SEPTEMBER/OCTOBER 2007
Fines and jail terms can result from violations of the U.S. Foreign Corrupt Practices Act, which forbids companies—and third parties who work for them—from making improper payments to FOREIGN officials.
BY JEREMY LEVIN
At ISRI’s convention in April, I led a workshop on the Foreign Corrupt Practices Act, a law that prohibits improper payments to foreign officials related to the conduct of international business. I mentioned the workshop to a scrap recycler sitting next to me on the shuttle bus to the final-night event.
“Ah, yes,” the fellow said, “U.S. companies can’t do that—no bribes.”
I was impressed—not everyone knows about this law.
“Yeah,” he continued, “they have to use middlemen for that stuff!”
The man does not actually conduct business overseas, so my relating this story does not put him at risk of prosecution. But he revealed a common and dangerous misperception about the FCPA: that U.S. companies doing business overseas can’t get in trouble for the actions of their agents, brokers, and sales representatives. The truth is they can, so companies must understand the law—or risk multimillion-dollar fines and even imprisonment for company officials.
Chipping Away at Corruption
Congress passed the FCPA in 1977 with the idea that the United States should not tacitly promote international corruption by allowing U.S. companies to pay bribes to obtain or retain overseas business. Business interests have criticized the legislation at times, saying it puts U.S. companies at a competitive disadvantage vis-à-vis their foreign competitors, who often can bribe with little or no fear of prosecution in their home countries. In 1999, the Organization of Economic Cooperation and Development implemented an international anti-bribery convention that 37 countries have since ratified, which promises to level the playing field somewhat. Still, corruption runs rampant in many parts of the world, and challenges abound even for companies trying to do the right thing.
Those in the scrap industry might have heard about last year’s investigation of a major West Coast scrap company for alleged FCPA violations. The U.S. Department of Justice and the Securities and Exchange Commission claimed that company officials arranged to pay kickbacks to managers of government-owned steel mills in China and improperly accounted for other alleged bribes to private operators in China and South Korea. The firm settled the case, paying more than $16 million in penalties and disgorgement of profits. It also has to employ an independent monitor of its FCPA compliance and internal controls for three years.
The Justice Department and SEC continue to step up their enforcement of the FCPA, increasingly investigating small businesses and individuals, not just major international corporations. Despite the reality that corruption is endemic in some parts of the world, it’s not enough for businesses operating in those regions to say, “Come on! How else are we going to do business in [Corrupt Country X]?” In fact, the government expects businesses operating in such regions to take additional precautions to prevent FCPA violations. It views rampant corruption as putting businesses on notice that they must take extra care to ensure that they, their employees, and their agents do not pay bribes.
What the Law Requires
All individuals and companies must follow the bulk of the FCPA’s anti-bribery provisions, which prohibit the payment of anything of value to a foreign official to obtain or retain business or to secure an improper advantage. The term foreign official includes an employee of a state-owned or partially state-owned entity, which is particularly important to note for companies doing business in China or the former Soviet republics, where there is considerable state investment even in supposedly private entities. Moreover, the SEC and Justice Department consistently take a broad view of what constitutes bribery “to obtain or retain business” or “to secure an improper advantage.”
Indeed, in a rare judicial opinion on the FCPA, the Fifth Circuit Court of Appeals also declined to read the statute narrowly. It found that bribes paid to officials to reduce a tax burden could be sufficiently related to obtaining or retaining business as to come within the scope of the law. Basically, the government is likely to view any bribe paid to a foreign official for a business purpose as actionable under the FCPA unless it comes within one of the specific statutory exceptions.
The FCPA sets additional requirements on public companies—those listed on U.S. securities exchanges. The books and records of these companies must accurately reflect the disposition of all assets (including money paid to foreign officials), and the companies must maintain certain internal controls to prevent the payment of bribes.
The law does allow two small exceptions. The first is “reasonable and bona fide expenditure[s] such as travel and lodging expenses.” Under this provision, it’s OK—within strict limits—to give small business gifts or to bring an official to a company facility. The travel must have a business purpose—that means no golf weekends, no family members along, and definitely no trips to Disneyland. Gifts must have a nominal value—say $100 or less—and it’s best if they also serve an obvious marketing purpose, such as by featuring a company logo.
The second exception is for small “facilitating payments” or “grease payments” given to facilitate “routine governmental action”—in other words, to receive services to which you are entitled and which you would receive if the officials were doing their job properly. For example, the few dollars you have to give an immigration official to get him to stamp your visa, or the $50 you need to pay to get the police to do their job, is not likely to get you in trouble. If you have to pay a small bribe to secure the performance of a duty the official is in fact obligated to perform under applicable law, that bribe is not forbidden by the statute.
Don’t expect the government to take a broad view of what constitutes a reasonable and bona fide expenditure or a facilitating payment. If you make a payment to obtain or retain business or to secure a benefit to which you are not entitled, or if the payment appears out of proportion (to the official’s salary, for example), there’s a good chance it’s actionable.
Third-Party Activity
“No problem,” you might be thinking. “My employees and I are honest. We don’t pay bribes to anyone, much less to government officials.” That’s great, but FCPA regulation extends beyond the boundaries of your payroll. It also prohibits payments to third parties—agents, joint venturers, consultants, subcontractors, sales representatives, or anyone else paid in connection with business operations—that a company made with the knowledge that the third party will use the money to bribe a government official. These are the “middlemen” the guy next to me on the convention shuttle was talking about.
Now you might be thinking, “Maybe that sales representative who gets 10 percent is paying somebody off—it’s possible—but I don’t know, and I don’t want to know.” In this situation, ignorance is not bliss. In a legal sense, knowledge can be actual or constructive. If you know a third party that you’ve hired is paying bribes, that’s actual knowledge. (If that’s the case, I suggest you put down this article and call your lawyer.) Here’s the tricky part, though: You still might have committed an FCPA violation if you should have known the third party was bribing someone—that’s constructive knowledge. If you fail to take reasonable steps to vet your third-party partners, the government might view you as having constructive knowledge of a violation. If you’re doing business in an area of the world known as corrupt, if you fail to ask all the right questions of the agent ahead of time through due diligence and/or auditing books and records, if you fail to secure warranties that the agent will not make unlawful payments, and then it turns out that your agent is paying bribes, the government is going to presume that you had constructive knowledge of the arrangements.
Looking for Red Flags
Companies are responsible for ensuring that third parties that help them do business overseas know about the FCPA and agree to abide by it, and that they do not exhibit “red flags” that suggest they might be paying government officials. The presence of red flags puts you on notice that the agent might be making improper payments—and gives you constructive knowledge of them if they exist.
The government does not define exactly what constitutes a red flag, but common sense can be a guide. First, consider your company’s financial arrangements with the third party. Commissioned agents and sales representatives who receive substantial percentage-based success fees are the highest-risk partners. Fixed-fee agents are less risky, and service providers such as distributors and freight forwarders are typically at the bottom of the risk ladder. That’s not to say that such companies never pay bribes (they do) or that the government would not hold you responsible if they do (it could). Indeed, one of the highest-profile recent FCPA cases involved a freight forwarder in Nigeria.
Then consider whether the country, region, or industry is known for corruption or has been in the news lately for corruption. (Check www.transparency.org, and see the map on page 84.) Remember, the existence of corruption where you are doing business means the government expects more, not less, diligence on your part.
What are other potential red flags? If the third party
• refuses to provide references, refuses to allow independent auditing, or otherwise does not have transparent books and records;
• will not reveal the ownership of corporations involved in a deal;
• has no office or staff;
• requests payment in cash;
• is related to or has other close ties to government officials;
• requires that you not expose his or her identity;
• is recommended by a potential foreign government customer;
• asks you to make payments to a party not involved in the transaction;
• receives a commission that is substantially higher than the going rate, disproportionate to the services provided, or high in relation to other professional salaries in the country;
• refuses to confirm that he or she will not make payments to government officials or to certify compliance in this respect;
• makes statements that indicate a lack of truthfulness or full disclosure; or
• makes statements that indicate a particular amount of money is needed to “get the business,” or guarantees success if you pay a certain amount.
Of course, you’re hiring the third party to get you business—that’s the whole point. But ensure that you understand the agent’s scope of work—what you’re paying for—and that the compensation is reasonable for that work. The above list is by no means exhaustive, but it highlights the types of points to keep in mind.
Pre-emptive Measures
In addition to looking out for red flags, companies can take some actions to protect themselves and their employees from unscrupulous business partners. For example, they can hire certain companies to perform due diligence on potential business partners. Services typically include gathering reference letters and information from public sources such as embassies and interviewing the third party on a regular basis throughout the relationship, at least every couple of years. Businesses can seek representations and warranties from third parties that attest that they will not make payments to government officials and will not violate the company’s code of business conduct. And they can train third-party business partners on the FCPA the same way they train their own employees.
Those measures might seem simple, but that’s not always the case. Because of cultural differences around the world, the task of explaining U.S. law to foreigners is not always straightforward. Information you collect about potential business partners might be ambiguous or incomplete. Due diligence investigations might reveal some minor suspicions, but nothing concrete. And how far should such investigations go?
These questions don’t have easy answers, but more information is always better. Companies that are serious about stepping up their third-party oversight are eliciting more specific information from agents, particularly at renewal; using detailed internal questionnaires to identify red flags; identifying and reporting all agents’ roles and responsibilities; and ensuring that company counsel fully understands all compensation arrangements. They’re asking what might seem like obvious questions about their partnerships, such as
• Is the fee reasonable?
• What is the agent doing for the firm?
• And, do I have reason to think the agent might be paying bribes?
Asking these and other difficult questions in the course of due diligence could have some painful results at first. Vetting business partners slows operations, and when a person or company does not hold up under such scrutiny, it can be an awkward and potentially costly setback. But at root, FCPA compliance is part of good corporate governance and good business management. In the current climate, it’s too risky to take chances. And in the long run, most businesses take pride and satisfaction in their full compliance with the law.
With that in mind, one of the best practices I’ve heard companies engage in is to make sales and operations personnel equally or more responsible for FCPA compliance than the company’s lawyers. Serious friction can occur when salespeople are trying to meet their monthly goals and the lawyers have to slow down a deal because of concerns about a third party. Increasingly, responsible companies are recognizing this tension and making compliance part of the sales team’s obligations. They emphasize at a companywide level how proper compliance—even if it can be an obstacle in the short term—helps the company preserve its reputation, reduce risk, and further its long-term goals.
Jeremy Levin is an associate in the litigation group at the Washington, D.C., office of Baker Botts, a law firm based in Houston. The viewpoints expressed in this article are those of the author, not of Baker Botts, and should not be interpreted as providing legal counsel.
Fines and jail terms can result from violations of the U.S. Foreign Corrupt Practices Act, which forbids companies—and third parties who work for them—from making improper payments to FOREIGN officials.