Companies need to be aware that both the Securities and Exchange Commission and the Department of Justice have stepped up enforcement of a federal law banning bribery of foreign officials, according to experts.
The Foreign Corrupt Practices Act has been in effect since the 1970s but only recently has it been aggressively enforced—due in part to self-disclosure provisions contained in The Sarbanes-Oxley Act of 2002.
Wrage
“This is not the DOJ kicking down doors and finding wrongdoing,” says Alexandra Wrage, president of TRACE International in Washington. She notes that there have been at least six FCPA cases in the last 10 months.
Pell
Owen Pell, a partner at White & Case in New York, attributes the accelerated enforcement of the FCPA to The Sarbanes-Oxley Act of 2002 and other factors. “Another reason is that, for the first time, there is an increased sensitivity among foreign governments to issues of corruption—the SEC has a lot more sources of information. It’s hearing about things from abroad they didn’t used to hear about,” Pell says.
In addition, the terrorist attacks of 9/11 have focused the government’s attention on “money going places that we can’t trace,” adds Pell. “[Authorities are] cracking down in general on money flow. They want businesses to keep better track and have guidelines.”
Pell notes that the potential liability for violating the FCPA is much greater than it was in the past. “Companies are now looking at disgorgement [as a potential sanction],” he says. “If you won a $20 million contract, the government might say that the proper measure of harm is not a $20,000 fine but $20 million—the amount of any ill-gotten gains.”
Potential fines and other penalties aren’t the only concerns. Wrage notes that FCPA issues have caused a number of mergers and acquisitions to unravel. “No company wants to buy itself an enforcement action,” she says. “Smaller companies have given fewer resources to [FCPA] issues—and they’re most likely to be acquisition targets. They don’t pay attention until it’s too late—until the due diligence team comes in and finds something." As a result, Wrage recommends that executives get proactive about policy enforcement. "Companies should do this on their own and do it now, especially if they think there’s an acquisition in their future.”
"Sweetheart Deals, Trips & Gifts"
Companies that get in trouble under the FCPA often do so without even knowing they’re running afoul of the anti-bribery law. “Some companies just do bad things and they mean to, but a lot of companies end up inadvertently in trouble,” says Wrage. “Generally, people don’t make large cash payments in brown paper bags these days—that’s not how bribes are made. Instead it’s sweetheart deals, trips, gifts.”
Travel and entertainment “remains a minefield for companies,” agrees Pell, noting that paying for an official to go on a fact-finding trip to a facility can easily turn from a legitimate expenditure into an FCPA issue. “When you bring [the official], that’s fine. But when you bring him, his wife, and his 15 kids, and there are side-trips to Orlando, that’s a problem.”
The law is “very vague on gifts and hospitality,” adds Wrage, noting that even a genuine business dinner can run into a gray area. “How lavish a dinner is too lavish? What if you lose control of the wine list at a business dinner in Paris and a government official starts ordering multiple bottles of $400 wine?”
Having a policy on gifts and hospitality is meaningless, says Wrage, if the policy simply states that permitted behavior should be reasonable. “There must be a policy that makes sense on the ground. ‘Only reasonable hospitality is permitted’ is not helpful guidance,” she says. “You have to make a decision where the signoff is going to be—whether you’re going to go to a dollar threshold or country-by-country standard. Make sure the policy can be interpreted without confusion by everybody on the ground. And then audit.”
Determining who is a public official is another area that causes problems. Pell notes that, in countries with socialized medicine, every doctor and every board member of a hospital is a public official—and if a company pays for a physician to attend a conference, that could be deemed a bribe.
The lines are also fuzzy in situations where the government controls industries that might appear private to an outside observer.
“It’s very complicated in China, for example, to figure out who is a public official," says Wrage. "You may be working with a company that seems to be privately owned and it’s not.” Other perils exist there too warns Wrage, noting that if you inadvertently bribe a Chinese public official you face not only problems under the FCPA but under Chinese law—where potential punishments include the death penalty.
Beware Of Independent Distributors
Pell agrees with Wrage that a key to avoiding FCPA liability is having robust audit functions. “Some companies routinely audit—send people from the U.S. to the foreign subsidiary even if there’s no indication of any red flags,” he says. “But a lot of companies don’t want to invest in that—which is penny-wise and pound foolish. You’re much more likely not to have the bad news later if you act now.”
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In terms of training employees, “make it non-legalese and make it very interactive—something that non-lawyers and non-senior managers can understand and get into,” Pell says, observing that FCPA compliance functions should be separate from the general ethics procedures. “It behooves public companies to have their anti-corruption policies be a separate defined piece of their training," he says. "The SEC increasingly wants to see that you have hotlines dedicated to FCPA complaints.”
And be aware that a company is liable for the actions of independent distributors. “You don’t insulate yourself from FCPA liability merely because you use a distributor,” says Pell. “The SEC and DOJ expect businesses to be screening their distributors. In fact, Pell argues the Commission and DoJ will not look kindly on companies that fail to screen such partners. "You have to have done a background check," he warns. "You have to find out how they operate in the local market—you better be prepared to vouch for your distributors.”
The FCPA is an issue that “companies are going to have to take seriously either voluntarily or involuntarily,” Wrage says. As a result, she would prefer to see companies get more proactive about education and enforcement. “It would be my preference for companies to take the reigns and put into place a sound effective compliance program voluntarily rather than go through the investigation, fine and oversight that a violation is going to bring," she says.
And Wrage argues that the fines aren't necessarily the worst part of an FCPA violation. "The disruption for business that’s brought about by that sort of investigation—it’s absolutely commercially crippling for a company," she says. "To get ahead of an issue voluntarily can be an unexpected expense, an inconvenience, but it isn’t commercially crippling.”
Pell also notes that companies that come clean with federal authorities are likely to be treated more leniently. “There is no question in my mind that the SEC does reward cooperation and openness if offered truly and forthrightly,” he says. “We have seen examples of companies going to the government" and disclosing problems, he says. "That’s the best way for the government to say, ‘Okay. We’re not going to punish you.’”
But Wrage warns that, though the SEC and DOJ claim that cooperation pays dividends, that may not always be true. “They certainly talk about giving a great benefit to a company that’s cooperative and has a robust compliance program. We’re not seeing that in the numbers, however.”
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