The Foreign Corrupt Practices Act: A Primer and Recent Developments

 

Today’s topic is the Foreign Corrupt Practices Act.

In a white paper available here, former Securities and Exchange Commission Staffer Jay Perlman offers a primer on the Foreign Corrupt Practices Act (FCPA). As the memorandum outlines, in the early 1970s, in the wake of the Watergate political scandal, the Securities and Exchange Commission (SEC) discovered that a number of companies had created “slush funds” to make illegal campaign contributions in the U.S. and corrupt payments to foreign government officials, and then had falsified their corporate books and records to conceal or misrepresent these payments. Through its investigation, the SEC found that more than 400 corporations, 117 of which were ranked in the Fortune 500, had paid out more than $300 million to foreign government officials, politicians and political parties to secure favorable treatment by foreign governments. Congress deemed these payments “counter to the moral expectations and vales of the American public” and noted that such payments, “erode[d] public confidence in the integrity of the free market system.” [1] In the wake of these findings, Congress enacted the Foreign Corrupt Practices Act. A brief summary of the FCPA prepared by the Department of Justice is available here.  The SEC’s spotlight on the FCPA is available here.

Broadly speaking, the FCPA makes it illegal to offer, authorize, promise or pay a bribe to a foreign official to obtain or retain business. The FCPA also requires issuers to make and retain accurate books and records and to devise and maintain a system of internal accounting controls that reasonably assures control, authority and responsibility over a firm’s assets.  The FCPA covers a wide range institutions and individuals and it is industry neutral.  In 2014, the U.S. government meted out approximately $1.6 billion in monetary penalties for violations of the FCPA, an amount that was almost double the amount assessed in 2013. Also during 2014, 12 corporate executives entered guilty pleas and/or were arrested or indicted for violations of the FCPA

On April 5, 2016, Department of Justice announced a one-year FCPA Pilot Program applicable to business organizations.  Information about the Pilot Program and a link to the DOJ’s “Enforcement Plan and Guidance” Memorandum are available here.  The Pilot Program and Memorandum provide guidance concerning mitigation credit offered by DOJ in FCPA prosecutions.  Under the Pilot Program, the DOJ considers four factors in deciding whether it would be appropriate to decline prosecution, or reduce monetary penalties assessed in connection with a resolution: (1) the company’s voluntary self-disclosure, (2) the company’s cooperation with the DOJ, (3) the company’s remediation, and (4) the company’s disgorgement of ill-gotten profits.  To qualify for full mitigation credit under the Pilot Program, a company must (1) voluntarily self-disclose; (2) fully cooperate with a DOJ investigation; and (3) remediate, as appropriate, internal controls and compliance programs.

In June 2016, the DOJ released its first declination letters since the launch of the Pilot Program. The letters were sent to home-security and thermostat systems-maker Nortek, Inc. and internet-services provider Akamai Technologies, Inc.  Both companies had been under investigation by the DOJ and SEC after voluntarily self-disclosing FCPA-related misconduct connected to payments to Chinese officials by their wholly-owned Chinese subsidiaries.  These letters shed some light on the steps a business organization must undertake to qualify for mitigation credit.

 Nortek, Inc.

In a January 2015 SEC filing, Nortek reported that it had uncovered questionable hospitality, gift and payment practices, and other questionable expenses at its China-based subsidiary as part of a routine audit. Nortek’s investigation reportedly revealed that from at least 2009 to 2014, the subsidiary’s managing director, accounting manager, customs liaison officer, and other employees made or approved some 400 improper payments and gifts to local officials in order to receive preferential treatment, relaxed regulatory oversight, and reduced customs duties, taxes, and fees. The investigation further revealed that during this period, employees of Nortek’s subsidiary inaccurately recorded the payments and gifts in Nortek’s books and records, which Nortek’s internal accounting controls failed to identify.

The DOJ’s letter to Nortek identified the following facts in support of decision to decline prosecution:

  • Nortek’s internal audit function identified the misconduct;
  • Nortek’s prompt voluntary self-disclosure of the misconduct to government authorities;
  •  Nortek’s thorough investigation of the misconduct;
  •  Nortek’s “fulsome” cooperation, which included identifying all individuals involved in or responsible for the misconduct and providing all facts relating to their misconduct to the DOJ;
  • Nortek’s agreement to continue to cooperate in any ongoing investigations of individuals;
  • Nortek’s efforts to enhance its compliance program and its internal accounting controls;
  • Nortek’s “full remediation,” which including terminating the employment of all five individuals involved in the misconduct, included two high-level executives of its China subsidiary; and
  • The fact that Nortek will be disgorging to the SEC the full amount of disgorgement as determined by the SEC.

Akamai Technologies, Inc. 

In a March 2015 SEC filings, Akamai disclosed an internal probe regarding potential bribery by a subsidiary in an unidentified country. The probe reportedly revealed that from at least 2013 through 2015, a regional sales manager colluded with a channel partner to bribe employees of three customers, including two Chinese state-owned entities, to obtain and retain business. The scheme involved providing gifts and entertainment to Chinese government officials and then improperly recording the expenditures as legitimate business expenses.   Akamai reportedly failed to conduct formal due diligence of China-based channel partners, failed to monitor or review customer internet usage in high-risk regions, and failed to translate anti-bribery and anti-corruption policies into Mandarin. Akamai also reportedly failed to provide adequate employee training on FCPA compliance and anti-bribery policies.

The DOJ’s letter to Akamai identified the following facts in its decision not to prosecute:

  •  Akamai’s prompt voluntary self-disclosure of the misconduct to government authorities;
  •  Akamai’s “thorough investigation and fulsome cooperation,” which included identifying all individuals involved in or responsible for the misconduct and providing all facts relating to that misconduct to government authorities;
  •  Akamai’s agreement to continue to cooperate in any ongoing investigations of individuals;
  •  Akamai’s steps to enhance its compliance program and its internal accounting controls,
  •  Akamai’s “full remediation,” which included (i) promptly suspending the individual involved in the misconduct who then resigned shortly thereafter; (ii) terminating the relationship with the channel partner involved in the misconduct, and (iii) disciplining five other employees who should have prevented other violations of the Akamai’s policies;
  •  The fact that Akamai will be disgorging to the SEC the full amount of disgorgement as determined by the SEC.

In addition to seeking mitigation credit from DOJ, both companies also cooperated with the SEC.  The resulting non-prosecution agreements between the SEC and each company contain detailed discussions of the nature of each companies’ remedial efforts, which included disciplinary measures against those involved in the misconduct, enhanced anti-corruption training, enhanced internal accounting controls, and strengthened anticorruption polices and procedures.

The declination letters and the non-prosecution agreements suggests that the FCPA remains an enforcement priority for both the DOJ and the SEC. They also suggest that business organizations seeking mitigation credit under the DOJ’s Pilot Program and any similar SEC initiatives must act quickly upon the discovery of potential wrongdoing to investigate potential FCPA violations, report any such violations to government authorities, and then implement robust remedial measures.

[1] House of Representatives Report No. 95-640, Unlawful Corporate Payments Act of 1977, (September 28, 1977). (hereinafter H.R. Report 95-640), at p.4.  H.R. Report incorporated information from the U.S. Securities and Exchange Commission Report on Questionable and Illegal Corporate Payments and Practices, (1976).

[2] The Memorandum is available at available at https://www.justice.gov/opa/file/838386/download.

Christine Chung

Christine Chung

This blog is edited by Christine Sgarlata Chung, Associate Professor of Law at Albany Law School, and Co-Director, Institute for Financial Market Regulation. In addition to her work in academia, Professor Chung previously served as a Branch Chief in the Enforcement Division of the Securities and Exchange Commission and as a partner at a large Boston-based law firm.
Christine Chung