Complying with the FCPA in Emerging Markets After SOX

The FCPA, which amended Section 30A of the Securities Exchange Act of 1934, is codified at 15 U.S.C. ” 78m, 78dd-1 ' 78dd-3, and 78ff. It prohibits public companies from bribing foreign officials to obtain or retain business or to otherwise secure an improper advantage over competitors. Public companies can be held liable if they know there is a high probability that third parties will make a corrupt payment on their behalf. They also can be held liable for their subsidiaries' conduct.

The FCPA requires public companies to implement accounting and financial controls designed to assure transparency. 15 U.S.C. ' 78m(b)(2). Unlike the anti-bribery requirements, the accounting provisions apply to 'all corporations subject to the SEC regulation regardless of whether they are engaged in foreign business.' Masako N. Darrough, The FCPA and the OECD Convention: Some Lessons from the U.S. Experience (Feb. 2004), at 6, available at http://papers.ssrn. com/ sol3/papers.cfm?abstract_id=555643.

FCPA violations can lead to SEC administrative or civil-penalty actions or DOJ criminal prosecutions. The Act prohibits companies from indemnifying fines or penalties imposed against individuals for FCPA violations; moreover, under 26 U.S.C. ' 162(c), violators cannot deduct FCPA fines and penalties from their taxes. FCPA violations also can lead to other significant collateral consequences, including debarment and loss of export privileges.

The FCPA excludes small payments from its otherwise broad reach if they are made to obtain routine, non-discretionary government actions (so-called 'grease payments'). 15 U.S.C. ' 78dd-1(b). Two affirmative defenses are available: one for payments or promises of value that are lawful under the foreign country's laws, and the other for making reasonable and bona fide expenditures for a foreign official under limited, specified circumstances. 15 U.S.C. ' 78dd-1(c). Finally, the DOJ encourages companies to use its advisory opinion procedure, set out at 28 C.F.R. Part 80. Issuers and domestic concerns can obtain advisory opinions about whether contemplated acts run afoul of DOJ's FCPA enforcement policy.

SOX Builds upon The FCPA's Groundwork

The FCPA pushed businesses into adopting formalized compliance programs to prevent or limit wrongdoing, and to consider voluntary disclosure of wrongdoing to secure leniency from the government. The SEC established a voluntary disclosure program that let issuers conduct internal investigations of their foreign payments, adopt policies to cease such payments, and then file reports with the SEC ' which agreed not to prosecute issuers who reported the results of their investigations. See, e.g., Kathleen Lacey, et al., Assessing the Deterrent Effect of the Sarbanes-Oxley Act's Certification Provisions: A Comparative Analysis Using the Foreign Corrupt Practices Act, 38 Vand. J. Transnat'l L. 397, 416 (2005).

SOX (officially the 'Public Acc-ounting Reform and Investor Protection Act of 2002,' Pub. L. 107-204, 116 Stat. 745) added corporate governance procedures and reporting obligations in three categories: 1) requirements for public companies to disclose new categories of information; 2) more real-time reporting of corporate disclosures; and 3) requirements for companies to develop new internal procedures.

SOX drew upon the FCPA's accounting provisions as their model. In ' 404 of SOX, codified at 15 U.S.C. ' 7262(a), Congress directed the SEC to prescribe rules that required an annual internal control report stating management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and containing an annual assessment about the effectiveness of the issuer's internal control structure and procedures for financial reporting.

FCPA Exposure in Emerging Markets

Some of the major factors that make FCPA compliance increasingly difficult in today's environment include the globalization of business activities, the growing opportunities for transnational companies to make large profits in developing markets, and the enactment of anti-corruption laws by most developed countries. When U.S. companies begin conducting business in emerging economies, they must be particularly wary of actions that could involve a foreign official and violate the FCPA.

A good example is China, which in recent years has been transitioning from complete state control over industry to quasi-capitalistic markets. 'So tightly knit are corrupt practices into the fabric of modern Chinese society that they are almost invisible,' says Stanley Lubman, describing a 1998 report by the U.S.-China Business Council: 'For businesspeople, corrupt practices have layered cost upon cost, as each government organization with any say over a given deal has to be negotiated with, cajoled, and managed in order to fend off the rent-seeking behavior.' Looking for Law in China, 20 Colum. J. Asian L. 1, 74 (2006). Yet, as the Baker Hughes case illustrates, companies that conduct business in former communist countries are more likely to encounter foreign officials who will request bribes for obtaining or retaining business.

One study about FCPA violations describes some common characteristics of those businesses that are more likely to violate the FCPA. Companies that conduct business in highly competitive markets are more likely to pay bribes, as are companies that have experienced business setbacks or dwindling profits. See Darrough, The FCPA and the OECD Convention: Some Lessons from the U.S. Experience, at 26.

How to Minimize FCPA Dangers in Emerging Markets

It is clear that transnational companies must be proactive about FCPA compliance in business dealings with foreign countries. SEC branch chief Nina B. Finston has listed red flags under the FCPA: doing business in a country or an industry that is high-risk for bribery; operating a joint venture with a foreign government entity; entering into consulting and agency arrangements with persons acting as intermediaries with a foreign government; employing intermediaries who have control over the foreign venture's financial expenditures or financial reporting; unusual payments to foreign agents in light of the prevailing local rates and the nature of services provided; making bonuses for employees in foreign operations contingent on reaching unduly aggressive operating results. Ethical Pitfalls for Florida Practitioners Under the Foreign Corrupt Practices Act (May 20, 2004), available at edgar.sec.gov/about/offices/oia/oia_enforce/fcp-act.pdf.

Finally, as recommended by the World Bank in its Special Report on Fighting Corruption (Sept 2006), some critical steps are required for conducting enhanced due diligence for FCPA liability, such as examining the reputations, associations, activities, and ethics of potential partners, investors or key hires; confirming or refuting allegations and rumors of criminal or questionable business practices; identifying any undisclosed liabilities or questionable financial reporting; researching unusual offshore structures and unexplained financial arrangements associated with potential merger, acquisition, or joint venture targets; and clarifying the nature of relationships between target companies and various individuals, including government officials.

Michael E. Clark ([email protected]), a former federal prosecutor, is a member of this newsletter's Board of Editors. He represents businesses and professionals in administrative, civil, and white collar criminal matters at Hamel Bowers & Clark L.L.P., Houston, and is the Chair of the White Collar Crimes Committee in the ABA Section of Business Law.

One of the current top priorities of the Department of Justice ('DOJ') and SEC is enforcing the Foreign Corrupt Practices Act (FCPA or the 'Act'). The FCPA was enacted in 1977 after over 400 publicly traded U.S. corporations admitted to the SEC that, collectively, they had made over $300 million in illegal or questionable payments to foreign government officials, politicians, and political parties. The Act was amended in 1998, and its reach was further expanded to correspond with the 'OECD Convention on Combating Bribery of Foreign Public Officials in International Business Trans- actions' adopted by 30 OECD members and five additional countries. After the enactment of Sarbanes-Oxley ('SOX') in 2002, disclosures of FCPA violations increased dramatically. 'In 2004, the SEC and DOJ brought the largest number of FCPA enforcement actions ever and have imposed record level fines accompanied by an unprecedented variety of additional criminal and civil sanctions.' Aaron G. Murphy, The Migratory Patterns of Business in the Global Village, 2 N.Y.U. J. L. & Bus. 229, 256 (2005).

The recent settlement of parallel FCPA actions in the Southern District of Texas against Baker Hughes, Inc., a major oilfield service company, and its wholly owned subsidiary Baker Hughes Services International Inc. (collectively 'Baker Hughes'), underscores the importance of complying with the FCPA's provisions in emerging markets. Over $4 million in bribes was paid to a consulting firm that was Baker Hughes' agent for a major oil field services contract. Baker Hughes knew that its agent would transfer funds to an official with the state-owned oil company of Kazakhstan, a country with enormous oil reserves. To resolve the actions, Baker Hughes paid $44 million in combined fines and penalties ' the largest sanction ever imposed in an FCPA case.

FCPA Mechanics

The FCPA, which amended Section 30A of the Securities Exchange Act of 1934, is codified at 15 U.S.C. ” 78m, 78dd-1 ' 78dd-3, and 78ff. It prohibits public companies from bribing foreign officials to obtain or retain business or to otherwise secure an improper advantage over competitors. Public companies can be held liable if they know there is a high probability that third parties will make a corrupt payment on their behalf. They also can be held liable for their subsidiaries' conduct.

The FCPA requires public companies to implement accounting and financial controls designed to assure transparency. 15 U.S.C. ' 78m(b)(2). Unlike the anti-bribery requirements, the accounting provisions apply to 'all corporations subject to the SEC regulation regardless of whether they are engaged in foreign business.' Masako N. Darrough, The FCPA and the OECD Convention: Some Lessons from the U.S. Experience (Feb. 2004), at 6, available at http://papers.ssrn. com/ sol3/papers.cfm?abstract_id=555643.

FCPA violations can lead to SEC administrative or civil-penalty actions or DOJ criminal prosecutions. The Act prohibits companies from indemnifying fines or penalties imposed against individuals for FCPA violations; moreover, under 26 U.S.C. ' 162(c), violators cannot deduct FCPA fines and penalties from their taxes. FCPA violations also can lead to other significant collateral consequences, including debarment and loss of export privileges.

The FCPA excludes small payments from its otherwise broad reach if they are made to obtain routine, non-discretionary government actions (so-called 'grease payments'). 15 U.S.C. ' 78dd-1(b). Two affirmative defenses are available: one for payments or promises of value that are lawful under the foreign country's laws, and the other for making reasonable and bona fide expenditures for a foreign official under limited, specified circumstances. 15 U.S.C. ' 78dd-1(c). Finally, the DOJ encourages companies to use its advisory opinion procedure, set out at 28 C.F.R. Part 80. Issuers and domestic concerns can obtain advisory opinions about whether contemplated acts run afoul of DOJ's FCPA enforcement policy.

SOX Builds upon The FCPA's Groundwork

The FCPA pushed businesses into adopting formalized compliance programs to prevent or limit wrongdoing, and to consider voluntary disclosure of wrongdoing to secure leniency from the government. The SEC established a voluntary disclosure program that let issuers conduct internal investigations of their foreign payments, adopt policies to cease such payments, and then file reports with the SEC ' which agreed not to prosecute issuers who reported the results of their investigations. See, e.g., Kathleen Lacey, et al., Assessing the Deterrent Effect of the Sarbanes-Oxley Act's Certification Provisions: A Comparative Analysis Using the Foreign Corrupt Practices Act, 38 Vand. J. Transnat'l L. 397, 416 (2005).

SOX (officially the 'Public Acc-ounting Reform and Investor Protection Act of 2002,' Pub. L. 107-204, 116 Stat. 745) added corporate governance procedures and reporting obligations in three categories: 1) requirements for public companies to disclose new categories of information; 2) more real-time reporting of corporate disclosures; and 3) requirements for companies to develop new internal procedures.

SOX drew upon the FCPA's accounting provisions as their model. In ' 404 of SOX, codified at 15 U.S.C. ' 7262(a), Congress directed the SEC to prescribe rules that required an annual internal control report stating management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and containing an annual assessment about the effectiveness of the issuer's internal control structure and procedures for financial reporting.

FCPA Exposure in Emerging Markets

Some of the major factors that make FCPA compliance increasingly difficult in today's environment include the globalization of business activities, the growing opportunities for transnational companies to make large profits in developing markets, and the enactment of anti-corruption laws by most developed countries. When U.S. companies begin conducting business in emerging economies, they must be particularly wary of actions that could involve a foreign official and violate the FCPA.

A good example is China, which in recent years has been transitioning from complete state control over industry to quasi-capitalistic markets. 'So tightly knit are corrupt practices into the fabric of modern Chinese society that they are almost invisible,' says Stanley Lubman, describing a 1998 report by the U.S.-China Business Council: 'For businesspeople, corrupt practices have layered cost upon cost, as each government organization with any say over a given deal has to be negotiated with, cajoled, and managed in order to fend off the rent-seeking behavior.' Looking for Law in China, 20 Colum. J. Asian L. 1, 74 (2006). Yet, as the Baker Hughes case illustrates, companies that conduct business in former communist countries are more likely to encounter foreign officials who will request bribes for obtaining or retaining business.

One study about FCPA violations describes some common characteristics of those businesses that are more likely to violate the FCPA. Companies that conduct business in highly competitive markets are more likely to pay bribes, as are companies that have experienced business setbacks or dwindling profits. See Darrough, The FCPA and the OECD Convention: Some Lessons from the U.S. Experience, at 26.

How to Minimize FCPA Dangers in Emerging Markets

It is clear that transnational companies must be proactive about FCPA compliance in business dealings with foreign countries. SEC branch chief Nina B. Finston has listed red flags under the FCPA: doing business in a country or an industry that is high-risk for bribery; operating a joint venture with a foreign government entity; entering into consulting and agency arrangements with persons acting as intermediaries with a foreign government; employing intermediaries who have control over the foreign venture's financial expenditures or financial reporting; unusual payments to foreign agents in light of the prevailing local rates and the nature of services provided; making bonuses for employees in foreign operations contingent on reaching unduly aggressive operating results. Ethical Pitfalls for Florida Practitioners Under the Foreign Corrupt Practices Act (May 20, 2004), available at edgar.sec.gov/about/offices/oia/oia_enforce/fcp-act.pdf.

Finally, as recommended by the World Bank in its Special Report on Fighting Corruption (Sept 2006), some critical steps are required for conducting enhanced due diligence for FCPA liability, such as examining the reputations, associations, activities, and ethics of potential partners, investors or key hires; confirming or refuting allegations and rumors of criminal or questionable business practices; identifying any undisclosed liabilities or questionable financial reporting; researching unusual offshore structures and unexplained financial arrangements associated with potential merger, acquisition, or joint venture targets; and clarifying the nature of relationships between target companies and various individuals, including government officials.

Michael E. Clark ([email protected]), a former federal prosecutor, is a member of this newsletter's Board of Editors. He represents businesses and professionals in administrative, civil, and white collar criminal matters at Hamel Bowers & Clark L.L.P., Houston, and is the Chair of the White Collar Crimes Committee in the ABA Section of Business Law.