Liability of U.S. Companies for Alleged Bribery By Foreign Subsidiaries

If the parent were the direct beneficiary of a bribe, would it be liable even if none of its officers were involved? Would the fact that the foreign subsidiary's financials are consolidated into the parent's be sufficient to establish the parent “looked the other way”? If an employee of the parent is temporarily stationed in the foreign subsidiary's offices, is that evidence of the parent's knowledge? What if the subsidiary's actions are completely contrary to the parent's well-established internal controls and procedures, but the parent's auditing did not catch the misconduct?

Determining how much knowledge warrants criminal or civil prosecution of the parent is difficult because the case law is surprisingly spare. Virtually all anti-bribery enforcement actions settle, and prosecutions plead prior to any rulings of law. Relevant standards must be divined by reviewing Informations, Department of Justice (DOJ) and SEC press releases, civil resolutions with the SEC, and civil complaints filed in derivative actions following public announcements of the case.

Four factors seem to be the most important in bearing on the government's decision whether and how to prosecute a parent: 1) Did the parent receive a direct benefit from the subsidiary's conduct? 2) Were there any meaningful controls in place to detect illicit payments? 3) Did the individual malfeasor hold a position of importance within the parent while working for the subsidiary? and 4) Did the parent voluntarily disclose the conduct to the government?

Receipt of Direct Benefit

The more direct a benefit the parent obtains from the subsidiary's bribery, the more likely the parent will be targeted for prosecution since it had “reason to know.” See, eg, United States v. NAPCO Int'l, Crim. No. 48964, 2 FCPA Rptr. 697.80 (D. Minn. Mar. 10, 1989) (information). Conversely, if the benefit inures only to the subsidiary, the parent may be found not to have the requisite knowledge. See United States v. Goodyear International Corp., Crim. No. 89-0156 (D.D.C. May 11, 1989) (only subsidiary prosecuted).

Internal Controls

Although the books-and-records and internal-controls provisions are separate from the anti-bribery provisions, the presence or absence of controls appears to have influenced government decisions on whether to charge a parent. For example, in U.S. v. ABB Vetco Gray, Inc. and ABB Vetco Gray UK Ltd., No. 04 CR 27901 (S.D. Tex. 2004), the DOJ prosecuted two subsidiaries of ABB Ltd. for a bribery scheme that generated over $5.5 million in profits. There was no allegation that ABB Ltd. knew or approved its subsidiaries' illegal payments; the parent was prosecuted, albeit, only civilly, with a complaint alleging that ABB “lacked any meaningful internal controls to prevent or detect such illicit payments.” See S.E.C. v. ABB Ltd., No. 1:04 CV 1141 (D.D.C. July 6, 2004) (RBW), SEC Lit. Rel. No. 18755 (July 6, 2004). But see SEC v. Schering Plough Corporation, No. 1:04CV00945 (PLF) (D.D.C. June 9, 2004), SEC Lit. Rel. No. 18740 (June 9, 2004) (parent's internal controls inadequate to detect improper payments by subsidiary to foreign official's “Foundation”; nevertheless, no bribery charges).

Conversely, in SEC v. Chiquita Brands International, Civ Action No. 1:01CV02079 (D.D.C.) (filed Oct. 3, 2001), the SEC's Cease and Desist Order made a point of stating that “Chiquita's policies and procedures contain strict guidelines regarding the use of a discretionary expenses account,” but its foreign subsidiary “did not comply with Chiquita's procedure.” The Order lists several “strict guidelines” that the sub ignored. Although a civil books-and-records penalty was assessed against the parent, it was not charged with civil or criminal anti-bribery violations. A similar result is seen in In re IBM Corp., SEC Securities Exchange Act Release No. 43761 (Dec. 21, 2000) (order), where the SEC Order noted that the actions of IBM's Argentinean subsidiary were conducted “without the knowledge or approval of any IBM employee in the United States” and in violation of IBM's contracting and procurement procedures. Although IBM was subjected to enforcement for records violations caused by the subsidiary, it was not charged under the anti-bribery provisions. See, also, In re BJ Services, SEC Exch. Act Rel. No. 4930 (March 10, 2004) (subsidiary acted in violation of established controls).

Notice to the Parent: Overlapping Officers

Even when parent companies have not been the direct beneficiaries of their subsidiaries' bribery, they have been held liable where an officer of the parent has been involved in the bribe. For example, in SEC v. Sam P. Wallace Co. et al., 2 FCPA Rptr. 683 (D.D.C. 1982) (complaint), the contract obtained through bribery appeared to benefit only the subsidiary. Nevertheless, the parent was subjected to both a civil enforcement action and a criminal prosecution under the anti-bribery provisions. United States v. Sam P. Wallace Co., Crim. No. 83-0034 (PG) (D. P.R. Feb. 23, 1983). An important fact was that the president of the subsidiary involved in the bribe became an executive vice-president of the parent during the course of the bribery scheme. Similarly, in SEC v. Syncor Intl. Corp., No. 1:02 CV 02421 (D.D.C. 2002), liability under the anti-bribery provisions was found where the parent's founder and chairman knew and may have approved the subsidiary's misconduct, much of which was carried out by his brother. See also In re BJ Services, SEC Exch. Act Rel. No. 4930 (March 10, 2004) (order) (parent liability where the sub's country and regional managers were employees of the parent).

In one case, a parent company officer learned of a bribe but took no action; the parent fired that officer and escaped bribery charges. See, eg, SEC v. Triton Energy Corp., Civ No. 1:97CV00401 (D.D.C.), SEC Lit Rel. No. 15266 (Feb. 27, 1997).

Voluntary Disclosure

Although the parent officer's involvement in the bribe was very similar in Syncor and Wallace, only Wallace resulted in the parent's criminal plea to bribery charges. The difference may be that the parent in Syncor “promptly brought this matter to the attention of the Commission's staff and the US Department of Justice.”

How Can the Parent Protect Itself?

Strong internal controls designed to detect improper payments, including a good audit program, may be key. This entails understanding the business and procedures of the subsidiary. The parent's internal auditors must be sufficiently versed in the foreign country's language and customs. When a problem is detected, the parent cannot assume it has no exposure simply because all the conduct occurred in a foreign country. First, it must find out if any wrongdoers are officers of the parent. Then it should examine whether departments such as legal, accounting, finance, marketing and human resources have parent-subsidiary reporting relationships that bypass the direct reporting hierarchy. For example, even if the subsidiary's management manages to hide its misconduct from the parent, the subsidiary's accountants may have consulted accountants in the parent about the treatment of certain payments. Detailed regular debriefing of parent officers on temporary stints abroad is also a wise precautionary measure.

Accounting Provisions

The FCPA requires issuers to keep accurate books and records and devise and maintain procedures to provide “reasonable assurances” that transactions are consistently executed and recorded in an authorized manner. See 15 U.S.C. ' 78m(b)(2)(A-B). Criminal liability arises when the accounting provisions are violated “knowingly.” See 15 U.S.C. ' 78m(b)(3)(B)(4-5). Criminal prosecutions for accounting violations are rare and appear limited to pleas in light of the company's corrective actions and cooperation, where the facts would have supported direct criminal bribery charges. See, eg, United States v. Monsanto Company, No. 05 CR 00008 (D.D.C, Jan. 6, 2005).

The key factor in determining whether a parent is civilly liable under the FCPA for its subsidiary's accounting violations is whether the parent owns a majority interest. Prior SEC practice was codified in a 1988 amendment to the FCPA that created a conclusive presumption of compliance with the civil accounting provisions if a parent with less than 50% ownership of a culpable subsidiary can demonstrate that it made a “good faith” effort to influence the subsidiary to use internal controlsconsistent with the FCPA. See U.S.C. ' 78m(b)(6). What constitutes “good faith” depends upon “the relative degree of the issuer's ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located.” Id. Where a subsidiary is majority or wholly owned, its parent may face strict civil liability for the subsidiary's accounting violations. Indeed, parents have faced enforcement actions even when they had no knowledge of subsidiaries' misconduct and employees of the subsidiaries deliberately deceived them. See, eg, In re Chiquita Brands Intl., Inc., supra; In re IBM Corp. supra.

The Foreign Corrupt Practices Act (FCPA) provides two avenues by which a U.S. concern can be prosecuted for improper payments to foreign officials: the anti-bribery provisions, and the books-and-records and internal-control provisions. Somewhat unclear, however, is the kind of involvement in a foreign subsidiary a U.S. parent must have such that it might be exposed to criminal or civil enforcement. This article explores liability for misconduct of foreign subsidiaries and what preventive measures a parent can take.

Anti-Bribery Provisions

It is a violation for a domestic concern to corruptly offer any payment, gift or thing of value to any foreign official for the purpose of influencing any act or decision of the foreign official or securing any improper advantage or to any other person “while knowing” that some or all of the payment will be passed on to a foreign official for the improper purposes enumerated. 15 U.S.C. ' 78dd-2(a). The FCPA does not expressly address payments by a foreign subsidiary. The original Senate Report explains that the prohibition “would not cover payments by foreign nationals acting solely on behalf of foreign subsidiaries … where the issuer, reporting company or domestic concern had no knowledge of the payment.” S. Rep. No. 114 95th Cong., 1st Sess. (1977), at 11 (emphasis added). However, the Report warns that the parent may not look the other way in an effort to insulate itself from a subsidiary's misconduct. Parent liability ultimately depends on “all the facts and circumstances.”

If the parent were the direct beneficiary of a bribe, would it be liable even if none of its officers were involved? Would the fact that the foreign subsidiary's financials are consolidated into the parent's be sufficient to establish the parent “looked the other way”? If an employee of the parent is temporarily stationed in the foreign subsidiary's offices, is that evidence of the parent's knowledge? What if the subsidiary's actions are completely contrary to the parent's well-established internal controls and procedures, but the parent's auditing did not catch the misconduct?

Determining how much knowledge warrants criminal or civil prosecution of the parent is difficult because the case law is surprisingly spare. Virtually all anti-bribery enforcement actions settle, and prosecutions plead prior to any rulings of law. Relevant standards must be divined by reviewing Informations, Department of Justice (DOJ) and SEC press releases, civil resolutions with the SEC, and civil complaints filed in derivative actions following public announcements of the case.

Four factors seem to be the most important in bearing on the government's decision whether and how to prosecute a parent: 1) Did the parent receive a direct benefit from the subsidiary's conduct? 2) Were there any meaningful controls in place to detect illicit payments? 3) Did the individual malfeasor hold a position of importance within the parent while working for the subsidiary? and 4) Did the parent voluntarily disclose the conduct to the government?

Receipt of Direct Benefit

The more direct a benefit the parent obtains from the subsidiary's bribery, the more likely the parent will be targeted for prosecution since it had “reason to know.” See, eg, United States v. NAPCO Int'l, Crim . No. 48964, 2 FCPA Rptr. 697.80 (D. Minn. Mar. 10, 1989) (information). Conversely, if the benefit inures only to the subsidiary, the parent may be found not to have the requisite knowledge. See United States v. Goodyear International Corp., Crim. No. 89-0156 (D.D.C. May 11, 1989) (only subsidiary prosecuted).

Internal Controls

Although the books-and-records and internal-controls provisions are separate from the anti-bribery provisions, the presence or absence of controls appears to have influenced government decisions on whether to charge a parent. For example, in U.S. v. ABB Vetco Gray, Inc. and ABB Vetco Gray UK Ltd. , No. 04 CR 27901 (S.D. Tex. 2004), the DOJ prosecuted two subsidiaries of ABB Ltd. for a bribery scheme that generated over $5.5 million in profits. There was no allegation that ABB Ltd. knew or approved its subsidiaries' illegal payments; the parent was prosecuted, albeit, only civilly, with a complaint alleging that ABB “lacked any meaningful internal controls to prevent or detect such illicit payments.” See S.E.C. v. ABB Ltd., No. 1:04 CV 1141 (D.D.C. July 6, 2004) (RBW), SEC Lit. Rel. No. 18755 (July 6, 2004). But see SEC v. Schering Plough Corporation, No. 1:04CV00945 (PLF) (D.D.C. June 9, 2004), SEC Lit. Rel. No. 18740 (June 9, 2004) (parent's internal controls inadequate to detect improper payments by subsidiary to foreign official's “Foundation”; nevertheless, no bribery charges).

Conversely, in SEC v. Chiquita Brands International, Civ Action No. 1:01CV02079 (D.D.C.) (filed Oct. 3, 2001), the SEC's Cease and Desist Order made a point of stating that “Chiquita's policies and procedures contain strict guidelines regarding the use of a discretionary expenses account,” but its foreign subsidiary “did not comply with Chiquita's procedure.” The Order lists several “strict guidelines” that the sub ignored. Although a civil books-and-records penalty was assessed against the parent, it was not charged with civil or criminal anti-bribery violations. A similar result is seen in In re IBM Corp., SEC Securities Exchange Act Release No. 43761 (Dec. 21, 2000) (order), where the SEC Order noted that the actions of IBM's Argentinean subsidiary were conducted “without the knowledge or approval of any IBM employee in the United States” and in violation of IBM's contracting and procurement procedures. Although IBM was subjected to enforcement for records violations caused by the subsidiary, it was not charged under the anti-bribery provisions. See, also, In re BJ Services, SEC Exch. Act Rel. No. 4930 (March 10, 2004) (subsidiary acted in violation of established controls).

Notice to the Parent: Overlapping Officers

Even when parent companies have not been the direct beneficiaries of their subsidiaries' bribery, they have been held liable where an officer of the parent has been involved in the bribe. For example, in SEC v. Sam P. Wallace Co. et al., 2 FCPA Rptr. 683 (D.D.C. 1982) (complaint), the contract obtained through bribery appeared to benefit only the subsidiary. Nevertheless, the parent was subjected to both a civil enforcement action and a criminal prosecution under the anti-bribery provisions. United States v. Sam P. Wallace Co., Crim. No. 83-0034 (PG) (D. P.R. Feb. 23, 1983). An important fact was that the president of the subsidiary involved in the bribe became an executive vice-president of the parent during the course of the bribery scheme. Similarly, in SEC v. Syncor Intl. Corp., No. 1:02 CV 02421 (D.D.C. 2002), liability under the anti-bribery provisions was found where the parent's founder and chairman knew and may have approved the subsidiary's misconduct, much of which was carried out by his brother. See also In re BJ Services, SEC Exch. Act Rel. No. 4930 (March 10, 2004) (order) (parent liability where the sub's country and regional managers were employees of the parent).

In one case, a parent company officer learned of a bribe but took no action; the parent fired that officer and escaped bribery charges. See, eg, SEC v. Triton Energy Corp., Civ No. 1:97CV00401 (D.D.C.), SEC Lit Rel. No. 15266 (Feb. 27, 1997).

Voluntary Disclosure

Although the parent officer's involvement in the bribe was very similar in Syncor and Wallace, only Wallace resulted in the parent's criminal plea to bribery charges. The difference may be that the parent in Syncor “promptly brought this matter to the attention of the Commission's staff and the US Department of Justice.”

How Can the Parent Protect Itself?

Strong internal controls designed to detect improper payments, including a good audit program, may be key. This entails understanding the business and procedures of the subsidiary. The parent's internal auditors must be sufficiently versed in the foreign country's language and customs. When a problem is detected, the parent cannot assume it has no exposure simply because all the conduct occurred in a foreign country. First, it must find out if any wrongdoers are officers of the parent. Then it should examine whether departments such as legal, accounting, finance, marketing and human resources have parent-subsidiary reporting relationships that bypass the direct reporting hierarchy. For example, even if the subsidiary's management manages to hide its misconduct from the parent, the subsidiary's accountants may have consulted accountants in the parent about the treatment of certain payments. Detailed regular debriefing of parent officers on temporary stints abroad is also a wise precautionary measure.

Accounting Provisions

The FCPA requires issuers to keep accurate books and records and devise and maintain procedures to provide “reasonable assurances” that transactions are consistently executed and recorded in an authorized manner. See 15 U.S.C. ' 78m(b)(2)(A-B). Criminal liability arises when the accounting provisions are violated “knowingly.” See 15 U.S.C. ' 78m(b)(3)(B)(4-5). Criminal prosecutions for accounting violations are rare and appear limited to pleas in light of the company's corrective actions and cooperation, where the facts would have supported direct criminal bribery charges. See, eg, United States v. Monsanto Company , No. 05 CR 00008 (D.D.C, Jan. 6, 2005).

The key factor in determining whether a parent is civilly liable under the FCPA for its subsidiary's accounting violations is whether the parent owns a majority interest. Prior SEC practice was codified in a 1988 amendment to the FCPA that created a conclusive presumption of compliance with the civil accounting provisions if a parent with less than 50% ownership of a culpable subsidiary can demonstrate that it made a “good faith” effort to influence the subsidiary to use internal controlsconsistent with the FCPA. See U.S.C. ' 78m(b)(6). What constitutes “good faith” depends upon “the relative degree of the issuer's ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located.” Id. Where a subsidiary is majority or wholly owned, its parent may face strict civil liability for the subsidiary's accounting violations. Indeed, parents have faced enforcement actions even when they had no knowledge of subsidiaries' misconduct and employees of the subsidiaries deliberately deceived them. See, eg, In re Chiquita Brands Intl., Inc., supra; In re IBM Corp. supra.