Amendment to the Foreign Corrupt Practices Act – Another Perspective

Ed. Note-today we have a guest post from our colleague Stephen Clayton. The following is a synopsis of his article published by ACC and a copy of this was sent to the relevant House and Senate committees dealing with proposed amendments to the FCPA. 

Proposals for and against amending the Foreign Corrupt Practices Act, the US Federal law against government bribery in international business, have been percolating for the past 18 months. US Chamber of Commerce took a lead role, sponsoring a paper titled “Restoring Balance” in October 2010, advocating the position that substantial amendments to the FCPA are required to promote international business by US companies. Other groups have taken positions opposing any revisions that would weaken the FCPA or impede enforcement. The main arguments against the Chamber’s proposed amendments were set out in “Bursting Bribery” published in September 2011 by the Open Society Foundations. The possibility of amendments has prompted the Department of Justice to commit to issuing some form of written “Guidance” within the next few months. All parties profess to agree with the basic reason the FCPA exists:  bribery in international business is a serious crime that should be deterred and punished.

The Chamber is promoting 5 amendments which, taken as a whole, would make it significantly more difficult for the DOJ and SEC to enforce US criminal law against bribery in international business by US corporations.  The advocates on the other side are opposing the Chamber’s proposals, but not advocating significant amendments of their own. Status quo is to leave the FCPA as–is and enforcement to the fairly broad discretion of the Department of Justice and SEC.

In reviewing the positions of both sides, neither side has mentioned several potential amendments that would make the law more certain for US business people and promote the goal of reducing corruption in international business.  Indeed the proposals in “Restoring Balance” would require complex new definitions and rules which will make the FCPA even more confusing and difficult for US business people to understand.  Congress should consider common sense changes that reduce the potential for confusion by US business people and eliminate or modify poorly written provisions of the 35-year-old FCPA. This article discusses 6 amendments that would make the law easier for US business people to understand and help US companies create and run meaningful FCPA compliance programs.

1. Eliminate the Exception for Facilitating Payments.
The FCPA contains an exception for low-level bribes euphemistically called “facilitation payments.”  Facilitation payments are bribes. This exception creates the illusion minor bribery of employees of foreign governments by US companies and their agents can be “legal.” The exception for facilitation payments creates serious confusion for business people because it gives them the impression that some bribes are permitted under US law, but it can be difficult in practice to determine which bribes Congress considers tot be “legal.” The facilitating payments exception is offensive to normal ethical standards of corporate governance and should not exist.
2. Eliminate the affirmative defense for bribes that are “lawful under the written law or regulation of the country.”

No country has written law that permits conduct that is illegal under the FCPA. But business people and non-specialist lawyers see this language in the statute and think it must have some meaning.  They are forced to guess which types of bribes Congress considers to be “legal.” What difference does it make to good corporate governance if a country rigs its laws to allow bribery of members of its royal family or specific government employees?  This affirmative defense is meaningless and confusing and there is no reason for it to remain in the law.

3. Amend the FCPA to add Provisions Making Commercial Corruption a Federal Crime.

This is the most important change and would make the FCPA easier for US business people to understand. A major flaw of the FCPA is it makes it a crime to bribe only certain people, i.e. “foreign officials” including employees of “instrumentalities” of foreign governments.  Writing the FCPA this way gave rise to the idea among US business people and lawyers that bribes to other people can be paid legally and ethically.

It is a waste of time to argue whether Congress intended this result, though it has been the cause of a vast amount of discussion at conferences over who is a government official and what is an instrumentality. Congress should recognize the fundamental error and put an end to any confusion by simply amending the FCPA to criminalize all bribery of anyone in international business.

After all, when a bribe is paid by one US company (or a UK, German or Chinese company) to an employee of a foreign telecommunications company to win a bid and three other US companies which competed honestly and bid on that project lose to the briber, it does not really matter to the losing US companies whether the foreign telco was 49% or 51% owned by a government. The honest US companies still lost business due to bribery.  If the FCPA covered all bribery, no one will ever need to ask the bogus questions about whether a person is a “government official” or whether an entity is an “instrumentality.”

The FCPA should be stated in simple terms all business people can understand: It is a crime to bribe anyone. By making this change Congress would also recognize the current status of US business ethics. Nearly all US public corporations already have internal ethical codes of conduct that prohibit commercial bribery, and all corporate anti-corruption training orders employees to not bribe anyone.  So amending the FCPA to include commercial bribery involves no change of existing practice for US companies or their management or employees.
4. Add a UK style strict liability crime of failure to prevent bribery to the FCPA and a corresponding affirmative defense for proving an adequate compliance program.

The UK Bribery Act came into effect in July 2011 and contains a new crime that does not exist in the FCPA: Failure by a business organization to Prevent Bribery.  It is a strict liability crime: if bribery occurred in a company’s business, the company has violated this law. Due to the strict liability aspect of the crime, the UK government provided an affirmative defense – if the company can prove it had in place adequate processes to prevent bribery before the bribery occurred, it could avoid liability for this specific crime.  Congress should consider amending the FCPA to incorporate this UK innovation in legislation against corruption in international business.  Adopting the UK ‘s  “failure to prevent” legislation would make the prohibitions of the FCPA and US expectations about compliance programs much more clear to US business people.

Adding a “compliance defense” to the FCPA without simultaneously adding the new crime of failure to prevent bribery would not make sense.  A compliance defense would simply weaken the FCPA, undermine its basic tenants and create a new area of litigation around whether a company that had profited from bribery is nevertheless entitled to a defense based on it’s failed compliance program.  Courts will be called on to determine whether a compliance program was “robust” or ”state-of–the-art.”  That is not simple to understand or good for business.

It is already clear under the Federal Sentencing Guidelines that a company will get credit for a compliance program. That has been true for many years, but most companies have not put in place FCPA compliance programs that implement the DOJ’s clear guidance. Any US company that spends a modest amount of time researching the FCPA and examining its business practices can readily determine what elements it needs to have in place to have in an “adequate” FCPA compliance program.

5. Add provisions to the FCPA to make it clear that a Parent Company is Responsible for the Violations of its Subsidiaries.  

Managers of US companies know that they create, manage and are responsible for their company’s subsidiaries. Subsidiaries are created and exist to generate profits and provide business advantages to the parent company. Subsidiaries should not be a convenient and easily manipulated shield from criminal liability, and US law must be clear on that point.  Companies with average FCPA compliance programs apply their program to all of their domestic and international subsidiaries. Business people in those companies would be surprised if someone told them US law allowed their company to create a subsidiary that could engage in activities that might violate the FCPA and ignore the company’s ethical rules.  They would be surprised if the law shielded the parent company from liability even if a subsidiary engaged in criminal activity.  Relaxing the FCPA for subsidiaries adds to the list of gray areas in which unethical people can argue that Congress intends that certain types bribes are legal.  To the extent it is not already clear, the FCPA should be amended so US business people understand that the parent company is responsible for the bribery, corruption and false records of any of the company’s subsidiaries.
6. Widen the scope of the FCPA’s “reasonable and bona fide expenditures” affirmative defense.

It is important for US companies to be able to engage normal sales and marketing operations. The FCPA should clearly promote this. The current language of this affirmative defense for is poorly worded and unnecessarily restrictive. It limits bona fide business expenditures to those “directly related to the promotion, demonstration or explanation of products or services; or the execution or performance of a contract…” That limitation is not necessary and is confusing to business.

In general, US businesses should be able to defend themselves against charges of FCPA violations if they can prove the payments they made were reasonable and bona fide business expenses done for a substantial, legitimate corporate business purpose.

The 7^th Point:  Successor Liability 

Congress should reject proposals to weaken successor liability. Restricting successor liability would permit companies to retain the profits derived from intentional, clearly illegal corrupt activity. If companies know they will be able to keep the profits from the bribery of the business entities they acquire, they have no incentive to take reasonable measures to detect bribery prior to an acquisition. Limiting successor liability would provide a perverse incentive for sellers of businesses to conceal conduct which might be illegal and for buyers to refrain from engaging in rigorous due diligence.  Due diligence by US companies in international acquisitions is already weak.  The burden, cost and legal liability for the corrupt activity should be on the company that engaged in the corruption in the first place and later sold its business – and the purchaser who enjoys the increased value and ongoing profits derived from the illegal conduct also needs to be subject to prosecution and required to disgorge the profits of bribery.
Conclusion: 

The FCPA has been in place for 35 years, though minimal enforcement of the law only started in the Bush II administration. The FCPA set the international standard for criminalizing bribery in international business. In the 21st century, bribery in international business is still common and widespread, and based on the high level of corruption, the current enforcement efforts of the DOJ and SEC are still at a low level that most US companies can ignore. Most US business people still do not consider bribery by a US company in Russia, China or Brazil to be a “real” crime. There is no reason to change US legislation to make it more difficult for the government to prosecute acts of bribery or falsification of corporate records by companies or individuals.

Some changes to the FCPA are warranted to remove obsolete provisions such as the exception for facilitation payments and the affirmative defense of legality. The scope of the FCPA should be widened to include all bribery in international business, so companies do not have to be concerned with whether a person is a “government official” or a company is an “instrumentality.”  US corporations already have internal rules prohibiting all bribery, government or commercial, in their operations and those of all their subsidiaries – the FCPA should follow the sensible lead of business in this regard.   To the extent it is not already clear, Congress should provide that parent companies are responsible for the unlawful activity of their subsidiaries.  These changes would make the FCPA easier for corporate management to understand, and benefit ethical and compliant US companies.

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Stephen Clayton can be reached at stephen@stephenclaytonlaw.com.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author

Stephen Clayton Reviews Mukasey’s Proposed FCPA Amendments

Ed. Note-today we have a guest post from our colleague Stephen Clayton, who has prepared a lengthy review and commentary on the written testimony Michael Mukasey submitted in the Sensenbrenner hearings in House of Representatives on June 15th. The full article is available here.  A shorter summary is below.

The proposals for reform being made by Mr. Mukasey could severely curtail the ability of the government to prosecute violations of the FCPA and could have the effect of reducing the incentive for companies to introduce or continue robust FCPA compliance programs.  The proposed amendments may make the world a safer place for those who pay bribes in international business.

My article agrees that clarifications to the way FCPA enforcement is done by the DOJ and SEC are necessary. But it joins with others who recommend this be done by guidance, not amendment to the FCPA itself.

In covering each of Mr. Mukasey’s 6 numbered proposals  – and 2 other proposals Mukasey references in his written testimony, the article hits the following points:

1. Adding a  Compliance Defense

Basing a major change to a working US law on the examples of untried UK and Italian laws is ill advised.   The details of the compliance defense in the UK law are not in the law but contained in Guidance from the Ministry of Justice. The UK affirmative defense of “having in place adequate procedures to prevent persons associated with the company from bribing” only applies to the strict liability crime of “Failure of Commercial Organisations to Prevent Bribery” stated in Section 7 of the Bribery Act. The FCPA does not contain the strict liability crime of Failure of a Commercial Organization to Prevent Bribery.  The combination of the Federal Sentencing Guidelines and guidance from the DOJ on the elements of an adequate FCPA compliance program (see Attachment C to the 2010 Alcatel-Lucent DPA) is more clear than the status of what constitutes “adequate procedures” under the UK law.

2. Clarifying the meaning of “Foreign Official” and “Instrumentality“

The confusion Mukasey fears in this area is not serious and reducing the scope of these definitions is not critical to companies which already have in place robust FCPA Compliance programs. They have dealt with these issues and moved on to determining how to deal with private corruption which generally accompanies government corruption.  The rule now and for the last 4-5 years has been, “Don’t Bribe Anyone.”  It is very important to know when your customers and business partners are “government.” and companies must make  a serious effort to know that.  That being said, improved guidance from the DOJ would be welcome.

3.  Improving Guidance from the DOJ

Mr. Mukasey correctly states that there is need for more guidance and direction from the DOJ and SEC.  The article provides  some specific examples including a leniency program and publication of information on decisions to not prosecute. The DOJ should take the efforts by the Chamber of Commerce to push amendments to the FCPA seriously and move to put in place guidance which negates the need for amendment.

4. Limiting Successor Liability

There is  a danger that creating a statutory  limitation of successor liability will allow companies to use or even create an acquisition to shield themselves from liability for corruption.  Mukasey’s statements that companies do very robust, exhaustive FCPA due diligence in merger and acquisition transactions is wishful thinking.  FCPA due diligence in most M & A transactions is far from adequate.   DOJ provided guidance in its Opinion on Halliburton’s request, and should provide further specific guidance in this area.  The FCPA should not be amended  to allow the profits and business gained by  international bribery to be passed to a successor with no liability.

5. Adding a Willfulness Requirement for Corporate Criminal liability

Mr. Mukasey’s is proposing a defense based on company senior management not knowing what its employees, subsidiaries and business partners are doing. To exempt  companies from responsibility because management does not make the necessary effort  to understand and control their employees and business would be bad for reducing corruption and bad for business.  Companies can actually set up business systems to know what their employees and subsidiaries are doing. A good FCPA compliance program will help with that business goal.

Mukasey introduces 2 additional reforms in this section:

– A Rebuttable Presumption that Gifts of De Minimis Value are not a Violation. This is a solution looking for a problem from a practical point of view. Companies with adequate FCPA compliance programs have dealt with it, but it should be the subject of DOJ guidance; and

– A Materiality Standard for Books and Records and Corporate Controls violations.   This proposal is an insidious attempt to gut enforcement of the Books and Records and Corporate controls parts of the FCPA.  Bribes made in international business are almost never material in monetary amount, they are material precisely because they are a violation of criminal law.

6. Limiting Parent Liability for Subsidiary Conduct Not Known to the Parent

Parent companies have complete power to manage and operate their subsidiaries, hire and direct their management and have full access to all to the subsidiary’s records and information.  Amending the law to allow a parent to use a subsidiary as a conduit to pay bribes and a shield from liability for corrupt activities based on the parent failing to understand what is going on in this part of its business would be a huge step backwards for reducing corruption.  It would reward poor management.

Mukasey bases his argument that amendments are necessary on faulty premises. His arguments are based the illusion that all companies have robust, state of the art FCPA compliance programs and are going to great expense to comply with a confusing and poorly written law.  Despite their sincere efforts to comply, they are being subjected to oppressive prosecution by the SEC and DOJ. They are being prosecuted for matters which are beyond their knowledge and control. Therefore substantial changes must be made to the law.  The trouble is that is not true.

Bribery in international business is common in many parts of the world and pervasive in some countries. Falsification of corporate books and records for various reasons is not unusual in international business.  There is an international trend towards criminalizing bribery in international business which has been led by the USA for 30 years. Weakening the FCPA through the amendments Mukasey advocates could end that US leadership and lead to more corruption. Companies can deal with bribery in their own business by instituting good business practices.  Companies with robust FCPA compliance programs are rarely subjected to prosecution. Despite the past 5 years of increased enforcement, most companies still have inadequate FCPA compliance programs which are not properly budgeted or staffed – or have no program at all. Many business people still do not take the law seriously.  The information is available for companies to determine how to assess their specific risks and set up a cost effective FCPA compliance program to prevent bribery and detect occurrences of corruption that slip through despite reasonable efforts.  Companies would be helped by further guidance from the DOJ and SEC.

Stephen Clayton ran the global anti-corruption compliance and investigation program for Sun Microsystems and has been an international business lawyer for over 30 years. He is now doing FCPA consulting in the San Francisco Bay Area and teaching a course in International Anti-corruption at Golden Gate University School of Accounting. He can be reached at stephen@stephenclaytonlaw.com.