The Foreign Corrupt Practices Act: A Primer for American Social Entrepreneurs Working Abroad
Anne E. Andrews, Esq., The Sector Agnostic

Because their aims frequently include eliminating poverty, American social entrepreneurs who take their projects abroad tend to target developing countries. What they often do not realize is that they are subject to the Foreign Corrupt Practices Act ("FCPA") while working abroad. [1]

The FCPA is a U.S. law that applies to all entities, for-profit and non-profit, that are either organized in the U.S. or have their principal place of business in the U.S. In essence, it prohibits bribing foreign officials. Anyone considering working in a country with a low transparency index must be prepared to encounter requests or hints for bribes. Unfortunately, countries with a high poverty burden often have pervasive corruption, [2] meaning that social entrepreneurs are more likely to face situations where bribes are sought.

The FCPA was enacted in 1977 when, in the wake of the Watergate scandal, the U.S. Securities and Exchange Commission discovered that public companies were maintaining slush funds for use in paying both illegal campaign contributions and overseas bribes. One aim of the law was to prevent American companies from fueling corruption abroad when bidding for lucrative government contracts. At the time, no country in the world had outlawed the paying of overseas bribes. [3]

The FCPA has essentially three components. First, it prohibits bribery. Second, it requires companies to keep accurate books and records. Third, it requires companies to institute internal controls to ensure that their books and records are accurate. The second and third components are meant to help enforce the first.

Does It Apply to You?

The FCPA casts a wide net that includes entities that are formed in the United States or traded on a U.S. stock exchange. The law is sector-agnostic, as it applies to nonprofits and for-profits alike. In addition, if you are subject to the FCPA, you must comply with it irrespective of your geographic location. In fact, even if your venture is not formed or traded in the U.S., its actions may still give rise to FCPA liability by virtue of its U.S.-based parent company. [4]

What You Cannot Do

If you are a management employee in a venture that is subject to the FCPA, you need to understand what your obligations are. Put very simply, U.S. entities cannot pay bribes overseas. More specifically, the FCPA prohibits Americans and American entities from giving anything of value to a foreign official for the purpose of influencing a foreign government to help the entity obtain or keep business. It also prohibits bribing an employee of a public international organization such as the United Nations. In order to ensure that companies maintain transparency, the FCPA requires corporations to keep fair and accurate records of their transactions and maintain internal controls over accounting.

It may seem obvious that bribing a foreign official in order to win a government contract is improper. But the FCPA's reach extends much farther than this. It also prohibits entrepreneurs from bribing officials in exchange for something that would bring or retain business. In the case of Rupert Murdoch's News of the World, for example, it is enough that reporters paid police for information that would allow the paper to publish juicy tidbits leading to increased newspaper sales. So, whether you are looking for a government contract or just trying to increase your business from elsewhere, payments made to foreign officials to help you accomplish your goal are illegal. [5]

Furthermore, the FCPA does not distinguish between monetary bribes and bribes paid with other kinds of value. One common example is employment. Foreign entities, particularly NGOs, are perceived as having lucrative jobs to offer locals. As jobs are a valuable commodity in developing economies, social entrepreneurs working in those areas may be tempted to give in to a "soft bribe" in which an official agrees to confer a particular benefit in exchange for employment for his nephew. Thus, it does not matter whether a suitcase full of cash is handed over or something more subtle is transferred (such as a gift, a meal, or a promise of future employment). [6]

The "Routine Governmental Action" Exception

Anyone who has worked in a country where corruption is commonplace knows how difficult it can be to get things done while avoiding bribes completely. Writer James Cameron, in his memoir of his time in India during the 1970s, described such systems when he said "it is ordained that ... every bureaucrat must be paid not just to expedite the application-form but specifically not to obstruct it."

The FCPA contains an exception to its anti-bribery provision for payments made to "facilitate" or "expedite" performance of a "routine governmental action." Under the exception, paying a (corrupt) government official to do something he or she should be doing anyway — that is, to give you something you are already entitled to — is permissible. Similarly, paying an official to expedite the processing of something that must otherwise be processed is allowed. [7] But, if during the processing you pay an official an illicit fee to move your application or request to the top of a pile in such a way that a benefit is given to you instead of someone else, you are essentially paying to change the outcome of the situation. This goes against both the letter and the spirit of the law.

It is easy enough to see how the exception can become gray around the edges. What if an overseas official offers to let you pass a factory inspection in exchange for a bribe? Such a payment would probably violate the FCPA because passing an inspection is a matter of discretion for the government officer and the "facilitating payments" exception applies only when the benefit being obtained is non-discretionary. On the other hand, if the factory should have passed the inspection anyway, you would simply be paying for something you were otherwise entitled to, in which case the "facilitating payments" exception might apply. But what if the inspector is simply nit-picking about minor violations that are customarily overlooked in an effort to extract money? Would the "facilitating payments" exception apply then? It is not always clear whether payments are permissible under the FCPA.

Recently, some observers have opined that the SEC's prosecutions indicate the "facilitating payments" exception is decaying. [8] This is all the more reason to take care in situations where bribes are being considered.

Best Practices

Do your due diligence. If you are a U.S.-based social entrepreneur and you have projects operating overseas, regardless of the legal relationship between your U.S. entity and your foreign programs, it is important to be aware of what is happening on the ground. If you wish to partner with an existing organization that has a presence in the foreign country you are going to, the partnership should be preceded by a period of due diligence. Does the local entity have any relationships with government officers? Will the entity be in a position where local staff might be tempted to offer a bribe, such as bidding for government contracts? Consider whether the people in country will be capable of toeing the line between permissible facilitating payments and prohibited bribes.

Keep accurate records. By requiring that companies keep accurate accounting records, the FCPA makes it more difficult to mask improper payments. Insisting upon accurate accounting, receipts, and annual audits by certified accountants will help discourage bribes from being paid, and bring to light improper payments if they do happen. If it is necessary to make a payment that you believe would qualify for the "facilitating payments" exception, you should identify it accordingly in your accounts.

Maintain regular oversight. Social entrepreneurs whose program teams are operating in foreign countries while management is mostly in the U.S. must scrutinize foreign activities carefully. In such a situation, when the implementing team is part of a different entity from the management team, a legal structure in which the foreign entity is a subsidiary of the U.S. parent allows the U.S. parent entity to have more control over the situation. Or if the foreign entity is a nonprofit, you can consider placing a representative of the U.S. entity on the subsidiary's board.

Conclusion

Thanks to the gray area created by the "routine governmental action" exception, there is plenty of room to argue over the application of the FCPA in low-transparency countries. But what's clear is that for social entrepreneurs doing business in countries where corruption is the way things get done, running afoul of the FCPA presents a very real risk. Social entrepreneurs need to be aware of the risk in order to minimize it.

[1] 15 U.S.C. §§ 78dd-1, et seq.

[2] Says Ajit Mishra, development economist and author of The Economics of Corruption, "countries with high levels of corruption also have high levels of poverty." The Cancer of Corruption, Forbes.com, January 22, 2009. Transparency International has also identified the "strong correlation between corruption and poverty." Transparency International press release, November 5, 2006.

[3] See http://www.pbs.org/frontlineworld/stories/bribe/2009/02/history-of-the-fcpa.html for a multimedia presentation on the history of the FCPA.

[4] As was demonstrated in the Securities and Exchange Commission's 2004 case against U.S. pharmaceutical company Schering-Plough, a U.S. parent company can be hauled into court for bribes paid by its foreign subsidiary even when there is no evidence that the U.S. parent company knew about the bribes. See In the Matter of Schering Plough Corporation: Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Cease And Desist Order, U.S. Securities and Exchange Act, Administrative Proceeding File No. 3-11517 (June 9, 2004). More recently, some U.S. politicians have suggested that Rupert Murdoch's U.S.-traded News Corp. could be liable under the FCPA for bribes paid by News of the World, a newspaper owned by its foreign subsidiary.

[5] The punishment for violating the FCPA can be severe. Criminal sanctions, including fines of up to $2 million, are possible. Under RICO, fines can be tripled. The Department of Justice and the Securities and Exchange Commission are charged with prosecuting FCPA violations.

[6] See http://www.fcpaenforcement.com/explained/explained.asp.

[7] See the Report from the Committee on Interstate and Foreign Commerce, 1977.

[8] See Patricia Brown Holmes and Valarie Hays, "Grease Payments are a Thing of the Past as the Reach of the FCPA Continues to Expand," Bloomberg Law Reports: Risk & Compliance, Vol. 3, No. 3, March 2010.

Note: This article is not intended as legal advice and does not create an attorney-client relationship. If you are seeking legal advice, you should contact an attorney for advice regarding your specific situation.

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The Foreign Corrupt Practices Act: A Primer for American Social Entrepreneurs Working Abroad
Anne E. Andrews, Esq., The Sector Agnostic

Because their aims frequently include eliminating poverty, American social entrepreneurs who take their projects abroad tend to target developing countries. What they often do not realize is that they are subject to the Foreign Corrupt Practices Act ("FCPA") while working abroad. [1]

The FCPA is a U.S. law that applies to all entities, for-profit and non-profit, that are either organized in the U.S. or have their principal place of business in the U.S. In essence, it prohibits bribing foreign officials. Anyone considering working in a country with a low transparency index must be prepared to encounter requests or hints for bribes. Unfortunately, countries with a high poverty burden often have pervasive corruption, [2] meaning that social entrepreneurs are more likely to face situations where bribes are sought.

The FCPA was enacted in 1977 when, in the wake of the Watergate scandal, the U.S. Securities and Exchange Commission discovered that public companies were maintaining slush funds for use in paying both illegal campaign contributions and overseas bribes. One aim of the law was to prevent American companies from fueling corruption abroad when bidding for lucrative government contracts. At the time, no country in the world had outlawed the paying of overseas bribes. [3]

The FCPA has essentially three components. First, it prohibits bribery. Second, it requires companies to keep accurate books and records. Third, it requires companies to institute internal controls to ensure that their books and records are accurate. The second and third components are meant to help enforce the first.

Does It Apply to You?

The FCPA casts a wide net that includes entities that are formed in the United States or traded on a U.S. stock exchange. The law is sector-agnostic, as it applies to nonprofits and for-profits alike. In addition, if you are subject to the FCPA, you must comply with it irrespective of your geographic location. In fact, even if your venture is not formed or traded in the U.S., its actions may still give rise to FCPA liability by virtue of its U.S.-based parent company. [4]

What You Cannot Do

If you are a management employee in a venture that is subject to the FCPA, you need to understand what your obligations are. Put very simply, U.S. entities cannot pay bribes overseas. More specifically, the FCPA prohibits Americans and American entities from giving anything of value to a foreign official for the purpose of influencing a foreign government to help the entity obtain or keep business. It also prohibits bribing an employee of a public international organization such as the United Nations. In order to ensure that companies maintain transparency, the FCPA requires corporations to keep fair and accurate records of their transactions and maintain internal controls over accounting.

It may seem obvious that bribing a foreign official in order to win a government contract is improper. But the FCPA's reach extends much farther than this. It also prohibits entrepreneurs from bribing officials in exchange for something that would bring or retain business. In the case of Rupert Murdoch's News of the World, for example, it is enough that reporters paid police for information that would allow the paper to publish juicy tidbits leading to increased newspaper sales. So, whether you are looking for a government contract or just trying to increase your business from elsewhere, payments made to foreign officials to help you accomplish your goal are illegal. [5]

Furthermore, the FCPA does not distinguish between monetary bribes and bribes paid with other kinds of value. One common example is employment. Foreign entities, particularly NGOs, are perceived as having lucrative jobs to offer locals. As jobs are a valuable commodity in developing economies, social entrepreneurs working in those areas may be tempted to give in to a "soft bribe" in which an official agrees to confer a particular benefit in exchange for employment for his nephew. Thus, it does not matter whether a suitcase full of cash is handed over or something more subtle is transferred (such as a gift, a meal, or a promise of future employment). [6]

The "Routine Governmental Action" Exception

Anyone who has worked in a country where corruption is commonplace knows how difficult it can be to get things done while avoiding bribes completely. Writer James Cameron, in his memoir of his time in India during the 1970s, described such systems when he said "it is ordained that ... every bureaucrat must be paid not just to expedite the application-form but specifically not to obstruct it."

The FCPA contains an exception to its anti-bribery provision for payments made to "facilitate" or "expedite" performance of a "routine governmental action." Under the exception, paying a (corrupt) government official to do something he or she should be doing anyway — that is, to give you something you are already entitled to — is permissible. Similarly, paying an official to expedite the processing of something that must otherwise be processed is allowed. [7] But, if during the processing you pay an official an illicit fee to move your application or request to the top of a pile in such a way that a benefit is given to you instead of someone else, you are essentially paying to change the outcome of the situation. This goes against both the letter and the spirit of the law.

It is easy enough to see how the exception can become gray around the edges. What if an overseas official offers to let you pass a factory inspection in exchange for a bribe? Such a payment would probably violate the FCPA because passing an inspection is a matter of discretion for the government officer and the "facilitating payments" exception applies only when the benefit being obtained is non-discretionary. On the other hand, if the factory should have passed the inspection anyway, you would simply be paying for something you were otherwise entitled to, in which case the "facilitating payments" exception might apply. But what if the inspector is simply nit-picking about minor violations that are customarily overlooked in an effort to extract money? Would the "facilitating payments" exception apply then? It is not always clear whether payments are permissible under the FCPA.

Recently, some observers have opined that the SEC's prosecutions indicate the "facilitating payments" exception is decaying. [8] This is all the more reason to take care in situations where bribes are being considered.

Best Practices

Do your due diligence. If you are a U.S.-based social entrepreneur and you have projects operating overseas, regardless of the legal relationship between your U.S. entity and your foreign programs, it is important to be aware of what is happening on the ground. If you wish to partner with an existing organization that has a presence in the foreign country you are going to, the partnership should be preceded by a period of due diligence. Does the local entity have any relationships with government officers? Will the entity be in a position where local staff might be tempted to offer a bribe, such as bidding for government contracts? Consider whether the people in country will be capable of toeing the line between permissible facilitating payments and prohibited bribes.

Keep accurate records. By requiring that companies keep accurate accounting records, the FCPA makes it more difficult to mask improper payments. Insisting upon accurate accounting, receipts, and annual audits by certified accountants will help discourage bribes from being paid, and bring to light improper payments if they do happen. If it is necessary to make a payment that you believe would qualify for the "facilitating payments" exception, you should identify it accordingly in your accounts.

Maintain regular oversight. Social entrepreneurs whose program teams are operating in foreign countries while management is mostly in the U.S. must scrutinize foreign activities carefully. In such a situation, when the implementing team is part of a different entity from the management team, a legal structure in which the foreign entity is a subsidiary of the U.S. parent allows the U.S. parent entity to have more control over the situation. Or if the foreign entity is a nonprofit, you can consider placing a representative of the U.S. entity on the subsidiary's board.

Conclusion

Thanks to the gray area created by the "routine governmental action" exception, there is plenty of room to argue over the application of the FCPA in low-transparency countries. But what's clear is that for social entrepreneurs doing business in countries where corruption is the way things get done, running afoul of the FCPA presents a very real risk. Social entrepreneurs need to be aware of the risk in order to minimize it.

[1] 15 U.S.C. §§ 78dd-1, et seq.

[2] Says Ajit Mishra, development economist and author of The Economics of Corruption, "countries with high levels of corruption also have high levels of poverty." The Cancer of Corruption, Forbes.com, January 22, 2009. Transparency International has also identified the "strong correlation between corruption and poverty." Transparency International press release, November 5, 2006.

[3] See http://www.pbs.org/frontlineworld/stories/bribe/2009/02/history-of-the-fcpa.html for a multimedia presentation on the history of the FCPA.

[4] As was demonstrated in the Securities and Exchange Commission's 2004 case against U.S. pharmaceutical company Schering-Plough, a U.S. parent company can be hauled into court for bribes paid by its foreign subsidiary even when there is no evidence that the U.S. parent company knew about the bribes. See In the Matter of Schering Plough Corporation: Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Cease And Desist Order, U.S. Securities and Exchange Act, Administrative Proceeding File No. 3-11517 (June 9, 2004). More recently, some U.S. politicians have suggested that Rupert Murdoch's U.S.-traded News Corp. could be liable under the FCPA for bribes paid by News of the World, a newspaper owned by its foreign subsidiary.

[5] The punishment for violating the FCPA can be severe. Criminal sanctions, including fines of up to $2 million, are possible. Under RICO, fines can be tripled. The Department of Justice and the Securities and Exchange Commission are charged with prosecuting FCPA violations.

[6] See http://www.fcpaenforcement.com/explained/explained.asp.

[7] See the Report from the Committee on Interstate and Foreign Commerce, 1977.

[8] See Patricia Brown Holmes and Valarie Hays, "Grease Payments are a Thing of the Past as the Reach of the FCPA Continues to Expand," Bloomberg Law Reports: Risk & Compliance, Vol. 3, No. 3, March 2010.

Note: This article is not intended as legal advice and does not create an attorney-client relationship. If you are seeking legal advice, you should contact an attorney for advice regarding your specific situation.

To post comments, Click Here to Login