New DOJ, SEC guide on FCPA warns and provides roadmap to other crimes corruption brings

As if the expanding population coming into the sights of government investigators and prosecutors for possible Foreign Corrupt Practices Act violations do not have enough to worry about with this broader assault on corruption, the new government FCPA guidance of last week warns them and provides roadmaps to other tough felonies that come into play when corruption is found.

What the Justice Department and SEC call the “the most comprehensive effort ever undertaken to explain enforcement of the Foreign Corrupt Practices Act,” in referring to the guide, is also a tutorial on various first cousins of the FCPA.

The 120-page FCPA guidance is an attempt to clarify some of the contentious compliance and enforcement issues in the far-reaching law, which is the world’s oldest anti-corruption law and touches all corners of the world.

No financial institution will lose sight of the fact that every FCPA case involves a financial institution at some point in the corruption scheme, on the giving or the receiving end or both.

Three first cousins of all FCPA violations

US laws closely connected to the FCPA include three staples of almost all FCPA violations – money laundering, tax evasion and international travel or funds transfers.

Money laundering is a sleeping monster in FCPA enforcement. The principal US money laundering law includes FCPA violations as one of its 230 or so “Specified Unlawful Activities.” (Title 18, USC Sec. 1956(c)(7)).

This puts in danger of money laundering charges not only the direct players to the foreign corruption but also the financial institutions whose facilities are used to move or hold the dirty money. The legal concept of “willful blindness” has been used against bankers and banks in money laundering prosecutions. It is often use to prove “knowledge” and complicity in underlying criminal activity, such as FCPA crimes.

The ‘Travel Act’ also tackles other ‘mobs’

The new guide also warns of another law, which was enacted decades ago to attack organized crime. It is commonly called the Travel Act and prohibits travel in interstate or foreign commerce or using the mail or a facility in this commerce, intending to distribute the proceeds of an unlawful activity or promote or carry on the activ­ity. (Title 18, USC Sec. 1952)

“Unlawful activity” includes violations of the FCPA, as well as state commercial bribery laws. The guide gives the example of a company paying kickbacks to an employee of a private company who is not a foreign official. It says this “private-to-private bribery” could be charged as a Travel Act violation.

Who ever heard of a corrupt person reporting bribes as income?

The guide also warns that FCPA crimes may also violate US tax laws, which cover a range of common corruption-related ruses. These include false deductions, evaded income, deduc­tions for bribes, and deductions for false sales commissions.

The FBI, Internal Revenue Service Criminal Investigation and the US Postal Inspectors are the principal federal players in these investigations, usually in aid of the work of federal grand juries which are directed by federal prosecutors.

Prosecutions under the law have increased dramatically in the past 15 years. Thus, there is little doubt that corporate counsel, compliance officers and risk managers at US companies and those in other countries that do business in the United States will absorb the new guidance.

The guidance is described as “non-binding, informal, and summary in nature” and not to be taken as “rules or regulations” or as creating “any rights, substantive or procedural.”

‘Corruption has corrosive effects on democratic institutions’

The guidance lays this groundwork about the focus of the FCPA: “Corruption has corrosive effects on democratic institutions, undermining public accountability and diverting public resources from impor­tant priorities such as health, education, and infrastructure. When business is won or lost based on how much a company is willing to pay in bribes rather than on the quality of its products and services, law-abiding companies are placed at a com­petitive disadvantage—and consumers lose.”

The guidance is divided into 10 chapters, including one on whistleblower incentives and procedures, and several appendices. It is also laced with hypothetical situations in which the reader is asked to determine a corrupt scenario or improper activity.

“No one knew what to expect with this guidance,” said Matteson Ellis, principal of Ellis Law, in Austin, and a specialist in FCPA cases. “Few thought it would be so detailed, comprehensive, and instructive. Certainty and predictability are key in business, and in the uncertain world of foreign corruption and compliance, this gets us closer to understanding expectations.”

“Most helpful are the specific hypothetical scenarios provided,” he adds. “These create benchmarks for companies looking to pursue business opportunities aggressively and doing so in a compliant way.”

Guidance tackles thorny definitions in FCPA

The “Resource Guide to the Foreign Corrupt Practices Act” tackles the definitions for some terms in the FCPA, such as who is a “foreign official” and what is an “instrumentality” of a foreign government.

The guidance also addresses the enforcement and prosecution approach to FCPA violations of the Justice Department and SEC, describing nine factors they consider when pondering an enforcement action.

Possibly the greatest assistance to financial institutions, corporations and other business entities that the guidance provides are the basic elements of an effective FCPA compliance program.

Kelvin Dickenson, Vice President of D&B Global Risk Management Solutions, said, “The FCPA guidance from the DOJ and SEC is good news. It help thousands of businesses, including our customers, more clearly see the way to adopting anti-corruption programs that allow prevention of corruption in their supply and distribution channels, as they continue to seek and win business in foreign markets.”

Agencies tout FCPA enforcement ‘clarity and transparency’ in guidance

At a November 14 press conference announcing the guidance, Assistant Attorney General Lanny Breuer and SEC Director of Enforcement Division Robert Khuzami stressed that the guidance was not a shift in policy shift but a clarification of the policies of the two government entities.

“The real value of [this guidance] is clarity and transparency,” said Khuzami. “It allows us to communicate directly with public companies. Company officials can pick this up and read it, understand what we’re doing…, and understand how to run their compliance programs accordingly.”

“While there’s been no shift in policy, it’s incredibly helpful in that we have the government putting pen to paper and standing behind some of the positions it’s been advancing unofficially for years,” says Matthew Reinhard, a partner at Miller & Chevalier, in Washington, DC, who specializes in FCPA matters.

Guidance does not ‘give in to any side,’ says Breuer

Critics of FCPA enforcement, such as the US Chamber of Commerce, may find little to love in the guidance. Breuer made clear at the press conference that the guidance avoids the “bright-line” policies the Chamber has long advocated, including defined rules on what level of government ownership constitutes an “instrumentality” of a foreign government.

“The goal was to explain what we do and why we do it, not to give in to any side,” Breuer said. He added that the guidance was partly intended to “debunk myths – myths that said we brought cases for trivial reasons. We have not and will not.”

Agencies assure that ‘trivial’ gifts, entertainment are not violations

Breuer and Khumazi stressed that “legitimate” or “minor” gifts and entertainment expenses will not be targeted.

“We’re not interested in the $5 cup of coffee, we’re interested in clear and substantial payments to foreign officials to obtain or retain business,” Khumazi said.

The guidance hammers home that point. “[It] . . . is difficult to envision any scenario in which the provision of cups of coffee, taxi fare, or company promotional items of nominal value would ever evidence corrupt intent, and neither DOJ nor SEC has ever pursued an investigation on the basis of such conduct,” it says.

“Regardless of size, for a gift or other payment to violate the statute, the payor must have corrupt intent—that is, the intent to improperly influence the government official,” it continues.

‘Instrumentality’ issue addressed, but no rule provided

Few issues in FCPA compliance cause as much consternation as the meaning of “instrumentality.” The law forbids corrupt payments to employees of any foreign government instrumentality, but provides no definition of the term.

The guidance provides no relief but cites multiple factors that may help resolve the issue on a case-by-case basis.

“The DOJ and SEC have pursued cases involving instrumentalities… and have long used an analysis of ownership, control, status, and function to determine whether a particular entity is an agency or instrumentality of a foreign government,” it says.

It lists 11 “non-exclusive factors to be considered” when determining what is an “instrumentality.” The factors were gleaned from jury instructions given by US District Court judges over time in FCPA criminal trials. The guidance suggests a 50% ownership threshold is, at least, a key indicator of an “instrumentality.”

“As a practical matter, an entity is unlikely to qualify as an instrumentality if a government does not own or control a majority of its shares,” the guidance says.

“However, there are circumstances in which an entity would qualify as an instrumentality absent 50% or greater foreign government ownership,” it adds, referring to a few DOJ or SEC enforcement actions that have been instituted in such situations.

Guidance reveals ‘9 factors’ that underlie enforcement actions

The guidance provides valuable advice on the enforcement standards that the Justice Department and SEC have adopted in reaching deferred prosecution agreements, issuing opinion releases, and in their speeches.

The guidance states that “nine factors are considered in conducting an investigation, determining whether to charge a corporation, and negotiating plea or other agreements,” They are:

  • Nature and seriousness of the offense, including the risk of harm to the public,
  • Pervasiveness of wrongdoing within the corporation, including the complicity in… the wrongdoing by… management,
  • History of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it,
  • Timely and voluntary disclosure of wrongdoing and willingness to cooperate in the investigation,
  • Existence and effectiveness of a pre-existing compliance program,
  • Remedial actions,
  • Collateral consequences, including… disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable,
  • Adequacy of the prosecution of individuals responsible for the…  malfeasance
  • Adequacy of remedies such as civil or regulatory enforcement actions.

Guidance specifies elements of an ‘effective’ compliance program

Compliance officials and other persons designing anti-corruption programs will be pleased to know that the guidance provides comprehensive standards for an FCPA compliance program.

In its “Hallmarks of Effective Compliance,” the guidance lists 12 factors that make a sound FCPA compliance program:

  • Commitment from senior management,
  • Accessible and updated written code of conduct and compliance procedures,
  • Compliance officials with “appropriate authority… adequate autonomy… and sufficient resources,”
  • Risk assessment on transactions, payments and business actions,
  • Continuous training and advice,
  • Incentives for compliance and disciplinary measures for violators of compliance standards,
  • Due diligence on third parties, such as sales agents and distributors,
  • Methods for confidential reporting and effective internal investigation,
  • “Periodic testing and review” of the compliance program.

The guidance alludes to the spread of anti-corruption laws in other countries and suggests that business organizations pay attention to compliance risks beyond US shores.

“Businesses should consider designing programs focused on anti-corruption compliance more broadly,” the guidance advises.

Thorny definition of ‘foreign official’ still pending

The question of who is a foreign official under the FCPA has been an issue in court cases for many years. The Justice Department and SEC historically have cast a wide net in their enforcement actions and have defined the term to include elected officials, political appointees and employees of state-owned enterprises.

The guidance indicates that the agencies do not intend to back down from that expansive definition.

The FCPA applies to corrupt payments to “any” officer or employee of a foreign government and to those acting on the foreign government’s behalf,” the guidance emphasizes. “The FCPA thus covers corrupt payments to low-ranking employees and high-level officials alike.”

The guidance also stresses that payments made to a government agency may constitute an FCPA violation risk.

“The FCPA prohibits payments to foreign officials, not to foreign governments,” the guidance says. “That said, companies contemplating contributions or donations to foreign governments should take steps to ensure that no monies are used for corrupt purposes, such as the personal benefit of individual foreign officials.”

Books and records compliance also addressed in guidance

The guidance also focuses on the FCPA’s unique accounting provisions.

Sulaksh Shah, a specialist in FCPA accounting requirements and Director of PwC Forensic Services, says, “The guidance gives a good overview of the FCPA’s accounting provisions and helpful examples of internal control failures and accounting violations, which could include criminal liability.

“It also elucidates Sarbanes Oxley compliance duties and their FCPA implications. Many companies and non-FCPA practitioners may not be aware of this important linkage to FCPA compliance,” he continued

Guidance highlights overlap of FCPA with money laundering, tax fraud

Recognizing the commonalities shared by all financial crimes, the DOJ and SEC also include a section on how FCPA violations intersect with other violations of US law, including money laundering, wire fraud and tax evasion.

“Businesses and individuals should be aware that conduct that violates the FCPA’s anti-bribery or accounting provisions may also violate other statutes or regulations,” the guidance states. “Moreover, payments to foreign government officials and intermediaries may violate these laws even if all of the elements of an FCPA violation are not present.”

The guidance notes that “many FCPA cases also involve violations of anti-money laundering statutes,” and highlights a recent case in which three Haitian officials were convicted on money laundering charges for taking bribes from a US company. The Justice Department has increasingly been using the international scope of US money laundering laws to target not only bribe payers, but the recipients as well.

The guidance also suggests the increasing frequency of inter-agency cooperation in FCPA cases. In recent years, the Justice Department has received investigative and analytic support in FCPA cases from a growing network of law enforcement agencies, including the FBI, US Immigration and Customs Enforcement, and Internal Revenue Service Criminal Investigation division.

“[IRS-CI] has been involved in a num­ber of FCPA investigations involving tax violations, as well as other financial crimes like money laundering,” the guidance says.

While welcomed by all, guidance is not binding

Many FCPA practitioners caution that the guidance is not binding. “One thing to remember is that this is exactly what it says it is – guidance,” says Reinhard. “In the end, it’s not law.”

“How useful this [guidance] will end up being depends on how it’s treated by the Justice Department and SEC,” he concludes.

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