By Nora Whitehead, Haynes and Boone, LLP
Last November, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) published joint, non-binding guidance on the U.S. Foreign Corrupt Practices Act (FCPA). The publication, entitled A Resource Guide to the U.S. Foreign Corrupt Practices Act (the “Guidelines”) (6 MELR 729, 11/28/12),1 is intended by the DOJ and the SEC to clarify the government's approach to the anti-bribery and the accounting provisions of the FCPA and to guide U.S. companies in building compliance programs that effectively avoid common pitfalls under the Act. For example, Chapter 5 of the Guidelines lays out in considerable detail the considerations each agency makes when deciding whether to open an investigation or bring charges. Additionally, Chapter 5 lays out what the DOJ and SEC consider the “hallmarks” of effective FCPA compliance programs. Although the Guidelines do not describe new enforcement priorities or dramatically revamp existing DOJ and SEC practices under the law, they do provide valuable guidance for companies looking to design or update their FCPA compliance programs.2
However, for all of the helpful detail contained in the Guidelines, specifics are notably absent in the DOJ and SEC's discussion of scienter under the FCPA, often described as paying or offering to pay a foreign official with the “corrupt intent” to assist in obtaining or retaining business. Although industry groups and corporate entities have sought clarification and guidance on the standard for determining the intent required under the FCPA, the DOJ and SEC have declined to offer much assistance in the recent Guidelines. In fact, the Guidelines devote less than a page to the issue, stating that “[t]he corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.”3 Although the SEC and DOJ offer hypothetical situations to illustrate the presence and absence of the required “corrupt intent” on the part of a U.S. company,4 such examples are so clearly on one side of the line or the other that they offer little valuable take-away for companies designing their compliance programs.
As a result, this article analyzes what is in many ways the most helpful part of the Guidelines – Chapter 5 (“Guiding Principles of Enforcement”) – in order to glean the DOJ and SEC's approach to the corrupt intent requirement. Instead of focusing on the agencies' sparse language specifically addressing the requirement itself, this article addresses their prescription for action and their suggested hallmarks of effective compliance programs. These hallmarks, more than any of the hypotheticals contained in the Guidelines, contain important clues as to the DOJ and SEC's approach to enforcement of the FCPA and their interpretation of its “corrupt intent” requirement.
The FCPA, codified at 15 U.S.C. §§78dd-1, 78dd-2, 78dd-3, 78m, and 78ff, prohibits certain U.S. companies and their employees from directly or indirectly making payments or presenting gifts to any foreign official (or political party, political party official or candidate for political office) for the purpose of influencing any act or decision of the payee or inducing the payee to use his or her influence to affect any act or decision of a foreign government or instrumentality thereof in order to obtain or retain business. In order for an individual to be criminally liable under the FCPA, he or she must have “willfully” engaged in such conduct. Proof of willfulness is not required to prove corporate criminal or civil liability, but according to the recently published Guidelines, proof of “corrupt intent” is. In a notably short discussion of scienter under the FCPA, the Guidelines note that “[t]he word ‘corruptly’ means an intent or desire to wrongfully influence the recipient” and that “[b]y focusing on intent, the FCPA does not require that a corrupt act succeed in its purpose.”5 Additionally, the agencies remark that as long as the payment or offer to pay is made corruptly, the actor need not know the identity of the recipient.
Because of the lack of detailed guidance in the DOJ and SEC's general discussion of the scope of the FCPA's anti-bribery provisions, it is helpful to take a look at six of the hallmarks of effective compliance programs listed in Chapter 5 of the Guidelines. Those six—identified by the agencies as Commitment from Senior Management and a Clearly Articulated Policy Against Corruption; Code of Conduct and Compliance Policies and Procedures; Risk Assessment; Training and Continuing Advice; Third-Party Due Diligence and Payments; and Confidential Reporting and Internal Investigation—are discussed in more detail below.
The DOJ and SEC begin their list by noting that an effective FCPA compliance policy will be reinforced and implemented by senior management, middle management, and employees at all levels. The agencies note that they “have often encountered companies with compliance programs that are strong on paper but nevertheless have significant FCPA violations because management has failed to effectively implement the program even in the face of obvious signs of corruption.”7 In turn, the agencies emphasize that a “strong ethical culture directly supports a strong compliance program.”8 Here, the agencies imply that a clear commitment by a company's management against corruption can serve as a moral code for the company's employees. If, as the Senate defined it, “[t]he word ‘corruptly’ connotes an evil motive or purpose, an intent to wrongfully influence the recipient,”9 then a clear corporate policy defining bribery as wrong would be useful in the agencies' analysis of scienter in the context of an alleged FCPA violation. After all, if there is in place a clear corporate policy that defines bribery as wrong – and the policy has been effectively communicated to all employees – any violation of such a policy would comprise a knowing, wrong act.
Next, the DOJ and SEC stress the role of a clear, unambiguous code of conduct in a company's FCPA compliance program. The DOJ emphasizes that “the most effective codes are clear, concise, and accessible to all employees and to those conducting business on the company's behalf,” and the Guidelines note that it would be difficult to implement an effective FCPA compliance program if the company's code of conduct and compliance program were not available in a foreign language so that employees of the company's foreign subsidiaries could access and understand it.11 Once again, the inclusion of this hallmark of effective compliance programs indicates that the agencies look to corporate communications regarding what conduct is “right” and “wrong” under the FCPA, and therefore, what conduct is “corrupt.” This hallmark in particular emphasizes that any corporate policy or code of conduct must be effectively communicated to the company's employees. If effective communication and dissemination has occurred, it would be difficult for an employee accused of corrupt intent to argue that he or she did not act with the requisite scienter.
Noting that risk assessment is a “fundamental” part of an effective FCPA compliance program, the agencies stress the following: “Devoting a disproportionate amount of time policing modest entertainment and gift-giving instead of focusing on large government bids, questionable payments to third-party consultants, or excessive discounts to resellers and distributors may indicate that a company's compliance program is ineffective.”13According to the agencies, “[a] $50 million contract with a government agency in a high-risk country warrants greater scrutiny than modest and routine gifts and entertainment.”14 Here, the agencies suggest – as they do in the examples in Chapter 2 of the Guidelines – that the value of the gift at issue is important in determining whether the requisite scienter was present at the time the gift was given.
In fact, this may be read to mean that the agencies anticipate the presence of scienter when analyzing improper payments in association with high-value contracts and big business, as opposed to what the agencies call “modest entertainment and gift-giving.” After all, any company – whether it has maintained a proper FCPA compliance program or not – would ostensibly perform careful due diligence and closely monitor any employees involved with a high-value contract like the $50 million contract cited above. If potentially improper payments in connection with such a high-value contract are uncovered by the agencies, it is safe to presume that both the DOJ and the SEC would view claims by the company that there was no corrupt intent with relative skepticism.
The agencies' comments with regard to risk assessment make this hallmark the most specifically helpful in terms of teasing out the government's treatment of scienter under the FCPA. Although it may be going too far to state that agencies apply a presumption of scienter when evaluating potentially improper payments made in connection with “large government bids, questionable payments to third-party consultants, or excessive discounts to resellers and distributors,”15 it is undeniable that the value of the business at stake is an important factor that may sway the agencies' analysis.
In this section, the DOJ and SEC describe their commitment to evaluating whether a company has taken steps to ensure that relevant policies and procedures have been communicated throughout the company in an appropriate and effective way, including the dissemination of training materials in the appropriate language. The agencies suggest that companies meet this standard by providing “different types of training to their sales personnel and accounting personnel, with hypotheticals or sample situations that are similar to the situations they might encounter.”17
Just as they do in the Guidelines' discussion of risk assessment, the agencies express in this section that a clear commitment by corporate management against corruption and bribery, as epitomized by detailed and audience-appropriate training, minimizes employees' and agents' capacity to claim ignorance of the FCPA.18That said, while a clear and unequivocal anti-corruption and FCPA compliance policy is absolutely essential, it is a double-edged sword. Once a company develops its policy and effectively disseminates it, it becomes that much more difficult for any employee accused of making an improper payment to claim that he or she did not do so with the requisite scienter under the law.
Switching their focus from internal activities and regulation to the evaluation of third parties, the DOJ and SEC suggest the following guiding principles for conducting due diligence on agents, consultants, and distributors: (i) understand the qualifications and associations of any third-party partners (including any relationships with foreign officials); (ii) develop an understanding of the business rationale for including the relevant third party in the transaction; and (iii) monitor third-party relationships on an ongoing basis.20
Once again, the DOJ and SEC emphasize that no company can keep its head in the sand when it comes to payments and activities prohibited by the FCPA. A company will not be able to assert a defense of ignorance of the activities of its third-party partners because the agencies will assume that such company will have appropriately vetted the relevant partner before engaging it to do business. Furthermore, the agencies' emphasis on appropriate compliance training and a clear commitment to anti-corruption should and often does translate into appropriate communication of the company's anti-corruption policy to all potential partners. It necessarily follows that if a company is aware of the activities of its third-party partners in connection with company business, and those third parties have been appropriately trained or informed of the company's clear commitment to compliance with the FCPA, there is little room to claim that the third party did not act with the requisite scienter or that the company was unaware of the challenged activities.
The agencies recommend that when developing a compliance program, a company should include a mechanism for its employees and others to report suspected or actual misconduct or violations (e.g., hotlines or ombudsmen). Importantly, this reporting mechanism should allow an employee to report suspected violations of the FCPA on a confidential basis and without fear of retaliation by the company or anyone else.
Here, the agencies make a final attempt to drive home the importance of clear communication within a company, this time from the ground up to corporate management rather than the top-down dissemination of corporate policy and procedures. Safe, effective bilateral communication is an absolutely essential component of the FCPA and anti-corruption policies envisioned by the DOJ and SEC; implementing a realistic way for employees to report potential violations by their colleagues (including their superiors) and partners sends a clear message that such conduct both should be recognized and will not be tolerated. As for this hallmark's relationship to the agencies' ability to prove scienter, the story is a familiar one. Instituting an effective and realistic reporting mechanism is essential, and in the event that the DOJ or SEC becomes aware of a potential violation that was reported using such a reporting mechanism, the company's response is key. In other words, it would be an uphill battle for a company that intentionally ignored or concealed an employee's report of a payment prohibited by the company's anti-corruption policy to argue that either the payer or the company did not act with the scienter required by the FCPA.
Although they make few explicit mentions of the corrupt intent requirement under the FCPA, the Guidelines were clearly written with scienter in mind. As a result, companies should view the Guidelines not only as a guide to an effective and defensible FCPA compliance program, but as a guide as to how the DOJ and SEC may seek to prove scienter in future investigations and associated litigation. Companies ought to take an especially close look at the factors outlined in this article – namely, the agencies' discussions of commitment from senior management and clearly articulated policies against corruption, codes of conduct and compliance policies and procedures, risk assessment, training and continuing advice, third-party due diligence and payments, and confidential reporting and internal investigations – as they build and revise their own programs and deal with employee reports and potentially improper payments. While in many ways FCPA enforcement patterns remain difficult to predict, these Guidelines have proven to shed some light on the agencies' thinking and help companies further adapt to life under the FCPA.
Nora Whitehead is an associate in the White Collar and Antitrust Practice Groups in the Washington office of Haynes and Boone, LLP. She concentrates her practice on antitrust and competition issues and international trade matters. She can be reached at firstname.lastname@example.org.
©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
To view additional stories from Bloomberg Law® request a demo now