On November 14, 2012, the Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") jointly released much-anticipated guidance on the Foreign Corrupt Practices Act ("FCPA"), titled A Resource Guide to the U.S. Foreign Corrupt Practices Act ("Guide"). The Guide aims to provide the clarity and transparency long-requested by the business community and legal practitioners regarding the FCPA and enforcement efforts relating to the statute. During his Keynote Address at the 27th National Conference on the FCPA last week, Assistant Attorney General Lanny Breuer noted that the Guide is "the most comprehensive effort ever undertaken by the SEC or DOJ to explain our approach to enforcing any statute" and reflects the fact that the "FCPA is a reality companies know they must live with and must adjust to." 27th National Conference on the FCPA (Nov. 16, 2012).
The Guide collects and synthesizes the enforcement agencies’ positions on a wide variety of FCPA-related risks and topics, and provides practical tips for companies seeking to design appropriate corporate compliance policies. While the Guide may not provide the direct or specific statutory interpretations that some commentators were hoping for, it remains an essential tool for U.S. businesses, foreign officials, and non-governmental officials who may be impacted by the FCPA.
Highlights of the Guide
In 120 heavily-footnoted pages, the Guide includes a discussion of key FCPA provisions and focuses on the need to implement robust compliance programs tailored to a company’s particular risk factors. The Guide also highlights the emphasis regulators place on timely and thorough internal investigations and voluntary self-disclosure.
The Guide also provides a succinct and user-friendly summary of the key provisions of the FCPA, including an extended discussion of the Act’s anti-bribery provisions; a plain English summary of key definitions in the Act (such as what "corruptly" means for purposes of payments to a government official); and a helpful summary of the Act’s accounting provisions and internal control requirements, as well as a short discussion of auditor obligations.
Corporate Compliance Programs
Perhaps the most useful section of the Guide is its discussion of the "Guiding Principles of Enforcement," starting with an overview of the importance of corporate compliance programs.
While companies will necessarily have different compliance needs based on their size and the particular risks associated with their businesses, the Guide reiterates several key factors that are currently taken into consideration when charging decisions are made under the FCPA:
- the critical importance of the "tone at the top";
- the need for a strong employee code of conduct to form "the foundation upon which an effective compliance program is built";
- assigning appropriate individuals to maintain oversight over the company’s compliance program and affording those responsible for compliance sufficient authority, autonomy, and resources;
- conducting an appropriate risk assessment in developing a compliance program, noting that companies often run into problems with the "[o]ne-size-fits-all" approach;
- the importance of proper FCPA compliance training, as well as disciplinary measures for those employees found in violation of company policy; and
- whether there is a mechanism for an organization’s employees and others to report suspected or actual misconduct or violations of the company’s policies on a confidential basis and without fear of retaliation.
Self-Reporting and Cooperation
The guidance reiterates the DOJ’s and SEC’s previously-stated position that these agencies place significant weight on self-reporting in determining the appropriate resolution of FCPA matters. In criminal matters, the Guide confirms the importance of the factors listed in the U.S. Sentencing Guidelines, including self-reporting of violations, as key factors in making enforcement decisions. The Guide also affirms the importance of the Seaboard factors as central to the SEC’s decision-making process, again with an emphasis on the importance of self-reporting. A company’s cooperation, in turn, is critical to the decisions of both the DOJ and SEC whether to grant leniency and potentially decline to take enforcement action.
To emphasize the point that self-disclosure plays a critical role in enforcement decisions by federal regulators, the Guide discusses six anonymous examples of recent DOJ and SEC declined prosecutions – each involving scenarios where a company voluntarily disclosed its conduct to regulators.
Reasonable & Bona Fide Expenditures
With respect to "bona fide" expenditures on behalf of foreign officials (expenses associated with the promotion of products and services or the execution of existing contracts), the Guide sets forth a list of permitted activities, including travel and expenses to visit company facilities, training, and product demonstration or promotional activities. It also contains a non-exhaustive list of "safeguards" for businesses to consider implementing, including:
- Do not select the particular officials who will participate in the party’s proposed trip or program, or if you do select them, do so based on pre-determined, merit-based criteria.
- Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of receipts.
- Do not advance funds or pay for reimbursements in cash.
- Ensure that any stipends are reasonable approximations of costs likely to be incurred and/or that expenses are limited to those that are necessary and reasonable.
- Ensure that costs and expenses on behalf of foreign officials will be accurately recorded in the company’s books and records.
Gifts and Entertainment Expenses
Similarly, the Guide removes some of the ambiguity that currently exists as to gifts and entertainment expenses. The guidance states that gifts and entertainment expenses of nominal value may be permitted, provided that they are not intended to influence any government officials.
- A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other, and there is often a practical need for businesses to offer such gifts. However, such gifts must be given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law.
- Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC. The DOJ’s and SEC’s anti-bribery enforcement actions have focused on small payments and gifts only when they comprise part of a systemic or long standing course of conduct that evidences a scheme to corruptly pay foreign officials to obtain or retain business.
However, it is clear that the government also has not established any type of safe harbor for gifts, entertainment, and travel expenses below a specific threshold. To the contrary, the Guide makes clear that even a nominal expense could violate the FCPA in certain circumstances.
In summary, the guidance underscores that in judging the propriety of such expenses, the government has taken, and will continue to take, a fact-specific approach that focuses on whether the expense has an improper purpose. This approach, although perhaps sensible from a regulatory perspective, continues to make it difficult for companies to establish clear, bright-line rules. Overall, such expenses will continue to be a nettlesome topic that will require careful attention from compliance professionals and legal counsel.
Unfortunately, as with gifts and entertainment, the Guide does not offer the clarification many hoped for regarding the government’s expansive definition of "instrumentality" under the FCPA, and instead makes clear that federal regulators still take the position that the employees of any state-owned or state-controlled enterprise (such as state-owned utility companies, hospitals, and universities) can be "foreign officials" for FCPA purposes. The breadth of who (or what) can constitute a "foreign official" will continue to be a challenge for businesses and their counsel.
Mergers & Acquisitions
The Guide emphasizes the importance of performing adequate due diligence on acquisition targets to avoid liability under the FCPA, and notes that even if such pre-acquisition diligence is not possible, companies may still be rewarded if they choose to conduct post-acquisition due diligence. Likewise, after acquisition, it is equally important that the acquired company is promptly incorporated into the acquiring company’s compliance programs.
Third-Party Due Diligence
The DOJ and SEC emphasize the importance of U.S. companies knowing their business partners in foreign jurisdictions, and provide the following guidance regarding risk-based due diligence protocols for assessing prospective business partners:
- Understand the qualifications and associations of third-party partners, including their business reputation, and relationship, if any, with foreign officials.
- Understand the business rationale for including the third-party in the transaction.
- Monitor the third-party relationships on an ongoing basis.
In addition to these diligence precautions, the Guide reiterates that, in considering the effectiveness of a company’s compliance program, regulators will assess whether the company communicated its own compliance measures and a commitment to ethical and lawful business practices to the third-parties with whom it conducts business.
While it does not present any departures from the enforcement agencies’ previously-stated positions, the Guide reaffirms and synthesizes a number of key points that U.S. companies conducting business internationally should keep in mind:
- U.S. regulators view the FCPA as a critical tool for fighting trans-national bribery and corruption, and the statute will be rigorously enforced by both the DOJ and the SEC in the coming years.
- Effective, individually-tailored compliance programs are of critical importance in detecting and preventing FCPA violations, and federal regulators will place great weight on the adequacy of such programs when deciding what, if any, enforcement actions to take under the FCPA.
- The DOJ and SEC strongly emphasize the importance of self-reporting, along with cooperation and remedial efforts, in determining whether an enforcement action will ultimately be pursued against a company for FCPA violations.
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With substantial experience in helping companies handle FCPA training, compliance, and investigations, as well as transactional counseling and due diligence, we are available to answer any questions you may have, including addressing the heightened risks faced by companies with global operations. If you would like additional information, please contact Todd Cronan or Jennifer Chunias in the Boston office, Rich Strassberg, or William Harrington in the New York office, or the Goodwin Procter attorney with whom you typically consult.