Businesses should expect increased enforcement of the Foreign Corrupt Practices Act
May, 2009
In the early months of 2009, the Foreign Corrupt Practices Act (the "Act") made headlines when the Securities and Exchange Commission (the "SEC") launched an investigation concerning violations of the Act by the former head of Morgan Stanley Real Estate in China. The allegations giving rise to the investigation concern improper payments and gifts made by the former Morgan Stanley executive to Chinese officials in violation of the Act. This alleged misconduct is but one instance in a long line of investigations and enforcement actions for violations of the Act. In fact, 2009 has delivered a significant increase in investigation and enforcement actions for violations of the Act. In an article published by the Wall Street Journal on May 26, 2009, Mark Mendelsohn, a deputy chief overseeing the Department of Justice's prosecutions under the Act, stated that 120 companies were currently under investigation for violations of the Act. Given the current economic climate and the Department of Justice's and SEC's renewed drives to locate and remedy fraud on the market, the number of investigations for violations of the Act is likely to increase.
With reduced geographical limitations on businesses in the global economy, and the continuous desire of businesses to expand their market reach, it is important for companies to re-familiarize themselves with the Act, which has significant implications for communication between companies that utilize the U.S. markets and officials or agents of foreign governments.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act was enacted in 1977 in the wake of SEC investigations in which several hundred U.S. companies admitted making unlawful payments to officials of foreign governments and politicians in exchange for business advantages. In adopting the Act, Congress was determined to restore integrity in the U.S. business system, and change the way companies operating in U.S. markets operated internationally.
The Act has two complimentary components: (1) the anti-bribery provisions, and (2) the accounting provisions. Specifically, the anti-bribery provisions forbid various entities from illegally influencing or inducing action on the part of a foreign official or politician, by means of giving or offering to give money or any other gift, in order to secure a business advantage. The accounting provisions require reporting companies to make and keep records that accurately reflect the transactions and assets of the company.
The Department of Justice is responsible for criminal and civil enforcement of the anti-bribery provisions with respect to domestic entities, foreign companies and nationals. The SEC is responsible for civil enforcement of the anti-bribery provisions with respect to issuers.
Anti-Bribery Provisions
The anti-bribery provisions prohibit those falling within the Act's jurisdictional reach from promising or offering to pay money or any item of value to certain foreign officials or parties for the purpose of securing a business advantage. According to the Department of Justice, the following five elements must be met for a violation of the Act to occur:
(1) The "violator" must fall within one of the jurisdictional categories: (a) U.S. citizen, national, or permanent resident; (b) U.S. company; or (c) any issuer (including a non-U.S. company), and its officers, directors, employees, or agents acting on behalf of said issuer, that: (i) registers securities pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act"), or (ii) files reports under Section 15(d) of the Exchange Act;
(2) The "violator" must have a "corrupt intent," and the purpose of the payment must be to influence acts of foreign officials or parties or to induce such officials or parties to act in violation of their lawful duties;
(3) The "violator" must pay or offer to pay anything of value;
(4) The corrupt payment must be to a foreign official, foreign political party, political party official, candidate for foreign political office, or to any person or entity acting in an official capacity for a foreign government or public international organization (for example, the World Bank); and
(5) The "violator" must make the payment in order to obtain a business advantage, such as obtaining or retaining, or directing business to itself, or the entity for which it is acting.
The criminal penalties for violating the anti-bribery provisions include fines up to $2,000,000 for companies and $100,000 for employees of such companies, as well as imprisonment for up to five years. Civil penalties may be up to $10,000 for companies and their employees, in addition to disgorgement for any profits received as a result of a violation of the anti-bribery provisions.
Accounting Provisions
The accounting provisions of the Act require all issuers (including non-U.S. companies) that have securities registered under Section 12, or that file reports under Section 15(d), of the Exchange Act, to: (a) maintain books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and (b) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions involving the company and all actions involving the company's assets are being recorded and conducted with proper authorization and accountability.
These accounting provisions are not limited to transactions with foreign officials or governments; rather, they apply to all transactions of the company, whether national or international. The SEC has extensive prosecutorial authority in the event an issuer knowingly circumvents the accounting requirements.
Conclusion
With the expected increase in enforcement of the Act's provisions, it is important that those entities falling within the Act's jurisdictional reach become intimately aware of the requirements set forth in the Act. It is important that such entities have policies in place to ensure that their employees and agents are well versed in the Act's provisions. Furthermore, the increased enforcement of the Act's provisions is sure to be met with similar actions by other countries within their national jurisdictions, and thus, for those entities that have extensive operations outside U.S. borders, it is important to have knowledge and familiarity of similar anti-bribery laws that may be in place in jurisdictions in which such entities operate.
If you have further questions on requirements under the Act, or if you need assistance with creating corporate policies and procedures to ensure that your business is in compliance with the Act, please contact Daniel Eng or Kelly Mosby at Bullivant Houser Bailey PC.
The information contained in this article is intended for general information purposes only and should not be construed as legal advice on any specific facts or circumstances. An attorney-client relationship is not created or continued by reading this article.