United States: Waging New Fight Against Foreign Bribery

By C. Stephen Heard Jr.

There have been several significant developments in the fight against foreign bribery in international business transactions. What was once considered solely the concern of the United States became an international objective when 33 of the world's largest trading nations, including the U.S., signed the Organization for Economic Cooperation and Development (OECD) Convention on Combating the Bribery of Foreign Public Officials in International Business Transactions (the Convention) (please see endnote1).

The Convention marks a sea-change in the international community's attitude toward bribery and corruption. Recognizing that "bribery is a widespread phenomenon in business," the Convention requires signatories to enact anti-bribery legislation similar to the framework codified by the U.S. in the Foreign Corrupt Practices Act (FCPA). Because the Convention was broader than the FCPA in several significant respects, Congress recently amended it to conform to the Convention (please see endnote 2).

The new international anti-bribery regime is significant to U.S. companies because it:

(1) addresses interstices in the FCPA by expanding its coverage to include acts of U.S. companies and nationals occurring outside the U.S., as well as any act of foreign companies and nationals committed in the U.S. in furtherance of an unlawful foreign bribe; and

(2) increases the number of countries now imposing comprehensive anti-bribery laws.

The FCPA contains anti-bribery provisions which make it a crime to bribe a foreign government official, foreign political party or party official, or a candidate for foreign political office. The U.S. Department of Justice (DOJ) maintains jurisdiction over activities governed by the anti-bribery provisions.

A corrupt act is defined as: (1) an offer of, payment of, promise to pay, or authorization to pay, anything of value to (2) any foreign government official, (3) for the purpose of influencing any act or decision of such official in his official capacity, inducing the official to do or omit to do any act in violation of the lawful duty of such official or (as recently added) securing any improper advantage, (4) in order to assist the U.S. company in obtaining or retaining business for or with or directing business to any person (please see endnote 3).

Included within the definition of corrupt acts are payments made to foreign agents of U.S. companies where the company knew or had reason to know that all or part of any payment made by the agent would be passed on to a foreign government official for a proscribed purpose. To be found guilty of a FCPA violation, the required mental state -- corrupt intent -- must have coexisted with the corrupt act.

The FCPA also contains accounting and record-keeping controls requiring all companies issuing or proposing to issue securities in the U.S. to maintain accurate records -- The Securities and Exchange Commission (SEC) maintains jurisdiction over activities governed by these provisions of the FCPA (please see endnote 4). Notably, the books and records provisions are not limited to instances of foreign bribery (i.e., "slush funds" and "off-the-book accounts"), but apply to any accounting impropriety regardless of any connection to a foreign bribe. A U.S. parent company must ensure compliance by majority-owned foreign subsidiaries, and if ownership is 50% or less, it must reasonably and in good faith use its influence to cause the subsidiary to keep accurate records (please see endnote 5).

The FCPA applies to "issuers" and "domestic concerns." "Issuers" consist of companies that have issued or propose to issue securities registered under § 12 of the Securities Exchange Act of 1934 or who file periodic reports under § 15(d) of the Act, as well as their officers, directors, employees and shareholders acting on their behalf (please see endnote 6). Simply put, all U.S. public companies and their employees as well as all foreign companies that issues securities in the U.S. (and their employees) are covered by the statute.

"Domestic concerns" consist of U.S. citizens, nationals and resident aliens, and entities that have their principal place of business in the U.S. or are organized under U.S. law (please see endnote 7). Additionally, U.S. citizens working for non-U.S. companies are covered by the FCPA, even if the companies themselves are not.

Notably, the anti-bribery provisions are not expressly applicable to an issuer's non-U.S. subsidiary. However, a U.S. issuer may be liable for the acts of its non-U.S. subsidiary if the issuer takes any actions in furtherance of the unlawful payment or based on vicarious liability, willful blindness or conscious disregard theories of criminal liability (please see endnote 8).

The FCPA includes exceptions and affirmative defenses which recognize routine or legally sanctioned business practices in foreign jurisdictions. For example, it permits "grease payments," the purpose of which is to facilitate or expedite "routine governmental action" -- i.e., payments for obtaining permits, processing visas, providing police protection, and loading and unloading cargo (please see endnote 9). Moreover, a company may avail itself of two affirmative defenses: that the payment was (1) lawful under the written laws of the foreign country, or (2) made for a bona fide business purpose, such as paying the travel expenses of an official who visits the U.S. to observe a demonstration of a U.S. company's product (please see endnote 10).

While companies often first confront the FCPA at the time of a questionable payment investigation, companies doing business abroad should recognize that certain prophylactic measures may prevent the imbroglio of an FCPA inquiry. Agency agreements should include FCPA provisions expressly limiting the authority of agents and third parties in order to exclude acts that would constitute FCPA violations.

Likewise, joint venture agreements should include FCPA provisions limiting the activities of non-U.S. joint venture partners. FCPA prohibitions and certifications in agency or joint venture agreements help shield U.S. companies from liability in the event an agent or joint venture partner makes an unauthorized payment. Moreover, companies must institute FCPA compliance programs and establish reporting systems which screen for "red flags." (please see endnote 11)

Intending to level the playing field in the global business arena, the U.S. convinced its trading partners to adopt the OECD Convention which, for the first time, memorializes the commitment of the signatories to adopt anti-bribery legislation (1) barring the bribery of foreign public officials to get or retain any improper advantage; and (2) requiring that companies keep accurate books and records to stymie efforts to conceal corrupt payments. The Convention mandates the criminalization of proscribed conduct and requires a signatory, if it lacks a system of corporate criminal law, to enact equivalent non-criminal sanctions.

Furthermore, the Convention addresses two problems that have plagued FCPA enforcement. First, signatories must assert jurisdiction both over acts committed within the country and over its citizens accused of engaging in proscribed conduct anywhere. This represents a significant departure from the FCPA, which formerly required the use of the mails or an instrumentality of interstate commerce in furtherance of a foreign bribe as a nexus for asserting the jurisdiction of U.S. courts.

Thus, U.S. companies operating abroad must now monitor their compliance not only with the FCPA, but also with the anti-bribery laws of many countries in which they conduct business, some of which previously allowed illicit payments as an ordinary business expense (please see endnote 12). Second, the Convention requires multinational cooperation in the extradition and prosecution of offenders, which may ameliorate the investigatory hurdles the DOJ previously faced when dealing with uncooperative countries (please see endnote 13).

The adoption of the International Anti-Bribery and Fair Competition Act of 1998 (1998 Amendments) (please see endnote 14) brought the U.S. in conformity with the Convention. The 1998 Amendments expand the FCPA in five major areas: (1) the class of prohibited conduct; (2) the definition of "foreign officials"; (3) extraterritorial jurisdiction over domestic companies and nationals; (4) jurisdiction over foreign companies and nationals; and (5) the application of criminal sanctions against natural persons regardless of nationality. These amendments close some of the loopholes that have in the past handicapped FCPA enforcement.

First, the 1998 Amendments increase the scope of prohibited conduct. Previously, a corrupt act was defined as payments to a foreign official, foreign political parties, party officials and candidates for the purpose of (i) influencing any act or decision of such person or party in their official capacity, or (ii) inducing such person or party to do or omit to do any act in violation of the lawful duty of such official or party (please see endnote 15). The definition has been amended to include a payment to a foreign official to secure any "improper advantage."

Second, the 1998 Amendments expand the definition of "foreign official" to include an official of a public international organization (please see endnote 16).

Third, and of particular import, the 1998 Amendments expand the jurisdictional basis for liability of U.S. companies and nationals. Previously, the FCPA required an act in the U.S. which utilized the mails or any other instrumentality of interstate commerce to further an improper payment. The 1998 Amendments dispense with this requirement entirely and extend coverage to acts of U.S. companies and nationals that take place entirely outside the U.S. "irrespective of whether such [U.S. company or national] makes use of the mails or any means or instrumentality of interstate commerce."

The amendments do not impose liability on foreign nationals who act outside U.S. (i.e., do not make use of the U.S. mails, etc.). However, Congress expressed its clear expectation that under the doctrine of respondeat superior, U.S. companies could be liable for the extraterritorial acts of their officers, directors, employees and agents regardless of nationality (please see endnote 17).

Fourth, the 1998 Amendments create a new basis for civil and criminal penalties by imposing liability on any "person," which is defined as any foreign national or company that is not an issuer and does not have a principal place of business in the U.S., which commits any act in the U.S. utilizing the U.S. mails or other instrument of interstate commerce in furtherance of an unlawful, foreign bribe (please see endnote 18).

Significantly, pursuant to a theory of respondeat superior, a single act committed in the U.S. by a foreign national could now subject a foreign company with no U.S. operations to FCPA liability. However, the 1998 Amendments do not completely address the lacunas which exist with respect to the FCPA's jurisdiction over foreign companies and nationals. Thus, a wholly owned foreign subsidiary that acts completely outside the U.S. in furthering a foreign bribe cannot be subject to FCPA liability. However, the U.S. parent company could be liable if an agency relationship or other form of vicarious liability is established.

Last, the 1998 Amendments remedy a disparity in the penalties assessed against U.S. as opposed to foreign nationals who are employees or agents of a domestic company. Previously, U.S. nationals were subject to both civil and criminal sanctions, while foreign nationals were subject only to civil penalties. Now, all natural persons are subject to criminal and civil sanctions. Criminal sanctions include imprisonment for up to five years and fines of up to one hundred thousand dollars for natural persons or two million dollars for corporations (please see endnot 19).

There have been relatively few criminal prosecutions under the FCPA. However, the Convention, and the 1988 Amendments, will provide greater opportunity for the DOJ and the SEC to pursue these types of cases.

The best strategy for dealing with the difficult commercial issues raised by the FCPA is to take certain prophylactic measures, including requiring FCPA compliance language in agency and joint venture contracts, due diligence on the background/connections of agents and other potential contract partners with foreign government officials in the host country where business is intended, and adoption of compliance programs which guard against, and provide internal reporting procedures for, violations of the FCPA (please see endnote 20). Further, in light of the Convention and the 1998 Amendments, U.S. companies must revisit existing compliance programs to ensure that they address the changes in the U.S. law as well as the law of the OECD signatories.

1. 1 The Convention was signed by 28 members of the OECD (Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, South Korea, Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States), as well as five non-member nations (Argentina, Brazil, Bulgaria, Chile and the Slovak Republic). See Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, Dec. 18, 1997, 37 I.L.M. 1 (1998). A copy of the full text can also be found on the Internet at http://www.usdoj.gov/criminal/fraud/fcpa/oecdcon.htm. However, as of March 19, 1999 only Iceland, Japan, Germany, Hungary, the United States, Finland, the United Kingdom, Canada, Norway, Bulgaria, South Korea and Greece have ratified the Convention.
2. 2 The amended Foreign Corrupt Practices Act (FCPA), P.L. 105-36 (Nov. 10, 1998) is to be codified at 15 U.S.C. §§ 78dd-1, 78dd-2, 78dd-3 and 78ff.
3. 3 See 15 U.S.C. § 78dd-1(a), as amended by P.L. 105-36 (Nov. 10, 1998).
4. 4 All issuers must "make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the issuer." 15 U.S.C. § 78m(b)(2)(A). Additionally, all issuers must "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that" certain levels of detail are met. 15 U.S.C. § 78m(b)(2)(B). The SEC plans to adopt stricter guidelines on what constitutes "material" information which likely will require public companies to make increased disclosures, and thus arguably expand the "books and records" obligations under the FCPA.
5. 5 See 15 U.S.C. § 78m(b)(6).
6. 6 See 15 U.S.C. § 78c(a)(8).
7. 7 See 15 U.S.C. § 78dd-2(h)(1).
8. 8 See Dooley v. United Technologies Corp., 803 F. Supp. 428 (D.D.C. 1992); see also United States v. Miller, 962 F.2d 739, 745-746 (7th Cir. 1991) (defining "willful blindness").
9. 9 See 15 U.S.C. § 78dd-1(b).
10. 10 See 15 U.S.C. § 78dd-1(c).
11. 11 "Red Flags" include situations where an agent: (1) requests payment in cash or in an indirect manner; (2) receives payment in a country with a widespread history of corruption; (3) refuses to confirm an intention to abide by the provisions of the FCPA; (4) has family or business ties with a foreign official; (5) requires that its identity not be disclosed; (6) asks for commissions that are substantially higher than the going rate in that country; and (7) requests an unusually large credit line for a new customer.
12. 12 For example, Germany has historically treated bribes as legitimate business expenses.
13. 13 See The OECD Convention, art. 9.
14. 14 International Anti-Bribery and Fair Competition Act of 1998, Pub. L. No. 105-366 [S. 2375], (1998).
15. 15 15 U.S.C. § 78dd-1(a).
16. 16 15 U.S.C. § 78dd-1(f)(1) (includes a definition of "public international organization" for purposes of the FCPA). The OECD commentary defining "public international organizations" is available on the Internet at http://www.oecd.org/daf/cmis/bribery/20nov2e.htm.
17. 17 See H.R. REP. No. 105-802, 1998 WL 710062, at 22 (1998).
18. 18 See 15 U.S.C. § 78dd-2(a).
19. 19 See 15 U.S.C. § 78dd-2(g).
20. 20 Litton Industries was recently the subject of an FCPA investigation arising out of commissions and fees paid to foreign agents in order to secure defense contracts in Greece and Taiwan. However, Litton ultimately avoided prosecution under the FCPA by pleading guilty to charges which included conspiracy to defraud the government, and by paying a $18.5 million fine. See Raymond Bonner, "Litton Reported Set to Admit Payments Guilt", New York Times, June 19, 1999, at C1.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.