FCPA compliance a challenge for US oil, gas companies

Few US federal statutes have generated as much controversy over how US companies do business abroad as the Foreign Corrupt Practices Act.

Since its passage more than 25 years ago, critics of the FCPA, which prohibits bribery of foreign government officials, have repeatedly claimed that it ties the hands of US businesses in competition with foreign companies.

Nevertheless, the FCPA, along with the recently passed Sarbanes-Oxley Act, remains at the forefront of US corporate-governance issues for any international oil and gas company.

FCPA origin, application

The FCPA prohibits bribery of a foreign official or a foreign political-party official in order to obtain business.¹ The statute also prohibits tendering money to an intermediary, knowing that some or all of the amount will be given to foreign government officials. The FCPA, the impetus for which was born in the Watergate era (during the administration of US President Richard M. Nixon) amid revelations of illegal foreign payments and a US Securities & Exchange Commission program for voluntary disclosures, was passed in 1977. It was later amended in 1988 and 1998.

The scope of the application of the FCPA has caught many companies off guard. Both the SEC and the US Department of Justice enforce the statute. The FCPA not only prohibits bribes and attempted bribes of foreign officials, but it also has detailed accounting requirements. These requirements apply not just to domestic corporations but to any corporation that trades securities on a US stock exchange. If securities of a foreign corporation are sold in the US, for example, then the corporation is subject to the FCPA. The antibribery provisions specifically apply to issuers that have securities registered under the Securities Exchange Act of 1934 or are subject to the reporting requirements under the Exchange Act. The FCPA also applies to all officers, directors, employees, agents, or stockholders of such corporations that have securities registered under the Exchange Act.

The FCPA does have explicit defenses. Companies can assert that the payments were merely "facilitating" or "expediting" payments with respect to routine governmental action, or what some have called "grease payments." Furthermore, a company may argue that the payment or gift is lawful under the written laws of a country in question. Moreover, there is no violation if the payment is merely a reimbursement of reasonable and bona fide expenses directly related to promotion of a product or services or execution of performance of a contract.

Despite complaints about the burden imposed by the statute in doing business abroad, it is unlikely that substantive changes will be made. The passage by Congress of the Sarbanes-Oxley Act hardly signals a greater degree of tolerance of corporate wrongdoing. More importantly, other nations of the world are making progress in passing and enforcing anticorruption statutes in light of the Organization for Economic Cooperation and Development convention on combating bribery of foreign officials in business transactions. The defense that the payment was lawful under the written laws of the foreign country has become more difficult in light of the OECD's efforts. The OECD convention was signed in Paris in December 1997 and ratified by members and entered into force on Feb. 15, 1999. The convention still requires individual states to enact domestic legislation to prohibit and punish bribery of foreign officials. The OECD web site maintains information on steps taken and further action to be taken by each participating country.²

The criminal penalties for violations of the FCPA can be severe. For business entities, the criminal fines may be as much as twice the gain or loss caused by the corrupt payments, which could be millions of dollars. For an individual, penalties may be as much as 5 years in prison plus payment of a fine. Individuals' fines may not be paid by employers. Federal sentencing guidelines, moreover, may increase penalties for certain high-level officers in a company.

Other consequences

Beyond criminal penalties, other consequences may result. First, there could be a loss of export privileges or the suspension and debarment from US government contracting, as well as the loss of benefits under government programs (e.g., financing). A direct private right of action does not exist under either the foreign bribery provisions³ or the accounting and record keeping provisions of the FCPA.⁴

However, any felony violation of the FCPA can, under certain circumstances, give rise to a violation of the Money Laundering Act and the Travel Act, the violation of which are both predicate acts for a civil claim under the US Racketeer Influenced and Corrupt Organization Act (RICO), which would allow a private right of action. At least two courts have held that, where a Travel Act violation occurs due to a bribery offense in violation of US law, the violation is a predicate act under RICO.⁵

Effective compliance strategies

Corporate compliance officers should be aware that, based on recent trends, non-US corporations and nationals are being targeted for FCPA prosecution. Moreover, US corporations are being prosecuted for the illegal conduct of their controlled foreign affiliates. To implement an effective compliance strategy, therefore, the following key issues should be considered:

• First, the overall training program for any US company that does business abroad must include an FCPA element, along with the other relevant topics. This should include specific rules in the corporate code of conduct against bribery and annual training in this particular area.
• Second, a company should consider inserting specific contract clauses in any transactional documents to show evidence of the intent of all parties to comply with the FCPA. Such clauses demonstrate that it is the corporate policy to avoid improper payments.
• Third, as a matter of corporate governance in the wake of numerous recent accounting scandals, compliance officers should scrutinize FCPA accounting requirements. The statute requires issuers to keep books and records in reasonable detail that accurately and fairly reflect the transactions and dispositions of assets of the issuer. Moreover, it requires issuers to maintain a system of internal accounting controls that provide reasonable assurances that transactions are authorized. Violations of these requirements, of course, do not require the payment of any actual bribes, nor is there any requirement of intent. They merely require accurate recordkeeping so that the SEC could determine if improper payments were actually being made. In a recent case, for example, the SEC accused a corporation of a recordkeeping violation for characterizing a payment as a "consulting fee," rather than what the commission believed was a bribe.
• Fourth, US company relationships with third-party agents, partners, or consultants in other countries must be carefully reviewed. Annual written representations of the third party can be required attesting that this person has complied with and will continue to comply with the FCPA. These representations are important to avoid any argument that the third party was unaware of the requirements. Other signs that should be weighed include unusual payment patterns or financial arrangements, such as demands for payment in cash to jurisdictions outside the country where the services are to be performed, requests for commissions that are far greater than what may be the prevailing rate, or demands to increase a commission during the middle of negotiations.

These signs, as well as other "red flags" identified by the Department of Justice, describe practices that should arouse suspicion.⁶

Each compliance officer should be aware of these "red flags." A country's reputation for corruption can also be checked through Transparency International, which publishes a corruption-perceptions survey called the "Bribe Payers Index."⁷

Conclusion

To avoid FCPA problems, an energy corporation that does business outside the US should take proper steps to avoid violations.

Compliance with the accounting rules, proper training of employees in a regular compliance program, and a due- diligence review of any foreign agent or contractor, which would include questionnaires, interviews, reference checking, and monitoring, are minimum steps.

No one step may ensure avoidance of all violations, but a thorough and complete compliance program is prudent for effective corporate governance.

References

1. 15 U.S.C. § 78dd2-1.

2. http://www.oecd.org/dataoecd/ 50/33/1827022.pdf

3. See Lamb vs. Phillip Morris Inc., 915 F.2d 1024, 1029 (6th Cir. 1990); J.S. Service Ctr. Corp. vs. General Electric Technical Servs. Co., 937 F. Supp. 216, 226-227 (S.D.N.Y. 1996).

4. See Eisenberger vs. Spectex Indus. Inc., 644 F. Supp. 48, 50-51 (E.D.N.Y. 1986); Lewis vs. Sporck, 612 F. Supp. 1316, 1332-1333 (N.D. Cal. 1985).

5. See Dooley v. United Technologies Corp., 803 F. Supp. 428, 438 (D.D.C. 1992); United States vs. Young & Rubicam Inc., 741 F. Supp. 334, 338-339 (D. Conn. 1990).

6. http://www.usdoj.gov/criminal/ fraud/fcpa/dojdocb.htm see "Third Party Payments."

7. http://www.transparency.org/ cpi/2002/bpi2002.en.html#bpi