Category: Foreign Corrupt Practices Act

Ding Dong, FCPA Calling

Avon, the beauty products seller, announced that is voluntarily conducting an investigation of its China Operations, focusing on compliance with the Foreign Corrupt Practices Act.

“The Company, under the oversight of the Audit Committee, commenced in June 2008 an internal investigation after it received an allegation that certain travel, entertainment and other expenses may have been improperly incurred in connection with the Company’s China operations. The company has voluntarily contacted the Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. The internal investigation is in its early stage and no conclusion can be drawn at this time as to its outcome.”

Richard L. Cassin, on The FCPA Blog, notes that China forced Avon to market its products through shops and boutiques and restricted direct selling. But two years ago, Avon convinced regulators to allow door-to-door sales.

Text of the Foreign Corrupt Practices Act

You can find the complet text of the Foreign Corrupt Practices Act on the Department of Justice’s Foreign Corrupt Practices Act site.

§ 78dd-2. Prohibited foreign trade practices by domestic concerns

(a) Prohibition

It shall be unlawful for any domestic concern, other than an issuer which is subject to section 78dd-1 of this title, or for any officer, director, employee, or agent of such domestic concern or any stockholder thereof acting on behalf of such domestic concern, 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, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; 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 domestic concern 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, (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, or (iii) securing any improper advantage; or

(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 domestic concern in obtaining or retaining business for or with, or directing business to, any person;

(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, (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 (iii) securing any improper advantage; 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 domestic concern in obtaining or retaining business for or with, or directing business to, any person.

(b) Exception for routine governmental action

Subsections (a) and (i) 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.

(c) Affirmative defenses

It shall be an affirmative defense to actions under subsection (a) or (i) 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.

Who is a Foreign Official under the FCPA?

The FCPA defines “foreign official” as:

[A]ny officer or employee of a foreign government or any department, agency, or instrumentality thereof, or a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.

It is obvious that person holding political office is a foreign official. In this age of increasing privitization of government services and the sudden investment of government investment in private businesses, it is not clear when an entity is an “instrumentality” of a foreign government.

The OECD Anti-Bribery Convention uses the term “public enterprise” which it defines to include “any enterprise in which the government holds a majority stake, as well as those over which a government may exercise a dominant influence directly or indirectly.

Under the FCPA, Who Is a Foreign Official Anyway? by Joel M. Cohen, Michael P. Holland, and Adam P. Wolf of Clifford Chance examine some of thses issues in great detail. You can find the article in the August 2008 edition of The Business Lawyer.

Kay – Certiorari Denied

The U.S. Supreme Court will not be reviewing the Fifth Circuit’s decision in Kay v. U.S. (cert denied shows up page 8 of the Orders List from October 6, 2008.)

Kay argued that the FCPA didn’t apply to bribes to reduce taxes, or that if it applied, the “obtaining or retaining” language in the law (the business nexus element) is so ambiguous that enforcement in their case would be unfair.

Compliance programs need to be aimed not just at bribes intended to directly help obtain business from foreign governments but also to any overseas public bribery that might create a commercial advantage. Complaince needs to find any payments to reduce taxes, speed up refunds, jump customs lines, obtain favorable inspections, manipulate business registrations, reduce utility costs, or enhance property usage.

Walking The Fine Line Of Compliance In China

Jeffrey M. Rawitz and Erica L. Reilley of Jones Day published an article in Mondaq: China: The Foreign Corrupt Practices Act: Walking The Fine Line Of Compliance In China.

Four Suggestions for Avoiding FCPA Complications in China

Any company seeking to avoid potential FCPA problems in China, or elsewhere, should start by developing a rigorous internal compliance program. A good compliance program will include clear standards and procedures and will provide thorough training for all employees that have business dealings with China or any other foreign nation. Compliance materials and training should be targeted to the employees receiving them; thus, employees in China should be trained by local staff that understand the FCPA and can take into account the likely cultural issues—e.g., the long-standing Chinese tradition of gift giving—that may have an impact on proper compliance.

In addition, companies can limit exposure to potential FCPA problems through vigilant adherence to corporate due diligence. As noted above in the section on successor liability, U.S. enforcement authorities do not always view a merger or acquisition as extinguishing liability for past unlawful conduct. Thus, a company planning to merge with or acquire a company that has done business in China will need to do its due diligence on the target company’s business dealings, including those of its partners, agents, and distributors, to ensure FCPA compliance.

A third suggested practice to limit FCPA exposure is to negotiate and draft contracts that minimize FCPA risks. A company can do this by incorporating standard representations, warranties, and covenants in contracts with agents and distributors wherein they affirm their understanding of the FCPA and their commitment to comply with its requirements. Appropriate oversight of these agents and distributors, via inspection of business records and financial reports, may also prove helpful to ensuring a company’s overarching compliance with the FCPA.

Finally, a company’s potential FCPA liability can be minimized by forming an investigative team that can respond quickly when potential FCPA issues arise. The first part of this process requires that employees feel comfortable raising potential issues as they come up—compliance training can be particularly helpful here in assuring employees that the company wants to know of these concerns. Typically it is best for in-house counsel to be responsible for receiving such reports and for managing the resulting investigations. Lawyers usually can best assess the potential for liability (and thus the need for a complete and thorough investigation), and they can take appropriate precautions to keep the identity of the reporting employee confidential. Where notice of potential FCPA liability comes from U.S. enforcement authorities, it often is best to have in-house counsel work closely with outside counsel to provide a certain level of independence and objectivity throughout the investigation as well as to cooperate with enforcement authorities, if needed.

Product Samples and The Foreign Corrupt Practices Act

Richard L. Cassin of The FCPA Blog highlights Review Procedure Release No. 81-02 from December 11, 1981: A Rare (Or Medium-Rare) Opportunity. The release helps give a roadmap on how to introduce new products to potential government customers in foreign countries without violating the Foreign Corrupt Practices Act.

In Release 81-02 (December 11, 1981), the Department stated it would take no enforcement action where the requestor wished to provide samples of its products to officials of the Soviet Ministry of Foreign Trade. The Department stated that theFCPA was not implicated where (i) the samples were intended for the officials’ inspection, testing, and sampling; (ii) the samples were not intended for their personal use; and (iii) the Soviet government had been informed that the company intended to provide the samples.  (From the DOJ Website Section 1.1.5)

History of the Foreign Corrupt Practices Act

In 1977, Congress enacted the Foreign Corrupt Practices Act as part of the 1934 Securities Exchange Act .  The FCPA criminalized the bribery of foreign officials by U.S. corporations and individuals pursuing business in other countries and required that companies with publicly-traded stock meet certain standards regarding their accounting practices, books and records, and internal controls.

The FCPA consequently was amended in both 1988 and 1998.  First in 1988, Congress added two affirmative defenses and directed the executive branch to urge America’s global trading partners to pass anti-corruption laws to promote international parity with regard to business corruption.

In 1998, the FCPA was again amended to implement the Organization of Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.  Congress ratified the OECD Convention and enacted implementing legislation.  These new amendments broadened the reach of potential FCPA bribery violations by expanding the scope of persons covered by the Act to include some foreign nationals.  Also, the 1998 amendments extended the FCPA’s jurisdiction beyond America’s borders to allow greater enforcement efforts by U.S. prosecutors.

FCPA Investigations are on the Rise

According to the Wall Street Journal’s Law Blog, And the FCPA Party Continues:

“U.S. government had open investigations into 84 companies at the end of last year, up from three in 2002, according to Shearman & Sterling. “In the 30-plus years I have followed these matters, there were long periods of little activity and few prosecutions in the early years. Recently there has been a dramatic increase in such activity,” says Danforth Newcomb, a Shearman partner.”

Kay v. United States

Kay v. United States (Docket: 07-1281) is on the docket of the Supreme Court’s opening conference on September 29, 2008 for the Court’s October 2008 term. The petition for certiorari and all cert-stage briefs are available at scotusblog.com.

David Kay and Douglas Murphy were sentenced in 2005 to 37 and 63 months in prison respectively for violating the FCPA. They bribed Haitian officials in order to reduce their company’s taxes.

Richard L. Cassin over at The FCPA Blog has an excellent background article on the case