Practicable Considerations for U.S. Corporations
Synopsis: In 1977, Congress enacted the Foreign Corrupt Practices Act to halt the practice of bribery as a means of obtaining foreign business. This article surveys the background of the act, the key provisions of the act and some salient issues under the act as they appertain to U.S. corporations doing business globally.
Introduction
Invoking the prerogative of professorial humor, Descartes began his most influential treatise:
Good sense is of all things in the world the most equally distributed, for everybody thinks himself so abundantly provided with it, that even those most difficult to please in all other matters do not commonly desire more of it than they already possess.1
This survey will discuss the Foreign Corrupt Practices Act2 ("the act") and will be divided into three parts: An Analysis of the Statute; Salient Points For the Practitioner and Conclusion. The object is to subject the act to scrutiny not only through the light of statutory construction, but also through the Cartesian prism of common sense.
I. An Analysis of the Statute
For analytical purposes, the two key provisions of the act are the anti-bribery provisions and the accounting provisions, commonly referred to as the books and records provisions.
The Anti-Bribery Provisions. "Section 78dd-1. Prohibited foreign trade practices by issuers3 applies to publicly held4 companies. Subsection (a)(1) thereof makes it unlawful to give a bribe to a foreign official for the purposes of influencing a decision of such foreign official in her official capacity or inducing such foreign official to use her influence to affect a governmental decision in order to assist one in obtaining or retaining business.
Similarly, subsection (a) (2) makes it unlawful to give a bribe to a foreign political party, a party official or a candidate for foreign political office under the circumstances described above.
Finally, subsection (a) (3) makes it unlawful to tender a bribe to an intermediary knowing that some or all of the bribe will be given to a foreign official, a political party, a party official or a candidate for political office under the circumstances described above.
Very significantly, subsection (b), Exception for routine governmental action,5 codifies the exception for "facilitating or expediting payment" which is sometimes referred to as a grease payment. An example of a facilitating payment is a small tip given to a government worker in order to get better service than one would get without having given such gratuity. This statutory exception, and the distinction on which it is founded, has prompted one wag to remark that a facilitating payment is paid to get a government employee to do what she should do, whereas a corrupt bribe is paid to get a government employee to do what she should not do.
Subsection (c), "Affirmative defenses,"6 sets out two categories of affirmative defenses to a violation of the act. The first affirmative defense is that such conduct (payment of a bribe) was not unlawful under the local law. The second affirmative defense is that the payment was a reasonable and bona fide expenditure related to product promotion or performance of a government contract, such as the payment of travel or lodging expenses of a government official.
The Books and Records Provisions. Lacking in a cloak-and-dagger mystique as it may be, the humble books and records provisions of the act constitute yet another snare for the unwary. Section 78m(b)(2) of the act obligates issuers to make and keep accurate financial records.7 Failure to do so, or a fraudulent entry in one's books and records, constitutes an independent violation of the act.
The foregoing statutory prohibitions and requirements have spawned enormous controversy, litigation8 and a growing body of professional literature on point.9
For example, those members of the bar with clients in the fields of aerospace or international sales, not to mention government contracting and sub-contracting, are keenly aware of the restrictions of the act. When the act was enacted in 1977 a veritable hue and cry went up from industry complaining about the unfairness of the act to American business. Some ameliorative relief was achieved 11 years later, in 1988, when Congress amended the act to give official, de jure recognition to the de facto practice of facilitating payments abroad.
An Eighth Circuit case cited above, United States v. Liebo, exemplifies proscribed "bribery" conduct and the ease with which the court sustained the bribery conviction on appeal.
In its recitation of the facts of the case, the court wrote that the background leading to Liebo's conviction has all the earmarks of a modern fable. Richard H. Liebo was a vice president in the U.S. aerospace industry in the 1980s. Liebo's employer was a prime contractor on aircraft maintenance for the Niger Air Force. The chief of maintenance for the Niger Air Force, one Captain Ali Tiemogo, testified that Liebo and another told him they would make "some gestures" to him if he helped get the contract approved. Captain Tiemogo's cousin and close friend, one Tahirou Barke, was first consular for the Niger Embassy in Washington, D.C. Later, Liebo deposited $30,000 in a bank account. Mr. Barke used some of the money for personal items and gave a portion of the money to Captain Tiemogo.
Mr. Barke testified that he informed Liebo of his (Barke's) honeymoon plans, and Liebo offered to pay for his (Burke's) airline tickets as a gift.
The court easily affirmed the conviction, holding there was sufficient evidence that the airplane tickets were given to obtain or retain business. Furthermore, the court held that sufficient evidence existed from which a reasonable jury could find that the airline tickets were given "corruptly." The court pointed out that the airline tickets were given shortly before the third of three contracts was approved by the Niger Air Force. There was, also, undisputed evidence concerning the close relationship between Captain Tiemogo and Mr. Barke and Captain Tiemogo's important role in the contract approval process. Finally, there was testimony that Liebo classified the airline tickets for accounting purposes as "commission payments." Such evidence, the Eighth Circuit reasoned, could allow a reasonable jury to infer that Liebo gave the tickets to Mr. Barke intending to influence the Niger government's contract approval process.
Some salient issues raised since the 1977 enactment are discussed in the following section of this article.
II. Salient Points For the Practitioner
This section addresses two fundamental points for the practitioner: how to spot FCPA issues and how to recognize a bribe violation.
1. How To Spot FCPA Issues
As is obvious from the previous section's citation of the operative provisions of the act and this writer's attempt to reduce the act to its component parts, the first challenge for the practitioner is to grasp the elements of the offense proscribed. Precious little about the statute is simple, singular or unitary. To the contrary, virtually every subsection, clause and term of the statute contains a recitation of multiple variables which, when taken together, can and do constitute law violations. It is not enough to understand that payment of money to a foreign government official to influence her decision to award a lucrative contract to your client is a violation. The practitioner must also be aware that a client may not do indirectly what she is prohibited directly from doing. That is to say, a client may not evade the law by use of a sales agent to pass along the bribe money. A client may not evade the reach of the act by substituting expensive gifts for bribe money or by channeling the gift to a political party or party official instead of to a government official.
A recent article10 in the organ of the ABA's Section on International Law and Practice contains a thoughtful checklist approach to spotting whether or not your client has a FCPA issue. The author of that 1997 article prepared the following six questions for determining whether a particular activity is subject to, or in violation of, the act.
1. Is the actor an issuer or a domestic concern?
2. Is there a "corrupt" intent in the activity?
3. Is there activity " in furtherance of " a promise or provision of something of value?
4. Does the promise or payment make use of interstate commerce?
5. Is the recipient of the payment or promise a foreign official or other covered entity? and
6. Was the payment provided to obtain or retain business?
Space considerations do not permit much more than the observation that a client can also have vicarious liability under the act, for example, by authorizing, directing or participating in illicit activities of one's foreign-incorporated subsidiary.
2. How to Recognize a Bribe Violation
To most of the readership of this journal, the concept of a bribe is repugnant. It goes against the grain of people imbued with a work ethic as something that frustrates the aims and goals of competition on the merits. A bribe, generally, is regarded as something that is wrong if for no other reason than it is always done furtively and in secret.
That having been said, those practitioners who have either resided in or visited former European colonies in Asia and Southeast Asia were exposed to cultures in which bribery is neither legally prohibited nor morally offensive. The hue and cry that went up in the 1977 to 1988 time frame from the U.S. business community frequently was bottomed on a perceived unfairness in which U.S. business was forced to compete with Europeans and others on an uneven playing field. As recently as last year this lament11 was echoed in the article cited in the previous subsection.
Nevertheless, practitioners embrace the act as the law of the land and busy themselves with finding effective ways to help their clients comply with the law. A practicable consideration for the practitioner is the use of a pertinent provision in contracts involving international parties, territories and the like.12
An authoritative and practical paper prepared by practitioners for their international law practice contains a listing of six "red flags" evidencing a likelihood of a violation or a need for further investigation.13 Summarized below are the "red flags":
1. Commissions substantially in excess of the going rate. Unless investigated and evidence adduced that the commissions are economically justified, a substantial risk exists that a portion of these excessive payments will be passed on to government officials.
2. Requests for payments in cash or to jurisdictions other than the country where services, and the underlying contract, are performed. These requests often suggest a purpose by the agent to evade local exchange control or income tax laws. Knowing participation by a U.S. principal in such a scheme almost always implicates a violation of local aiding and abetting or assistance crimes. From an FCPA perspective, the fact that an agent is prepared to engage in local fraud violations (and, in the process, involve its principal) does not provide the requisite comfort to the U.S. principal that the agent's written compliance representations are meaningful or that it will adhere to the agreement's strictures against bribery.
3. Requests (or urgings) by foreign government decision makers to a U.S. supplier to utilize the services of a specific agent. This factor becomes exacerbated if the agent is a family relative lacking experience or capacity to perform under the contract.
4. Use of more than one agent on a particular contract where aggregate commissions exceed the going rate (or legal ceiling) in the country and an economic rationale for the use of a second agent is inadequate, illusory or absent.
5. The reputation of a country for corruption. While generally this is not sufficient by itself to warrant the requisite knowledge of a bribe payment, it does suggest the advisability of enhanced due diligence procedures. Two recent surveys have attempted to quantify the corruption ratio in various countries (see New York Times, August 20, 1995, and Fortune, August 1, 1995).
6. A request by an agent to increase its commission during the course of active negotiations with the government customer and in a context of severe competitive pressure.
From the foregoing we can see that legal counsel must not only be skilled in the law but also must achieve mastery over the facts of the case. The continual application of professional objectivity and common sense will allow legal counsel to spot the likelihood of bribery violation or a need for further investigation.
III. Conclusion
For portions of three decades the Foreign Corrupt Practices Act has been the law of the land. Its continued vitality does not appear to be in doubt. U.S. corporations doing business globally are well advised to acquaint themselves with the contents of the act and to exercise common sense in conducting business in compliance with the act.
Endnotes
1 René Descartes, Discourse on the Method of Rightly Conducting the Reason, Great Books of the Western World, Volume 31, p. 41.
2 Public Law 95-213, 91 Stat. 1494, December 19, 1977 [S. 305] as amended by the Foreign Corrupt Practices Act Amendments of 1988, Public Law 100-418, 102 Stat. 1415, 15 U.S.C. § 78m(b) (1988) [Accounting standards], 15 U.S.C. § 78dd-1 (1988) [Prohibited foreign trade practices by issuers] and 15 U.S.C. § 78dd-2 (1988) [Prohibited foreign trade practices by domestic concerns].
3 Section 78dd-1. Prohibited foreign trade practices by issuers
(a) Prohibition
It shall be unlawful for any issuer which has a class of securities registered pursuant to section 78l of this title or which is required to file reports under § 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to--
(1) any foreign official for purposes of--
(A)(i) influencing any act or decision of such foreign official in his official capacity, or (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;
(2) any foreign political party or official thereof or any candidate for foreign political office for purposes of--
(A)(i) influencing any act or decision of such party, official, or candidate in its or his official capacity, or (ii) inducing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate.
(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person; or
(3) 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, to any foreign political party or official thereof, or to any candidate for foreign political office, for purposes of--
(A)(i) influencing any act or decision of such foreign official, political party, party official, or candidate in his or its official capacity, or (ii) inducing such foreign official, political party, party official, or candidate to do or omit to do any act in violation of the lawful duty of such foreign official, political party, party official, or candidate, or
(B) inducing such foreign official, political party, party official, or candidate to use his or its influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person.
4 A subsequent provision, 15 U.S.C. § 78dd-2 (1988). Prohibited foreign trade practices by domestic concerns, applies to domestic (U.S.) concerns which are not publicly held.
5 15 U.S.C. § 78dd-2 (1988), (b) Exception for routine governmental action
Subsection (a) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.
6 15 U.S.C. § 78dd-2 (1988), (c) Affirmative defenses
It shall be an affirmative defense to actions under subsection (a) of this section that--
(1) the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official's, political party's, party official's, or candidate's country; or
(2) the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to--
(A) the promotion, demonstration, or explanation of products or services; or
(B) the execution or performance of a contract with a foreign government or agency thereof.
7 15 U.S.C. § 78m(b) (1988) [Accounting standards].
(2) Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section
78o(d) of this title shall--
(A) make and keep 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--
(i) transactions are executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
8 For a U.S. Supreme Court case involving a private action for damages under the act, see W.S. Kirkpatrick & Co., Inc. v. Environmental Tectonics Corp., Int'l, 493 U.S. 400 (1990); for a prosecution under the anti-bribery provisions of the act, see U.S. v. Liebo, 923 F. 2d 1308 (8th Cir. 1991); and for an injunctive action under the books and records provisions of the act, see Securities and Exchange Commission v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724 (1983).
9 See generally Stuart H. Deming, Foreign Corrupt Practices 31, The International Lawyer, Summer 695 (1997); Summary of OECD Anti-Bribery Convention 27 International Law News 10 (Winter 1998); Stanley J. Marcuss, Biting the Hand That Bribes, Legal Times, September 15, 1997, at S41.
10 Michael R. Geroe, Complying with U.S. Antibribery Law, 31 The International Lawyer 1037 (Winter 1997).
11 Id. at 1037.
12 Licensee agrees that neither it nor any of its directors, officers, employees, subcontractors or agents will make any offer, payment, promise to pay or authorization of the payment of any money, offer, gift, promise to give, or authorization of the giving of anything of value to any official, political party, party official or political candidate or any person, knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly to any official, political party, party official or political candidate, for the purpose of retaining business for or with, or directing business to, Licensee or Licensor. As used in this section, the term "official" refers to any officer or employee in private or public service and includes any officer or employee of a government, or any department, agency or instrumentality thereof, or any person acting in such an official capacity for or on behalf of any such government or any department, agency or instrumentality thereof.
13 Robert J. Gareis, The Foreign Corrupt Practices Act, A Pragmatic Analysis (Baker & McKenzie) (1996).
Mr. Knoten is associate corporate counsel of Brown Group, Inc., in St. Louis County. He received his J.D. in 1973 from Washington University School of Law, St. Louis. He is a member of the Section of International Law and Practice of the American Bar Association, The Missouri Bar and the Bar Association of Metropolitan St. Louis. The opinions expressed in this article are those of the author and do not necessarily represent those of Brown Group, Inc.
1999, Thomas P. Knoten