Written by : Aaron Wolfson、Eric Berger KWM New York Office

The Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (“FCPA”) is a U.S. federal law enacted in 1977 that focuses on anti-bribery provisions and also addresses associated accounting practices.  The FCPA anti-bribery provisions apply to all U.S. persons and certain foreign issuers of securities and broadly prohibit any corrupt payment or promise of payment to a foreign official to influence that official to assist in obtaining, retaining, or directing business to any person.  Since the enactment of certain amendments in 1998, the FCPA anti-bribery provisions also apply to foreign firms and persons who directly or through their agents act in furtherance of any such corrupt payment that is to take place within the United States.

The FCPA also requires companies whose securities are listed in the United States to comply with certain accounting provisions that were designed to operate in tandem with the anti-bribery provisions.  Specifically, the FCPA requires corporations covered by the accounting provisions to (a) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain an adequate system of internal accounting controls.

The FPCP Resource Guide

In November of 2012, the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) published A Resource Guide to the U.S. Foreign Corrupt Practices Act (the “Resource Guide”) that provides a detailed analysis of the FCPA and closely examines the SEC and DOJ approach to FCPA enforcement.  The Resource Guide is intended to provide information to businesses and individuals regarding how the SEC and DOJ interpret the FCPA and related case law and make enforcement decisions.   It should be noted, however, that the Resource Guide is non-binding, informal, does not constitute rules or regulations, and does not create any rights or in any way limit the enforcement decisions of the SEC and DOJ.

On July 3, 2020, the SEC and DOJ published a second edition of the Resource Guide, which is the first update to the Resource Guide since its original publication.  While the update does not fundamentally change the format or policies reflected in the original 2012 Resource Guide, it does provide substantial new guidance and clarification, including by defining and interpreting relevant terms and addressing case law and enforcement activity that has occurred since the original Resource Guide was released.  This note provides an overview of significant updates found in the Resource Guide.

Defining “Foreign Official” and “Instrumentality”

The anti-bribery terms of the FCPA apply to corrupt payments made to foreign officials, which include officers or employees of a department, agency, or instrumentality of a foreign government.  In this context, the term “instrumentality” is intentionally broad and can include state-owned or state-controlled entities.  Determining whether a particular entity constitutes an “instrumentality” of a foreign government under the FCPA definition is a fact-specific inquiry that considers the entity’s ownership, control, status, and function.  The Resource Guide promotes the definition of “instrumentality” used recently by the U.S. Court of Appeals for the Eleventh Circuit in United States v. Esquenazi, which interpreted “instrumentality” under the FCPA as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”  The Eleventh Circuit provided the following non-exhaustive list of factors that should be considered in determining whether a foreign government “controls” an entity:

  • The government’s formal designation of the entity;
  • Whether the government has a majority interest in the entity;
  • The government’s ability to hire and fire the entity’s principals;
  • The extent to which the entity’s profits, if any, go directly into the governmental fiscal accounts, and, by the same token, the extent to which the government funds the entity if it fails to break even; and
  • The length of time these indicia have existed.

The Eleventh Circuit further identified the following non-exhaustive list of factors that should be considered in determining whether an entity performs a function that a government treats as its own:

  • Whether the entity has a monopoly over the function it exists to carry out;
  • Whether the government subsidizes the costs associated with the entity providing services;
  • Whether the entity provides services to the public at large in the foreign country; and
  • Whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.

Companies would be wise to consider these factors when designing FCPA compliance programs and evaluating the risk of committing potential FCPA violations.

Mergers & Acquisitions Successor Liability

General principles of corporate liability apply to the FCPA.  This includes so called “successor liability” that exists where a company merges with or acquires another company, causing the successor company to assume the liabilities of the predecessor company.  The updated Resource Guide continues to emphasize the existence and importance of successor liability for FCPA violations, while also providing clarification on when successor liability exists.

The Resource Guide update makes clear that the SEC and DOJ recognize that, while robust pre-acquisition diligence is advisable in mergers and acquisitions, it is not always possible.  When it is not possible, the SEC and DOJ will consider the timeliness and thoroughness of the acquiring company’s post-acquisition due diligence and compliance integration efforts.  The update further notes that in a significant number of instances, the SEC and DOJ have declined to take action against companies in the M&A context that voluntarily disclosed and remediated conduct and cooperated with the SEC and DOJ.

The Resource Guide goes on to identify practical tips to reduce FCPA risk for M&A activity, such as seeking an opinion from the DOJ in anticipation of a potential acquisition.  But the Resource Guide recognizes that such DOJ opinions likely contain more stringent requirements than are necessary in most circumstances.  Instead, the SEC and DOJ encourage companies involved in M&A to follow certain enumerated steps.  The SEC and DOJ will give meaningful credit to companies that follow those steps and may decline to bring enforcement actions in such circumstances.  The update provides examples of specific relevant enforcement cases and their outcomes.

Corporate Compliance Updates

The updated Resource Guide expounds on the original version’s guidance to companies regarding their internal anti-corruption corporate compliance programs and how those programs are evaluated by the SEC and DOJ.  The SEC and DOJ do not have any formulaic requirements for corporate compliance programs, but instead evaluate them using a common-sense and pragmatic approach that looks at whether the compliance program is well designed, whether it is being applied in good faith, and whether it works in practice.  This Resource Guide’s instruction on corporate compliance programs includes an updated explanation of certain hallmarks of effective compliance programs and a citation to compliance program guidance issued by the DOJ, which was updated as recently as June 2020.  The cited DOJ guidance identifies factors the DOJ considers when evaluating corporate compliance programs (although this DOJ guidance does not apply to any SEC actions).  Notably, the update characterizes that how a company responds to misconduct is the truest measure of its corporate compliance program.

FCPA Jurisdiction and “Agent” Liability After United States v. Hoskins

In general, a foreign individual or entity may be held liable for conspiring to violate the FCPA or for aiding and abetting an FCPA violation even if that foreign individual or entity did not take an act in furtherance of the corrupt payment within the United States, so long as at least one co-conspirator is an issuer, domestic concern, or commits a reasonably foreseeable overt act within the United States.  In such instances, the foreign individual or entity may face FCPA liability because it acts as an agent of a US concern.

In its recent decision in United States v. Hoskins, however, the U.S. Court of Appeals for the Second Circuit addressed the issue of whether individuals not directly covered by the FCPA antibribery provisions could nevertheless be guilty of conspiring to violate, or aiding and abetting the violation of, the FCPA antibribery provisions.  The court in Hoskins found that such individuals could not be found guilty of conspiring to violate the FCPA or aiding and abetting a violation of the FCPA.  Accordingly, the Resource Guide noted that, at least in the Second Circuit, an individual can be criminally prosecuted for conspiracy to violate the FCPA’s anti-bribery provisions or aiding and abetting such a violation only if the individual’s conduct and role fall into one of  the enumerated categories expressly listed in the FCPA’s antibribery provisions.  The Resource Guide did note, however, that at least one district court in another circuit rejected the Hoskins reasoning, so this issue remains unsettled in some U.S. jurisdictions.

Clarification on FCPA Accounting Provisions

The updates in the Resource Guide provide clarification on both the statute of limitation and the mens rea, or state of mind, requirement for criminal violations of the FCPA accounting provisions.  First, the Resource Guide signals a change in the government’s view regarding the statute of limitation applicable in FCPA cases.  While it was previously understood that a five-year limitations period applied to both the FCPA’s anti-bribery and accounting provisions, the updated Resource Guide clarifies that that the FCPA accounting provisions have a six-year limitations period and the five-year period only applies to the FCPA anti-bribery provisions.  Second, the Resource Guide also provides updated guidance on the mens rea requirement for criminal liability for books and records and internal controls violations, making clear that a “knowing and willful” failure to maintain accurate books and records or implement an adequate system of internal accounting controls is required for criminal liability under the FCPA’s accounting obligations.

Civil Forfeiture and Disgorgement in view of U.S. Supreme Court Precedent

The Resource Guide update added a section on forfeiture and disgorgement that addresses and reflects the decisions of two U.S. Supreme Court cases on this issue.  The update notes that while the purpose of a penalty is to punish and deter misconduct, the primary purpose of forfeiture and disgorgement is to return the perpetrator to the same position as before the crime, thereby ensuring that the perpetrator does not profit from the misconduct.  Accordingly, the Resource Guide acknowledges that in Kokesh v. SEC, the Supreme Court ruled that the civil disgorgement remedy is a “penalty” and therefor subject to the five-year statute of limitations under 28 U.S.C. § 2462.  The Resource Guide also acknowledges that in SEC v. Liu, the Supreme Court found that disgorgement is a form of equitable relief and therefore should not exceed a wrongdoer’s net profits and is awarded for victims.

Anti “Piling On” Resolutions

In May 2018, the DOJ released a policy against a so called “piling on” scenario where multiple agencies investigate and punish a company for the same underling misconduct.  The DOJ’s anti piling on policy seeks to reduce the burden of enforcement activities on companies, particularly when they cooperate.  The Resource Guide update makes clear that the DOJ and SEC seek to avoid imposing duplicative penalties, forfeiture, and disgorgement for the same conduct.  The Resource Guide update provides examples of where the DOJ, SEC, and foreign regulatory entities coordinated their punishments for the same underlying misconduct and credited one another for imposing fines and disgorgement.  The update further articulates factors that prosecutors are to consider in determining whether and how much to credit another authority.

Conclusion

Although the updated Resource Guide is informal, non-binding, and does not specify new FCPA regulations or procedures, it does help clarify a number of important FCPA provisions and harmonize recent case law, enforcement actions, and governmental guidance with the Resource Guide’s directions.  Accordingly, the updated Resource Guide should prove a valuable tool for corporations and individuals looking to identify and implement best practices to ensure compliance with FCPA regulations.