The New FCPA Guidance: DOJ and SEC's Views on Hospitality, Instrumentalities, Successor Liability, and Compliance
Authors: Jacqueline C. Wolff | Lorie E. Lupkin
The Department of Justice and the Securities and Exchange Commission have jointly issued long-awaited guidance on their interpretation and enforcement of the U.S. Foreign Corrupt Practices Act. Contrary to the expectation of many practitioners that only DOJ would offer the guidance and that the guidance would be a summary memorandum, the "Resource Guide" is actually a detailed and thoughtful discussion of many aspects of the Act, including some helpful guidance on some of the important day-to-day issues that have confronted in-house and outside counsel in the past.
Although much of what is contained in the Guide reiterates earlier statements by DOJ and SEC in public statements and legal briefs, the Guide also incorporates language from court opinions, advisory opinions that DOJ had previously provided to individual companies through its Opinion Procedure Release process, hypothetical situations that would or would not result in an enforcement action, and anonymized key factors in cases that DOJ and SEC have declined to prosecute. Extensive guidance is provided on compliance programs and gifts and hospitality. The Guide does not, however, provide a "compliance program" defense requested by the U.S. Chamber of Commerce. Of course, it will take time to fully digest the detailed 120-page guidance offered by DOJ and SEC, but some of the more notable aspects are highlighted below.
DOJ and SEC emphasize that an effective compliance program that "works" is a key factor the government uses when deciding whether to prosecute. The Guide places a premium on risk assessment in developing effective compliance programs.
They emphasize that there is no "one-size-fits-all" program and that such a program may be inefficient and ineffective. Such programs may result in resources being spread too thin, with too much focus on low-risk markets and transactions to the detriment of high-risk areas. More specifically, DOJ and SEC note that devoting a disproportionate amount of time to policing modest entertainment and gift-giving instead of focusing on large government bids, questionable payments to third-party consultants, or excessive discounts to resellers and distributors might indicate that a company's compliance program is not well-designed.
DOJ and SEC emphasize that a compliance program should be dynamic and should evolve as a business and its markets change. In assessing compliance programs, DOJ and SEC state that they will evaluate whether a company has taken steps to ensure that its code of conduct and compliance program remain current and effective, including periodic reviews and updates.
Gifts, Travel, and Entertainment
The Guide addresses gifts and hospitality extensively. In particular, it provides helpful, real-world examples that companies can apply to their day-to-day business decisions. For example, when a company provides training to a foreign entity's employees under a contract, the Guide indicates that the company may allow senior officials to inspect the facilities and observe the training, and may pay for airfare, hotel, and transportation. For a lengthy international flight, business class airfare may be appropriate, provided the company's own employees would also be entitled to it. Meals and entertainment that are only a small component of the business trip and are moderately priced may also be provided. The Guide specifically refers to a moderately priced dinner, a baseball game, and a play.
The Guide also provides what DOJ and SEC consider to be "hallmarks of appropriate gift-giving," such as when the gift is given openly and transparently, properly recorded in the giver's books and records, provided only to reflect esteem or gratitude, and permitted under local law. One example provided is a wedding gift of a crystal vase to the general manager of an entity 100% owned by the State well after the contract with the entity was entered into. Providing an example like this, of course, raises the question of whether such a vase could be the basis for a violation if the contract was entered into a week earlier or was up for renewal a year later.
Who Is a "Foreign Official"?
One of the main issues repeatedly confronting companies conducting business in countries like China, where seemingly private companies are often owned or partially owned by the State, is whether the person they are dealing with is indeed a foreign official. In other words, is the seemingly private entity an "instrumentality" of the State covered by the FCPA? Companies have been clamoring for guidance.
Although DOJ has, in court filings, suggested that majority control of the shares of the entity is relevant, in the Guide, DOJ and SEC provide a more concrete and useful position. DOJ and SEC state that "as a practical matter, an entity is unlikely to qualify as an instrumentality if a government does not own or control a majority of its shares." There are important exceptions, and, again, the Guide provides concrete information, highlighting a situation where the government had veto power over all major expenditures and controlled important operational decisions. The issue of whether an entity where the state owns 51% of the shares falls under the FCPA when there is robust competition by numerous private entities is not addressed.
The Guide explicitly recognizes that businesses operating in high-risk countries may face real threats of violence or harm to their employees. The Guide states that payments made in response to imminent threats to health and safety do not violate the FCPA.
The guidance draws a clear distinction, however, between true extortionate demands under imminent threat of physical harm and mere economic coercion.
The Guide unequivocally states that successor liability does not create liability where none existed before. If the target was not previously subject to the FCPA's jurisdiction, the acquiring company will not be held liable for the target's actions in the past. That being said, the Guide also makes clear what DOJ and SEC's expectations are for acquiring issuers, and those expectations include extensive due diligence, self-disclosure, and immediate remediation at the time of acquisition.
Many practitioners had hoped for greater transparency in DOJ's declination decisions. The Guide notes that DOJ has a longstanding policy not to provide nonpublic information on cases it declines to prosecute without a party's consent. Nevertheless, the Guide notes that both DOJ and SEC have declined to prosecute cases where potential FCPA violations were alleged and provides a handful of descriptions of those cases. Common threads include the companies' voluntary disclosure to the government, improving their compliance programs, putting an end to the conduct at issue, cooperating with DOJ and SEC investigations, and terminating employees or severing ties with third-party agents.
The most useful thing about the Guide may be that it collects the thinking of the agencies, along with descriptions of their past practices, in one place. It does offer some specific guidance in a few of the areas that have been of concern to companies and their counsel and provides some helpful descriptions of hypothetical situations that would, would not, or might constitute violations of the FCPA, but it also leaves the status quo intact in many ways. For example, it does not create a compliance defense for companies or set a minimum monetary threshold for payments that might trigger enforcement. One thing that it surely does is underscore the need for companies to make careful, considered, risk-based assessments of their business and design policies and procedures that meet their specific needs.