DOJ and SEC Publish Second Edition of "A Resource Guide to the U.S. Foreign Corrupt Practices Act"
“I gave you prophecy on my first joint, and y’all lamed out
Didn’t really appreciate it, til the second one came out”
— Jay Z, Hard Knock Life (Ghetto Anthem)
On July 3, 2020, the Department of Justice Criminal Division (DOJ) and the Securities and Exchange Commission (SEC) published their second edition of A Resource Guide to the U.S. Foreign Corrupt Practices Act. When they originally published the Resource Guide in 2012, it marked the first time the two federal agencies had made available to practitioners such detailed, consolidated information about the FCPA statute and their enforcement efforts. Although the SEC and DOJ released a version with minimal, non-substantive changes in 2015, the 2020 edition is the first significant update in the eight years, during which time defendants increasingly challenged FCPA prosecutions thereby generating a significant body of case law.
Organization of the Resource Guide
The Second Guide, like the First Guide, discusses: (1) the provisions of the FCPA, the agencies’ interpretations of the provisions; (2) the criminal and civil cases that the agencies have tried or appealed, respectively; (3) some hypothetical factual scenarios and the outcomes under the agencies’ interpretations of the provisions; and (4) the conditions, circumstances, and factors that the agencies consider when deciding whether to bring criminal or civil actions (or both) and the extent to which they will seek penalties, and how the criminal and civil penalty amounts relate one to the other.
Included among the new topics are: (1) the 1998 extension of the FCPA’s jurisdictional reach, which can rest on nationality and not interstate commerce; (2) the meaning of “foreign official”; (3) the affirmative defense of compliance with “foreign written laws”; (4) the liability of successors in mergers and acquisitions; (5) the SEC’s disgorgement authority; (6) the DOJ’s new enforcement and compliance policies; and (7) the mens rea and statute of limitations for criminal violations of the accounting provisions. The Resource Guide also notes that “a number of countries have implemented foreign bribery laws and significantly increased their enforcement efforts.”
The FCPA Statute
The Foreign Corrupt Practices Act of 1977 (“FCPA”), which amended the Securities and Exchange Act of 1934 (“Exchange Act”), consists of: (1) three anti-bribery provisions, each of which addresses a different scenario: 15 U.S.C. § 78dd-1, § 78dd-2, and § 78dd-3 (“Prohibitions”); and (2) two accounting provisions, 15 U.S.C. § 78m(b)(2)(A) and § 78m(b)(2)(B). These accounting provisions complement the anti-bribery provisions because public companies must account for the assets, typically cash, which they allegedly use to pay bribes in these unlawful transactions. Accounting for the unlawful transaction may be accomplished by ignoring it or mischaracterizing the true use of the expended assets. Importantly, no value threshold is required to violate either the anti-bribery provisions or the accounting provisions; even if a company avoids liability under the anti-bribery provisions as a result of a lack of jurisdiction, it may still be subject to legal action for violating one or both of the accounting provisions.
The Anti-Bribery Provisions
The Prohibitions generally make it unlawful for the scenario-specific agent(s) to make use (1) of the mails or any means or instrumentality of interstate commerce [jurisdictional means] corruptly (2) 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 [bribe] to any foreign official to induce (3) for the purpose of influencing or inducing a foreign official, foreign political party, foreign party official, candidate for foreign political office, or person to provide an illegal act or improper business advantage relative to the foreign government or otherwise. The affirmative defenses that the Second Guide discusses include the Local Law Defense and the Reasonable and Bona Fide Expenditures defense.
The Accounting Provisions
Unlike the FCPA anti-bribery provisions which apply to issuers of stock or companies required to file with the SEC, the accounting provisions apply to “any person.” Section 78m(b)(2)(A), known by its Exchange Act section number, 13(b)(2)(A), is the books-and-records provision that requires public companies to make and keep books, records, and accounts in reasonable detail in order that they accurately and fairly reflect the transactions and dispositions of the assets of the issuer, and § 78m(b)(2)(B), known by its Exchange Act section number 13(b)(2)(B), is the internal-controls provision that requires public companies to 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; and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets.
Notable Legal Updates to the Resource Guide
The SEC and DOJ note that the 1998 amendments to the FCPA created an alternative basis for jurisdiction based on the actor’s nationality. Thus, even if a U.S. citizen or U.S. entity does not act within “interstate commerce” in the United States, the FCPA applies as to that individual or entity even outside the United States. This expanded jurisdiction, however, does not apply to non-U.S. nationals acting outside the United States. In United States v. Hoskins, the Second Circuit held that foreign nationals who do not fall within the “categories of persons directly covered” by the FCPA cannot be convicted of conspiracy to violate the statute nor of aiding and abetting an FCPA violation that occurred outside the United States. In reaching this holding, the court found that the FCPA expressly applies only to overseas conduct of U.S. “issuers” and “domestic concerns” and their officers, directors, employees, agents, and stockholders.
Significantly, the Resource Guide notes that Hoskins is limited to the Second Circuit, and it highlights a district court in the Seventh Circuit that declined to follow it. The Resource Guide also clarifies that the Second Circuit’s decision does not impact the extraterritorial reach of the FCPA’s accounting provisions because those provisions expressly apply to “any person” rather than the enumerated categories. With these two editorial details, the agencies may be signaling that they intend to push the extraterritorial reach of the FCPA in future enforcement actions.
Definition of Foreign Official and the Test for Instrumentality
Under the FCPA, a “foreign official” is “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The statute itself is silent as to what constitutes an “instrumentality.” However, in United States v. Esquenazi, the Eleventh Circuit defined the term as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The decision reinforced the DOJ’s position that instrumentality was a fact-bound question rather than a term with a limited definition and one dispositive factor. The Resource Guide now explicitly endorses the test for instrumentality as provided by the Esquenazi court:
(1) Whether the government controls the entity:
- the foreign government’s formal designation of the entity,
- whether the government has a majority interest in the entity,
- the government’s ability to hire and fire the principals,
- the extent to which the government profits from or subsidizes the entity, and
- the length of time these indicia have existed.
(2) whether the entity performs a function that the government treats as its own:
- whether the entity has a monopoly over the function it exists to carry out,
- whether the foreign government subsidizes the costs associated with the entity providing the services,
- whether the entity provides services to the public at large in the foreign country, and
- whether the foreign government generally perceives the entity to be performing a governmental function.
Local Law Defense
The FCPA provides a so-called local-law affirmative defense: “It shall be an affirmative defense … that … 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.” 15 U.S. Code § 78dd–1(c)(1). The Resource Guide notes that “if a defendant can establish that conduct that otherwise falls within the scope of the FCPA’s anti-bribery provisions was lawful under written, local law, he or she would have a defense to prosecution,” and references United States v. Kozeny, a Southern District of New York opinion addressing whether the written law of Azerbaijan authorized one to pay a bribe. The Court ruled that although the law relieved the payer of liability for having paid a bribe, it did not make the payment lawful. The Resource Guide also references United States v. Ng Lap Seng, another Southern District of New York case in which the judge denied a Chinese defendant’s request for a jury instruction that the payments at issue in his FCPA prosecution were not unlawful under the written laws and regulations of Antigua and the Dominican Republic, a denial the defendant did not appeal.
M&A Successor Liability
The Resource Guide now provides greater clarity on corporate successor liability under the FCPA in the context of mergers and acquisitions. The agencies concede that “in certain instances, robust pre-acquisition due diligence may not be possible.” In such a circumstance, the timeliness and thoroughness of compliance integration efforts, appropriate due diligence, and voluntary disclosure of uncovered wrongdoing post-acquisition will be the primary considerations for the DOJ and SEC in deciding whether to take action against a successor for violations identified at a predecessor company. With regard to post-acquisition actions, the Resource Guide tracks the guidance issued in the DOJ’s FCPA Corporate Enforcement Policy; namely, that if the successor voluntarily discloses post-transaction misconduct by the predecessor and takes remedial steps, it may still receive a declination.
Mens Rea Requirement for Criminal Violations of the Accounting Provisions
The Resource Guide states that criminal liability under the Accounting Provisions arises when the company or individual “knowingly and willfully” fails to comply with the books and records or internal accounting controls. Furthermore, the Guide explicitly provides that the five-year limitations period in 18 U.S.C. § 3282 applies to substantive violations of the anti-bribery provisions, but the limitations period for violations of the accounting provisions, defined as “securities fraud offenses,” is six years.
Notably, the Resource Guide is updated with the holdings from two recent U.S. Supreme Court decisions that limit the scope of SEC’s ability to seek disgorgement as an equitable remedy in enforcement actions pursued in federal court, including those brought under the FCPA. In Kokesh v. SEC, the Supreme Court held that disgorgement is a penalty subject to the five year statute of limitations of 28 U.S.C. § 2462. In Liu v. SEC, the Court held that the SEC has the authority to obtain disgorgement, but as an equitable remedy where the disgorged amount may not exceed the defendants’ net profits from the misconduct and generally must be refunded to the specific fraud victims. AGG’s in-depth coverage of these two decisions and the SEC’s underlying policies can be accessed here and here.
The Resource Guide provides a roadmap on how to avoid arrangements that may violate the FCPA. It notes that the adverb “corruptly” refers to “an intent or desire to wrongfully influence the recipient” of the payment characterized as a bribe. In other words, the payer’s objective is that the payment will cause the recipient to undertake an action that (1) is illegal or improper and (2) benefits the payer or the payer’s principal or both. Achievement of the objective is not necessary for corrupt intent.
A number of hypotheticals distinguish transfers of value with “marketing intent” or for marketing purposes from transfers made with corrupt intent. Items, including gifts, travel, and entertainment that are transferred to create personal relationships and induce recipients to purchase the issuer’s product are not bribes but promotional gifts. Also, items that are transferred to customer-recipients as “tokens of esteem or gratitude” are appropriate marketing expenditures. Finally, donations and charitable payments are acceptable if they are “not … used as a vehicle to conceal payments made to corruptly influence foreign officials.” Transparency — the availability of the information and the accounting for the transfer — is important when the intent for transferring an item of value approaches corrupt intent.
Corporate Compliance Program Guidance
Perhaps the Resource Guide’s most significant updates concern changes to the DOJ and SEC’s guidance on for corporate compliance. It includes the DOJ’s most recent update to its guidance on “Evaluation of Corporate Compliance Programs” published in June of 2020. Notably, these changes emphasize the need to: (i) conduct meaningful risk assessments; (ii) create a corporate culture of compliance and “tone at the top”; and (iii) continuously improve and update the compliance program so that it remains effective. The updated guidance was organized around the key question: “is the program adequately resourced and empowered to function effectively?” AGG’s analysis of the June 2020 evaluation guidance can be accessed here.
The key features of a strong risk-based compliance program include a corporation’s encouragement, confidentiality, and acceptance of confidential reports and follow-up Internal Investigations on those reports. Continuous improvement is, according to the DOJ and SEC, necessary not only because the business and its environment change but also because portions of a program benefit when problems or gaps are discovered and systematically addressed. The Resource Guide specifically notes that the “DOJ and SEC evaluate whether companies regularly review and improve their compliance programs and do not allow them to become stale.”
FCPA Corporate Enforcement Policy
The Resource Guide expressly incorporates the DOJ’s FCPA Corporate Enforcement Policy which was piloted in 2016, formalized in 2017, and updated most recently in 2019. Specifically, the Guide endorses the presumption that the DOJ will decline to prosecute companies that voluntarily self-disclose misconduct, fully cooperate during an investigation, and timely remediate identified violations and other failures of conduct.
FCPA Internal Controls Provision
The Resource Guide addresses the FCPA’s internal accounting controls provision, which requires companies to establish processes that provide “reasonable assurances” regarding the reliability of financial reporting and preparation of financial statements. While the Guide acknowledges that “an effective compliance program contains a number of components that may overlap with a critical component of an issuer’s internal accounting controls,” it is crucial that a company recognize that internal controls are not synonymous with the company’s compliance program. A company’s internal controls must take into account the “operational realities and risks attendant to the company’s business,” such as the types of products and services offered, supply chain, work force, degree of regulation, extent of government interaction, and operations in high-risk jurisdictions.
Imposition of Corporate Monitors
The Resource Guide incorporates the DOJ’s “Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations,” which it first published in 2008 and has regularly updated with the last update in 2018. This guidance provides a list of factors for considering the “potential benefits” of a monitor: (1) the type of misconduct (i.e., whether it involved manipulation of corporate books and records or exploitation of an inadequate system of internal controls); (2) the pervasiveness of the misconduct, and whether it was approved or facilitated by senior management; (3) the company’s investments in, and improvements to, its corporate compliance program and internal control systems; and (4) whether remedial improvements to the compliance program and internal controls have been tested to demonstrate effective deterrence.
The Resource Guide is a useful but non-binding joint statement of the two federal agencies, the DOJ and the SEC, that investigate and prosecute, criminally and civilly, alleged violations of the FCPA provisions. It is more than a reference to the applicable case law concerning the FCPA but less than a full insight into the relationship between the two agencies. For instance, it does not address how the agencies decide when to decline joint FCPA prosecutions, although the quality and amount of evidence may be part of that decision. In the end, the Resource Guide is really a warning to companies and individuals about the U.S. government’s vigilance in this area and a roadmap on how to avoid or mitigate potential violations of the FCPA. As such, it is worthy of study and consideration.
- Aaron M. Danzig