Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act can expose U.S. citizens and issuers to criminal liability for payments to foreign officials in order to secure business. Because the number of FCPA investigations has increased in recent years, companies and individuals should understand the FCPA and its criminal implications and how to deter FCPA violations.

A. Overview of the FCPA

The FCPA subjects U.S. citizens and issuers to criminal liability for payments to foreign officials in order to secure business.1 Although certain foreign countries have laws similar to the FCPA,2 the SEC and the DOJ’s ability to enforce the FCPA civilly and criminally only extends to American companies and citizens who bribe foreign officials, not the foreign officials who are the bribe recipients—an aspect of the law that causes Americans to be on an uneven playing field in terms of competitive advantages.3 To prove a violation of the FCPA’s anti-bribery provisions, the government must prove the following eight elements:

  1. The defendant was a “domestic concern”4 or an officer, director, employee, or agent of a “domestic concern” or an “issuer” or an officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer;5
  2. The defendant with respect to the charged conduct specifically intended to make use of the mails or means of interstate commerce;6
  3. The defendant acted corruptly and willfully;
  4. The defendant specifically intended to act in furtherance of a payment—or an offer, promise or authorization for payment—or an offer, gift, promise to give or authorization of the giving of anything of value;
  5. The recipients of the payments were “foreign officials;”7
  6. The defendant knew that all or a portion of the payment was to be offered, given, or promised, directly or indirectly, to a foreign official;
  7. The payment was specifically intended to be for one of three purposes: (1) to influence an act or decision of the foreign public official in his or her official capacity; (2) to induce the foreign public official to do or omit to do any act in violation of that official’s lawful duty; or (3) to induce that foreign official to use his or her influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality; and
  8. The payment was specifically intended to obtain or retain business for or with, or directing business to, any person.

B. Issues and Ambiguities in FCPA Elements

With the increased number of prosecutions under the FCPA, some of its terms and provisions have received criticism, including the definitions and interpretations of “corruptly and willfully,” “knowingly,” and “foreign official.”

1. Corruptly and Willfully

In prosecuting a defendant for an FCPA violation, the government must prove that the defendant acted both corruptly and willfully. A person acts “corruptly” if he acts voluntarily and intentionally, with a bad, wrongful, or improper purpose or evil motive and a specific intent to influence a foreign official to misuse his or her official position to achieve an unlawful result, or a lawful result by some unlawful method or means.8

In United States v. O’Shea9—a case in which Berg & Androphy won exoneration of a U.S. executive accused of FCPA violations and a cover-up of payments made to officials of a Mexican state-owned electric utility after a jury trial in Houston federal court—the District Court for the Southern District of Texas gave the following jury instruction for the “corruptly” element:

  • To violate the law, the act must have been done knowingly and willfully. [The defendant] cannot be convicted because he made a mistake; he had to have known what he was doing. He also must have acted with the conscious intention of violating the law. [The defendant] did not have to have known of the particular provisions of the Act itself, but he must have acted knowing that what he was doing was bribery—a corrupt bargain.
  • The word “corruptly” in the Foreign Corrupt Practices Act means an attempt to get the foreign official to misuse his public authority—an exchange of benefits outside the legal governmental operation.10

And a person acts “willfully” if he acts deliberately and with the specific intent to do something that the Unites States laws forbid, that is, with a bad purpose to disobey or disregard the law. In other words, the government must prove that the defendant acted with knowledge that his conduct violated United States laws.11 The defendant must believe the transaction was illegal. He cannot be convicted of being negligent or mistaken—more is required than that.12

Proving that a defendant acted both corruptly and willfully requires the government to prove that the defendant knew his actions violated the FCPA—a difficult burden if the defendant never received FCPA training.

2. Foreign Official

Another issue at the center of FCPA prosecutions is the FCPA’s definition of “foreign official.” The FCPA defines “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.”13 But the FCPA does not define “instrumentality.”14

Without defining who is an instrumentality of a foreign official, the government has expanded the definition to cover employees not intended to be covered either under the text of the FCPA or the underlying purpose of the FCPA. For example, the government has taken the position that all employees of a government-owned foreign entity—regardless of rank, position, duties, or controlling ownership—are “foreign officials” within the meaning of the statute because the word “instrumentality” in the definition of foreign official includes state-owned or state-controlled foreign entities.15 Recent FCPA litigation has focused on whether the definition of “instrumentality” includes foreign state-owned entities and their employees.16

For example, in United States v. O’Shea, the final jury instruction on “foreign official” was as follows:

  • A foreign official is an officer or employee of the government of a country other than the United States.
  • The Commission is not an integral part of a foreign government’s public function merely because it is government-owned; it must be exercising a public, governmental function.
  • An official of a public agency does not perform a governmental function when his agency operates in his area substantially as its private-agency competitors do, without preferences, subsidies, or other privileges.

Regarding “non-governmental functions,” the court’s instructions continued:

  • If you conclude that the government has proved beyond a reasonable doubt that the Commission is an agency of the Mexican government, some of its officials may be responsible for operations of the Commission that are not governmental. To the extent that a part of the Commission operates a business on substantially the same terms as private companies, its officers in that part are not public officials.

Further, the United States and other signatories to the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (“OECD Convention”) do not accept the inclusion of state-owned corporations. For example, the United Kingdom’s new foreign bribery act does not include employees of state-owned corporations as “foreign public officials.”18 The U.S. Congress could have, but deliberately did not, bring the FCPA into perfect conformity with the OECD Convention because it chose not to adopt the “state-owned enterprise” language from the OECD Convention in 1998, just as it chose not to incorporate state-owned entities in the 1977 and 1988 amendments to the FCPA.

3. Knowingly

An additional hurdle that the government must overcome in an FCPA prosecution is proving that the defendant knew that the intended recipient of a payment was a foreign official.19 American employees and corporations often conduct business in a foreign country with foreign state-owned and state-controlled companies without knowing that the U.S. government will later contend that the employees of these companies are foreign officials. As noted above, whether a person is a foreign official is ambiguous because the statute itself fails to provide adequate guidance on this term, and therefore, proving that a defendant knew that a certain employee was a foreign official is a significant burden for the government.

One means by which the government often seeks to establish the defendant’s knowledge is through the doctrine of conscious avoidance or deliberate ignorance.20 The FCPA provides that: “When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.”21 Thus, to succeed under this doctrine, the government must persuade the jury that the defendant consciously avoided learning that fact while aware of a high probability of its existence.22

In United States v. Self, the defendant pleaded guilty to an information predicated on a conscious avoidance theory.23 The case arose from a sham marketing agreement executed with an official in the United Kingdom. The defendant admitted that he was not aware of any actual services provided by the British official and believed the likely purpose of the agreement was to encourage foreign business, yet the defendant made several improper wire transfers to the official.

In United States v. Mead, the government requested and received a willful blindness instruction. The defendant’s corporation, based in Delaware, funneled money between its Latin American operations into the operational budgets of its subsidiaries in Panama. The Defendant, an American executive of the corporation, paid $50,000 to Panamanian officials to secure contracts in Latin America. During the trial, the government submitted the following jury charge:

  • The element of knowledge may be satisfied by inferences you may draw if you find that the defendant deliberately closed his eyes to what otherwise would have been obvious to him. When knowledge of the existence of a particular fact is an element of the offense, such knowledge may be established if a person is aware of a high probability of its existence and then fails to take action to determine whether it is true or not.
  • If the evidence shows you that the defendant actually believed that the transaction was legal, he cannot be convicted. Nor can he be convicted for being stupid or negligent or mistaken; more is required than that. But a defendant’s knowledge of a fact may be inferred from willful blindness to the knowledge or information indicating that there was a high probability that there was something forbidden or illegal about the contemplated transaction and payment. It is the jury’s function to determine whether or not the defendant deliberately closed his eyes to the inferences and the conclusions to be drawn from the evidence.

But a conscious avoidance instruction is not without flaws. The court in U.S. v. Kozeny, in quoting the Seventh Circuit opinion by Judge Richard Posner, acknowledged that, “[t]he most powerful criticism of the ostrich instruction is, precisely, that its tendency is to allow the jury to convict upon a finding of negligence for crimes that require intent.”25 As explained in a 1988 House conference report, Congress amended the FCPA’s original language to delete any indication that liability could be based on mere negligence or even recklessness.26 Reckless disregard of the facts is insufficient to support a finding of knowledge; knowledge also requires “conscious” disregard with the aim of avoiding the truth.27 Both prongs are necessary, for otherwise the “doctrine of willful blindness [is] indistinguishable from the civil doctrine of negligence in not obtaining knowledge.”28

C. Statutory Exception and Defenses

In addition to using the above-mentioned ambiguities and issues to defend against an FCPA prosecution, the FCPA expressly provides a statutory exception and two affirmative defenses.

1. Exception

Under the FCPA’s exception, payments are not in violation of the FCPA if the payments were facilitating or expediting payments to a foreign official “the purpose of which is to expedite or to secure the performance of a routine governmental action”—a defined term under the FCPA.29 This exception to the FCPA is commonly referred to as the “grease payment” exception.

2. Affirmative Defenses

The FCPA sets forth two affirmative defenses: (1) the payments, while a violation of the FCPA, were legal under the written laws of the foreign country, and therefore, defendant should not be convicted of the charges in the indictment;30 (2) the payment, gift, offer, or promise of anything of value that was made, while a violation of the FCPA, was a reasonable and bona fide expenditure.31

D. Enforcement Trends in FCPA Cases

In recent years, FCPA enforcement activity by the SEC and the DOJ has increased sharply. For example, in 2000, the government did not prosecute a single FCPA case, but in 2010, the DOJ’s Criminal Division imposed $1 billion in penalties in FCPA cases—the largest in the history of FCPA enforcement.32

E. Considerations for Corporate Defendants, Individual Defendants, Whistleblowers, and their Counsel

1. Corporate Defendant’s Perspective

Companies that violate the FCPA pay significant fines and penalties, often willingly as a risk-based decision, with the understanding that these sanctions are part of the cost of doing business in foreign countries. The government’s primary resolution vehicles for FCPA enforcement actions are plea agreements, deferred prosecution agreements (DPAs), and non-prosecution agreements (NPAs).33 Rather than endure a lengthy, expensive trial and potentially suffer harm to their business and goodwill, many companies prefer to enter plea agreements, DPAs, and NPAs. Before signing any agreement with the government, companies should be aware that such agreements often require the company to implement a compliance monitoring program, waive the attorney-client privilege, turnover employees’ private documents and data, cut off support for certain employees’ legal defense, and terminate the employment of those who do not cooperate with government investigations.

Knowing all the consequences that accompany FCPA litigation, many companies choose to be proactive and self report to the DOJ and SEC to take advantage of any leniency that the government might offer.  Because a company is often held to a strict liability standard for the acts of its employees, a company should take steps to lessen the probability that it will violate the FCPA. For example, all companies should consider the following preventative measures:

  • Train employees on the FCPA and the consequences for U.S. citizens doing business abroad who violate the FCPA’s anti-bribery provisions by bribing foreign officials
  • Educate employees on the cultural differences in the countries in which the company conducts business
  • Caution employees to be mindful of who might be considered a foreign official in third world countries because the government often has extensive “ownership” and “control” over all economic activities, and in recent FCPA actions, the U.S. government has considered employees of state-owned foreign entities to be foreign officials under the FCPA
  • Implement an FCPA compliance program, a code of conduct, and specific policies and procedures regarding conducting business in foreign countries
  • Incorporate provisions into contracts with intermediaries setting forth strict guidelines on their interaction with foreign government officials and prohibitions on acts that would violate the FCPA
  • Provide resources and procedures for employees to report FCPA violations or meet with general counsel to address questionable foreign business practices that might violate the FCPA
  • Request an opinion from the Attorney General under 15 U.S.C. § 78dd-2(f) to determine whether prospective conduct would violate the FCPA
  • Consider the advantages of self-reporting through voluntary disclosures to the SEC and DOJ if internal investigations reveal violations of the FCPA

2. Individual Defendant’s Perspective

FCPA prosecutions of individuals are not a prevalent as corporate prosecutions. Individuals charged with FCPA violations more likely than not worked at companies that failed to take precautionary measures, implement FCPA policies and procedures, or provide FCPA training. But unlike the companies for which they worked, individuals do not have deep pockets to pay FCPA sanctions. Consequently, many FCPA defendants plead guilty without a fight to avoid the possibility of being sent to prison.

As long as FCPA defendants—both individuals and corporations—enter into plea agreements, DPAs, and NPAs, the government will continue to build its arsenal of “prosecutorial common law” to support its aggressive and slanted interpretation of the FCPA.34 Court acceptance of plea agreements does not convert the government’s pronunciations on the law into sources of legal authority. Indeed, the government’s strategy of creating its own would-be common law threatens to strip the federal courts of their judicial power to interpret the FCPA. The federal courts, and not the Department of Justice nor any other division of the executive branch, are the final arbiters of what the FCPA actually provides.35

Obstacles in defending an FCPA action that are common to both individual defendants and corporate defendants include obtaining records from foreign countries, hiring experts on foreign law, and gathering related opinions from foreign courts or government agencies regarding the alleged conduct. Given the adversities associated with defending an FCPA case, for many individuals, the process is cost-prohibitive.

3. Whistleblower’s Perspective

The Dodd-Frank Act’s SEC whistleblower program offers substantial rewards to individuals for assisting the SEC in uncovering FCPA violations. Much like the False Claims Act (and to a lesser extent the IRS whistleblower program),36 the SEC’s whistleblower program may foster an environment that will lead to more individuals coming forward as whistleblowers. The SEC whistleblower provisions describe the procedures for submitting information to the SEC and for making a claim for an award after an action is brought. The claim procedures provide opportunities for whistleblowers to present their claim before the SEC makes a final award determination. Under the provisions, the SEC also will pay an award based on amounts collected in related actions brought by certain agencies that are based upon the same original information that led to a successful SEC action.

Regarding the increased anti-retaliation provisions, a whistleblower who provides information to the SEC is protected from employment retaliation if the whistleblower possesses a reasonable belief that the information he or she is providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur. In addition, the rules make it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the SEC, including threatening to enforce a confidentiality agreement.

Although the SEC’s whistleblower provisions do not require that employee whistleblowers report violations internally in order to qualify for an award, the rules strengthen incentives that had been proposed and add certain additional incentives intended to encourage employees to use their own company’s internal compliance programs when appropriate to do so. For example, the rules make a whistleblower eligible for an award if the whistleblower reports internally and the company informs the SEC about the violations. In addition, an employee is considered a whistleblower under the SEC program as of the date that the employee reports the information internally—as long as the employee provides the same information to the SEC within 120 days.

Through this provision, employees are able to report their information internally first while preserving their “place in line” for a possible award from the SEC. More importantly, the rules provide that a whistleblower’s voluntary participation in a company’s internal compliance program is a factor that can increase the amount of an award, and that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.

ENDNOTES

  1. See 15 U.S.C. § 78dd-2(a) (domestic concerns); 15 U.S.C. § 78dd-1 (issuers).
  2. See S.Rep. No. 114 at 4, 1977 U.S. Code Cong. & Admin. News at 4101 (testimony of Treasury Secretary W. Michael Blumenthal that in many nations, such payments are illegal). For example, in the United Kingdom, the Serious Fraud Office enforces its overseas corruption laws, and in Canada, the Corruption of Public Officials Act is the equivalent of the FCPA in the United States.
  3. See United States v. Castle, 925 F.2d 831 (5th Cir. 1991) (per curiam) (holding that foreign officials who take bribes cannot be prosecuted under the FCPA or the general conspiracy statute and discussing the policy decisions behind Congress’ decision to exclude foreign officials from prosecution).
  4. See 15 U.S.C. § 78dd-2(h)(1) (defining “domestic concern”).
  5. See 15 U.S.C. § 78dd-1(a).
  6. See 15 U.S.C. § 78dd-2(h)(5) (defining “interstate commerce”).
  7. See 15 U.S.C. § 78dd-1(f)(1) (defining “foreign official” but not defining “instrumentality” of a foreign official); 15 U.S.C. § 78dd-2(h)(2) (same).
  8. See United States v. Kozeny, 493 F. Supp. 2d 693, 704 (S.D.N.Y. 2007) (defining “corruptly” as being beyond the element of “general intent” present in most criminal statutes and defining it as “a bad or wrongful purpose and an intent to influence a foreign official to misuse his official position”), aff’d, 541 F.3d 166 (2d Cir. 2008); S. Rep. No. 95-114, at 10 (1977) (According to the Senate Report for the FCPA, “[t]he word ‘corruptly’ connotes evil motive or purpose, an intent to wrongfully influence the recipient.”).
  9. Cr. 09-629 (S.D. Tex. 2012). For more information, see /news-oshea.html.
  10. Jury Instruction in United States v. O’Shea, Cr. 09-629 (S.D. Tex.).
  11. See Jury Instructions in United States v. Bourke, S2 05-cr-518 (SAS) (S.D.N.Y.); Bryan v. United States, 524 U.S. 184, 191 (1998) (holding that to prove that a defendant acted “willfully,” the government must prove that the defendant knew his conduct was unlawful); United States v. Kay, 513 F.3d 432, 448-50 (5th Cir. 2007) (holding that proving a defendant acted “willfully” requires the government to prove that the defendant knew his conduct was unlawful).
  12. See Jury Instructions in United States v. Jefferson, 1:07-CR-209 (E.D. Va. 2009) (For the knowledge element of the FCPA, the court instructed the jury “If the evidence shows you that the defendant actually believed the transaction was legal, he cannot be convicted, nor can he be convicted of being stupid or negligent or mistaken. More is required than that.”).
  13. 15 U.S.C. § 78dd-2(h)(2)(A); 15 U.S.C. § 78dd-1(f)(1)(A).
  14. See 15 U.S.C. § 78dd-2(h)(2)(A);
  15. 15 U.S.C. § 78dd-1(f)(1)(A). See, e.g., United States v. Alcatel-Lucent SA, No. 1:10-cr-20906 (S.D. Fla. Dec. 27, 2010) (DOJ and SEC charged Telekom Malaysia Berhad as a state-owned and controlled entity because the Malaysian Ministry of Finance owned approximately 43% of its shares, had veto power over all major expenditures, and made important operational decisions). But as the jury instructions above explain, employees of a state-owned entity are not “officials” of a foreign government just because the government has termed certain employees as “officials” in an indictment without explanation. United States v. Blondek, 741 F. Supp. 116, 120 (N.D. Tex. 1990) (referring to “foreign officials” as a “small class of persons” and a “well-defined group”).
  16. See United States v. O’Shea, No. 09-629 (S.D. Tex.); United States v. Aguilar, No. 10-1031 (C.D. Cal.); United States v. Esquenazi, No. 09-21010 (S.D. Fla.); United States v. Carson, No. 09-00077 (C.D. Cal.).
  17. Cr. 09-629 (S.D. Tex. 2012).
  18. See An Ocean Apart, http://fcpaprofessor.blogspot.com/2011/01/ocean-apart.html (Jan. 16, 2011).
  19. See 15 U.S.C. § 78dd-1(f)(2) (defining knowing as used in the FCPA); 15 U.S.C. § 78dd-2(h)(3)(A) (same); see also Stipulation re: Further Briefing Regarding Jury Instructions, United States v. Carson, No. SA CR 09-00077-JVS (C.D. Ca. Sept. 21, 2011) (stipulation between the government and the defense that the answer to the court’s question, “Must he [the defendant] know that the individual is in fact a government official?” is “yes”).
  20. This is also known by various authorities as conscious disregard, willful blindness,  the head-in-the-sand or ostrich approach. See H.R. Conf. Rep. No. 576, 100th Cong. 2d Sess. H2115, at 919-20 (1988), available at http://www.usdoj.gov/criminal/fraud/fcpa/history/1988/tradeact-100-418.pdf.
  21. 15 U.S.C. § 78dd-2(h)(3)(B).
  22. United States v. Svoboda, 347 F.3d 471, 477 (2d Cir. 2003).
  23. United States v. Self, No. 08-Cr-110-AG-1 (C.D. Cal. filed May 2, 2008).
  24. United States v. Mead, Cr. No. 98-240-01 (D.N.J. filed Apr. 17, 1998).
  25. United States v. Kozeny, 664 F. Supp. 2d 369, 388 (S.D.N.Y. 2009) (quoting United States v. Giovanetti, 919 F.2d 1223, 1228 (7th Cir. 1990)).
  26. H.R. Conf. Rep. No. 576, 100th Cong. Sess. H2115, at 919-20 (1988), available at http://www.usdoj.gov/criminal/fraud/fcpa/history/1988/tradeact-100-418.pdf.
  27. United States v. Jewell, 532 F.2d 697, 700 (9th Cir. 1976) (en banc).
  28. See United States v. Jewell, 532 F.2d 697 (9th Cir. 1976) (en banc); United States v. Bright, 517 F.2d 584 (2d Cir. 1975); United States v. Jacobs, 475 F.2d 270, 287, n.37 (2d Cir. 1973); cert. denied sub nom, Lavelle v. United States, 414 U.S. 821 (1973); see also H. Rept. No. 96-1396, 96th Cong., 1st Sess. 35 (1980).
  29. See 15 U.S.C. § 78dd-1(b) (setting forth the exception); 15 U.S.C. § 78dd-2(b) (same); 15 U.S.C. § 78dd-1(f)(3) (defining “routine governmental action”); 15 U.S.C. § 78dd-2(h)(4) (same).
  30. See 15 U.S.C. § 78dd-1(c)(1); 15 U.S.C. § 78dd-2(c)(1).
  31. See 15 U.S.C. § 78dd-1(c)(2); 15 U.S.C. § 78dd-2(c)(2).
  32. See Press Release, Dept. of Justice, Department of Justice Secures More Than $2 Billion in Judgments and Settlements as a Result of Enforcement Actions Led by the Criminal Division, Jan. 21, 2011, available athttp://www.justice.gov/opa/pr/2011/January/11-crm-085.html.
  33. See Mike Koehler, The Foreign Corrupt Practices Act in the Ultimate Year of Its Decade of Resurgence, 43 Ind. L. Rev. 389, 406 (2010) (noting that “no business entity has publicly challenged either enforcement agency in an FCPA case in the last twenty years”).
  34. See Bingham’s Michael Levy on the Rise of Prosecutorial Common Law, 25 Corporate Crime Reporter 6, Feb. 7, 2011, available at http://www.corporatecrimereporter.com/michaellevy020711.htm (describing “prosecutorial common law”).
  35. See U.S. Const. art. III, § 1; Marbury v. Madison, 1 Cranch 137, 177 (1803) (“It is emphatically the province and duty of the judicial department to say what the law is.”); United States v. Nixon, 418 U.S. 683, 704 (1974) (noting that judicial powers cannot be shared with the Executive Branch).
  36. See Joel Androphy, Federal False Claims Act and Qui Tam Litigation, Law Journal Press (2010).