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The Foreign Corrupt Practices Act of 1977 (“FCPA”) was enacted as an amendment to the Securities Exchange Act of 1934 (“Exchange Act”). The FCPA broadly prohibits improper payments to foreign officials. The FCPA has two components. First, the anti-bribery provisions criminalize the bribery of a foreign official to obtain or retain business. Second, the accounting provisions require companies whose securities are listed in the U.S. to maintain accurate books and records and an effective system of internal controls. 

  1. Overview.
    1. The anti-bribery provisions make it a crime, directly or indirectly, to offer, promise, authorize or make a corrupt payment (i.e., a bribe) of money or anything else of value to a foreign official.
    2. The FCPA’s reach is broad. Its primary provisions apply to “issuers” and “domestic concerns,” as well as officers, directors, employees, agents, or shareholders acting on behalf of the issuer, domestic concern, or person. 15 U.S.C. §§ 78dd-1(a), 78dd-2(a).
      1. An “issuer” is any U.S. or non-U.S. company that has either issued securities registered with the Securities and Exchange Commission (“SEC”) or is otherwise required to file reports under Section 15(d) of the Exchange Act. 15 U.S.C. §§ 78c(a)(8).
      2. A “domestic concern” includes:
        1. Any person who is a citizen, national, or resident of the United States; or
        2. Any corporation that has its principal place of business in the United States, or which is organized under the laws of a State of the United States or a territory, possession, or commonwealth of the United States.

          Id. § 78dd-2(h)(1)(B).

    3. Elements of the Offense.
      1. A party subject to the FCPA’s anti-bribery provisions, who
      2. Uses or authorizes the use of the U.S. mail or any means or instrumentality of interstate commerce or authorizing such use, including:
        1. telephone calls
        2. facsimile transmissions
        3. Internet
        4. wire transfers
        5. interstate or international travel
      3. In furtherance of an offer, promise, authorize or make a payment of money or “anything of value,” including:
        1. Excessive gifts or entertainment provided to foreign officials or their representatives; and
        2. Any tangible or intangible object, services, or facilities provided to foreign officials or their representatives other than for purposes of promoting or demonstrating the company’s products or services.
        3. Anything of value” is construed quite literally, as the FCPA does not provide a de minimus exemption.
      4. To any “foreign official,” defined broadly to include any:
        1. employee or agent of a foreign government or foreign government-owned or controlled entity;
        2. official or candidate for a foreign political party; and
        3. employee or agent of a public international organization (e.g., the Red Cross, United Nations or World Bank).
      5. With “corrupt” intent
      6. For the purpose of:
        1. influencing any official act or decision;
        2. inducing a violation of a lawful duty; or
        3. securing any improper advantage.

        The Second Circuit in Stichting Ter Behartiging Van De Belangen Van Oudaandeelhouders In Het Kapitaal Van Saybolt Int’l B.V. v. Schreiber (“Schreiber”), 327 F.3d 173, 182 & n.7 (2d Cir. 2003), held that the FCPA incorporates elements of the crime of bribery by proscribing corrupt acts “for purposes of . . . influencing any act.” (referring to the bribery provision, 18 U.S.C. § 201(b)(2)). To establish bribery, “there must be a quid pro quo – a specific intent to give or receive something of value in exchange for an official act.” United States v. Sun-Diamond Growers, 526 U.S. 398, 404-05 (1999).

        Thus, to prosecute a person under the FCPA’s anti-bribery provisions, the Government must prove the person’s specific intent to make payments to a foreign official as a quid pro quo for an official act. See also United States Department of Justice, Lay Person’s Guide to FCPA, http://www.usdoj.gov/criminal/fraud/docs/dojdocb.html (last visited July 4, 2007) (“The person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person”) (emphasis added).

      7. In order to obtain or retain business for any person.
    4. The “Any Person” Provision.
      1. Since 1998, the FCPA also covers “any person,” which is defined as any person or entity other than an issuer or a domestic concern, including foreign persons or companies.
      2. Such person is subject to criminal liability if s/he commits an act in furtherance of a payment otherwise prohibited by the FCPA while in the U.S. or in U.S. territory.
    5. Alternative Jurisdiction Provision.
      1. Since 1998, there has been an alternative jurisdiction provision covering United States individuals and corporations.
      2. 15 U.S.C. § 78dd-2(i)(1) provides:

        It shall be unlawful for any United States person to corruptly do any act outside the United States 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 [a foreign official] … irrespective of whether such United States person makes use of the mails or any means or instrumentality of interstate commerce in furtherance of such offer, gift, payment, promise, or authorization.

      3. Thus, U.S. individuals and corporations may be held liable under the FCPA in the absence of any territorial nexus to the United States, i.e., even if the prohibited conduct occurred entirely outside the United States.
    6. Knowledge Requirement.
      1. Actual Knowledge.
        1. A person has the requisite knowledge with respect to misconduct if such person has a firm belief or is aware that s/he is engaging in such conduct, that such circumstances exist, or that such result is substantially certain to occur. 15 U.S.C. §§ 78dd-1(f)(2), 78dd-2(h)(3), 78dd-3(f)(3).
      2. Willful Blindness.
        1. Under the FCPA, “knowledge” is not limited to actual knowledge. The FCPA explicitly provides that knowledge may also be established if a person “is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.” Id.
        2. Thus, knowledge may be implied if a person deliberately insulates himself or herself from, or consciously disregards, suspicious actions or circumstances (i.e., “red flags”).
  2. Permissible Payments and Affirmative Defenses.
    1. The FCPA does not prohibit all payments to foreign officials. The statute recognizes exceptions or affirmative defenses for three types of payments.
      1. Routine Government Action.
        1. The FCPA permits “facilitating” or “grease” payments to foreign officials to expedite “routing governmental action,” which includes:
          1. obtaining business permits, licenses, or other official documents;
          2. processing governmental papers;
          3. providing police protection, mail pick-up and delivery, or scheduling inspections;
          4. providing telephone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or
          5. actions of a similar nature.

            15 U.S.C. §§ 78dd-1(b), 78dd-2(b), 78dd-3(b).

        2. To qualify as a “facilitating” payments under this exception:
          1. the payment must not be used to influence a foreign official to award or continue business with any party;
          2. the duties of the foreign official receiving the payment must be ministerial or clerical;
          3. the foreign official’s task should not involve matters in which he or she has discretion; and
          4. the payment is legal and customary in the foreign country.
      2. The FCPA also provides two affirmative defenses for payments to foreign officials. 15 U.S.C. §§ 78dd-1(c), -1(f)(3); 78dd-2(c), -2(h)(4); 78dd-3(c), -3(f)(4)(A).
        1. Payments that are lawful under the written laws and regulations in the country in which they were made. 15 U.S.C. §§ 78dd-1(c)(1), 78dd-2(c)(1), 78dd-3(c)(1).
          1. The presence of written law affirmatively authorizing the activity is necessary to satisfy this defense.
          2. Any claim that the payment is “traditional” or “common” will not support the legality of the payment.
        2. Payments that constitute a “reasonable and bona fide expenditure.” 15 U.S.C. §§ 78dd-1(c)(2), 78dd-2(c)(2), 78dd-3(c)(2).
          1. The bona fide expenditures may include travel, meals, lodging and other business expenses.
          2. The expenditures must have no corrupt purpose and must be “directly related” to:
            1. the promotion, demonstration, or explanation of products or services; or
            2. the execution or performance of a contract.
    2. Other Potential Defense: Gratuity Payments.
      1. There is a strong legal argument that the FCPA only criminalizes bribery payments, which require a “quid pro quo,” and that, therefore, gratuities fall outside the proscriptions of the FCPA. See Schreiber, 327 F.3d at 183; Sun-Diamond Growers, 526 U.S. at 404.
      2. “The only element which distinguishes bribery from giving a gratuity is the specific intent to influence which is required for conviction of bribery.” United States v. Harary, 457 F.2d 471, 475 (2d Cir. 1972).
      3. Practice Tip: When a person does not intend for a payment to be the primary motivation of an official’s action, because s/he gives the payment believing that the official will perform the action regardless, such a payment is merely a gratuity. See United States v. Muldoon, 931 F.2d 282, 287 (4th Cir. 1991) (“[A]n illegal gratuity is a payment made for an act by the recipient that might have been done without any payment.”); see also United States v. Gatling, 96 F.3d 1511, 1522 (D.C. Cir. 1996) (“[P]ayments to a public official for acts that would have been performed in any event . . . are probably . . . gratuities rather than bribes.”) (quoting United States v. Campbell, 684 F.2d 141, 148 (D.C. Cir. 1982)).
  3. Jurisdiction.
    1. One must always assess carefully whether the United States can properly assert jurisdiction.
    2. The government, in its hyper-aggressive effort to enforce the FCPA, seems to cut corners when it comes to asserting jurisdiction. As described below, there may be ways to push back.
    3. Issuers and Domestic Concerns
      1. Issuers and domestic concerns are not necessarily liable for the acts of their foreign subsidiaries with respect to the anti-bribery provisions of the FCPA.
      2. Practice Tip: In order for parent companies to face liability for the corrupt acts of their foreign subsidiaries abroad, the government must establish a proper basis for doing so.
      3. To establish vicarious liability of the parent, the government may assert various legal theories.
        1. The first way for the government to establish liability is to show that the parent authorized the improper payment, or gave money to its subsidiary with knowledge that some of the money would be used to make improper payments. 15 U.S.C. §§ 78dd-1(a); 78dd-2(a).
          1. Of course, to do so, there must be evidence of such authorization or proof that an officer, director, employee, or agent of the parent corporation had such improper knowledge.
        2. The second way is under a piercing the corporate veil (“PCV”) theory.
          1. PCV assumes that the two separate entities (parent and subsidiary) are essentially the same actor.
          2. PCV is an extremely difficult standard to overcome, particularly if the parent and the subsidiary observe appropriate corporate formalities. Courts generally recognize a presumption of separateness between a parent corporation and its subsidiary. Am. Protein Corp. v. AB Volvo, 844 F.2d 56, 60 (2d Cir. 1988).
          3. Piercing the corporate veil is, therefore, only appropriate when the subsidiary has no will of its own and is independent of the parent in form only, or is the parent’s alter ego. Thompson-CSF, S.A. v. Am. Arb. Ass’n, 64 F.3d 773, 777 78 (2d Cir. 1995); see also Maung Ng We v. Merrill Lynch & Co., No. 99 Civ 9687, 2000 U.S. Dist. LEXIS 11660, at *9-10 (S.D.N.Y. Aug 14, 2000) (parent may be found liable for the subsidiary’s acts on the assumption that “the parent fraudulently induced the subsidiary to incur the obligation”).
        3. The third way for the government to establish liability is under an agency theory. The government has, in the past, simply asserted that employees of foreign subsidiaries are either employees or agents of the parent corporation. The law, however, makes clear that such an agency relationship is not so easily established.
          1. In order to establish an agency relationship:
            1. there must be an understanding between the parties that the principal is to be in control of the undertaking;
            2. there must be a manifestation by the principal that the agent shall act for and on behalf of him; and
            3. the agent must accept the undertaking.

              Cleveland v. Caplaw Enters., 448 F.3d 518, 522 (2d Cir. 2006); Manley v. AmBase Corp., 337 F.3d 237, 246 (2d Cir. 2003); Maung Ng We, 2000 U.S. Dist. LEXIS 11660, at *11.

          2. Subsidiaries may be found to be agents of their parents. Just as one corporation can hire another to act as its agent, a parent can commission its subsidiary to do the same. Royal Indus. Ltd. v. Kraft Foods, Inc., 926 F. Supp. 407, 413 (S.D.N.Y. 1996).
          3. However, “[t]his does not mean that every subsidiary is the agent of its parent; so to declare would be to destroy the privilege of limited liability obtained by satisfying the incorporation law which permits the subsidiary to be organized.” Comind, Companhia de Seguros v. Sikorsky Aircraft Div. of United Tech. Corp., 116 F.R.D. 397, 405 (D. Conn. 1987) (quoting 3 Restatement, Second, Agency § 14m, reporter’s notes).
      4. Foreign Subsidiaries
        1. Foreign subsidiaries (or their officers, directors, employees and agents) of issuers or domestic concerns are not automatically liable under the FCPA.
        2. With respect to non-U.S. companies and individuals (and unless they are agents of an issuer or domestic concern), the FCPA only applies if they commit an act in furtherance of an FCPA violation “while in the territory of the United States.” 15 U.S.C. § 78dd-3 (emphasis added). This language thereby indicates that the person must have either committed the act or used the mails or instrumentality of interstate commerce in furtherance of a bribe while that person is physically located within U.S. territory.
        3. The Department of Justice (DOJ), however, has taken a more aggressive position with respect to the phrase “while in the territory of the United States” than the FCPA supports. The DOJ-Department of Commerce brochure on the FCPA states that any person is subject to the FCPA if “it causes, directly or through agents, an act in furtherance of the corrupt payment to take place within the territory of the United States” (emphasis added). Thus, the DOJ contends that only the occurrence of the act, and not necessarily the person subject to the FCPA, needs to be in U.S. territory.
        4. Recent cases brought by the Government suggest that it will aggressively claim jurisdiction over “any person” under the FCPA.
          1. SEC v. Syncor Int’l Corp., 79 SEC Docket 378 (Dec. 10, 2002). The government pursued an FCPA action under the “any person” provision, where there was only a minor act that was minimally in furtherance of a corrupt payment -- an e-mail approving questionable expenses.
          2. In re Baker Hughes Inc., Exchange Act Release No. 44,784 (Sept. 12, 2001). The government asserted that an Indonesian accounting firm and its senior partner, both hired by a foreign subsidiary of an issuer, constituted “any person” pursuant to the FCPA, even though it did not allege that the partner or any employee of the firm conducted activity while in United States territory.
          3. SEC v. ABB Ltd., Litig. Release No. 18775, 2004 SEC LEXIS 1425 (July 6, 2004). The government claimed that a foreign subsidiary in the United Kingdom violated the FCPA under the “any person” provision, by offering payment to government officials in Kazakhstan, Nigeria, and Angola. Its complaint alleged neither which action of the subsidiary fell under FCPA’s jurisdiction, nor whether the subsidiary acted in furtherance of a corrupt payment while in U.S. territory.
        5. Nevertheless, no courts have ruled on this issue. All of the above cases involved settlement. This is an issue, therefore, that is ripe for an appropriate challenge, assuming the “any person” can afford the risks associated with making such a challenge. See infra.
      5. One Last Argument – the Rule of Reasonableness.
        1. The Government’s assertion of extraterritorial jurisdiction is subject to the requirement of “reasonableness,” in light of the interests of affected parties implicated by the Government’s reach. H. Lowell Brown, Extraterritorial Jurisdiction under the 1998 Amendments to the Foreign Corrupt Practices Act, 26 N.C. J. Int’l L. & Com. Reg. 239, 301 (2001).
      6. Thus, a careful analysis of the jurisdictional issues may provide grounds for avoiding liability, at least with respect to the anti-bribery provisions of the FCPA.
      7. Practice Tip: Nevertheless, a company must consider carefully the decision to challenge the Government if they are insistent on prosecuting the company. Settlement is often the safer course, notwithstanding extremely strong defenses.
        1. Even if a company has jurisdictional defenses to the anti-bribery provisions of the FCPA, it may face a tougher time defending itself against a charge that it violated the FCPA’s accounting provisions.
        2. Even if a company might ultimately defend itself successfully, the harm to a company from its mere indictment may be catastrophic. As the case of Arthur Andersen has shown, prevailing entirely may be an entirely pyrrhic victory indeed.

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