By Jeremy Baker
Design professionals tempted by the lure of overseas work need to understand the Foreign Corrupt Practices Act (“FCPA”). FCPA compliance is an important loss prevention issue. While exchanging gifts and things of value is a way of life in many countries, U.S. anti-bribery laws apply to the overseas operations of U.S. companies. The FCPA does not prohibit certain “facilitating” payments to expedite routine action. However, corruptly paying “anything of value,” directly or indirectly, to keep or secure business has led to huge losses for some U.S. companies — and prison for their executives. The line between legal “grease” payments and illegal bribery is thin. This article discusses what international design firms must know about U.S. anti-bribery laws and highlights the importance of an FCPA compliance program.
Why Should Design Firms Be Concerned?
Employees of U.S. companies operating in foreign countries must obey the requirements of the FCPA. A wave of Department of Justice and Securities and Exchange Commission enforcement actions under the FCPA is currently underway.
Moreover, since 1998, most other countries have signed anti-bribery treaties and enacted laws to make bribery of foreign officials criminal. Those laws are being increasingly enforced. For example, China — a large consumer of U.S. design services — is only now starting to enforce its own strict anti-bribery laws.
Illegal bribery can take forms other than cash payments. A prominent U.S. bank is being investigated for hiring children and other relatives of well-connected Chinese politicians in hopes of steering business to the firm. Likewise, U.S. and Chinese authorities are investigating a large pharmaceutical company for using some 700 foreign travel agencies to indirectly pay $490 million to health care professionals to boost sales.
What Does the Foreign Corrupt Practices Act Prohibit?
The FCPA prohibits:
- Corruptly paying “anything of value,” directly or indirectly,
- To a “foreign official”
- To influence an official act or decision of such foreign official or secure any improper advantage
- In order to “obtain or retain” business for or with, or direct any business to, any person.
The phrase “anything of value” is broadly interpreted.It can include discounts on goods, valuable gifts, use of equipment and facilities, vacation transportation and lodging, school tuition for dependents, promises of employment and insurance benefits. Business-related functions such as lunches and other forms of entertainment are generally permissible. However, care and judgment must be exercised.The entertainment or gift must not be unreasonable or excessive.
The term “foreign official” includes any officer or employee of a foreign government, or of a department, agency or instrumentality of a foreign government. The term includes officers and employees of state-owned enterprises. The FCPA also prohibits payments to any foreign political party, political candidate, or party official (such as the Communist Party in China).
The phrase “obtain or retain business” is also interpreted broadly, and goes beyond the mere award or renewal of a contract. The phrase encompasses payments to avoid or reduce foreign taxes and customs duties, receive government product registrations, or affect legislation in other countries. Note that the “business” to be obtained or retained does not need to be with a foreign government or instrumentality.
Legal Grease v. Illegal Bribery
The FCPA does not prohibit making a “facilitating” payment to a foreign official to expedite or secure the performance of a “routine governmental action.” “Routine governmental action” is defined as relatively minor, ministerial acts such as providing utility service, loading and unloading cargo, protecting perishable products, or scheduling inspections.
However, legal “grease” is very limited. For example, a Texas company was fined $26 million for paying $2.1 million to Nigerian customs officials to obtain preferential treatment in the customs process. A prominent U.S. chemical company was fined $325,000 in a civil action brought by the SEC because its Indian subsidiary had paid bribes to an Indian government official to “expedite” the approval and registration of pesticide products for sale in India.
Indirect Payments Are Illegal
A U.S. company cannot hide from liability by letting its foreign agent pay the bribes. It is unlawful to make a payment to an agent or intermediary, “knowing” that the money will be paid, directly or indirectly, to a foreign official to influence his act or decision. The concept of "knowing" includes "conscious disregard" and "willful blindness."
Much FCPA enforcement activity has resulted from the activities of foreign subsidiaries of U.S. companies or foreign nationals employed by U.S. companies. Foreign agents and consultants engaged by U.S. companies and their foreign subsidiaries to assist in business activities abroad frequently commit FCPA violations.
U.S. companies who joint venture with local “partners” (i.e., co-venturers) or retain local sales agents to do business abroad must be cautious. Due diligence is essential. U.S. companies must check the backgrounds of local partners or agents and monitor their activities to ensure FCPA compliance.
“Red flags” signaling possible bribery risks include unusual financial arrangements requested by the foreign agent, unusually high commissions, and a lack of transparency in expenses and accounting records of the foreign partner. A “recommendation” by an official of the potential government customer that you go through a particular co-venturer, agent or consultant is also a red flag, as is an obvious lack of qualifications or resources on the part of the local partner.
The FCPA contains detailed record-keeping and internal accounting requirements for public companies. While these statutory rules do not directly apply to privately-held companies, other statutes (such as the Internal Revenue Code) prohibit false entries. From a compliance perspective, good accounting practices can detect and deter improper payments.
Risks and Penalties
U.S. companies may be fined up to $2 million (or more) for each violation of the FCPA anti-bribery provisions (and $5 million for violations of the accounting provisions). For knowing violations, company officers and employees are subject to imprisonment of up to 5 years and fines up to $250,000 for each violation of the FCPA. Additionally, under the Alternative Fines Act, criminal fines imposed under the FCPA may be increased to twice the gain realized through the offense or twice the loss inflicted on other parties.
An FCPA violation may also give rise to a private suit against the company by an injured competitor or to actions under other federal or state laws. Especially troubling is that contractors and suppliers, including design firms, can be debarred from U.S. government work if they are convicted of violating the anti-bribery provisions of the FCPA.
Advice: Implement an FCPA Compliance Program
International design firms should implement programs to help their employees comply with the FCPA. The absence of what prosecutors deem an “effective” compliance program — as set forth in the U.S. Sentencing Guidelines — would diminish the chances of being granted a non-prosecution agreement or any benefit in the sentencing process. Prosecutors are unsympathetic to the claim that an FCPA compliance program is too expensive or too difficult to implement.
An effective FCPA compliance "program" involves creating a permanent infrastructure and performing several important tasks:
- Commitment of the Board of Directors and senior management to a "culture of compliance" and adoption of an appropriate corporate policy statement.
- Appointment and training of a compliance officer and of a compliance committee or team with representation from all offices and practice groups.
- Preparation and distribution of a compliance manual targeted to the company and its (unique) risks.
- Training of officers, directors, managers, and (as appropriate) employees on the contents of the manual.
- Logging and tracking of training to ensure that all required personnel have attended.
- Monitoring and auditing to ensure that the training is effective (including by written or online testing).
- Establishment and implementation of a toll-free "hotline" for employees to report bribes or other improper activity to the company on an anonymous basis.
- Monitoring and auditing to ensure that all reports to the "hotline" are properly logged, investigated, and resolved including by means of sanctions and/or reporting to the Department of Justice, as appropriate.
A U.S. company that fails to make a good faith effort to implement an FCPA compliance program that includes substantially all of the aspects addressed above is not likely to receive credit from prosecutors for trying to avoid violations. By contrast, prosecutors have given credit to companies with effective FCPA compliance programs.
The FCPA can jeopardize a firm’s bottom line and the lives of its employees. Executives of U.S. design firms work would be wrong to assume that they cannot be blamed, or prosecuted, for the illicit acts of their subsidiaries or agents performed on the other side of the globe. U.S. law makes top management responsible for the acts of their employees. FCPA compliance is a critical loss prevention issue for international design firms.