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

Issuers⁴that 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.²³In 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 corporations^24.1 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 revised^24.3 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. affiliate^24.17 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: