Compliance Under the Foreign Corrupt Practices Act (FCPA)

The Foreign Corrupt Practices Act (FCPA) is a broad but largely misunderstood legislation that underlies multiple federal investigations every year. If your business is engaged in (or gearing up to engage in) transactions carrying FCPA implications, compliance should be a top priority.

For companies with operations abroad and foreign interests, the importance of FCPA compliance cannot be emphasized enough. The FCPA applies to a wide range of corporate and commercial transactions, and companies’ compliance requirements extend to their accounting and disclosure practices, too. It is enforced by the U.S. Department of Justice (DOJ) as well as the U.S. Securities and Exchange Commission (SEC).  While a lot of company owners and executives presume that the FCPA is not an issue due to their efforts to avoid any transactions that might look to be “corrupt,” the statute’s sweeping applicability indicates that companies can face exposure under a broad array of different scenarios commonly coming under FCPA compliance in general.  Some situations may result in the need for a FCPA defense attorney.

As it was originally enacted, the FCPA covers transactions between U.S. businesses and foreign government officials. That said, amendments to the statute have significantly increased its purview to foreign entities engaging in “corrupt” transactions within U.S. borders. 

The Department of Justice summarized it thusly:

“Since 1977, the anti-bribery provisions of the FCPA have applied to all U.S. persons and certain foreign issuers of securities. With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.

“The FCPA also requires companies whose securities are listed in the United States to meet its accounting provisions. . . . These accounting provisions, which were designed to operate in tandem with the anti-bribery provisions of the FCPA, require corporations . . . to (a) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain an adequate system of internal accounting controls.”

The SEC explains further :

“The [FCPA] generally prohibits the payment of bribes to foreign officials to assist in obtaining or retaining business. The FCPA can apply to prohibited conduct anywhere in the world and extends to publicly traded companies and their officers, directors, employees, stockholders, and agents. . . .

“The FCPA also requires issuers to maintain accurate books and records and have a system of internal controls sufficient to, among other things, provide reasonable assurances that transactions are executed and assets are accessed and accounted for in accordance with management’s authorization.”

How Do I Maintain FCPA Compliance?

Taking the scope of the FCPA into account, what does it take for an organization to stay FCPA compliant? In particular, when is compliance necessary, and what steps need to be taken in avoiding undesirable scrutiny from the DOJ and SEC?

1. Does the FCPA Applies to Your Company?

Step one toward making informed choices about FCPA compliance is to figure out whether compliance is a requirement for your company. As detailed in the FCPA Resource Guide, which is jointly published by the DOJ’s Criminal Division and the Enforcement Division of the SEC, the FCPA is applicable to three types of entities, or “persons”:

“Issuers” – A company can be classified as an “issuer” under the FCPA if either (i) it is listed on a U.S. stock exchange, or (ii) it is required to enter SEC reports in connection with over-the-counter trading activity.

“Domestic Concerns” – A “domestic concern” is a person or business entity whose principal place of business is in the United States or is organized under U.S. federal or state law.

Certain Other Persons in the U.S. – The FCPA also pertains to any foreign individual or entity who “engage[s] in any act in furtherance of a corrupt payment (or an offer, promise, or authorization to pay) while in the territory of the United States.”

2. Figuring Out Whether Transactions Raise FCPA Implications

Entities that fall under the FCPA’s jurisdiction, the ensuing question that to be answered is if a particular transaction bears FCPA implications. As detailed in the DOJ’s and SEC’s FCPA Resource Guide, “[t]he FCPA applies only to payments intended to induce or influence a foreign official to use his or her position ‘in order to assist . . . in obtaining or retaining business for or with, or directing business to, any person.’ This requirement is known as the ‘business purpose test’ and is broadly interpreted.”

Some examples of transactions that may set off FCPA enforcement under the “business purpose test” include payments that are unlawful and are made for the purpose of:

Obtaining or retaining government contracts

Securing favorable tax treatment

Eliminating customs duties or circumventing regulatory requirements

Preveningt competitors from entering the market

Winning a contract, gaining access to non-public bid information, or otherwise influencing the procurement process

Influencing the outcome of legislative, regulatory, or judicial proceedings

While a bribe can be in the form of a monetary payment, the FCPA covers any transactions involving “anything of value.”.  Meals, travel, event tickets, physical gifts, securities, “free” access to venues and benefits, and loans are a few examples of things of value that can trigger FCPA enforcement. In a number of cases, the DOJ and SEC have re-classified payments structured as commissions and consulting fees as bribes that are unlawful and in violation of the FCPA.

3. Establishing Procedures, Policies, and a Top-Down Culture of Compliance

We have made it clear that the FCPA is very broad in its scope.  Just about any transaction involving a foreign official can potentially trigger DOJ and/or SEC scrutiny. Due to this fact, companies involved in overseas dealings should adopt FCPA compliance programs proactively. Their programs should be designed to make certain that executives and personnel at all levels of the organization avoid making and accepting offers that carry the potential to end up in civil or criminal enforcement. In general, an effective FCPA compliance program should consist of:

Documentation of  FCPA Compliance Policies and Procedures

For the purpose of  establishing compliance, companies should adopt standalone FCPA compliance policies and procedures. Just as critical as establishing compliance, if not more so in certain respects, implementing effective FCPA compliance documentation will also assist in  demonstrating good-faith compliance efforts and overcoming any allegations of willful non-compliance in the event of a DOJ or SEC investigation.

Developing a Culture of Compliance: A “Top Down” Approach

Emphasis on the criticality of FCPA compliance should start from the top and make its way downward. Communications should be created and distributed in order to demonstrate this top-down approach, and companies should make additional efforts to develop and nurture a company-wide culture of compliance.

Organization-Wide Training in FCPA Compliance

Creating a company-wide culture of compliance, and demonstrating compliance to the DOJ and SEC, also necessitates compliance training organization-wide FCPA. Training programs work well if they are custom-tailored to your company’s unique business operations and to the roles of individual employees’ in ensuring compliance in foreign transactions. This is so not only for board members, executives, and other high-level staff members, but also for  any other employees who could potentially be involved in communications with foreign officials, “intermediaries,” or other third parties.

FCPA Compliance Review, Remedies, and Enforcement for Third-Party Contracts

When working with third parties in executing foreign investments and other transactions, an important aspect of FCPA compliance entails ensuring that these third parties are held accountable for compliance also. While businesses can – and should – place warranties, indemnification clauses, and other provisions in agreements so that they apportion liability for statutory violations appropriately, it might also be necessary to carry out (and document) due diligence so as to determine whether or not third parties have sufficient compliance policies and protocols in place.

Internal Transactional and Accounting Controls

Any time a potential  risk exists of payments being exectutred in violation of the FCPA, companies need to implement internal transactional and accounting oversight measures that are designed to both (i) prevent unlawful payments whenever possible, and (ii) identify illegal transactions as soon as possible after they occur. In addition to creating and putting internal compliance policies and procedures in place, our laywers can assist with the establishment of such controls.

Internal Investigations and Audits

In keeping with to other corporate compliance initiatives, an effective FCPA compliance program also must include internal auditing protocols and procedures for promptly conducting appropriate investigations internally. Should an audit or investigation ever reveal a potential FCPA violation, remedial action needs to be taken right away. What is required in terms of remedial action will be highly dependent upon the particular facts and circumstances involved.

DOJ and SEC Investigation Preparedness

In closing, a solid program for FCPA compliance should have an immediate action plan for responding to a DOJ or SEC investigation. Everything from whistleblower complaints to questions about the contents of companies’ public filings should be considered.  Indeed, FCPA investigations can have numerouss potential triggers. Figuring out what triggered an investigation is a critical early step toward executing a winning defense, and this will usually involve making contact with federal agents who are assigned to the inquiry. While there exist measures that company leadership and personnel can (and should) take immediately, all communications with the DOJ and SEC should be dealt with by the company’s FCPA compliance attorneys.