that companies are required to implement. Rather, the internal controls provision gives companies the flexibility to develop and maintain a system of controls that best suits their particular needs and circumstances.

What Do the DOJ and SEC Consider When Deciding to Investigate or Bring Charges?

The Guide notes that the DOJ will consider nine factors when conducting an investigation in determining whether to bring charges or negotiate a plea or other agreement. In most investigations, it comes down to the seriousness of the offense, pre-indictment conduct (including the existence of a compliance program), voluntary disclosure, cooperation and remediation.

The SEC will consider a number of factors in determining whether an enforcement action is warranted. These may include: the statutes or rules violated, the egregiousness of the violation, the magnitude of the violation, whether the conduct is ongoing, whether the conduct can be investigated within the statute of limitations period, and whether other authorities might be better suited to investigate.

The information contained in the Guide is not new to those who live in the FCPA world. However, the Guide does reinforce the idea that it is essential for companies doing business in foreign countries to have a comprehensive FCPA compliance program. For more information about the Guide or the FCPA, please contact a member of Taft’s FCPA and International Anti-Corruption practice group.

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