"How Company Size Influences FCPA Enforcement," InsideCounsel
The global market is no longer a playing field just for the large corporation. A growing number of entrepreneurs and private companies are becoming viable participants as well in a U.S. economy that has experienced a surge in exports over the last five years. Lucrative deals are possible in the international market only if companies understand the rules and play full court ball. In order to hit the winning basket, companies must be very strategic in identifying and aligning with acceptable in-country partners, negotiating a contract that affords favorable and reasonable protections, and understanding and complying with U.S. international trade laws and regulations.
The leveling of the playing field is not always prevalent when it comes to adequate resources that ensure compliance. The stakes are therefore chancier for privately held companies that enter into high-risk markets and expand their international sales than for large businesses with resources.
Most startups begin with a single individual or a small team, and do not have the infrastructure to address the complicated risks associated with international business. Oftentimes, there is no in- house counsel or specialized staff to navigate the risks. Over a three-year period, these companies grow into what Global Entrepreneurship Monitor (GEM) defines as a new business between three and 42 months old, to an established business that has survived its first three-and- a-half years. No matter where the company sits on the pendulum swing, it is fairly accurate to deduce that growing startups and private companies most likely have limited resources to explore options or to gain a full understanding of proscribed practices for conducting international trade best practices in compliance with U.S. laws and regulations. Notwithstanding, growing startups and private companies that have global aspirations are held equally accountable by the U.S. Government for their international business activities. They are not given a pass for having less developed corporate governance practices.
Conducting international business can be paradoxical where the do’s and don’ts in the U.S. may not be the order of the day in-country. For example, in many countries where there is fertile ground for innovation and entrepreneurship, what is considered a best practice and a legal norm to do business can be an absolute and direct violation of U.S. law. Bribery and corruption are issues of business ethics and examples of common problems that businesses face. Bribery of foreign officials is a practice used by some individuals in many countries as a means to gain a contractual advantage. Congress, the Administration and the courts unequivocally have made it clear that bribery of foreign officials for the purpose of obtaining or maintaining business is an illegal and unethical business practice.
Companies that conduct business overseas, therefore, must adhere to the Foreign Corrupt Practices Act (FCPA) [15 U.S.C. § 78dd-1, 15 U.S.C. §§ 78m(b)(2)(A) and (B)of 1977]. This was enacted in 1977 in response to widespread bribery of foreign officials by U.S. companies in order to hold American businesses accountable for contributing to corruption, to halt those corrupt practices and to restore business integrity.
A serious misconception held by startups and private companies is that FCPA only applies to issuers, which are companies whose securities are traded on a U.S. stock exchange or is otherwise required to file periodic reports with the U.S. Securities and Exchange Commission (SEC). However, the FCPA’s anti-bribery reach extends to startups and private companies – and their employees and agents. Agents are broadly defined by the FCPA to include third-party agents, consultants, distributors, joint-venture partners, subsidiaries and just about anyone partnered with your company in foreign countries.
Furthermore, foreign companies are subject to FCPA enforcement actions if the corrupt actions were carried out on U.S. soil, even if it is merely the use of email servers in the U.S. In essence, the anti-bribery provisions make it a crime for any U.S. individual, business entity or employee of a U.S. business entity to offer or provide, directly or through a third party, anything of value to a foreign government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage. The standard of intent and knowledge in the anti-bribery cases is minimal – intent and knowledge are usually inferred from the fact that bribery took place.
According to the 2015 Global Enforcement Report (GER), operating or doing business in certain countries comes with an increased risk of prosecution for bribery. China, Iraq, Nigeria, India, Russia, Brazil and Indonesia have seen the highest level of enforcement activity. FCPA enforcement has been – and remains – a top enforcement priority for the SEC and the U.S. Department of Justice (DOJ). On Nov. 3, 2015, the DOJ's Fraud Section retained its first ever "compliance expert," Hui Chen. According to the announcement and comments by DOJ officials, the compliance expert will help prosecutors to evaluate defendant companies’ compliance and remediation efforts, and to develop industry-specific benchmarks to help prosecutors evaluate whether a particular compliance program is keeping pace with best practices in the relevant industry.
Small and medium sized companies and/or their owners are under heightened scrutiny for FCPA compliance. Kara Brockmeyer, chief of the FCPA Unit, commented in the February 2015 “Highlights from the SEC Speaks” that, “going forward, the Unit will focus on small and medium-sized companies that venture into the international market.” In January 2015, DOJ indicted the former owner and president of Chestnut Consulting Group, Inc. for allegedly participating in a scheme to pay bribes to a European Bank for Reconstruction and Development (EBRD). Other recent enforcement actions brought against smaller companies serve as a wakeup call to small and mid-sized companies. Particularly, the actions of Smith & Wesson, Bruker and Layne Christensen are examples of failed attempts to meet the standards defined in the anti- bribery provisions, and therefore, the companies were pinged quite substantially for their violations.
In a settlement agreement on July 28, 2014, Smith & Wesson agreed to pay $2 million in fines and to adopt various internal controls and reporting obligations for retaining third-party agents in Pakistan, Indonesia, Turkey and other countries to pay bribes in the form of free guns and illegal cash payments in exchange for the award of contracts for gun sales to military and police forces. The DOJ found illegal practices in other cases involving invalid collaboration agreements and gifts in the form of non-business travel, sightseeing, tour tickets, shopping, etc.
Payments that are permissible under the FCPA, however, are called facilitating or grease payments. This exemption allows for payments to be made to a foreign official, political party or party official for the sole purpose of carrying out and ensuring “routine governmental actions.”
Keep in mind that FCPA enforcement actions carry substantial multi-million dollar civil penalties, and can also include criminal penalties against companies as well as shareholders, directors, officers and key employees.
Despite limited resources, small companies—whether a startup or an established business—have an incentive to take FCPA anti-bribery and corruption provisions seriously by establishing and implementing effective anti-corruption programs to avoid FCPA liability, as enforcement agencies have increasingly and repeatedly emphasized their commitment to prosecuting companies of any size.
According to A Resource Guide to the U.S. Foreign Corrupt Practices Act, jointly published by the DOJ and the SEC, “[w]hen it comes to compliance, there is no one size fits all program.” The Guide further states that small companies likely will have different compliance programs from large corporations.
A few measures to mitigate FCPA concerns include:
- A written Code of Conduct and an FCPA Compliance Policy signed by all employees and contractors. Modeling your ethics and compliance program on an existing one replete with best practices of other similar organizations.
- Executive leadership buy-in or directly managing the compliance and ethics efforts through available personnel rather than employing separate staff.
- A system of internal controls or an appropriate FCPA compliance program reasonably designed to address the risks of its new business model including checklists.
- Training presentations conducted in English during informal staff meetings, online, etc. and translated in local languages.
- An adoption of FCPA anti-bribery provisions in all third-party contracts.
- An annual anti-corruption risk assessment.
- Due diligence of in-country partners and third-party agents.
- Employing anonymous internal whistleblowing systems.
- Adequate policies for commission payments, such as the use of samples or commission advances.
- A monitoring system of the organization by regular walk-arounds and continuous observation of subcontractors, distributors, freight forwarders and express delivery services to avoid agent liability for their corrupt actions.
- Appropriate and timely responses when violations are discovered.
As more and more business opportunities are found in emerging and fast-growing markets, where private companies are increasingly venturing, private companies need to be mindful of their responsibility as proscribed by the FCPA. If in-house general counsel or a compliance officer is not retained, those companies could be at a higher risk for violating the FCPA than some of their larger multinational peers that have robust compliance and training programs. Remember, there is no one-size-fits-all program, but hitting the hallmarks could avoid pitfalls that potentially lead to substantial fines, criminal charges and forfeited business opportunities. Mitigation of risks must be a priority for private companies that engage in international business activity.
Reprinted with permission from the MARCH 22, 2016, edition of the InsideCounsel © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877.257.3382 or firstname.lastname@example.org.