Beware of the foreign corrupt practices act

Earlier this year San Diego-based Titan Corp. paid $28.5 million to settle criminal and civil charges by the SEC and Justice Department that it had violated the Foreign Corrupt Practices Act, or FCPA, in connection with its overseas operations.

The charges included that Titan paid a $2.1 million bribe to the election campaign of the president of a West African nation, and covered up other payments and commissions in six countries. The $28.5 million settlement by Titan was the highest amount ever paid by a company under the FCPA. The lesson of the Titan case is clear for other companies doing business internationally: Be FCPA compliant, or be prepared to face the consequences.

This article provides a general overview of the FCPA and also indicates "red flags" for spotting suspect transactions in the shadowy world of corrupt payments in international business.

Antibribery provisions

The general antibribery rule of the FCPA is easily stated. It is illegal for any U.S. person, acting directly or through third parties, to pay money or anything else of value to any foreign official in order to obtain or retain business.

The general rule is refined, however, by several key definitions, an important exemption, and the availability of certain defenses:

• Scope: The antibribery rules apply to U.S. citizens or residents and to any company or entity with its principal place of business in or organized under the laws of the United States, its territories or possessions. The prohibitions on bribery apply to all U.S. companies, whether or not publicly traded. A U.S. parent company may be liable for corrupt payments by a controlled foreign subsidiary if the parent authorized, participated in or "knowingly" permitted the payments.
• Who is a "foreign official": Under the FCPA, "foreign official" broadly means not only government officers or employees, but also foreign political parties or party officials, members of a legislative body or royal family, candidates for foreign political office, officials of international bodies, and directors, officers or other officials of business enterprises owned or controlled by a foreign state.
• Intermediaries: The FCPA prohibits using intermediaries -- agents, business partners, consultants -- to make corrupt payments. A U.S. company can be held liable for payments through intermediaries if it knew or should have known the payments would go to a foreign official.
• "Grease" exemption: The FCPA exempts from the anti-bribery provisions what it calls "facilitating payments" for "routine government action," colloquially known as "grease." The FCPA lists examples such as payments to obtain permits, licenses or other official documents, payments for processing official papers or for obtaining phone services or power and water supplies, or payments for loading and unloading cargo or protecting perishable goods. The statutory list is illustrative only and other types of payments may also come under the exemption.
• Defenses: Some actions that might otherwise appear to violate the antibribery provisions can benefit from so-called "affirmative defenses": that the payment was lawful under the written laws of the foreign country; or was a reasonable and bona fide expenditure directly related to promoting products or services, performing contractual obligations, or providing reasonable business hospitality.
  Companies facing complicated or unusual prospective payments can seek preapproval by applying to the Attorney General for a written "FCPA Opinion" as to whether specific proposed conduct conforms with current enforcement policy regarding the antibribery rules.

  Accounting provisions

  
  The accounting provisions of the FCPA aim to prevent slush funds, off-the-book transactions and improper expense classifications that can lend themselves to bribery. The provisions apply only to public companies and their majority-owned subsidiaries. A discussion of the accounting provisions is beyond the scope of this article, but the rules basically enact recognized accounting and record-keeping standards and procedures. Violations are subject to civil and criminal sanctions.

  Red flags

  
  Here are some common "red flags" that call for the exercise of extreme caution and the utmost due diligence:

  
  Anyone who suggests that a sum of money will fix the problem.

  
  An agent or business partner whose main qualification appears to be a personal relationship with government officials.

  
  Requests for large amounts of cash or for payment in bearer instruments; payments through a third party or to an account in a third country.

  
  Inflated commissions.

  
  Contracting with an entity whose ownership is not disclosed.

  
  An agent or business partner who refuses to enter into a written agreement governing his conduct, including compliance with prohibitions on bribery.

  Compliance programs

  
  Companies run a high risk of FCPA misconduct if they employ foreign agents, deal with government officials involved in the procurement process, bid on large foreign projects, or do business in countries where bribes, "gifts" and similar inducements are common business practice.

  
  The Titan case starkly illustrates the risks -- and costs -- of not having in place effective controls for FCPA compliance. The SEC claimed that although Titan had over 120 agents in over 60 countries, it had never had a formal company-wide FCPA policy -- a factor which apparently figured largely in the record settlement payment. If you think your company doesn't need an FCPA compliance program for its international business, you may wish to think again in the light of Titan's experience.

  
  

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  Kaplan practices corporate, financial and international business law in San Diego and is counsel to Goode, Hemme, Peterson & Sayler. Send comments to editor@sddt.com. All comments are forwarded to the author and may be used as Letters to the Editor.