The FCPA Demystified

Whether you’re a small company with 5 employees, or a multinational enterprise with 5000, every US company doing any business outside the US needs a plan for mitigating the risks associated with corruption. There are many laws covering anti-bribery and corrupt practices, but the largest and most well-known US law is the Foreign Corrupt Practices Act (FCPA). It’s becoming more important every day, and a great place to start a discussion on how to think about the potential impact for your business.

For non-SEC reporting companies, the most relevant provisions of the FCPA are the anti-bribery provisions, which essentially make it a crime for any US person, business or employee to offer/provide (directly or through a 3rd party) anything of value to a foreign government official with intent to influence or to gain an unfair advantage. You probably noticed the word “intent” -- be aware that the standard is quite low here. Intent/knowledge is usually inferred from the fact that the bribery took place and cases have shown that “willful blindness” is no excuse and could result in a prison term.

Why should I care – is corruption that common?

Although the US is certainly not immune to corruption in business, the relative ethics of American businesses compared to operating practice in many countries sometimes creates a blindspot for US businesses expanding overseas. It’s just not top of mind. Some may assume that unless a business is corrupt at the highest levels, there’s no risk of corruption in the rank and file, among salespeople in the field, or distributors in a region. Similarly, executives in the home office who are themselves highly ethical may not always understand the nuts and bolts of how business is being transacted internationally.

But corruption and bribery in the international context is significant. Consider the following:

• Nearly half of workers across Europe, the Middle East, Africa and India think bribery and corruption are acceptable ways to survive an economic downturn (source: Ernst and Young ‘Navigating today’s complex resources-resources-business risks Europe Middle East, India and Africa Fraud Survey 2013’)
• Around the world nearly 1 in 4 said that they paid a bribe when accessing public services in the last 12 months (source: Transparency International)

Simply put, international business corruption – bribes, kick-backs, false and unrecorded transactions -- is common but frequently ignored, purposely overlooked, or just an every day part of doing business. Exacerbating the risk to smaller US companies doing business overseas is a lack of cultural context, language differences and absence of a seasoned legal team who can help navigate the landmines surrounding the reality of international corruption.

Why should I care – is the FCPA actually enforced?

In a word, yes. The FCPA was enacted in 1977 and enforcement was quite low for almost 25 years. Since 2005, however, it’s picked up significantly and continues to trend up over time (see chart below). The Department of Justice, SEC and FBI all have units dedicated to investigation and prosecution and certain agencies have staff in key overseas markets.

Both companies and managers/employees can be prosecuted under the FCPA. So this isn’t just an issue for the company – if you’re reading this article, it’s likely an issue for you personally.

What should I do to minimize my company’s risk?

Assess it!

By Geography

The easiest first step in assessing your company’s risk is to consider the countries in which you’re currently doing business and which countries you envision doing business in the near future. One easy and user friendly resource is transparency.org which compiles a Corruption Perceptions Index. The index, which ranks 180 countries and territories by their perceived levels of public sector corruption according to experts and businesspeople, uses a scale of 0 to 100 - 0 is highly corrupt and 100 is very clean. 

In 2017, the index found that more than two-thirds of countries score below 50, with an average score of 43 (for reference, the US score in 2017 was 75, while the US’s two largest trading partners were 82 (Canada) and 29 (Mexico)). The region with the highest average score was Western Europe (average score of 66) while sub-Saharan Africa (average score of 32), Eastern Europe and Central Asia (average score of 34) had the largest amount of perceived corruption. If you’re thinking of expanding to one of the popular BRICI countries, note that in 2017 these countries scored as follows: Brazil (37), Russia (29), India (40), China (41) and Indonesia (37).

By Business Structure

Equally important is to ask some critical questions about how your business is structured and how much interaction your company (or its agents) has with government officials. “Government official” is defined broadly under the FCPA, including low level employees of government-owned companies. In many countries, healthcare and education are government run, meaning that doctors, professors and a variety of other professionals are deemed “government officials” for purposes of the FCPA. So consider:

• What kind of business does your company do outside the US?
• How much government involvement is required – for example do you need permits and/or does your business need to qualify products for sale?
• Do you use agents, distributors and intermediaries in the course of your foreign business?

The FCPA defines "intermediary" as a third party who assists the company in some aspect of its foreign business. The government assumes you have independently confirmed that your intermediaries are not involved in corruption, so don’t expect (as many do) to hide behind a shield of an intermediary. 90% of FCPA cases involve conduct by 3rd parties, so make sure you understand how many intermediaries you have and what (if any) relationship they have to government officials of any kind. 

When dealing with third parties, be particularly wary of intermediaries who are government employees (or who have close relatives in government positions), ask for excessive commissions, provide large discounts to distributors, as well as consulting agreements with vague services, shell companies and payment to offshore accounts.

• Are you involved in litigation in overseas markets (the judicial process necessarily involves court officials and judges that are routinely bribed in some foreign markets)?
• How is shipping structured – do you use freight forwarders and customs agents?

Establish a Compliance Program (even a basic one)

The Low-Hanging Fruit – Insist on FCPA Language in Every Foreign Contract

Simply put, have a lawyer draft a basic provision relating to FCPA that is non-negotiable with potential partners. It should, at a minimum, provide that the partner 1) understands and will comply with FCPA rules and regulations, 2) assist with any investigation that arises from a FCPA claim and 3) agrees that you may terminate the contract immediately upon any violation. A well-written FCPA provision is a no-brainer as a first step in mitigating your risk under FCPA.

Insist that Someone “Own it”

A standalone FCPA Compliance Policy is fairly straightforward to develop and administer, and various online sources have checklists and guidance on best practices. Do not assume that a small amount of language about international corruption buried in your Standards of Business Conduct will do, as history has shown it clearly will not. The agencies enforcing FCPA rely heavily on showings of “good faith” in a company’s compliance efforts, which require that a member of senior management be designated a responsible party and be accountable for the program.

Train Management, Employees and Third Parties who Distribute Your Products

If you have the budget (and particularly if you are in a high risk category for purposes of the FCPA), hire a skilled in-person trainer to educate senior management and, in an ideal world, all parties who could expose you to liability under FCPA. A personalized trainer will enable your managers and employees to familiarize themselves with the actual corruption risks in your industry, the countries where you do business and the business model your company is using. In-person training is certainly preferable to other options, but be aware that many online resources have developed basic training programs for employees and related parties that are affordable for even the smallest of businesses.

Establish Internal Controls over the $

First understand this: there is not concept of “materiality” in the FCPA, which means that the government doesn’t care if a bribe is small or big. Make sure your company is keeping books/records which accurately document all transactions and which flag those that are potentially fictional/corrupt. Have someone familiar with FCPA watch over internal financial controls. It’s possible that employees in a finance department may be involved in corrupt schemes - they know how the company keeps records and how it audits, so they know how to keep the books looking clean and hide evidence of corruption.

Don’t Rely too Heavily on the “Facilitating Payments” Loophole

You may have heard that the FCPA includes a provision allowing that “any facilitating or expediting payment to a foreign official . . . the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official” is a permissible payment. This may sound broad but be aware that the facilitating payment exception originated as narrow and, according to some legal experts, is in fact diminishing over time.

Making reliance on the loophole even trickier is the fact that little interpretative guidance exists as to when it can be lawfully used (and even if a payment doesn’t violate FCPA, it may still violate other anti-corruption laws and/or local laws in the area you’re doing business). Before considering whether to use the loophole, acquaint yourself with the detailed requirements and be aware that any payments need to be well documented.

Still lost? Look Here!

We get it. Establishing relationships that enable your company’s goods to cross the ocean may seem overwhelming enough, and the legal gobble-de-gook of corruption compliance may seem out of reach. If so, pour yourself a glass of wine and get comfortable with the resource guide published by the Department of Justice and SEC regarding FCPA compliance. In it, you’ll find “real life” hypotheticals that may answer your particular questions.