NEW YORK, Feb. 9 2005 – LAWFUEL – The Law News Network — US and non-US companies with listed US securities are increasingly targets for investigations under the Foreign Corrupt Practices Act (“FCPA”). In place since the 1970s, there has been a
recent surge in FCPA investigations and harsh penalties have been meted out by
both the Securities and Exchange Commission (“SEC”) and the U.S. Department of
Justice. The recent crackdown has affected a broad range of industries, such
as defense contracting, aerospace, petrochemical, mining and pharmaceutical,
but no industry doing business overseas is exempt from an FCPA investigation.
White & Case litigator Owen Pell, who is handling FCPA investigations for
companies, talks about what impact the increased scrutiny might have for
public companies.
Q: What exactly is the Foreign Corrupt Practices Act?
OP: Investigations by the SEC in the mid-1970’s revealed that more than
400 US companies admitted making questionable or illegal payments in excess of
$300 million to foreign government officials, politicians, and political
parties. The abuses ran the gamut from bribery of high foreign officials in
order to secure some type of favorable action by a foreign government to
so-called facilitating payments that allegedly were made to ensure that
government functionaries discharged certain ministerial or clerical duties.
Congress enacted the FCPA to bring a halt to the bribery of foreign officials
and to restore public confidence in the integrity of the American business
system.
The anti-bribery provisions of the FCPA make it unlawful for a US citizen
to make a corrupt payment to a foreign government official for the purpose of
obtaining or retaining business for or with, or directing business to, any
person. As important, the FCPA also mandates that companies maintain books
and records sufficient to reasonably assure that no such payments are made,
including by their non-U.S. subsidiaries or affiliates. Violations of the
recordkeeping provisions carry stiff penalties even where there is no evidence
of illegal payments being made.
The US Department of Justice and the SEC both investigate potential FCPA
violations and take enforcement action against FCPA violations.
Q: What’s driving federal authorities to increasingly investigate
companies under the FCPA?
OP: A number of factors. First, there is the Sarbanes Oxley Act which
was passed a few years ago in the wake of several large corporate accounting
scandals and has increased the focus on books, records and internal control
systems. Companies now must vouch for their internal control systems. Audit
committees are expected to pay more attention to these systems, and if they
find problems, often must disclose such information. Second, there is a
belief that many recent corporate debacles were the result of recordkeeping
failures.
Q: What other factors might contribute to the increased scrutiny?
OP: Other factors driving the renewed interest in the FCPA have been
heightened concerns about money-laundering and terrorism, as well as
anti-corruption efforts in China and the EU (particularly member states
Germany and Poland). . Also, the UN has recently completed a treaty that for
the first time defines “corruption.” If ratified by EU nations and Japan, this
will only increase the impetus for FCPA-like regulations across Europe and
Asia.
Q: What impact might an investigation have on public companies?
OP: The ramifications can be very serious. If companies are found to be
in violation of the FCPA, they’re opening themselves up to huge fines, in the
hundreds of millions of dollars, potential criminal prosecution and law suits
by irate shareholders.
Q: What can companies do to protect themselves?
OP: Both the SEC and DOJ have said that companies have a legal obligation
to report improper conduct or breakdowns in internal controls relating to the
FCPA, including in their non-US operations. So the first thing companies have
to do is review their internal controls and procedures, including outside the
US. For example, companies should be developing audit trails and budgets to
track things like promotional activities, charitable giving, entertainment
expenses, payments to middlemen or distributors in foreign countries – in
short, how money is moving, to whom is it going, why is it going there and who
knows its going there. It may sound bureaucratic, but really that’s what this
is all about – creating audit trails and making sure that things that you’ve
probably been doing in the US or as part of your US operations are also being
applied to your foreign operations. Companies also should institute training
and compliance programs in their US and non-US operations to teach their
managers and employees about the FCPA and to create and maintain a culture of
compliance. This can mean a great deal if you ever find yourself dealing with
a regulator on these issues.
Q: What does it mean to create a culture of compliance?
OP: A culture of compliance means raising employee awareness about the
FCPA, and a company’s zero tolerance for things like bribery or “grease
payments.” Companies should review their mission statements and company
credos and determine if employees are being trained to understand that paying
a little money under the table to help close a deal is not acceptable, even if
such activities have been regarded as commonplace in the past in that market.
Employees also must understand that skirting the rules on how money is spent
is not acceptable, will get everyone into big trouble and is not something the
company wants to see happen. One strategy that the US government is
recommending is that companies set up hotlines so that employees can
anonymously report potential FCPA violations.
Q: Any last recommendations?
OP: In today’s stricter regulatory environment, the cost of FCPA
non-compliance has simply become too high. The ramifications can be very
serious. Forward-thinking companies are proactively reviewing their internal
controls and beefing up training programs relating to the FCPA.
Owen Pell is a partner in White & Case’s litigation practice in New York,
where he focuses on complex commercial litigation, securities litigation,
bankruptcy litigation, litigation involving foreign sovereigns and their
state-owned entities, and litigation arising from issues of public
international law. He has special experience advising companies on Holocaust,
apartheid and slavery reparations issues, and has managed internal
investigations relating to the Foreign Corrupt Practices Act. Owen also
regularly presents lectures at the State University of New York at Binghamton
on the moral and social responsibilities of corporations, and the role of the
judiciary in a democratic society.
Any information contained in this interview is for educational purposes
only. It should not be construed as legal advice.
