Utah Bar Journal

A Guide to The Foreign Corrupt Practices Act

by Robert A. Youngberg

Utah companies do business in foreign markets now more than ever before. Among the 50 states, Utah has the seventh fastest growth rate in export shipments of goods. 2,141 companies exported goods from Utah in 2002, and most (83 percent) were not large companies. In 2003, the value of exported goods shipped from Utah topped $4 billion.1 Compliance with foreign trade laws is, therefore, increasingly vital to the success of Utah businesses.

One such law is The Foreign Corrupt Practices Act of 1977 (the "Act").2 Congress enacted it after learning of "questionable payments" by U.S. companies to foreign officials to garner business with foreign governments. The Act does more than prohibit bribery. It goes beyond bribery and prohibits actions that may, on first glance, appear to be acceptable business practices, especially in foreign lands. This article aims to guide its readers to a basic understanding of the Act.

General
The Act has two parts. The first pertains to accounting procedures, the second to bribery. The accounting provisions apply to all U.S. companies that have stock registered with the Securities & Exchange Commission. The bribery provisions apply to all U.S. companies, even those that do not have stock registered with the SEC, and to all U.S. citizens and residents. Penalties for violations include both fines and imprisonment.

Accounting Provisions
The accounting provisions essentially restate recognized accounting principles and procedures. As such, they require two things of a company's accounting system: (1) accurate records, and (2) internal accounting controls. Specifically, the Act requires a company to:

(1) make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets;

(2) create a system of internal accounting controls that provide reasonable assurances that transactions are properly authorized; and

(3) record accurately all amounts on the company's books.

There is no limit on materiality. That is, a company must account for all its money and not just sums that would be "material" in the financial accounting sense. For example, even for petty cash payments, a company should keep receipts.

Audits meeting the Act's requirements will test to see that a company follows its accounting procedures for all its assets and transactions. They also will test to ensure that all payments have adequate supporting documentation. In particular, auditors should look for cash payments; payments to anonymous or "numbered" bank accounts; checks written to "bearer" or to "cash"; and misleading or fake documentation serving as cover for fictitious sales, purchases, loans or other transactions.

A prudent company will audit its accounting procedures before starting business in a foreign country or with a foreign customer.

Bribery
The Act's second part relates to bribery. It strictly regulates payments of anything of value to foreign officials. However, the Act permits certain payments known as "facilitating payments," which are payments to obtain or expedite the performance of routine governmental action. One violates the Act by making a payment other than a facilitating payment corruptly to obtain or retain business.

Here is a simple outline of the elements of the bribery offense, using words and phrases from the Act itself:

A U. S. person (company, citizen or resident) may not:

¥ use interstate commerce

¥ to offer, promise to pay, pay or authorize payment of anything of value

¥ to a foreign official, or

a foreign political party or party official, a candidate for foreign political office, or

any other person while knowing that such person will offer, promise or give money or something of value to any person or entity mentioned above,

¥ corruptly

¥ for the purpose of influencing an official act or decision

¥ to obtain or retain business, to direct business to any person, or to obtain an improper advantage.

The offense is best understood by carefully considering the words and phrases used:

"Interstate commerce." This element of the offense is easy for a prosecutor to prove. Did company employees go to a foreign country on an airline from the U.S.? Did they phone someone in that country from the U.S., or send a letter or e-mail from the U.S.? Did the company ship goods from the U.S. to a foreign country? Your client's normal methods of doing business will easily satisfy this element of the offense.

"Pay." Notice that one need not actually make a payment to commit the crime. One need only offer or promise a payment, or authorize someone else to make it.

"Anything of value" means just that. Low-interest loans, vacations, sporting goods, and charitable donations are all possible examples. As a practical matter, the Act should not stop your client from paying for a customer's lunch. However, your client should know that Congress considered making an exception for gifts that are a "courtesy, a token of regard or esteem in return for hospitality," but declined to do so. There is no "business courtesies" defense. There is no safe harbor minimum value.

"Foreign official" sounds easy, but the term can be difficult to apply. Under the Act, a foreign official is anyone who acts in an official capacity for a foreign government and who exercises some discretionary authority. Obviously, it includes an officer of a foreign government. It also includes an officer in its armed forces. But it can include more. It can include any person employed by an agency of a foreign government, or by a corporation or other body owned or controlled by a foreign government. Moreover, an accountant, a lawyer, a consultant, a broker, or an investment advisor who acts for a foreign government may be a "foreign official."

"Knowing." A company cannot make payments to others while knowing they will use the payments contrary to the Act. The Act first required proof that a defendant have "reason to know" of illegal payments. However, amendments in 1988 changed that standard to a more comprehensive one, the "knowing" standard. This standard covers those with actual knowledge of illegal payments. It also covers those who fail to take action in spite of reasonable signs of illegal payments. The required state of mind includes a conscious purpose to avoid learning the truth. A company cannot close its eyes to possible violations of the Act by its foreign agents.

"Corruptly" means a bad motive or intent to wrongfully influence a foreign official to misuse his or her official position. This, too, is not a difficult element to prove. After proving the other elements of the offense, a prosecutor will argue that one can infer bad motive or intent, and the argument will likely succeed.

"Influencing an official act or decision." Here, emphasis is on the word "official." Courts interpret the word broadly. Does the payment relate - in any way - to a foreign official's position and the acts or decisions he or she makes in that position? Proof that a payment influenced any official act or any decision, however low in importance, will satisfy this element of the offense. Not only are payments to induce a foreign official to act or decide covered by the Act, but also payments to refrain from acting or deciding. Also covered are payments to induce a foreign official to use his or her influence to, in turn, influence another foreign official.

"To obtain or retain business, to direct business to any person, or to obtain an improper advantage." These words add a business nexus element to the offense. They require proof that a payment helped or was intended to help a company obtain or retain some business for itself or another person. In this respect, "business" is not limited to foreign government contracts. It includes any commercial activity. Congress amended the Act in 1998 to add the words "improper advantage" to the phrase. They refer to something to which one is not entitled. For example, an operating permit for a factory that fails to meet statutory requirements is an "improper advantage."

Exception: "Facilitating Payments"
At first, the Act did not make a distinction between those duties of foreign officials that are "discretionary" and those that are "ministerial." Amendments in 1988 did, however, make that distinction. They allow your client to make a "facilitating payment" when the purpose is "to expedite or secure performance of a routine governmental action." Payments that qualify for this exception are payments to:

¥ obtain permits, licenses, or other documents to qualify a company to do business in the foreign country;

¥ process governmental papers, such as work orders or visas;

¥ provide police protection or mail service;

¥ schedule routine inspections required by contract or related to transporting goods;

¥ provide telephone service, power and water supply, the loading and unloading of cargo, or protecting perishable products from deterioration; and

¥ actions "similar" to the above.

These exceptions allow a company to pay to hurry up governmental actions that would only happen later without the payment. The Legislative History gives us an example. Foreign government workers have left pharmaceutical products on an airport runway in a tropical climate. The American company that owns the products wants them removed and properly cared for. Under the "facilitating payments" exception, the company may pay a foreign official to speed up removal of the products from the runway.

The scope of this exception is limited. Payments would be comparatively small. If a company makes such a payment, it should record the payment accurately on its books ("facilitating payment" will do). Above all, remember that "routine governmental action" does not include decisions to award new business or to continue business.

Affirmative Defenses
The 1988 amendments also created two affirmative defenses for defendants charged with violations of the Act. They relate to:

(1) "Reasonable and bona fide" expenditures, such as travel and lodging expenses that are "directly related to the promotion, demonstration, or explanation of products or services or the execution or performance of a contract with the foreign government."

For example, your client may pay travel expenses for foreign officials to tour your client's facilities, either here or abroad. However, your client may not pay for any side trips or other expenses that are unconnected with the primary purpose of the tour. In most cases, the issue here is whether the proposed payments are "directly related."

(2) "Payments to officials that are lawful under the written laws of the official's country."

Here, success will depend on correctly understanding the foreign laws. When in doubt, get a written opinion from foreign counsel for any proposed payment.

Joint Ventures
If a company has a controlling interest in a joint venture (over 50%), the Act applies fully. With less than a controlling interest, your client should encourage the other members of the joint venture to adopt and follow practices that are consistent with the Act. This requires a well-documented "good faith" effort. To meet this standard, a company will investigate its joint venturers carefully before entering the joint venture. It also will document its opposition to any prohibited payments. Finally, it will insist that the joint venture agreement require adherence to the Act or its principles. Ideally, the agreement would require (1) an internal compliance program, (2) senior management commitment to the program, (3) accounting and cash disbursement controls, (4) clear policy statements on providing food, entertainment and gifts, (5) and audit controls to test whether the joint venture follows its own policies and procedures.

Of course, the smaller a company's interest in the joint venture, the less control it will have over these matters. Nevertheless, a company should make a good faith effort, and should document its efforts well.

Enforcement
The Department of Justice enforces the bribery provisions, while the SEC enforces the accounting provisions. The SEC also is responsible for civil enforcement of the bribery provisions against companies that have stock registered with the SEC.

Penalties
Penalties for violating the accounting provisions are the same penalties that apply to most other violations of the securities laws. These penalties include monetary fines but no criminal penalties.

On the other hand, penalties for violating the bribery provisions include both fines and imprisonment. Fines can be up to $2,000,000 per violation for a company and up to $100,000 for an individual. (A company may not reimburse its employees for fines). Imprisonment can be up to five years per violation. Before 1991, courts gave most individuals suspended sentences for violations of the Act. Under the 1991 Federal Sentencing Guidelines, however, convicted individuals serve some time in prison as well as pay fines.

Compliance Programs
Federal Sentencing Guidelines also require federal courts to consider the existence or absence of effective company compliance programs. Such a program can significantly reduce a company's penalty for violations of the Act, while the absence of such a program can increase the penalty. Therefore, all companies that do business in foreign markets should put into practice a compliance program designed to guard against violations of the Act by its employees.

Conclusion
All companies that do business in foreign markets should become familiar with The Foreign Corrupt Practices Act. Although its requirements are strict and its penalties severe, most companies find that the Act does not prevent them from successfully competing for foreign business, especially with the clarifications that the 1988 amendments provide. In the end, most companies know that successful foreign trade is not dependent on "questionable payments" to foreign officials, but rather on those things that have always mattered most in business relations - the quality of the goods, services, and expertise that companies offer their customers.

1. International Trade Administration and Bureau of the Census, U.S. Department of Commerce, Exporter Data Base, Utah: Exports, Jobs, and Foreign Investment, 5 January 2005, available at http://www.ita.doc.gov/td/industry/otea/state_reports/utah.html (last visited 8 March 2005).

2. Foreign Corrupt Practices Act, U.S. Code, vol. 15, sec. 78dd-1, et. seq. (1977).

Robert A. Youngberg served for 16 years as an attorney in the legal department of a major oil company, including 6 years at its London office, where he provided legal counsel to operating personnel in Europe and Africa. He currently resides in Park City, Utah.

Posted by BarJournal at August 6, 2005 11:35 AM