(Originally published Oklahoma Bar Journal March 28, 1998 - Vol. 69; No. 13)  

Ed And The Foreign Corrupt Practices Act
By Charles E. Daniels

The best thing about having Ed as a client was that Ed liked to do deals in foreign countries with nice beaches. After Ed got through reaching an agreement in principle (his term for genteelly talking around a few major points) he'd come back and tell his CFO and me to go paper it over (his term for hammering out all the details that Ed forgot). I always took my snorkel mask. You never knew where these discussions would lead.

Still, Ed had gotten better over the last couple of years. Prepping him before he left helped. And now I was drinking a single malt with him in the Kingpin Club, slowly revolving around the top of a moderately solvent bank, and listening to the latest deal he wanted me to paper over.

"Got a little hairy at one point," he was saying. "The government's chief negotiator's a little underpaid by our standards. So, he --- heh, heh, wanted a little gift."

I stopped swirling the ice in my glass and sat up straight. "Gift?"

"Yeah, but don't worry. I remembered what you said about that Corrupt Foreign . . ."

"Foreign Corrupt Practices Act?"1

"Yeah, that one. You can't make any kind of payment to a foreign official in order to get business, you said. So I told him no."

I beamed at Ed and went back to swirling my ice. Ed beamed back. "Knew you'd like that," he said. "So I found a way around it. Aww . . . you dropped your drink."

Back in my office I picked broken glass out of my trouser cuff and kicked off my loafers to let my socks dry. They smelled like Glenfiddich, but the cops rarely breathalysed my toes. "Tell me," I said, "about this way around it."

Ed was always more apprehensive in my office. I had a big grandfather clock in the corner which sounded to him like a meter ticking. In fact, it was. But he told me anyway. Seems the chief negotiator had a daughter who was desperate to go to school in the U.S., but the negotiator couldn't afford to send her. So Ed had decided to pay for a scholarship for the kid at his old alma mater, North Wombat University. Once he set everything up with the Dean of Admissions, he was going to call the negotiator and tell him the good news, expecting then to hear good news in return.

"See?" said Ed. "No money goes to the negotiator. No payment to a government official. Just helping to educate a third-world student. Win-win all the way around."

I grabbed my bottle of Mylanta and pushed it across the desk. "Have a swig," I said.

"This isn't single malt," Ed protested. "At your rates you can afford single malt."

"Have a swig anyway," I replied, "and let me tell you a little story about education and win-win deals."

I told him about Congressman Joseph McDade, who got all sorts of nice things from corporations, including a scholarship for his son. The Feds indicted him under a domestic bribery statute.2 The Congressman said that the scholarship went to his son, not to him, but the court ruled that a jury could find that the Congressman benefitted and that the scholarship could qualify as "anything of value" under the bribery statute. Although this was a domestic bribery case, the term "anything of value" is used in both it and the Foreign Corrupt Practices Act (FCPA).3 So I figured that a scholarship to North Wombat U. would make the grade under the FCPA.

Ed's face was the color of the firm's best bond paper when I finished. He held the Mylanta in a death-grip. "Deary me," he said. (Actually, he didn't say "deary me," but the editors won't let me quote him verbatim.) "And what other little horrors are lurking in this act?"

"Ed," I replied, "let me write you a memo on it. I'll outline it and tell you some of the main pitfalls."

"OK," he sighed. "Just don't load me up with legal mumbo-jumbo."

"I'll provide a translation," I assured him, as I tried unsuccessfully to wrest the Mylanta out of his hands.

A few days later the memo was ready. Here's what it said:

Dear Ed,

Here's the Foreign Corrupt Practices Act in a nutshell. The Act is in two parts:

The first part is all about accounting procedures. The gist of it is that your books have to be accurate.4 The Act says two things specifically:

(1) you have to keep books, records and accounts which accurately and fairly reflect the transactions and disposition of your assets;5 and

(2) you also have to have internal accounting controls which assure that:

a. transactions are executed in accordance with management's directions (in this case, Ed, your directions --- you ought to be all for this one);

b. the records maintain accountability for assets and permit preparation of financial statements under generally accepted accounting principles;

c. access to assets is limited in accordance with management's directions; and

d. assets are audited once in awhile.6 

Sounds reasonable, doesn't it? The law also says you can't falsify the records or fail to implement the controls. Kind of a backhanded way of reiterating what I outlined above. Here are a few tips on things to do and not do:

* Don't keep anonymous or "numbered" bank accounts; keep them in your firm name.

* Don't make any payments into anyone else's anonymous bank account or to a fictitious name.

* Don't make payments in cash (except for petty cash, and even there you oughta get a receipt) and don't make checks out to "bearer" or "cash."

* Don't use phony invoices, over-invoices, or other misleading documentation; same goes for phony entities, sales, purchases, services, loans or other financial arrangements.

In short, Ed, if the deal smells fishy, toss it out with the rest of the garbage. I could add a bunch more on this accounting business, but I'll save that for my next trip with your CFO.

One funny little thing about this part of the Act: despite the word "Foreign" in the title, this part of the Act applies to domestic operations and accounts as well. Tricky, huh?

But enough about counting beans. You want to know about the good stuff: bribery. So well cut to the chase.

This is the second part of the FCPA. Most people think of a bribe as some guy wearing sunglasses at night handing a black briefcase full of $100 bills over to a local politician. It is, but there's more to it than that. To show you that I'm still a real lawyer, despite hanging around with you, let me walk you through the anti-bribery provisions of the FCPA:

The FCPA makes it illegal for a U.S. individual or company (or for a foreign company which trades ADR's on a U.S. stock exchange):

* To use any means of interstate commerce

* Corruptly

* To offer, promise to pay, pay or authorize payment of

* Money, or

* Anything of value

* To

a foreign official, or

a foreign political party official (or to the political party itself), or

a candidate for foreign political office, or

a third party (like a consultant, an agent or a broker) while knowing that the third party will offer, promise or give money or something of value to any of the recipients listed above

* For the purpose of influencing an official act or decision

* In order to obtain or retain business or to direct business to any person.7

That's it. You can exhale now. Looks pretty straightforward, doesn't it? Ah, but like most Federal legislation, it isn't quite as easy as it first appears. Let me point out a few interesting details:

a. "Interstate Commerce." To set up the deal, did you go to the foreign country on an airline? Did you phone the foreign country in connection with it? Did you send a fax? Any of those actions satisfies the interstate commerce requirement.8 That's a slam-dunk for a prosecutor.

b. How about "corruptly?" That means an evil motive, an intent to wrongfully influence the official.9 That's hard to prove directly, but if the prosecutor can prove the other elements of the offense, "corruptly" can be inferred.10

c. Also, notice that you don't actually have to pay the bribe in order to commit a crime. If you offer it or if you promise to pay it or if you just authorize someone else to do it, you're in the soup.11

d. "Anything of value" means just that. Anything of value. There is no minimum value before the FCPA kicks in.12 Here are some examples: low-interest loans, 13 travel expenses,14 golf trips,15 sporting goods,16 and charitable donations. 17 Doesn't mean you can't get by with buying someone lunch or handing out promotional knick-knacks that aren't worth much, Ed. But be aware that Congress considered making an express exception to the bribery rules for gifts that are a "courtesy, a token of regard or esteem in return for hospitality," but decided not to.18 There is no "business courtesies" defense as such.

e. "Foreign official" sounds easy enough. But it isn't. Obviously, it includes an employee of a government (or one of its departments, agencies or instrumentalities) outside the U.S., but it includes more than that. It also covers members of the armed forces and anyone acting in an official capacity for a government (such as an outside lawyer, investment advisor or an accountant). It even extends to officials and employees of all state-owned companies19 and to members of a royal family engaged in commercial enterprise (things can get really fuzzy when you get into the royal family area, so come see me if this ever comes up).

f. Remember that you can't get around the law by having a third party do what you can't. This is the "Knowing" test. "Knowing" means knowing something first-hand, like you know you took a six on the tenth hole last Sunday even though you wrote down four (thought I was head-down in that bunker, didn't you?). It also means being aware of a high probability that an illegal payment could be made even if you don't know it first-hand.20

The law is very murky on this point. However, you can't stick your head in the sand. You cant ignore suspicious circumstances. You can't be willfully blind or deliberately ignorant.21 If you ever get prosecuted on an FCPA violation, the prosecutor will be using hindsight and will highlight every suspicious fact. Oh yeah, Ed, one other thing on this: The Feds figure that a corporation's knowledge is the sum of the knowledge of all its employees.22 So if you know A and the CFO knows B, then your company knows AB. Comforting, isn't it?

Ah, but it's not all gloom, Ed. A few little rays of light shine through here and there.

a. Facilitating Payments. The FCPA says that you can make (at least as far as the FCPA is concerned) a facilitating payment (sometimes known in the trade as a "grease payment," though of course we highbrows don't use such terms) where the purpose "is to expedite or secure performance of a routine governmental action" such as:

* Obtaining permits, licenses or other documents to qualify to do business in the country;

* Processing governmental papers such as work orders or visas;

* Providing police protection or mail service; scheduling routine inspections required by contract or related to transporting goods;

* Providing telephone service, power and water supply, loading and unloading cargo, or protecting perishable products from deterioration.23

Remember that "routine government action" does not include any decision whether to award new business or to continue business. It doesn't include any action by an official involved in the decision- making process to award new business or to continue existing business with a party.24 This whole exception is designed to allow you to get government functionaries to do something they are supposed to do anyway. It allows you to hurry up a non-discretionary action that would happen later without the payment. The scope of this exception is quite limited, and the payment should be quite small. And if you do make one of these payments, don't forget to record it accurately ("facilitating payment" will do) on your books.

b. The FCPA also has two affirmative defenses for:

* "Reasonable and bona fide" expenditures, such as travel and lodging expenses, that are directly related to the promotion, demonstration, or explanation of products or services or the execution or performance of a contract with a government or one of its agencies.25 This means, Ed, that you can haul the Ministers experts over to Idabel to see that your widget factory runs like a Swiss watch. It doesn't let you give them a week in Disney World on the way, though.

* Payments to official's that are lawful under the written laws of the officials country.26 This second affirmative defense can cover payments for training government employees where that's required by an investment contract. Generally, however, this defense isn't often available.

Remember that even payments which could be characterized as falling under one of these defenses will still be illegal if they were "corruptly made, in return for an official act or omission."

OK, Ed, that's what you can and can't do legally. Suppose you break the law and get caught? What then?

Penalties

If your company is convicted of violating the anti-bribery provisions, it can get slapped with a fine of up to $2,000,000 per violation.27 An individual --- like yourself, Ed --- can get hit with a fine of up to $100,000 and get tossed into a Federal clink for up to five years per violation.28 A company can't reimburse an employee or consultant for a FCPA fine.29

For a long time, the FCPA's bark was worse than its bite on individuals. Before 1991, most individuals who were convicted of FCPA violations were given suspended sentences --- no jail time. Under the 1991 Federal Sentencing Guidelines, however, any individual convicted of a FCPA offense will probably serve some time in the slammer as well as getting fined.30

Application

The FCPA applies to all U.S. companies, citizens and residents.31 Duh. It can also apply to the U.S. parent of a foreign company which makes a bribe.32 I know, Ed, that you have some joint ventures overseas. The FCPA applies even where you don't have 100% of the operation. The general rule seems to be:

* If you have over 50%, you can consider that the FCPA applies fully.33

* If you have 50% or less, you should, in good faith, use your influence to cause the joint venture to have internal accounting controls consistent with the FCPA's accounting requirements and to conduct its business consistent with the FCPA's anti-bribery provisions.34 Specifically, you ought to:

- check out your partner or joint venturer carefully, especially in emerging markets or places where bribery is common.

- if you find out that bribery has occurred, go on record as opposing it. This can be a difficult problem, and you should ask me for advice. I promise not to start the meter until you've had your first swig of Mylanta.

- stick some clauses in the governing agreement (such as the JV agreement or the shareholders' agreement) that require adherence to the FCPA.

- require the JV to have:

- an internal compliance program

- senior management commitment to the program

- good accounting and cash disbursement controls

- clear policy statements on providing food, entertainment, business expenses and gifts to government officials

- good recordkeeping and accounting systems, and

- good controls to test whether your policies and systems are being followed.

Obviously, the smaller your interest, the less control over these matters you are likely to have, but you have to make a good faith effort with respect to them and you need to document your efforts in this regard.

To close on a positive note, I should mention that the Feds do offer some help under this legislation. If you're about to take some action and you're not sure whether its legal under the FCPA, you can ask the Department of Justice for an opinion. You gotta give 'em all the facts, of course, but in theory they will come back to you in 30 days with a yea or nay.35 The way it works in real life is that you'll probably have a face-to-face session or two with someone in Justice first, but that's a good opportunity to sort things out informally.

Also, in recent years other organizations and other countries have begun to realize that bribery is a crummy way to do business. Transparency International spots corrupt countries. The International Chamber of Commerce (ICC) and the World Bank have issued rules and policies against bribery. The Organization for Economic Cooperation and Development (OECD) has arrived at an anti-bribery agreement among its member countries, and the Organization of American States (OAS) has recently put in place the Inter-American Convention Against Corruption.36

Gee, Ed, it's been fun working this memo up for you. Ill have even more fun working up the bill to cover it. See you in the Kingpin Club next Saturday, and with what you'll be paying me, I'll buy the drinks for a change.

ENDNOTES

1. 15 U.S.C. § 78dd. One article noted that "there is every indication that the Justice Department is becoming more aggressive than ever in pursuing matters" under this act. Kirk Victor, "Dirty Dealing," National Journal, April 30, 1996, at 869.
2. U.S. v. McDade, 827 F. Supp. 1153 (E.D. Pa. 1993).
3. 18 U.S.C. § 201(c)(1)(B) (the domestic bribery statute); 15 U.S.C. § 78dd-1(a) and 2(a).
4. Lucinda A. Low & John E. Davis, The FCPA in Investment Transactions: The Next Generation of Issues, Foreign Corrupt Practices Act (American Conference Institute) June 9 & 10, 1997.
5. 15 U.S.C. § 78m(b)(2)(A). The accounting provisions apply only to "issuers" --- publicly held companies.
6. 15 U.S.C. § 78m(b)(2)(B).
7. Just to confuse things, the FCPA bribery rules are set out in two largely parallel sections. One applies to "any issuer which has a class of securities" registered with the SEC. 15 U.S.C. 78dd-1. That also picks up foreign companies which have ADRs on a U.S. exchange. The other, broader provision is 15 U.S.C. 78dd-2, which deals with "any domestic concern" which means "any individual who is a citizen, national or resident of the United States" and any company, partnership or other organization which has its principal place of business in the U.S. or which is organized under the laws of a state or territory of the U.S. I'll cite to 78dd-2, but there are similar provisions in 78dd-1.
8. 15 U.S.C. § 78dd-2(h)(5).
9. S. Rep. No. 114, reprinted in 1977 USCCAN 4098, 4108.
10. U.S. v. Liebo, 923 F.2d 1308 (8th Cir. 1991).
11. 15 U.S.C. § 78dd-2(a).
12. See U.S. v. McDade, 827 F. Supp. 1153 (E.D. Pa. 1993). Domestic bribery case in which a congressman was charged with receiving "things of value," including a golf umbrella, bag and jacket. The court noted that "even the smallest of these items . . . are valuable enough . . . to be prosecuted under the gratuities statute." P. 1174.
13. U.S. v. Hare, 618 F.2d 1085 (4th Cir. 1980). This was a domestic bribery case, in which an IRS agent got a loan with "favorable interest and payment provisions." Page 1087.
14. U.S. v. Liebo, 923 F.2d. 1308 (8th Cir. 1991). This was a FCPA case in which airline tickets for a honeymoon were given to a foreign official.
15. U.S. v. Standefer, 610 F.2d 1076 (3rd Cir. 1979), aff'd, 447 U.S. 10 (1980). This was a domestic bribery case in which an IRS agent was given several golfing vacations.
16. U.S. v. McDade, 827 F. Supp. 1153 (E.D. Pa. 1993).
17. Lamb v. Phillip Morris, 915 F.2d. 1024 (6th Cir. 1990), though this case was thrown out before this issue was addressed. See also Brown, The Foreign Corrupt Practice Act Redux: The Anti-Bribery Provisions of the Foreign Corrupt Practices Act, 12 Int'l Tax & Bus. Law 260 (1994), from which several of these examples were taken.
18. H.R. Rep. No. 100-576, reprinted in 1988 USCCAN at 1955.
19. FCPA Review Release No. 94-1. The Justice Department's Peter Clark, Deputy Chief of the Fraud section, told the author at a seminar in June 1997 that he considers employees of foreign state-owned companies to be foreign officials for purposes of the FCPA.
20. 15 U.S.C. § 78dd-2(h)(3)(B).
21. H.R. Rep. No. 100-576, reprinted in 1988 USCCAN 1547, 1953. However, "simple negligence" and "mere foolishness" aren't a basis for liability.
22. Joseph P. Griffin, FCPA Perennials: Corrupt Intent, Knowledge and Vicarious Liability, Foreign Corrupt Practices Act (American Conference Institute), June 9 & 10, 1997.
23. 15 U.S.C. § 78dd-2(h)(4).
24. Id.
25. 15 U.S.C. § 78dd-2(c)(2); FCPA Review Release 85-1.
26. 15 U.S.C. § 78dd-2(c)(1); FCPA Review Release 92-1.
27. 15 U.S.C. § 78dd-2(g)(1)(A).
28. 15 U.S.C. § 78dd-2(g)(2)(A) and (B).
29. 15 U.S.C. § 78dd-2(g)(3).
30. William F. Pendergast, Foreign Corrupt Practices Act: An Overview of Almost Twenty Years of Foreign Bribery Prosecutions, Foreign Corrupt Practices Act (American Conference Institute) March 7, 1996. "Fines will increase and executives will go to jail." Page 48.
31. Note 7 supra.
32. S. Report 114, supra. "[A] U.S. company which looks the other way in order to be able to raise the defense that they were ignorant of bribes made by a foreign subsidiary, could be in violation of [the] section . . . requiring companies to devise and maintain adequate accounting controls." Page 4109.
33. Gregory Husisian and Jeffrey P. Bialos, The Foreign Corrupt Practices Act: Coping With Corruption in Russia and Other Transitional Economies, Foreign Corrupt Practices Act, (American Conference Institute) June 9 & 10, 1997.
34. Id.
35. 15 U.S.C. § 78dd-2(f).
36. Martin J. Weinstein, The Foreign Corrupt Practices Act and International Bribery and Corruption: Recent Developments, Foreign Corrupt Practices Act (American Conference Institute) June 9 & 10, 1997.

CHARLES E. DANIELS graduated from the OU College of Law in 1965. After meeting his military obligation, he tried dead cow cases in Texas for Phillips Petroleum. In 1971 he began doing international work for Phillips, which he has done most of the time since. During nine years of this period, he was stationed in London. He is currently senior counsel for Phillips in Bartlesville.