THE FOREIGN CORRUPT PRACTICES ACT

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THE FOREIGN CORRUPT PRACTICES ACT

• Presented to
• UPMC Legal Staff
• February 22, 2006
• Dale Hershey

2
FCPA Basics

• Prohibits making improper payments to foreign
  officials, parties or candidates, in order to
  assist a company in obtaining or retaining
  business for, or directing business to, any
  person
• Imposes record keeping and internal control
  requirements on companies subject to SEC
  jurisdiction

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Who Is Bound?

• Issuers companies whose securities are
  registered or are required to file periodic
  reports with the SEC
• Domestic concerns US citizens and business
  entities having their principal place of business
  in the United States
• Other persons who act in furtherance of a corrupt
  payment while in a territory of the United States
• Note liability for acts of non-US citizens

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Enforcers

• US Department of Justice criminal and civil
  prosecutions of companies having their principal
  places of business in the US
• Securities and Exchange Commission civil
  enforcement actions against registered issuers
  (SEC v Diagnostic Products)

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Targets of Enforcement

• US companies and their subsidiaries
• Officers, directors, employees, conspirators (US
  v. King, 8th Cir., 2003)
• Shareholders
• Agents
• Foreign corporations and foreign nationals in a
  US territory

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Five Elements

• Corrupt payment (or offer to pay) money or
  anything of value, directly or indirectly
• To a foreign official, a foreign political party
  or party official, a candidate for foreign
  political office, an official of a public
  international organization, or any other person
  while knowing that the payment or promise will
  be passed to one of these.

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Five Elements

• Using an instrumentality of interstate commerce
  (telephone, etc.) by any person (US or foreign)
  or an act outside the US by a domestic concern or
  US person, or an act in the US by a foreign
  person in furtherance of the offer or promise to
  pay

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Five Elements

• To influence an official act or decision of the
  bribed person or to get that person to use
  influence
• In order to assist the company in obtaining or
  retaining business or to direct business to any
  person, or to secure an improper advantage.

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Examples Anything of Value

• Cash or cash equivalents
• Tangible and intangible property
• Useful information
• Promise of future employment
• College scholarship
• Sports equipment

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Corrupt Intent

• Payment must be intended to influence the
  recipient to misuse his official position in
  order to wrongfully direct, obtain, or retain
  business
• Done voluntarily and intentionally and with the
  bad purpose of accomplishing an unlawful end or
  an action by unlawful means. US v. Liebo, 8th
  Cir, 1991.

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Knowing Conduct

• Knowing that a violation will occur or is
  substantially certain to occur
• Firmly believing that a circumstance exists or
  that a result is substantially likely to occur
• No willful blindness, deliberate ignorance,
  or head in the sand.

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Liability for Acts of Third Parties

• Company authorized payment or knew it would be
  made
• Company consciously disregarded a high
  probability that the payment would be made

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Some Red Flags

• Agent refuses to agree in writing to FCPA
  compliance
• Unusual payment arrangements or large sums
• Country or official reputed to be corrupt
• Official or agent with poor books or records
• Involvement of undisclosed or unnecessary third
  parties
• Agent is also an official or closely related to
  one

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Exception for Facilitating Payments

• Statutory exception for facilitating (grease)
  payments to low-level foreign officials who
  perform routine governmental actions
• Examples permit processing, licenses, visas,
  police protection, power supply, cargo handling,
  inspection scheduling
• Reflect payments in accounts

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Two Affirmative Defenses

• Payment permitted by written laws of the foreign
  country (But what country has written laws
  permitting bribery?)
• Reasonable and bona fide expenditures
• Travel for promotion or demonstration of products
• Travel for execution or performance of a contract
• (But not a large, unaccountable expense account)

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Necessity Is Not a Defense
It is not a defense to argue that business cannot
be done in the foreign country without bribing
officials, or that competitors from other
countries are engaging in bribery.
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Record Keeping

• Maintain accounts and controls so that
• All transactions have managements general or
  specific authorization
• Transactions are recorded in conformity with GAAP
  and assets are accounted for (even petty cash)
• Access to assets is only in accordance with
  managements authorization
• Recorded assets are found periodically to conform
  to existing assets

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Penalities

• Criminal penalities
• 2 million for companies
• 100,000 per violation for individuals (not
  reimbursed by company), plus up to 5 years in
  prison
• Alternative Fines Act twice the gain or loss
  from the offense
• Civil penalty 10,000 per violation for
  companies and individuals
• SEC action gain to defendant or fine of
  5-100,000 for individuals and 50-500,000 for
  businesses
• Debarment for companies

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Recent Fines

• Titan Corporation - 28.4 million
• Monsanto - 1.5 million
• ABB - 10.5 million penalty and 5.9 million
  disgorgement
• InVision - 800,000 penalty and 600,000
  disgorgement
• Fines are highest for companies without effective
  compliance programs.

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Best Practices - 1

• FCPA compliance program and training
• Contracts requiring FCPA compliance, with
  periodic certification
• Payments by check or wire transfer, not cash or
  bearer instruments
• No use of unnumbered or offshore bank accounts
• Detailed, accurate books, records, and accounts,
  which are periodically audited

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Best Practices - 2

• Prior approval for travel, meals, and
  entertainment
• Screening applicants for jobs in foreign offices
  to exclude those who are public officials or are
  closely associated with a foreign government
• Due diligence in mergers and acquisitions
• Country research (through Transparency
  International, etc.)
• Avoidance of grease payments (none to get
  business proper accounting)

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Formal Opinion Procedure

• Written request for DOJ Formal Opinion under 28
  CFR 80.1 80.16
• Only for future transactions (for past
  transactions rely on leniency procedures)
• No hypotheticals

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Anti-Corruption Measures

• OECD Convention (36 signatories)
• Inter-American Convention (46 signatories)
• Council of Europe Criminal Law Convention (46
  signatories)
• Council of Europe Civil Law Convention (2003)
• UN Convention Against Corruption (118 signatories)

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Transparency International 2005 Index

• 1 Iceland 9.7
• 12 United Kingdom 8.6
• 14 Canada 8.4
• 17 United States 7.6
• 28 Israel 6.3
• 41 Italy 5.0
• 78 China 3.2
• 112 Palestine 2.6
• 128 Russia 2.4
• 159 Nigeria 1.9