Threats to Non-U.S. Companies from the U.S. Foreign Corrupt Practices Act
By David Smyth, Brooks Pierce
Among the international business community, few law enforcement matters in recent years have attracted as much interest as the U.S. Foreign Corrupt Practices Act ("FCPA"). Enforcement of the FCPA – conducted by both the U.S. Department of Justice and the U.S. Securities and Exchange Commission ("SEC") – has been intense and increasing over the last decade. As Assistant Attorney General Lanny Breuer said late last year, "FCPA enforcement is stronger than it's ever been – and getting stronger." And while the FCPA is a United States law, it poses great risks for non-United States companies and individuals; severe liability can follow from disregarding it.
I. Brief Overview of the FCPA
Very briefly, the FCPA is divided into two sets of provisions, the anti-bribery
provisions, and the accounting provisions. On the anti-bribery side, the statute forbids paying any "thing of value" to a foreign government official in order to corruptly influence the official in an official act or secure any improper advantage to obtain or retain business. The FCPA also forbids such payments to intermediaries while "knowing" that the payments will be directed to foreign government officials.
On the accounting side, the FCPA requires companies whose securities are traded in U.S. markets to "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of [its] assets." The accounting provisions also require such companies to devise and maintain accounting controls sufficient to provide "reasonable assurances" that four objectives are met: (1) transactions are executed in accordance with management's instructions; (2) transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; (3) access to assets is controlled according to management's instructions; and (4) records are reconciled with existing assets at reasonable intervals. In essence, this means that publicly traded companies must install safeguards to ensure that corrupt payments are not made on their behalf.
II. Jurisdiction over Non-U.S. Companies
United States law enforcement authorities can acquire jurisdiction over non-U.S. companies in a number of different ways. First, the FCPA applies to "issuers" – that is, publicly held companies that are subject to either the registration or reporting provisions of the Securities Exchange Act of 1934. Critically for non-U.S. corporations, these include companies issuing American Depositary Shares that are registered and traded on a U.S. exchange. Second, the FCPA applies to "domestic concerns." A domestic concern is any business that has its principal place of business in the United States or is organized under the laws of the United States or its territories. Citizens and residents of the United States are also considered domestic concerns, as are employees, agents, and stockholders of issuers and domestic concerns. Finally, the FCPA applies to "foreign persons," natural and legal persons that are not issuers or domestic concerns. Officers, directors, employees, agents, and stockholders of foreign persons are also subject to the FCPA if they violate the statute while in the United States.
U.S. authorities have brought actions against a number of non-U.S. issuers in recent years. For example, in July 2011, the SEC brought an administrative action against London-based Diageo plc, a leading producer and distributor of premium alcoholic beverages. Because Diageo's ADRs are registered with the SEC pursuant to Section 12(b) of the Exchange Act and trade on the New York Stock Exchange, the company is an "issuer" and thus subject to the FCPA. The SEC found that Diageo and its subsidiaries paid more than $2.7 million to foreign government officials to obtain lucrative sales and tax benefits relating to its Johnnie Walker and Windsor Scotch brands, among others. According to the administrative order, the payments were made to high-ranking Thai government officials as well as Korean customs officials. Even without anti-bribery charges – the order found violations of the accounting provisions only – Diageo was forced to pay disgorgement of $11.3 million, prejudgment interest of another $2 million, and a civil penalty of $3 million.
Diageo is hardly an isolated example. In a more complex case filed in 2010, the SEC charged an Italian company, ENI, S.p.A., and its Dutch subsidiary, Snamprogetti Netherlands B.V., with a bribery scheme that included deliveries of cash-filled briefcases and vehicles to Nigerian government officials to win construction contracts for liquefied natural gas facilities. The two companies were part of a joint venture including a number of other corporations that banded together to plan and pay hundreds of millions in bribes to Nigerian officials. Because ENI had registered a class of securities with the Commission in 1995, and the company's ADRs traded on the New York Stock Exchange, the company was an issuer and therefore subject to the FCPA. Snamprogetti, itself not an issuer, is addressed below. The Justice Department took no action against Diageo or ENI.
Other recent cases against issuers have included actions against Technip (based in Paris), Tenaris, S.A. (Luxembourg), and Alcatel-Lucent, S.A. (Paris). All of these companies had ADRs that were registered with the SEC and traded on the New York Stock Exchange.
B. Persons Acting on U.S. Soil
Since 1998, another way for non-U.S. companies to fall within the statute's
clutches is to commit an FCPA violation "while in the territory of the United States." The U.S. Attorney's Manual interprets this provision "as conferring jurisdiction whenever a foreign company or national causes an act to be done within the territory of the United States by any person acting as that company's or national's agent." This position has lent itself to quite broad application of 15 U.S.C. § 78dd-3, and has reached companies that might not have expected to find themselves subject to the FCPA. At times, the Justice Department has penalized activity that did not happen within the United States at all, but merely included requests from actors that are in the United States.
1. SSI International Far East, Ltd.
For example, in a case brought against SSI International Far East, Ltd. ("SSI"), a wholly-owned subsidiary of Portland, Oregon-based Schnitzer Steel Industries, Inc., the Justice Department alleged a long-running scheme to pay cash bribes and other gifts to managers at government-owned steel mills in China and Korea. SSI, on behalf of its parent Schnitzer, engaged in long-standing transactions with these steel producers, making payments to induce these managers to purchase Schnitzer's scrap metal. While jurisdiction as to Schnitzer, an issuer, was clear, it was less so as to SSI. The jurisdictional statement in the criminal information said that SSI "transmitted requests to the United States for approval and wire transfer of funds for payment to managers of Schnitzer Steel's customers in South Korea and China in connection with sales of scrap metal to those customers. Accordingly, defendant SSI acted within the territorial jurisdiction of the United States." Though SSI or its agents never physically stepped into United States, making requests to others in the United States was enough to compel a settlement with SSI.
2. Daimler AG
In another recent matter, the SEC settled FCPA claims with Daimler AG in early 2010 based on the company's issuer status. But the Justice Department's case extended to Daimler's foreign subsidiaries based on their alleged actions taken within United States territory. In those cases, jurisdiction hinged on:
- wire transfers . . . sent from Daimler accounts in Germany to financial institutions in the United States . . . in furtherance of corrupt payments to Russian [and Chinese] government officials;
- payments to third party agents, including shell companies established in the United States knowing that such payments would be passed on . . . to Russian government officials; and
- enter[ing] into sham consulting contracts with shell companies incorporated in Delaware and Wyoming for the purpose of making improper payments to Croatian government officials.
Again, the foreign Daimler subsidiaries never walked into U.S. territory, but the threat of litigating FCPA allegations was too much to bear, and a settlement followed.
3. A Judicial Limitation on Section 78dd-3
In June 2011, though, the U.S. District Court for the District of Columbia put what could be a substantial limit on the reach of Section 78dd-3. In a group of matters known as the Africa Sting cases, jurisdiction over one of the individual defendants, Pankesh Patel, was based on that provision. Among the counts against Patel was a charge that he violated the FCPA's anti-bribery provisions by sending a DHL package "containing one original copy of the purchase agreements for the corrupt Phase Two deal" from the U.K. to Washington, D.C.. At the close of the Justice Department's evidence, Patel moved for a judgment of acquittal as to this charge. The government's problem was that Patel never violated the FCPA while he was actually in the United States. As Judge Richard Leon noted in open court, "I would think the more cautious, conservative interpretation would be that each act has to be while in the territory of the United States, wouldn't it?" The court granted Patel's motion for acquittal, and seemingly put the brakes on this aggressive theory of territorial jurisdiction.
4. And Disregard of That Limitation
A recent settlement by Japan-based Bridgestone Corporation, however, seems not to have slowed the Justice Department down with respect to its approach under Section 78dd-3. There, Bridgestone allegedly engaged in a scheme to bribe foreign officials in Latin America in attempts to increase sales of marine hose and other products. The Justice Department based jurisdiction solely on e-mails and faxes that were sent between Japan and the United States in connection with the bribery scheme – exactly the sort of conduct that Judge Leon held not to fall within Section 78dd-3. FCPA liability based on territorial jurisdiction therefore remains a substantial threat.
C. Alternative Theories and Curious Cases
Still other potential avenues for non-U.S. person FCPA liability exist.
1. Aiding and Abetting
Both the Justice Department and the SEC have aiding and abetting statutes that
further expand those agencies' jurisdictional reach. The Justice Department can bring charges for aiding and abetting criminal FCPA violations where a person willfully causes a violation by another person. So, when a non-U.S. person acts outside the United States, but "willfully causes an act to be done" that is in violation of the FCPA and within the territory of the United States, the Justice Department may be able to assert jurisdiction. For SEC matters, "any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of the [Securities Exchange Act of 1934 or underlying rule]" is deemed to be liable to the same extent as the primary violator. Both agencies have recently used these provisions to bring charges against non-U.S. persons.
2. Panalpina World Transport
In late 2010, the SEC charged the U.S. subsidiary of Panalpina World Transport (Holding) Ltd. ("PWT"), a global freight forwarding and logistics services provider based in Switzerland, with violating the FCPA by bribing foreign officials around the world on behalf of its customers. The SEC's complaint alleged that the subsidiary, Panalpina Inc. ("Panalpina"), together with other PWT subsidiaries and affiliates ("Panalpina Group"), bribed officials to obtain preferential customs, duties, and import treatment for its customers in connection with international freight shipments. The Justice Department alleged that PWT and its subsidiaries engaged in a long-standing practice of paying bribes to foreign officials for their own benefit and for the benefit of their customers.
The two agencies' jurisdictional theories differed. The Justice Department alleged that PWT was simply a "person" within the meaning of Section 78dd-3(f)(1). That is, PWT operated within the territory of the United States, and its actions thus fell within the scope of the FCPA. As for Panalpina, the Justice Department contended that it was a domestic concern under Section 78dd-2. Panalpina had 38 branches in several states, including Texas, New Jersey, and Michigan and kept its primary base of operations for its oil and gas customers in Houston. The SEC's theory of liability was novel. Although PWT, Panalpina, and the Panalpina Group were not issuers for purposes of the FCPA, many of their customers were. By paying bribes on behalf of issuers, Panalpina – again, the U.S. subsidiary of a foreign non-issuer company – both violated and aided and abetted violations of the FCPA. The SEC did not charge PWT, the parent company.
3. JGC Corporation
In April 2011, the Justice Department settled FCPA charges against JGC
Corporation, the last member of the joint venture including ENI/Snamprogetti and Technip, discussed above. JGC, a Japanese engineering and construction firm, agreed to pay a $218 million criminal penalty arising out of a decade-long scheme to bribe Nigerian government officials to obtain liquefied natural gas construction contracts. Perhaps sensing jurisdictional difficulties, the SEC did not bring a parallel action.
In the Justice Department's case, JGC was not alleged to be a domestic concern or an issuer, and territorial jurisdiction was not claimed explicitly. Instead, the criminal information based the two counts on (1) conspiring to execute the bribery scheme with the other joint venture partners, who were domestic concerns or issuers, and (2) aiding and abetting a domestic concern. The information also stated at the end that JGC wired payments from a Dutch bank account to Swiss bank accounts via New York bank accounts, but does not appear to have relied solely on those wires as a jurisdictional hook.
4. Snamprogetti Netherlands B.V.
Also as part of the Nigerian joint venture, the SEC charged Snamprogetti Netherlands B.V., a Dutch subsidiary of issuer ENI, S.p.A., for violating the anti-bribery provisions of the FCPA. The SEC based jurisdiction on Snamprogetti's having acted as ENI's agent, but did not actually allege facts establishing that Snamprogetti was ENI's agent. The very fact of the parent-subsidiary relationship was, again, enough to compel a settlement with the SEC that escaped close judicial scrutiny. While a litigated matter might yield a different result, the SEC's inclination to pursue such charges is enough to concern to the international business community.
Enforcement of the FCPA is at a fever pitch, and not going away in the near
future. Indeed, the jurisdictional theories of the SEC and Justice Department seem only to be expanding and becoming more creative. Companies falling within any of the categories discussed in this article would be wise to consult with competent FCPA counsel to assess the risk of non-compliance and prepare for action if suspicious activity arises.
David Smyth's practice focuses on financial services litigation and representation in response to government enforcement proceedings by federal and state authorities. Mr. Smyth also conducts internal corporate investigations and advises individuals and corporations, including broker-dealers, on compliance with securities laws.
Mr. Smyth served on the staff of the U.S. Securities and Exchange Commission for six years, ultimately as Assistant Director in the Division of Enforcement. While at the SEC, he led a team of attorneys in the investigation and litigation of cases involving the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Foreign Corrupt Practices Act. In doing so, he coordinated SEC actions with related criminal investigations by the Department of Justice, including those by the U.S. Attorney's Offices for the Southern and Eastern Districts of New York and the Eastern District of Pennsylvania.
David Smyth, Of Counsel