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On November 14, 2012, the U.S. Department of Justice and the Securities and Exchange Commission released their long-awaited Foreign Corrupt Practices Act guidance in the form of a 120-page document entitled “A Resource Guide to the U.S. Foreign Corrupt Practices Act.”
The Guide does not contain any significant change to or novel interpretation of DOJ and SEC policy. Instead, it primarily compiles information from previously available materials, such as enforcement actions, cases, statutes, opinion releases and jury instructions. The Guide also comes with the disclaimer that “[i]t is non-binding, informal, and summary in nature,” and “does not in any way limit the enforcement intentions or litigating positions” of the DOJ, SEC or any other U.S. government agency.
The following are some key points and observations regarding the Guide and its implications for companies and compliance practitioners:
In many ways, the Guide is an advocacy document that promotes the interpretations of law most favorable to the DOJ and SEC’s enforcement agenda. For example, the Guide asserts an expansive interpretation of the term “government official,” even though this is the subject of current litigation in the Eleventh Circuit. Similarly, the Guide sets forth a broad reading of what it means to make a payment for the purpose of “obtaining or retaining business.” It also describes a low threshold for the knowledge required to impose liability based on a third party’s conduct. In the area of self-disclosure, the Guide consistently recommends that any and all misconduct should be disclosed.
One positive development is that the DOJ and SEC explicitly endorse a risk-based approach to compliance. When discussing topics such as pre- and post-acquisition due diligence for mergers and acquisitions, internal compliance programs, and the assessment of third-party relationships, the Guide urges the use of a risk-based model. Rather than require companies to interview every employee and review every transaction, the Guide endorses a tailored approach, in which the greatest emphasis is placed on areas that present the largest and most obvious risks.
Clarification of Gift and Entertainment Policy
Regarding gifts and entertainment, the Guide gives welcome confirmation that modest gifts and entertainment are acceptable, provided there is no corrupt purpose. However, the Guide does not contain any minimum threshold values for what amounts the DOJ or SEC might consider to constitute “corrupt” gifts or payments. Moreover, the Guide notes that an amount that might be considered to be a modest, and presumably non-corrupt, payment in the United States might be “a larger and much more significant amount,” and possibly a corrupt payment, in another country. The Guide also reserves the possibility of prosecution if small payments or gifts are part of a “systemic or long-standing course of conduct that evidences a scheme to corruptly pay foreign officials to obtain or retain business.”
Some of the Guide’s examples of permissible gifts and expenditures include:
A moderately priced crystal vase as a wedding gift or “token of esteem” given by a company to a government official whose agency had already awarded the company a long-term contract.
Business-class international airfare, to which the company’s own employees would be entitled because of the length of the trip, for a multi-day factory inspection.
“A moderately priced dinner, a baseball game, and a play” during a multi-day business visit.
Companies must determine whether the gifts, entertainment and promotional expenses they permit are sufficiently similar to the examples provided in the Guide. They may well find themselves returning to evaluation of previously available materials, such as Opinion Releases, to ascertain whether certain promotional activities are worth the compliance risk.
Mergers & Acquisitions
The Guide notes that the DOJ and SEC have generally not prosecuted companies conducting mergers and acquisitions under a successor liability theory except in cases where: (1) the violations are egregious and sustained, (2) the successor company directly participated in the violations, or (3) the successor company failed to stop the violations. The Guide urges companies to conduct pre- and post-acquisition due diligence, consistent with the procedures set forth in Opinion Procedure Release 08-02 (the Halliburton Opinion), and provides suggestions for the content of such due diligence. The Guide does not specifically discuss timeframes for the completion of post-acquisition due diligence, indicating that it is likely sufficient for companies to complete post-acquisition due diligence and remediation as quickly as practicable.
The Guide reiterates that companies will be held liable for the conduct of their third parties, such as agents, consultants, and distributors. It emphasizes that companies that are aware of a high probability of misconduct may be held liable even if they do not possess actual knowledge of the misconduct. Due diligence on third parties is a must, both as part of any M&A transaction and as part of a robust compliance program. The Guide lists areas that third-party due diligence should cover, such as:
The qualifications and associations of the third parties, including their business reputation and relationships with foreign officials. Red flags may require further inquiry.
The business rationale for employing the third party. This includes examining the necessity for employing the third party, reviewing the payment terms, and ensuring that the third party’s work is adequately documented.
Ongoing monitoring of the relationship, which may include the exercise of audit rights, anti-bribery compliance certifications, and training.
The Guide lists six examples of declinations – decisions by the DOJ or SEC not to prosecute (pp. 77-79). Typically, information about declinations is not public. The declinations described in the Guide have a number of elements in common. In each, the companies engaged in prompt internal investigations, made voluntary disclosures to authorities, and strengthened their compliance programs. Although the Guide states that “in the past two years alone, DOJ has declined several dozen cases against companies where potential FCPA violations were alleged,” companies should not assume that they will automatically receive leniency if they self-report. Companies would be well-advised to consider all aspects of their circumstances, including applicable reporting requirements, before making the decision to self-report.
Useful Lists and Hypotheticals
The Guide also contains lists of factors and hypothetical examples that illustrate the DOJ and SEC’s views on various compliance issues, including some of the topics discussed above. Some of the information is of limited value, such as a case study stating that providing government officials with all expense paid vacations to Las Vegas constitutes a corrupt payment. Overall, however, these lists and case studies should be of some use to companies in shaping their policies, as well as in predicting how the DOJ and SEC will react to them. Areas addressed include:
Gifts, entertainment, and travel (pp. 17-18)
Payment of expenses for government officials (p. 24)
Due diligence and successor liability for mergers and acquisitions (pp. 31-33)
Whether an entity is an instrumentality of a foreign government (p. 20)
Red flags when assessing third-party agreements (pp. 22-23, 63-65)
The overall effectiveness of a corporate compliance program (pp. 57-62)
The Guide can be downloaded for free at the following links: