American Bar Association

Forum on the Construction Industry


 

 

 

 

Recognizing and Defending Against

Foreign Corrupt Practices Act Violations

 

 

 

 

 

Don Zarin

Holland & Knight

Washington, D.C.

 

Peter Evenson

Tuggle Duggins & Meschan

Greensboro, N.C.

 

 

 

 

 

 

April 24-26, 2008

La Quinta Resort and Club – Palm Springs, California

 

 

This document is reprinted with permission from Chapters 2, 4 and 8 of Doing Business Under the Foreign Corrupt Practices Act, by Don Zarin. Published by Practising Law Institute. Copyright © 2008. All rights reserved.

 

 

©2008 American Bar Association

 

 

 


TABLE OF CONTENTS

 

Introduction:   The Foreign Corrupt Practices Act

 

Section 1:  The Foreign Payments Provisions

§  1:1   U.S. Companies and U.S. Citizens

            §  1:1.1            Issuers

            §  1:1.2            Domestic Concern

            §  1:1.3            Officer, Director, Employee, Agent, or Stockholder

            §  1:1.4            Foreign Natural and Legal Persons

§  1:2   Jurisdiction

            §  1:2.1            Instrumentality of Interstate Commerce

            §  1:2.2            Nationality Jurisdiction

§  1:3   Corruptly

§  1:4   Foreign Official

            §  1:4.1          Officer or Employee

            §  1:4.2          Agency or Instrumentality of Foreign Government

            §  1:4.3          Acting For or On Behalf Of

            §  1:4.4          Public International Organization

§  1:5   Foreign  Political  Party  or  Official  Thereof or  Any  Candidate for

             Foreign Political Office

§  1:6   Anything of Value

§  1:7   Payments to Third Parties

§  1:8   Knowledge Standard

            §  1:8.1          Repeal of “Reason to Know” Standard

            §  1:8.2          Current Definition of Knowledge

§  1:9   Standard of Authorization

§ 1:10  Influencing or Inducing an Act or Decision of a Foreign Official

§ 1:11  Obtaining or Retaining Business or Directing Business to Any Person

§ 1:12  Conclusion

 

Section 2:  Fines, Penalties and Other Sanctions

§  2:1   Violation of FCPA

            §  2:1.1          The Accounting Provisions

            §  2:1.2          The Bribery Provisions

§  2:2   Ineligibility for Government Programs

            §  2:2.1          U.S. Government Procurement

            §  2:2.2          Export Licenses for Defense Articles

§  2:3   Tax Consequences

            §  2:3.1          Disallowance of Deductions

            §  2:3.2          Inclusion of Unlawful Payments in Taxable Income


 

Introduction

 

            The Foreign Corrupt Practices Act (FCPA or Act) is a by-product of the Watergate scandal of the 1970s.  It has drawn more attention in recent years as the likelihood that information regarding illicit payments made by a U.S. company or an affiliated third party in violation of the Act will be brought to the attention of U.S. enforcement authorities has increased.  This, coupled with the expansion of foreign trade by U.S. companies, makes it imperative that counsel for multinational construction companies (or those companies wishing to expand operations into foreign markets) be familiar with the provisions of the Act.

            The FCPA has two substantive parts:  (1) the accounting provisions, which impose certain accounting and record-keeping requirements upon publically held U.S. companies; and (2) the foreign payments provisions, which make it illegal for any U.S. company or U.S. citizen, national, or resident to bribe a foreign official for the purpose of obtaining or retaining business.  This overview focuses on the foreign payments provisions as these present the greatest exposure to non-publically held construction companies working outside of the United States.

            Specifically, the FCPA prohibits:

 

(1)        U.S. corporations or any officer, director, employee, agent or stockholder acting on behalf of such corporation, or

(2)        U.S. citizens, nationals, or residents from

(3)        using an instrumentality of interstate commerce

(4)        corruptly

(5)        in furtherance of an offer, payment, or promise to pay or authorization of the payment of

(6)        anything of value

(7)        to any foreign official,

(8)        foreign political party or official thereof or any candidate for foreign political office, or

(9)        to any person while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official,

(10)      for purposes of influencing any act or decision of such foreign official, inducing such official to do or omit to do some action, or induce such official to influence any act or decision of such government,

(11)      in order to assist in obtaining or retaining business, or directing business to any person.

            In addition, the FCPA was amended in October 1998 (hereinafter “the 1998 Amendments”) in order to conform the FCPA to the Organization for Economic Co-operation and Development (OECD) Convention.  The 1998 Amendments made several important changes:

(i)         they applied the nationality basis of jurisdiction to U.S. nationals and U.S. companies, and

(ii)        they extended the application of the FCPA to foreign persons and entities, including foreign subsidiaries of U.S. companies, which commit any act in furtherance of a prohibited payment while in the territory of the United States.

            By its terms, the FCPA applies to U.S. corporations and their officers, directors, employees, or agents acting on their behalf.  It generally does not apply to foreign corporations, unless some act in furtherance of the bribe occurs within the territory of the United States.  For example, it does not “cover payments by foreign nationals acting solely on behalf of foreign subsidiaries where no acts by the foreign person in furtherance of the bribe occur within the territory of the United States and where the issuer, reporting company, or domestic concern had no knowledge of the payment.”  Accordingly, any bribe which is wholly conceived of and executed by a foreign company outside of the territory of the United States, including a foreign subsidiary of a U.S. corporation, without the participation of the U.S. corporation, falls outside the purview of the FCPA.

            On the other hand, the legislative history makes very clear that a U.S. company that participates in a bribery scheme abroad, directly or indirectly through any other person or entity, is subject to liability under the FCPA.  The notion of participation indirectly through a foreign entity often creates the greatest uncertainty.  For example, liability may attach where a U.S. corporation “authorizes” a third party to make an illicit payment, or pays anything of value to a third party, “knowing” that all or a portion of such thing of value will be offered, given, or promised to a foreign official to obtain or retain business.  The “third party” may include foreign sales representatives or any other intermediaries such as foreign distributors, consultants, independent contractors, foreign subsidiaries, or other legal entities.  Furthermore, the FCPA’s standards of knowledge and authorization impose liability even in the absence of actual knowledge or explicit authorization.

Section 1:  The Foreign Payments Provisions

 

§  1:1   U.S. Companies and U.S. Citizens

 

In enacting the FCPA, Congress intentionally limited its jurisdictional scope principally to U.S. entities. During its deliberations, the conference  committee,  recognizing  the  jurisdictional,  enforcement, and  diplomatic  difficulties  inherent  in  extending  U.S.  law to  foreign entities  such  as  subsidiaries of  U.S. companies,  opted  against  the application of the Act to such foreign entities.1  Congress did, however, include  U.S.  citizens,  nationals,  or  residents who engage in illicit conduct within the jurisdictional reach of the FCPA, even if they are serving  merely  as  employees  of  foreign  companies.  Similarly, foreign nationals who serve as officers and directors, and in certain circumstances, employees or agents of U.S. companies, may be subject to the application of the FCPA.1.1

Specifically, the FCPA applies to:

 

(a)        issuers;2

 

(b)        domestic concerns;3  or

 

(c)        any  officer,  director,  employee,  or  agent  of  such  issuer  or    domestic concern, or any stockholder thereof acting on behalf of such issuer or domestic concern.

      § 1:1.1       Issuers

 

Issuers4 that have a class of securities registered pursuant to section 12 of the Exchange Act or that are required to file reports under section 15(d) of the Exchange Act5 are subject to the FCPA.  This includes several subsets of entities:

     Issuers  with  a  class  of  securities  registered  on  a  national securities  exchange  pursuant  to  section  12(b)  of  the  Exchange Act

     Issuers  with  a  class  of  equity  securities  listed  on  the  National Association   of   Securities   Dealers   Automated   Quotation (NASDAQ) System;

     Issuers that have $10 million or more in assets on the last day of their  most  recent  fiscal  year  and  that  have  a  class  of  equity securities  held  by  500  or  more  persons,  with  the  exception  of issuers  specifically  exempt  under  section  12  or  the  rules  thereunder or that have received an exemption from the SEC;6

     Foreign private issuers whose securities are registered under the Exchange Act;7

     Banks  and  other  financial  institutions  that  file  Exchange  Act reports  with  the  Office  of  the  Comptroller  of  the  Currency (OCC)  or  other  appropriate  financial  institution  agency,  also known as “section 12(i) companies”;8  and

     Issuers that offered securities to the public using the vehicle of a registration statement and prospectus pursuant to the Securities Act  of  1933—but  only  during  the  one-year  “duty  to  update” period following the offering (“section 15(d) registrants”). 9

      § 1:1.2       Domestic Concern

 

The term “domestic concern” means:

 

(A)       any individual who is a citizen, national, or resident of the United States;

            and

(B)       any corporation, partnership, association, joint-stock company,  business  trust,  unincorporated  organization,  or  sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State  of  the  United  States  or  a  territory,  possession,  or commonwealth of the United States.10

The  application  of  the  FCPA  was  originally  limited  to  business enterprises organized in the United States or which have their principal  place  of  business  there.  It did not cover foreign companies, including foreign subsidiaries of U.S. companies. The legislative history confirms that only U.S.  (and  not  foreign)  companies  were covered  by  the  FCPA.11   But  U.S. citizens,  nationals,  and  residents, even those employed by foreign companies, were and are subject to the FCPA’s jurisdiction if they engage in illicit payments abroad.12

An interesting issue was whether a foreign corporation which is doing business in the United States through a branch office and whose branch office uses an instrumentality of interstate commerce to make an illicit payment to a foreign official would be subject to the FCPA.  Since presumably the foreign corporation neither is organized under the laws of a state of the United States,13 nor has its principal place of business in the United States,14 it would appear to fall outside the purview of the Act,15  However, the 1998 amendments to the FCPA, which  extends the FCPA  to  foreign  corporations and  foreign nationals who commit any act in  furtherance of a prohibited payment while in the territory of the United States, render this issue moot.15.1

      § 1:1.3       Officer, Director, Employee, Agent, or Stockholder

 

            The application of the FCPA also extends to the officers, directors, employees, agents, or stockholders of U.S. companies who engage in illicit conduct on behalf of a U.S. company. This may include non-U.S. nationals.

            In  imposing  liability,  the  FCPA  originally  distinguished  between foreign nationals who were officers, directors, or stockholders of U.S. companies  and  those  who  were  employees  or  agents  of  U.S. companies. The FCPA reached foreign national officers or directors of a U.S. company, or a foreign national stockholder acting on behalf of a U.S. company.16  In  contrast,  foreign  national  employees  or  agents17  of  a U.S. company were subject to criminal liability18 under the FCPA only if  such  persons  were  “otherwise  subject  to  the  jurisdiction  of  the United States.”19

            The  distinction  between  officers  and  directors,  on  the  one  hand, and  employees  and  agents  on  the  other  hand,  had  its  origins  in  the so-called Eckhardt amendment. Originally, the FCPA required a finding that the U.S. company violated the FCPA as a predicate  to  any liability  for  the  actions  of  the  employee  or  agent  of  that  company.20 This requirement was repealed in the 1988 Amendments. As a result, an employee or agent of a U.S. company can be held liable under the FCPA, even if the U.S. company  is acquitted or  never charged  with  an offense.21  Presumably,  this  also  applies  to  foreign  nationals  who  are employees or agents of a U.S. company.22

            The 1998 amendment to the FCPA eliminated the differing treatment for foreign national employees or agents of a U.S. company, and deleted the phrase “otherwise subject to the jurisdiction of the United States.” As a result, all employees or agents of U.S. businesses will be subject to both civil and criminal penalties.22.1  In addition, if a foreign corporation’s securities are listed on a U.S. stock exchange, its foreign national employees may be subject to the jurisdiction of the FCPA as well.22.2

      § 1:1.4       Foreign Natural and Legal Persons

 

            The  OECD  Convention  calls  on  each  member  State  to  establish jurisdiction  over  the  bribery  of  a  foreign  official  committed  by  “any person” in whole or in part in the territory of the member State.23 In contract, the scope of the FCPA had been limited principally to U.S. companies and to U.S. citizens, nationals, and residents.24  The  Act generally  did  not  apply  to  foreign  corporations24.1 and  their  foreign national employees, even if such persons committed a substantial part of the illicit conduct within the territory of the United States.

            To conform the FCPA to the OECD Convention, the 1998 amendments to the FCPA  expanded  the  scope  of  the  FCPA to  cover  foreign  natural  and legal persons, but required, as a jurisdictional nexus, that such foreign persons commit an act in furtherance of the bribery of a foreign official “while  in  the  territory  of  the  United  States.”24.2  As a  result  of  this amendment,  the  FCPA  now  applies  to  “any  person”  but  contains differing jurisdictional standards for different categories of persons.

            The Administration had originally proposed to amend the FCPA by expanding its application to “any person” who uses an “instrumentality of interstate commerce” in furtherance of a prohibited payment. Such a provision would have substantially expanded the reach of the FCPA, as the jurisdictional requirement to use an instrumentality of interstate commerce has been very broadly construed.  The impact of the provision would have been felt principally by foreign subsidiaries of U.S.  companies,  since  these  entities  are  most  likely  to  use  an “instrumentality  of  interstate  commerce.”  Moreover,  since  none  of the other OECD members intended to apply the OECD Convention to their foreign subsidiaries, unless some illegal conduct occurred within their  own  State,  the  Administration  proposal  would  have  tilted  the playing field unevenly between the United States and the other OECD members.  Accordingly, after considerable internal debate within the Administration, the Administration proposal was revised24.3 to apply to foreign natural and legal persons only when such persons actually commit  an  act  in  furtherance  of  a  prohibited  payment  “while  in  the territory  of  the  United  States.”24.4   Moreover,  the  legislative  history made  clear  that  the  foreign  national  or  company  must  take  some action  while  “physically  present”  within  the  territory  of  the  United States.24.5

                The term “territory of the United States,” however, is given a broad interpretation  to  encompass  all  areas  over  which  the  United  States asserts  territorial  jurisdiction.24.6   This  includes  not  only  the  actual territorial boundaries of the fifty states, as well as territories, possessions,  and  commonwealths,  but  also  includes  airplanes  flying  under its flag, and persons aboard aircraft en route to the United States.24.7  Under  this  broad  interpretation,  a  telephone  call  made  by  a  foreign national on a U.S. airline flying over Europe could arguably be deemed to be an act within the territory of the United States. Moreover, in an indication of potentially broad enforcement intentions, a Department of  Justice  official,  at  a  conference  on  the  FCPA,  suggested  that  the Department  might  consider  an  act  physically  done  outside  the  territory of the United States (for example, email sent by foreign national from abroad) that triggers/causes an act to be done within the territory of  the  United  States  to  be  sufficient  to  meet  this  jurisdictional requirement.24.8   Such  an  interpretation  would  effectively  bring  the jurisdictional  requirement  close  to  the  “instrumentality  of  interstate commerce” test. This approach had been rejected by the Administration in its internal deliberations.

Under  this  new  amendment,  foreign  corporations,  particularly foreign subsidiaries of U.S. companies, and foreign national employees of foreign subsidiaries, may now, for the first time, be independently liable under the FCPA.24.9 This can occur even though the U.S. parent company  had  no  knowledge  of  or  involvement  with  such  conduct.  While the U.S. parent company may not be liable under the FCPA for the  improper  conduct  engaged  in  by  its  foreign  subsidiary,  the  press reports  of  the  indictment  of  a  U.S.  company’s foreign subsidiary are unlikely to make such a fine distinction. Accordingly, this amendment constitutes a significant expansion of the FCPA.

Notwithstanding  the  above  discussion,  however,  recent  FCPA enforcement  actions  appear  to  constitute  a  significant,  unwarranted expansion  of  subject  matter  jurisdiction  over  foreign  subsidiaries  of U.S. companies.  In  a  Plea  Agreement  that  arose  from  a  voluntary disclosure, DPC (Tianjin) Co. Ltd., a wholly-owned Chinese subsidiary of Diagnostics Products Corporation (“Diagnostics”), pled guilty to one  count  of  a  violation  of  the  FCPA.24.10  DPC  produces  and  sells diagnostic  medical  equipment.  It  made  payments  totaling  approximately $1.6 million from 1991 to 2002 to physicians and laboratory personnel  employed  by  government-owned  hospitals  in  the  PRC  to influence  their  decisions  to  purchase  the  company ’s  products.  Diagnostics  had  no  knowledge  of  and  did  not  authorize  the  improper conduct.

It  is  unclear  from  the  pleadings  whether  the  Chinese  subsidiary committed  any act in furtherance  of the improper payments while in the territory of the United States, a prerequisite for criminal liability under the FCPA.24.11  Rather, the Plea Agreement charged the Chinese subsidiary with being an “agent” of Diagnostics.24.12  As an agent, the jurisdictional  nexus  required  for  liability  is the  use of  an  instrumentality  of  interstate  commerce.24.13  The  plea agreement  indicates  that the Chinese subsidiary caused a proposed budget to be sent from Los Angeles  to  China  by  phone,  facsimile,  and  email,  and  sent  an  email message  from  China  to  Diagnostics  in  California,  which  attached  a monthly  report  that  included  payments  to  laboratory  personnel  and doctors.

Similarly, in a plea agreement arising from a voluntary disclosure by Schnitzer  Steel  Industries,  Inc.,  its  South  Korean  subsidiary,  SSI International  Far  East,  Ltd.  (“SSI Korea”),24.14 made  improper  payments to managers  of government-owned customers in exchange for continued business. SSI Korea entered a guilty plea to violations of the antibribery and books and records provisions of the FCPA, and Schnitzer Steel entered into a deferred prosecution agreement.24.15

                Paralleling the situation in DPC, the information filed in SSI International Far East alleged that SSI Korea acted as Schnitzer Steel’s “agent” in China. Furthermore, the DOJ alleged that SSI Korea “acted within the territorial jurisdiction of the United States” by transmitting requests to the United States parent company for approval and to wire transfer funds to make illicit payments.

            In  effect,  the  Department  of  Justice  appears  to  be  asserting  that actions outside the United States which “cause” actions to take place within  the  United  States  in  furtherance  of  a  prohibited  payment constitute acts “within the territorial jurisdiction of the U.S.”24.16

                Most  recently,  in  another  Plea  Agreement  that  arose  from  a voluntary  disclosure,  several  British  companies  and  their  U.S.  affiliate24.17  pled guilty  to a violation of the FCPA and conspiracy to violate the FCPA, for improper payments to customs officials in Nigeria. The fines totaled  $26  million.24.18  The basis  for the assertion  of jurisdiction over Vetco Gray Controls Limited, a British company, appears to be based upon its use of co-defendants and other affiliated U.S. entities and their personnel to perform acts within the U.S. in furtherance of illicit payments. In effect, it “caused” acts to occur within the territory of the United States.

            The 1998 amendments to the FCPA created a limited and narrow basis for asserting subject matter jurisdiction over a foreign subsidiary (that is, if it commits any act in furtherance of the bribe while in the territory of the United States). The legal support for the recent actions by the Department of Justice to stretch the jurisdictional reach of the FCPA,   albeit   in   the   context   of   plea   agreements,   is   at   best questionable.

§ 1:2    Jurisdiction

 

      § 1:2.1       Instrumentality of Interstate Commerce

 

            An additional jurisdictional prerequisite to liability under the FCPA is the requirement that the U.S. company  “make use of the mails or any  means  of  instrumentality  of  interstate  commerce  in  furtherance of” an illicit payment.25  The term “interstate commerce” covers trade, commerce,  transportation,  or  communication  among  the  states  or between any foreign country and any state, or between any state and any place outside the United States. It also includes the intrastate use of  a  telephone  or  other  interstate  means  of  communication  or  any  other interstate instrumentality.26

                The  inclusion  of  the  phrase  “in  furtherance  of”  as  part  of  this jurisdictional standard was intended to make clear that for liability to attach, the use of interstate commerce need only be in furtherance of making  a  prohibited  payment.27  This  clause  significantly  broadened the  jurisdictional  scope  of  the  FCPA,  making  it  easier  to  meet  this requirement. Under this standard, the use of an interstate facility need only be “incident to an essential part of the scheme.”28

            For example, in Schmuck v. United  States,29   the  defendant  was charged  with  mail  fraud  for  rolling  back  odometers  of  used  cars  and then  selling  the  automobiles  to  unknowing  retail  dealers  for  inflated prices due to low-mileage readings. The dealers in turn resold the cars to their customers.  To complete the resale transaction, the dealer mailed a title-application form to the State Department of Transportation.  The  Court  was  called  upon  to  decide  whether  the  mailing  of the  title-application  form  by  the  automobile  dealers  (who  were  not involved  in  the  fraudulent  scheme)  was  “in  furtherance”  of  the fraudulent scheme. In affirming the conviction, the Court stated that “[i]t is sufficient for the mailing to be ‘incident to an essential part of the scheme,’ .  .  . or ‘a step in the plot.’”30  The  Court  distinguished several  cases  in  which  the  mailing  occurred  after  the  defendant’s scheme  had  already  reached  fruition31   and  concluded  that  in  those instances, the use of the mail was not “in furtherance” of the scheme to defraud.32  The Court also stated that innocent or routine use of an instrumentality  of  interstate  commerce,  as  well  as  use  of  an  instrumentality of commerce that may have been counterproductive to the scheme, was sufficient.33

            As a practical matter, the interstate commerce nexus will generally be an easy element to meet.33.1  A telephone call or trip to the United States by the agent or employee of the foreign subsidiary to discuss the matter  would  suffice.  So too would the transnational use of computers, the repatriation of earnings, or the consolidation of the books and records.33.2

      § 1:2.2       Nationality Jurisdiction

 

            The  1998  Amendments  expanded  the  jurisdictional  basis  for  the prosecution  of  U.S.  companies and U.S. citizens by adding an alternative basis for jurisdiction—the nationality principle.33.3  Under this alternative standard, the FCPA would apply the nationality principle of jurisdiction  to  illicit  payments  made  by  U.S.  citizens  and  U.S.  companies that take place wholly outside the United States, without any use of an “instrumentality  of interstate  commerce”  in furtherance  of the illicit conduct.

            The alternative nationality principle of jurisdiction would apply to:

 </