Foreign Corrupt Practices Act(1)

COMPLIANCE WITH THEFOREIGN CORRUPT PRACTICES ACT OF 1977

IN THE POST-SARBANES-OXLEY WORLD

Jay G. MartinShareholder

Winstead Sechrest & Minick P.C.2400 Bank One Center

910 Travis StreetHouston, Texas 77002

Telephone: (713) 650-2765Facsimile: (713) 650-2400

[email protected]

February 2004

Jay G. Martin ©2004

Winstead Sechrest & Minick P.C.Jay G. Martin ©2004

TABLE OF CONTENTS

Page

Executive Summary

A. Introduction. ............................................................................................................1B. Overview of Foreign Corrupt Practices Act of 1977...............................................1C. Impact of the OECD Anti-Bribery Convention on FCPA........................................3D. United Nations Convention Against Corruption. ....................................................4E. Implementation of a FCPA Compliance Programs. ................................................4

I. Introduction..........................................................................................................................1

II. The Anti-Bribery Provisions of the FCPA ..........................................................................1A. Provisions ................................................................................................................1B. FCPA Exception for Facilitating Payments ............................................................3C. Foreign Subsidiaries................................................................................................4D. FCPA and Business Relationships...........................................................................7E. Joint Ventures with a State-Owned Entity ...............................................................7

III. Record-Keeping and Accounting Provisions of the FCPA..................................................7A. Application to Public Companies ............................................................................7B. No Materiality Standard ..........................................................................................8C. Foreign Subsidiaries................................................................................................8

IV. Affirmative Defenses Under FCPA for Routine Actions ....................................................8A. Overview. .................................................................................................................8B. Payment of Gifts and Promotional Expenses...........................................................9C. Local Law Defense...................................................................................................9

V. 1998 Amendments to the FCPA in Response to 1998 Anti-Bribery Convention ofthe OECD and the UN Convention Against Corruption and Fair Competition Actof 1998 ...............................................................................................................................10A. Introduction. ..........................................................................................................10B. The OECD Convention ..........................................................................................12C. Summary of the Impact of the 1998 Amendments to the FCPA.............................15D. Detailed Discussion of Amendments to the FCPA Brought About by 1998

Amendments ...........................................................................................................161) Broader Jurisdiction ..................................................................................162) Beyond "Business" - Securing "Any Improper Advantage".......................163) Payments to International Officials ...........................................................174) Non-U.S. Persons Now Fully Covered by Criminal Penalties ..................175) Application to U.S. Persons Abroad..........................................................17

E. Implications of 1998 FCPA Amendments for U.S. Companies .............................17


F. Future Developments Under the OECD Convention.............................................18G. United Nations Convention Against Corruption ...................................................18

VI. Prudent Selection of Foreign Consultants .........................................................................19

VII. Enforcement of FCPA........................................................................................................21A. DOJ Opinion Procedure........................................................................................21B. Fines and Penalties. Enforcement responsibilities of the FCPA are divided

between the DOJ and the SEC...............................................................................22

VIII. Implementing an Effective FCPA Compliance Program...................................................26

IX. Summary of Some Recent FCPA Enforcement Actions and Cases ..................................28A. Settlement of Suit Against Baker Hughes by Alan Ferguson.................................28B. ExxonMobil and ChevronTexaco Subpoenaed In Connection With FCPA

Kazakhstan Bribery Case.......................................................................................28C. Halliburton FCPA Violation in Nigeria. ...............................................................29D. Saybolt v. Schreiber. ..............................................................................................30E. United States v. Basu. ............................................................................................31F. United States v. Syncor Taiwan, Inc. .....................................................................32G. United States v. Sengupta. .....................................................................................32H. U.S. v. David Kay and Douglas Murphy (S. Dist Texas - Houston). .....................33I. Baker Hughes.........................................................................................................34

1) Facts Alleged by the SEC...........................................................................352) The Baker Hughes Consent Decree. ..........................................................363) Action Against KPMG-SSH and Harsono. ................................................374) Action Against Former Company Officers. ...............................................38

J. U.S. v. Cantor. .......................................................................................................39K. U.S. v. King and Barquero.....................................................................................39L. U.S. v. Halford; U.S. v. Reitz. ................................................................................40M. U.S. v. Rothrock. ....................................................................................................40N. Chiquita Brands International...............................................................................41O. DOJ Opinion Procedure Release 2001-01. ...........................................................41P. Metcalf & Eddy. .....................................................................................................42

1) The Alleged Facts. .....................................................................................422) Implications of M&E..................................................................................43

Q. Saybolt. ..................................................................................................................44R. United States v. Tannenbaum. ...............................................................................45S. Triton. ....................................................................................................................46

1) Background. ...............................................................................................462) The Settlement............................................................................................47

X. Conclusion. ........................................................................................................................48


COMPLIANCE WITH THEFOREIGN CORRUPT PRACTICES ACT OF 1977

IN THE POST-SARBANES-OXLEY WORLD

Executive Summary

A. Introduction.

It is vital for every company in the United States with foreign operations or sales tocarefully consider whether it has effective policies and procedures in place that adequatelymanage the company's risks under the Foreign Corrupt Practices Act of 1977 ("FCPA" or "Act")as such Act was amended in 1988 and 1998. The sharp rise in U.S. direct investment abroad hasrekindled a host of FCPA concerns – some familiar, others more subtle – affecting a wide varietyof business transactions. This trend, combined with the privatization of many state-runenterprises, the increasing competition for business abroad, and the further opening of emergingmarkets in Latin America, Asia and Africa, warrants a renewed awareness of FCPA prohibitionsby U.S. companies. In addition, the Sarbanes-Oxley Act of 20021 places significant additionalburdens on corporate officials to ensure that their company's accounts and financial statementsaccurately reflect the financial condition of their companies. While most business executives areaware of the FCPA's basic objectives and requirements, many do not do an adequate job ofprotecting their companies and their employees from potentially disastrous consequences – stifffines and prison sentences – that could result from a failure to comply with the Act.

B. Overview of Foreign Corrupt Practices Act of 1977.

Congress enacted the FCPA in 1977, in response to recently discovered but widespreadbribery of foreign officials by United States business interests. Congress resolved to interdictsuch bribery, not just because it is morally and economically suspect, but also because it wascausing foreign policy problems for the United States.2 In particular, these concerns arose fromrevelations that United States defense contractors and oil companies had made large payments tohigh government officials in Japan, the Netherlands, and Italy.3 Congress also discovered thatmore than 400 corporations had made questionable or illegal payments in excess of $300 millionto foreign officials for a wide ranges of favorable actions on behalf of the companies.4

1 See Corporate and Criminal Fraud Accountability Act of 2002, Title VIII, Pub. L. No. 107-204, 116 Stat. 745

(2002).2 The House Committee stated that such bribes were "counter to the moral expectations and values of the

American public," "erode[d] public confidence in the integrity of the free market system," "embarrass[ed]friendly governments, lower[ed] the esteem for the United States among the citizens of foreign nations, andlend[ed] credence to the suspicions sown by foreign opponents of the United States that American enterprisesexert a corrupting influence on the political processes of their nations." H.R. Rep. No. 95-640, at 4-5 (1977); SRep. No. 95-114 at 3-4 (1977), reprinted in 1977 U.S.C.C.A.N. 4098, 4100-01.

3 H.R. Rep. No. 95-640, at 5; S.Rep. No. 95-114, at 3.4 H.R. Rep. No. 95-640, at 4; S.Rep. No. 95-114, at 3.


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The FCPA's anti-bribery provisions prohibit most indirect or direct payments to foreignand international officials, regardless of the amount. The Act's anti-bribery provisions areapplicable to issuers of securities in the U.S. market, U.S. companies and persons and foreignentities if acts in furtherance of bribery were committed in the U.S. or through the U.S. mails.The anti-bribery provisions of the FCPA prohibit giving anything of value to a foreign orinternational official, with corrupt intent, for the purpose of obtaining or retaining business orgaining an improper advantage.

A limited exception to the prohibition on payments to foreign officials under the FCPA ispayments for routine, non-discretionary governmental actions, also referred to as facilitatingpayments. For example, payments in connection with obtaining governmental permits orlicenses, and processing visas. Although the amount for a permissible facilitating payment is notdefined by statute, it is generally thought that a facilitating payment should not exceed a fewhundred dollars.

There are two affirmative defenses under the FCPA's anti-bribery provisions: (1) if apayment or offer of anything of value is in accordance with the written laws of the country inwhich the payment is being made; and (2) the payment of reasonable and bona fide expendituresdirectly related to the business of the payer, such as travel, lodging and meal expenses for aforeign official. However, considerable caution should be used in conducting activities inreliance on the bona fide expenditures defense. In United States v. Metcalf & Eddy, Inc. (DMass. 1999), a company was found to have violated the FCPA by paying travel expenses for anEgyptian government official and his family, with the knowledge that the official was capable ofexerting influence on the award of a bid for a project in which the company was competing. Theexpenses covered by the company for the government official and his family were deemed by thecourt to be unreasonable (i.e. first class travel, cash advances in addition to paid per diem, etc.)

The FCPA's accounting provisions were added to the Act in 1994. They require allcompanies that are securities issuers5 under the Securities Exchange Act of 1934 ("ExchangeAct"), whether domestic or foreign, to maintain record-keeping and disclosure requirements inorder to prevent "off-book" accounting practices that facilitate bribery. The FCPA's books andrecords provisions apply to all U.S. and foreign companies that are issuers under the Act. Recentaccounting violation cases illustrate a move by the Securities and Exchange Commission("SEC") to hold U.S. companies responsible for the accounting violations of their foreignsubsidiaries.

A foreign subsidiary of a U.S. corporation is a foreign legal person, having the nationalityof its country of incorporation, and is thus not technically subject to the FCPA's anti-briberyprovisions except in respect of acts done by it within a territory of the U.S. However, a U.S.parent company is itself at risk of liability if it is found to have authorized, directed or controlled

5 Issuers are essentially publicly-traded companies – any corporation (domestic or foreign) that has registered a

class of securities with the SEC or is required to file reports with the SEC, e.g. any corporation with its stocks,bonds, or American Depository receipts traded on U.S. stock exchanges or the NASDAQ Stock Market, as wellas their officers, directors, employees, agents and their shareholders acting on behalf of the issuer.


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a foreign subsidiary committing an act of bribery. Even a finding of willful blindness or recklessdisregard on the part of the parent company will suffice to trigger liability in the absence ofexpress authorization, though negligence alone will not. In all likelihood, any form of effectivecontrol over a subsidiary's activities will probably be enough to expose the parent company tothe risk of liability under the FCPA. A U.S. issuer parent company is also obliged to enforce theFCPA books and records provisions in foreign subsidiaries which it controls.

The FCPA divides enforcement responsibilities between the Department of Justice("DOJ") and the SEC. However, because the FCPA casts such a wide net, FCPA violations mayarise in a number of contexts. As a result, other agencies may get involved in the investigationof FCPA violations, in addition to the DOJ and the SEC. Allegations of civil violations of theFCPA anti-bribery provisions by non-issuers are also investigated by the DOJ6; allegations ofcivil violations of the record-keeping and anti-bribery provisions of the FCPA by issuers are, onthe other hand, investigated by the SEC. SEC investigations against issuers are conducted byattorneys assigned to the SEC's Division of Enforcement in Washington D.C. and byenforcement attorneys in SEC regional offices. By contrast to the DOJ Criminal Division whichcan rely on the greater evidence-gathering tools available to its criminal prosecutors, FCPAinvestigations by the SEC have until now been constrained by limited enforcement resourcesand, as a result, the SEC has pursued relatively few investigations of violations of the FCPA anti-bribery provisions.

Penalties for FCPA violations may be civil and/or criminal. Penalties for criminalviolations are determined according to the United States Sentencing Guidelines Manual andinclude imposition of fines against companies and/or individuals -- i.e. directors, managers,employees -- as well as imprisonment.

C. Impact of the OECD Anti-Bribery Convention on FCPA.

The FCPA was amended in 1998 in order to comply with the 1998 Anti-BriberyConvention of the Organization for Economic Cooperation and Development ("OECD"), whichhas been adopted by 34 countries, including the U.S. The OECD Convention ("OECDConvention") requires countries to impose effective and dissuasive sanctions and its provisionscapture the illicit activities of intermediaries. It establishes the basis for cooperation betweencountries with respect to legal assistance and extradition in cases involving covered commercialbribery offenses. The OECD Convention also imposes corporate liability for bribery and makesbribery of foreign public officials a predicate offense for the purposes of money laundering. Inaddition, the parties to the OECD Convention commit to implement a program of systematicmonitoring of the implementation of their respective national laws. The passage of the OECD

6 Non-issuers, for the purpose of the application of the FCPA, are "domestic concerns other than issuers", i.e. any

corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or soleproprietorship that has its principal place of business in the U.S., or that is organized under the laws of the U.S.,or a territory, possession, or commonwealth of the U.S., as well as any person other than an issuer or a domesticconcern, i.e. any business entity that is organized under the laws of foreign countries and does not trade on theU.S. stock exchange.


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Convention marks an important step in the international movement to criminalize bribery in thatits signatories account for about two-thirds of all global exports and approximately 90 percent ofworldwide foreign direct investment.

D. United Nations Convention Against Corruption.

In December 2003, 97 countries signed the new United Nations ("UN") ConventionAgainst Corruption ("UN Convention"). This is the latest in a series of moves to force theinternational community to take action against bribery and other forms of corruption. The newUN Convention will come into effect upon ratification by 30 of its signatories.

Like the OECD Convention, the new UN Convention is not self-executing. Each party tothe UN Convention is required to adopt domestic legislation implementing the UN Convention'srequirements. Unlike the OECD Convention, however, the UN Convention goes far beyondbribery of public officials. It covers bribery in the private sector as well and includes suchadditional topics as embezzlement, money laundering, corporate record-keeping, obstruction ofjustice, extradition and international law enforcement cooperation. Implementation is to bemonitored by a UN watchdog committee.

E. Implementation of a FCPA Compliance Programs.

In the Caremark case, the Delaware Chancery Court held that the failure of a company tohave an adequate corporate information and reporting system in place could constitute a breachof fiduciary duty by the company's board of directors. Among other things, this could leavedirectors liable for losses incurred by companies for non-compliance with applicable lawincluding the FCPA. See In re Caremark International Inc. Derivative Litigation, 698 A.2d 959(Del Ch. 1996).

In order to meet the requirements of the Sarbanes-Oxley Act of 2002 and the standards ofthe Federal Sentencing Guidelines for Organizations, it is prudent for companies to take anumber of compliance actions with respect to the FCPA:

• Adopt a FCPA Corporate Policy. Every company should adopt a written corporatepolicy on FCPA compliance and distribute the policy to all employees, includingthose located in overseas offices. The FCPA policy should be carefully crafted toreflect the actual business and operations of the company (and not merely duplicatedfrom another company's policy or standards). The FCPA policy, as well asimplementing procedures, should be updated regularly to reflect new developments inthe U.S., the widespread adoption of the OECD Convention, and rapidly evolvingchanges in other anti-bribery laws around the world.

• Adopt Comprehensive Implementing Procedures for FCPA Compliance. A companyshould implement its FCPA policy by putting in place comprehensive monitoring andreporting procedures. Possibilities include establishment of an executive-level FCPAReview Committee to manage and review FCPA issues as they arise, designation of


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an FCPA Compliance Officer or Ombudsman to whom FCPA referrals may be madeby employees on a confidential basis, development of screening methods andchecklists to identify when FCPA issues may occur during normal businessoperations, development of questionnaires for use internally and with third-parties,and development of appropriate contract language for inclusion in all agreements thatmay give rise to FCPA concerns.

• Communicate With and Train Employees on Requirements of FCPA. As important asit is to have an appropriate FCPA policy and procedures, it is equally important thatall pertinent information be communicated effectively to employees. The languageused in the compliance and training materials must be clear and understandable toemployees at all levels of the organization. Affected employees should also receiveadequate training regarding the FCPA policy and procedures. Each employee withsubstantive responsibilities that relate to overseas operations or sales should berequired to attend periodic training sessions, incorporating practical guidance on howto deal with situations that may arise in the course of the employee's work. SuchFCPA training is best conducted in person by a company's compliance officer or legalcounsel so that issues particular to a group of employees can be addressed. Thecompany should keep a detailed record of the employees who attend these trainingsessions.

• Act Swiftly if FCPA Violations Occur. In the event allegations of FCPA violationsare received, the company should take swift action to investigate. In the event actualFCPA violations have occurred, the company should have in place standarddisciplinary procedures that apply to all employees who violate the FCPA policy.Prompt action must be taken with respect to actual abuses in an effort to avoidrepeated occurrences. The company should also assess whether or not its policy andprocedures need to be modified and its internal enforcement strengthened. Inappropriate cases, the company should consider voluntary disclosure of apparentFCPA violations to the federal government in order to mitigate its exposure toenforcement action.

• Review FCPA Matters Regularly. The company's FCPA Review Committee orCompliance Officer should report, on a regular basis, to the company's board ofdirectors any policy violations, enforcement measures and disciplinary actions. Theboard of directors should periodically evaluate the effectiveness of the FCPA policyand procedures.

If done properly, an FCPA comprehensive compliance program can become a valuablecorporate asset that enhances company operations, facilitates compliance with law and mitigatesdamage when and if violations take place.


I.Introduction

Congress enacted the FCPA in 1977,7 largely in response to disclosures in the early1970s of questionable payments by large U.S. companies. Those questionable payments took theform of either illegal political contributions or payments to foreign officials to secure contracts,many of which bordered on bribery. Accordingly, the principal focus of the FCPA is itssweeping prohibition against foreign bribery.8

In addition, the FCPA sets forth provisions on record-keeping and accounting practicesby U.S. companies, aimed at prohibiting the establishment of corporate slush funds used tofinance illegal payments. The record-keeping and accounting provisions apply to all U.S.companies that are "issuers"9 – those that have stock registered with the Securities and ExchangeCommission ("SEC") – and not just those with foreign operations. The anti-bribery provisionsof the FCPA apply to all companies, regardless of whether they have stock registered with theSEC.10

The FCPA affects not only procurement and concession decisions, but also thestructuring of foreign investments. These might include government requirements coveringtechnology transfers, local participation in projects or other local benefits like infrastructuredevelopment. Additional issues are faced by companies with joint ventures involving foreigngovernments, state-owned companies or private foreign entities that are owned or controlled bygovernment officials.

II.The Anti-Bribery Provisions of the FCPA

A. Provisions. The anti-bribery provisions of the FCPA make it illegal for anycompany, whether or not publicly traded, to bribe any foreign official for the purpose ofobtaining or retaining business or securing any improper advantage.11 A foreign official is 7 Act of Dec. 19, 1977, Pub. L. No. 95-213, 91 Stat. 1494, as amended by the Foreign Corrupt Practice Act

Amendments of 1988, Pub. L. No. 100-418, 102 Stat. 1415, 15 U.S.C. § 78m(b) (accounting standards), 15U.S.C. § 78dd-1 (1988) (prohibited foreign trade practices by issuers) and 15 U.S.C. § 78dd-2 (1988)(prohibited foreign trade practices by domestic concerns), as amended by the International Anti-bribery andFair Competition Act of 1998, 15 U.S.C. §§ 78dd-1 to 78dd-3, 78ff (West Supp. 1999), Pub. L. No. 105-366,112 Stat. 3302 (1998).

8 15 U.S.C. §§ 78dd-l(a) (West Supp. 1998) (for issuers), 78dd-2(a) (West Supp. 1998) (for domestic concerns).9 15 U.S.C. §§ 78dd-2(a); 78l; See also 15 U.S.C. § 78o(d).10 15 U.S.C. §§ 78dd-1(a) (for issuers); 78dd-2(a) (for domestic concerns).11 A violation of the anti-bribery provisions of the FCPA generally consists of five primary elements, which may be

summarized as follows:

• any issuer or person of the U.S. who either uses the U.S. mails or other instrumentalities of interstate commerce orperforms an act outside the U.S. (see 15 U.S.C. §§ 78dd-1(a) (for "issuers"), § 78dd-2(a) (for domestic concerns)),

• makes a payment of or an offer, authorization or promise to pay (see 15 U.S.C. §§ 78dd-1(a)(1) (forissuers), 78dd-2(a) (for domestic concerns)) money or anything of value (see 15 U.S.C. §§ 78dd-1(a)(3) (for issuers), 78dd-2(a)(3) (for domestic concerns)),


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defined as someone having discretionary authority.12 The FCPA prohibits individuals andbusinesses from offering, promising or authorizing (either directly or indirectly) the payment ofanything of value to any foreign official, government employee, officer of a public internationalorganization, foreign political party or political candidate, or any person acting on behalf of anyof these entities.13 The provisions also forbid direct bribes and bribes made throughintermediaries.14 The anti-bribery provisions affect both issuers and domestic concerns, as wellas their individual employees, officers, directors, stockholders and agents. The SEC and theDepartment of Justice ("DOJ") can convict individual corporate employees under the FCPA,regardless of whether the corporation is found guilty.15

A foreign public official is defined quite broadly by the FCPA and includes "anyofficer or employee of a foreign government or any department, agency, or instrumentalitythereof, or any person acting in an official capacity for or on behalf of any such government,department, agency or instrumentality". By contrast with Article 1 of the OECD Convention,the definition of foreign public official in the FCPA does not mention persons holdingjudicial office in a foreign country.

Another area of potential uncertainty under the FCPA involves officials of publicenterprises. Such enterprises are covered in U.S. law as instrumentalities, making theirofficers, directors, employees, etc., foreign officials under the FCPA. Neither the FCPA norits history define the term instrumentality, thus leaving it to U.S. companies to determinewhether an enterprise is an instrumentality or not. This can be difficult in some cases. Forinstance, are instrumentalities only enterprises that are wholly or majority-owned by the

• to any "foreign official" or foreign political party while "knowing" that the payment or promise to pay will be

passed on to one of the above (see 15 U.S.C. §§ 78dd-1(a)(1)-(2) (for issuers), 78dd-2(a)(l)-(2) (for domesticconcerns)),

• "corruptly" for the purpose of influencing an official act or decision of that person; inducing the person to do oromit to do any act in violation of his or her lawful duty (See S. REP. NO. 95-114, at 10 (1977), reprinted in 1977U.S.C.C.A.N 4098, 4108), and

• in order to obtain, retain or direct business to any person or securing an improper advantage (See 15 U.S.C. §§78dd-1(a)(1)-(2) (2000) (for issuers) and 78dd-2(a)(l)-(2) (2000) (for domestic concerns)). There is no seriousdifficulty in meeting the "interstate nexus" requirement: the interstate nexus can be as slight as a singleletter, fax, cable, phone call, or airline ticket, in the furtherance of the effort to make a prohibitedpayment. In Sam P. Wallace Co. (D.P.R. 1983), for instance, the mailing of checks was deemed "usesof means and instrumentalities of interstate commerce, that is, interstate and foreign bank processingchannels". In United States v. Harry G. Carpenter (Criminal Information No. 85-353 1985), a WesternUnion international telex was cited as the use of a means and instrumentality of interstate commercefor the purposes of the FCPA. In United States v. Reitz (W.D. Mo, 2001), the plea stated that infurtherance of the bribery act the defendant and other conspirators corresponded via e-mail andfacsimile transmission and engaged in numerous telephone conversations. In U.S. v. Mead (D.N.J.1998), the requisite interstate nexus was proven by the use of emails and international travel.

12 See 15 U.S.C. §§ 78dd-1(f)(1), 78dd-2(h)(2).13 See 15 U.S.C. §§ 78dd-1(a) (for "issuers"), 78dd-2(a) (for "domestic concerns").14 See 15 U.S.C. § 78dd-1(a)(3) (for "issuers"), 78dd-2(a)(3) (for "domestic concerns").15 See 15 U.S.C. §§ 78ff(c)(2)(B); 78dd-2(g)(2)(B).


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foreign government? Does the term instrumentality cover enterprises that are controlled bythe government, or entities in the process of privatization? While other U.S. laws maycontain some clues to a possible definition, most are in the domestic context and thus may beof limited relevance. For instance, the Foreign Sovereign Immunities Act (FSIA) defines anagency or instrumentality of a foreign state as an entity, "a majority of whose shares or otherownership interest is owned by a foreign state or political division".

B. FCPA Exception for Facilitating Payments. The FCPA was amended in 1988 toclarify that certain payments known as grease or facilitating payments were not intended to becovered under the FCPA.16 This exception covers any payment, the purpose of which is toexpedite or secure the performance of a routine governmental action.17 "Routine governmentalaction" includes actions that a government official routinely performs,18 including:

• obtaining permits, licenses, or other official documents that allow one to dobusiness in a foreign country,19

• processing governmental papers (such as visas and work orders),• scheduling inspections,• providing police protection,• mail pick-up and delivery,• phone, power or water service, and• loading and unloading cargo.20

A violation of the FCPA occurs when payments other than grease payments or facilitatingpayments are made corruptly to obtain or retain business, gain an improper advantage or tofacilitate nondiscretionary actions performed by governmental officials.21

There is an absence of any clear, published guidance as to what is meant by facilitatingpayments and where the limits are. The FCPA contains no per se limit on the size of thefacilitating payments, focusing instead on the purpose of the payment. No court has interpretedthe application of the facilitating payment exception and there are no settled cases to assist inprecisely delineating the boundary between acceptable and unacceptable payments. There arealso no relevant DOJ Opinions addressing facilitating payments. If a company asks the DOJ forinformal advice or reports a facilitating payment, the DOJ will sometimes determine straightaway, on the basis of judgment and experience, whether it falls within the facilitating payment

16 See 15 U.S.C. § 78dd-1(b) (for issuers) and 78dd-2(b) (for domestic concerns); It should be noted that this exception is

not provided for in the statute governing domestic bribery (18 U.S.C. § 201).17 Id.18 See 15 U.S.C. §§ 78dd-1(f)(3)(A)(i) (2000) (for issuers); 78dd-2(h)(4)(A)(i) (2000) (for domestic concerns).19 Id.20 See 15 U.S.C. §§ 78dd-1(f)(3)(A)(ii-iv) (for issuers); 78dd-2(h)(4)(A)(ii-iv) (for domestic concerns).21 See 15 U.S.C. §§ 78dd-1(f)(3)(B) (for issuers); 78dd-2(h)(4)(B) (for domestic concerns; See also H.R. CONF. REP. NO. 100-

576, at 921 (1988)).


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exception and if so, take no further action. This operates as a sort of informal, undocumented 'deminimis' rule.

Companies have developed different strategies to deal with facilitating payments. Atleast two major oil companies (i.e., BP and Shell Oil) impose a policy, applicable to their world-wide operations, that irrespective of the existence of the facilitating payments exception in theFCPA, no discretionary payments are to be made by their employees without express approval,as a way of reducing the scope for misjudgment by local employees.

C. Foreign Subsidiaries. Generally, the activities of a foreign subsidiary of a U.S.corporation are not subject to the FCPA.22 However, the U.S. parent may be held liable underthe FCPA for its foreign subsidiary's acts if the relationship between the U.S. parent andsubsidiary is sufficiently close. A sufficiently close relationship could be found where, forexample, the U.S. parent authorizes, directs or participates in the subsidiary's activities. Due tothe potential for liability under the vicarious liability provisions of the FCPA, reliance on themere fact that one's subsidiary is incorporated abroad is ill-advised, particularly where there isU.S. management and control of the subsidiary, or where the relationship between the U.S.parent and the subsidiary is sufficiently close.

There may be, depending on the circumstances, two possible ways of reaching corporatesubsidiaries under the FCPA: (1) through the direct liability of either the subsidiary or itsofficials or both; or (2) holding either the parent or its officials or both liable for the actions ofthe subsidiary.

When Congress was initially considering the FCPA, the original House bill would haveextended the FCPA's anti-bribery provisions to foreign subsidiaries owned or controlled by U.S.persons.23 The House Committee on Interstate and Foreign Commerce said it was "appropriateto extend the coverage of the FCPA to non-U.S. based subsidiaries because of the extensive useof such entities as a conduit for questionable or improper foreign payments authorized by theirdomestic parent."24 Recognizing the "inherent jurisdictional, enforcement and diplomaticdifficulties" that this would entail, however,25 the House deferred to the Senate in conference anddropped this provision.26 In so doing, the conferees emphasized "that any issuer or domesticconcern which engages in bribery of foreign officials indirectly through any other person orentity would itself be liable under the bill."27

22 Although the FCPA is ambiguous, its legislative history and case law confirm that foreign subsidiaries of U.S. companies

acting on their own behalf and not as agents of their U.S. parent are not covered by the anti-bribery provisions. See H.R.CONF. REP. NO. 95-831, at 15 (1977), reprinted in 1977 U.S.C.C.A.N. 4098, 4126; See also Dooley v. United TechnologiesCorp., 803 F. Supp. 428, 439 (D.D.C. 1992) (legislative history excludes foreign subsidiaries from FCPA coverage).

23 H.R. Rep. No. 95-640, at 11-12 (1977).24 Id.25 H.R. Rep. No. 95-831, at 14 (1977), reprinted in 1977 U.S.C.C.A.N. 4121, 4126.26 Id.27 Id.


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As amended in 1998, the FCPA provides for direct liability of the foreign subsidiary of aU.S. firm (or any officer, director, employee, agent or stockholder acting on the subsidiary'sbehalf) if the subsidiary is an issuer or if the subsidiary (or principal) causes an act in furtheranceof the bribe to take place in U.S. territory.28 The FCPA also reaches the foreign subsidiary'sofficials if they are U.S. nationals.29 In addition, it is possible that a foreign subsidiary of a U.S.corporation might face criminal liability under the local law of the state where it operates.Alternatively, under U.S. law the parent might be held liable for the subsidiary's actions througha variety of theories. For example, if the U.S. parent authorizes the subsidiary to make anunlawful payment, the FCPA applies.30

The FCPA also prohibits payments to "any person, while knowing that all or a portion ofsuch money or thing of value will be offered, given, or promised, directly or indirectly, to anyforeign official, to any foreign political party or official thereof, or to any candidate for foreignpolitical office."31 This prohibition could apply to funds transferred by a U.S. parent corporationto a foreign subsidiary. As originally enacted, this provision contained a "knowing or havingreason to know" standard.32 The 1988 Amendments to the FCPA removed the "or having reasonto know" language and defined a person's state of mind as knowing if "(1) such person is awarethat such person is engaging in such conduct, that such circumstance exists, or that such result issubstantially certain to occur; or (2) such person has a firm belief that such circumstance existsor that such result is substantially certain to occur."33 Moreover, knowledge is established "if aperson is aware of a high probability of the existence of such circumstance, unless the personactually believes that such circumstance does not exist."34

In adopting the 1988 Amendments to the FCPA, the conferees stated that "simplenegligence" or "mere foolishness" should not trigger liability under the FCPA.35 They alsoemphasized, however, that the knowing standard was intended to cover "conscious disregard,""willful blindness " or' "deliberate ignorance."36 Accordingly, a company making a payment toanother person, such as a foreign subsidiary, cannot rely on a "head-in-the- sand" defense inignoring the high probability of an unlawful payment.37

28 15 U.S.C. § 78dd-1(a) (Supp. 1999); 15 U.S.C. § 78dd-3(a) (Supp. 1999).29 15 U.S.C. § 78dd-2(i) (Supp. 1999).30 15 U.S.C. §§ 78dd-1(a), 2(a), and 3(a) (Supp. 1999).31 15 U.S.C. §§ 78dd-1(a)(3), 2(a)(3), and 3(a)(3) (Supp. 1999).32 15 U.S.C. §§ 78dd-1(a)(3), 2(a)(3), and 3(a)(3) (Supp. 1979).33 Foreign Corrupt Practices Act Amendments of 1988, Pub. L. No. 100-418, § 5003(a), (c), 102 Stat. 1418, 1423-

24 (1988).34 15 U.S.C. §§ 78dd-1(f)(2), -2(h)(3) (1997).35 H.R. Conf. Rep. No. 100-576, at 919-20 (1988), reprinted in 1988 U.S.C.C.A.N. 1547, 1953.36 Id.37 Id.


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Issuers may also be liable for foreign subsidiaries' actions under the books and recordsprovisions of the FCPA.38 These provisions require issuers to keep accurate records and tomaintain an adequate system of internal accounting controls.39 Although the 1977 version of theFCPA did not specify the extent to which the books and records provisions applied to foreignsubsidiaries of issuers,40 the Senate Banking, Housing and Urban Affairs Committee noted in itsreport on the FCPA that a U.S. company which 'looks the other way' in order to be able to raisethe defense that it was ignorant of bribes made by a foreign subsidiary, could be in violation of[the section] requiring companies to devise and maintain adequate accounting controls. Underthe accounting section no off-the-books accounting fund could be lawfully maintained, either bya U.S. parent or by a foreign subsidiary, and no improper payment could be lawfully disguised.41

In the 1988 Amendments to the FCPA Congress clarified that the books and recordsrequirements only apply to foreign subsidiaries of issuers in those cases in which the parentholds more than 50 percent of the voting power of the subsidiary.42 These requirements alsoapply where the parent consolidates its financial reports with those of the subsidiary.43 Wherethe parent holds 50 percent or less of such voting power, the parent is required only "to proceedin good faith to use its influence, to the extent reasonable under the issuer's circumstances"44 toensure that the foreign subsidiary maintains a system of internal accounting controls that wouldcomply with the statute's requirements.45 The conferees acknowledged in their agreement on thisprovision that "it is unrealistic to expect a minority owner to exert a disproportionate degree ofinfluence over the accounting practices of a subsidiary."46

Under U.S. law a parent can also be held liable for unlawful payments by its foreignsubsidiary when the subsidiary is deemed to be the "alter ego" of the parent because of the extentto which the parent dominates the operations of the subsidiary, or when the subsidiary acts as theagent of the parent.47

38 15 U.S.C. § 78(m) (1997).39 Id.40 15 U.S.C. § 78(m) (1976); 15 U.S.C. § 78dd-(1), -(2) (Supp. 1978).41 S. Rep. No. 95-114, at 11 (1977), reprinted in 1977 U.S.C.C.A.N. 4098, 4109.42 H.R. Conf. Rep. No. 100-576, supra note 31, at 917.43 United States Dep't of State, Battling International Bribery; First Annual Report on Enforcement and

Monitoring of the OECD Convention, at D-5 (1999) (United States response to OECD questionnaire relating tofour issues).

44 15 U.S.C. § 78m(b)(6) (1997).45 H.R. Conf. Rep. No. 100-576 supra note 31, at 917.46 Id.47 See H. Lowell Brown, Parent-Subsidiary Liability Under the Foreign Corrupt Practices Act, 50 Baylor L. Rev.

1, 38 (1998). In a number of other OECD countries, under certain circumstances courts may disregard theprinciple of separate legal identity of a subsidiary. See Org. for Econ. Cooperation and Dev., Responsibility ofParent Companies for their Subsidiaries 8-13 (1980). It is not clear to what extent this concept might apply incases involving bribery by foreign subsidiaries.


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D. FCPA and Business Relationships. The elements of an FCPA violation can arisein a wide variety of ordinary business transactions. For example, payment of anything of valuecan include a stock interest in a joint venture company, a contractual right or interest, or evenaccess to credit. As a result, the mere formation of a joint venture, the arrangement of financingor the establishment of a relationship with certain foreign parties – i.e., a foreign governmentofficial or someone close to that official – can raise FCPA issues. Even in the context of a purelyprivate joint venture, the ability of the joint venture to operate in a foreign country may turn ondiscretionary government decisions, including foreign investment approvals, the obtaining ofdiscretionary licenses or concessions, tax concessions, and other benefits. As a condition toinvestment approval or the award of a contract, the government may require the foreign investorto partner with a local firm, subcontract certain work to local firms, meet specified localemployment standards or build infrastructure.

E. Joint Ventures with a State-Owned Entity. In a joint venture with a state-ownedentity, that is, a state-owned company or a company owned or controlled by a foreign official,additional issues arise. Because the FCPA does not distinguish between foreign officials actingin a sovereign capacity on behalf of their government or governmental agency, and those actingin a commercial capacity for a state instrumentality, virtually any transaction between a personsubject to the FCPA and the employees of a state-owned entity – from the simple payment ofdirector's fees to employment contracts to stock options – can raise FCPA issues.

III.Record-Keeping and Accounting Provisions of the FCPA

A. Application to Public Companies. The record-keeping and accounting provisionsof the FCPA are essentially consistent with good general accounting practices. The accountingprovisions of the FCPA amend the Exchange Act48 to add record-keeping and disclosurerequirements to those persons and entities already subject to the Exchange Act.49 All issuers(public companies that file Form 10-K reports) must observe the accounting provisions, whetheror not they engage in foreign activities.50 Because the accounting provisions are codified in theExchange Act, the SEC is responsible for the enforcement of these provisions.

Under the FCPA, public companies are required to:

• Make and keep books, records and accounts which, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of theissuer;

• Create a system of internal accounting controls that will provide reasonableassurances that transactions are properly authorized; and

48 15 U.S.C. § 78a et seq. (1994).49 15 U.S.C. § 78m(b).50 See 15 U.S.C. § 78m(b)(2)(A); See also 15 U.S.C. § 78m(b)(6); Lewis v. Sporek, 612 F. Supp. 1316, 1333 (N.D. Cal. 1985)

(discussing need for FCPA's accounting provisions as a deterrent for bribery).


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• Record accurately all amounts on the company's books.51

B. No Materiality Standard. It should be noted that there is no materiality standardunder the FCPA; companies must have reasonable record-keeping and accounting provisions toaccount for all money and not just sums that would be material in the traditional financialsense.52 In short, records must include information that might alert the SEC to impropriety. Inpractice, the record-keeping provisions are intended to prevent three types of improprieties:

• The failure to record improper transactions;• The falsification of records to conceal improper transactions; and• The creation of records that are quantitatively correct, but fail to specify the

qualitative aspects of a transaction that might reveal the true purpose of aparticular payment.53

C. Foreign Subsidiaries. There are different rules regarding the applicability of theFCPA's record-keeping requirements to foreign subsidiaries of U.S. issuers. An issuer will beliable for enforcement of these requirements with regard to a subsidiary if it controls thatsubsidiary. As clarified by the then SEC Chairman Harold Williams in a formal statement ofpolicy given in January 1981 and codified in section 78m(b)(6) in the 1988 Amendments to theFCPA, the SEC applies practical tests in determining whether the issuer controls the subsidiaryand is thereby bound to enforce the accounting provisions where the issuer controls more than50 percent of the voting securities of its subsidiary, compliance is expected. Compliance wouldalso be expected if there is between 20 and 50 percent ownership, subject to some demonstrationby the issuer that this does not amount to control. The 1988 Amendments to the FCPA clarifiedthe issue of parent company responsibility for the accounting practices of its foreign subsidiaryor affiliate. If a U.S. firm owns 50 percent or less of a foreign firm, and the U.S. firm reasonablyand in good faith uses its influence to cause the foreign subsidiary or affiliate to make and keepaccurate books and records and establish a system of internal accounting controls, then the U.S.firm has no legal responsibility for the accounting practices of the foreign firm.54

IV.Affirmative Defenses Under FCPA for Routine Actions

A. Overview.

The FCPA provides two affirmative defenses:

• That the payment, gift, offer or promise of anything of value constituted areasonable and bona fide expenditure; and

51 See 15 U.S.C. § 78m(b)(2)(B).52 See 15 U.S.C. §§ 78m(b)(2)(A); 78m(b)(7).53 See SEC v. World-Wide Com Inv., Ltd., 567 F. Supp. 724, 752 (N.D. Ga. 1983).54 See Dooley v. United Technologies Corp., 803 F. Supp. 428 at 439 (D.D.C. 1992).


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• That the payment, gift, offer or promise of anything of value to a foreign official,political party or candidate was done in accordance with the written laws of thatcountry.55

B. Payment of Gifts and Promotional Expenses.

In order to constitute a reasonable and bona fide expenditure under the FCPA, however,such expenditure must be directly related to the promotion of products and/or services or to theexecution of a contract with the foreign government or agency.56 Sensitive cases may arise whencompanies plan promotional tours for visiting foreign officials and include recreational activitiesin the agenda. Although the DOJ, through its opinion release procedure, has approvedpromotional trips on several occasions, including payments for the entertainment of a foreignofficial and his wife, it has not commented on the nature or cost of the entertainment: theseopinions suggest only that the DOJ recognizes the business purpose of including someentertainment in promotional activities. Nor has any court interpreted the application of thedefense.

The Metcalf & Eddy case,57 in which the DOJ interpreted the provision of airfare, travelexpenses, and pocket money to an Egyptian official and his family during business trips to theU.S. as exceeding the legitimate levels for bona fide promotional expenses, suggests only thatthe DOJ would allow such expenses where the level of the expense is reasonable and thepayments are accurately documented and subject to audit. In addition to promotional activities,bona fide expenditures directly related to the "execution or performance of a contract with aforeign government or agency" may also be a difficult issue for companies. DOJ opinionsrelated to this provision include the approval of a proposal by a U.S. business to bring Frenchofficials to the U.S. to show them a plant similar to the one proposed for construction in France,and the approval of a proposal by an American petroleum company to provide training toemployees of a foreign government, where that training was required by local law. In neithercase, however, does the Opinion Release reveal what tests or standards were applied by the DOJin deciding not to take any enforcement action.

C. Local Law Defense.

The FCPA provides that it shall be an affirmative defense that the payment, gift, or offerof payment was 'lawful under the written laws and regulations of the foreign official's country'.This seemingly broad defense leaves open the issue of what is "lawful" under the written laws ofa country. The defense was introduced into the FCPA when it was amended in 1988, with theintention of "codifying" previous DOJ practice as evidenced by a series of Review Letters issuedto companies who had raised the question under the then-existing review procedure. Anexamination of several of these review releases dating from the 1980s shows that the language

55 15 U.S.C. §§ 78dd-1(c)(l); 78dd-2(c)(l).56 15 U.S.C. §§ 78dd-1(c)(2); 78dd-2(c)(2).57 U.S. v. Metcalf & Eddy (D. Ma. 1999), FCPA Rep. 699.749.


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most frequently used by the DOJ in explaining its decision not to take enforcement action wasthat the conduct in question did "not violate" or was "not in violation of the local law. This doeslittle to resolve the ambiguity. Nor is the U.S. Department of State in a position to providespecific guidance. Its brochure, Fighting Global Corruption – Business Risk Management,produced in consultation with the other government departments concerned, states at page 28 ofthe current edition, "Whether a payment was lawful under the written laws of a foreign countrymay be difficult to determine."

V.1998 Amendments to the FCPA in Response to 1998

Anti-Bribery Convention of the OECD and the UN ConventionAgainst Corruption and Fair Competition Act of 1998

A. Introduction.

The Organization for Economic Cooperation and Development ("OECD") resurrected theinternational antibribery movement in May of 1994 when the Committee on InternationalInvestment and Multinational Enterprises issued a pivotal report condemning internationalbribery.58 The 1994 Report called on member states to take steps to eliminate bribes to foreigngovernment officials.59

Shortly thereafter, the OECD Council endorsed the 1994 Report's findings in itsRecommendation on Bribery in International Business Transactions ("Recommendation").60 TheRecommendation also called on the OECD to establish an Antibribery Working Group, whosemission would be to develop concrete proposals to curb the use of bribes to win overseascontracts.61

The international antibribery movement received a boost in March 1996 when twenty-one countries signed the Inter-American Convention Against Corruption62 ("Inter-AmericanConvention"). The Inter-American Convention, an initiative of the Organization of AmericanStates, directed signatories to adopt legislation comparable to the FCPA.63 Two months later,

58 See Report on the OECD Recommendation on Bribes in International Business Transactions, OECD Document

C(94)75 (May 10, 1994) [hereinafter "1994 Report"], at 3 (noting that international bribery "exacts a heavyeconomic cost, hindering the development of international trade and investment" and "is especially damaging todeveloping countries, since it diverts needed financial and other assistance from the developed world").

59 See the 1994 Report, supra note 57 at 3-4.60 Council Recommendation on Bribery in International Business Transactions, May 27, 1994, 33 I.L.M. 1389.61 See id. at 1392.62 March 29, 1996, 35 I.L.M. 724.63 See id., art. VII, 35 I.L.M. at 730 ("The States Parties that have not yet done so shall adopt the necessary

legislative or other measures to establish as criminal offenses under their domestic law the acts of corruptiondescribed in [this Convention, including bribery] and to facilitate cooperation among themselves pursuant tothis Convention").


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OECD members agreed in principle to end the tax deductibility of bribes to foreign officials.64

Later, in June 1996, the G-7 nations endorsed the criminalization of bribery and called on theOECD to advance international efforts in that area.65 The antibribery movement seemed poisedfor a breakthrough.

That breakthrough came in May 1997, when the OECD Council adopted its RevisedRecommendation on Combating Bribery in International Business Transactions ("RevisedRecommendation"), together with Agreed Common Elements of Criminal Legislation andRelated Action ("Agreed Common Elements").66 The Revised Recommendation and AgreedCommon Elements were intended to guide the negotiators as they worked out a bindingantibribery agreement. The Revised Recommendation also established a timetable for action,creating a deadline for negotiations and calling on member states to ratify the OECD Conventionand adopt antibribery legislation by the end of 1998.67

In December 1997 U.S. Secretary of State Madeleine Albright and ministers representingthe other members of the OECD68 and five non-members participating in the Working Group onBribery in International Business Transactions of the Committee on International Investment andMultinational Enterprises ("CIME") (the "Working Group")69 signed the Convention onCombating Bribery of Foreign Public Official in International Business Transactions (hereinafterthe "OECD Convention").70 The OECD Convention, the product of several years of intense

64 See Council Recommendation on the Tax Deductibility of Bribes to Foreign Public Officials, OECD Doc.

C(96)27/FINAL, April 11, 1996, 35 I.L.M. 1311, 1312 (recommending that "those Member countries which donot disallow the deductibility of bribes to foreign public officials re-examine such treatment with the intentionof denying this deductibility").

65 See G-7 Emphasizes Trade, Investment, 5 Wash. Trade Daily (TRIG) No. 131, pt. 1 (July 1, 1996).66 Revised Recommendation on Combating Bribery in International Business Transactions, OECD Doc.

C(97)123/FINAL, May 23, 1997, 36 I.L.M. 1016. (The Agreed Common Elements are annexed to the RevisedRecommendation.)

67 See id. at 1019 (setting a December 1997 deadline for reaching an agreement; recommending that parties submitdomestic legislation to criminalize bribery to their domestic legislatures by April 1, 1998; and asking parties toenact appropriate implementing legislation by the end of 1998).

68 The 29 current members of the OECD are : Australia, Austria, Belgium, Canada, the Czech Republic, Denmark,Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, theNetherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, the UnitedKingdom, and the United States. See Pub. Affairs Div., Pub. Affairs and Communications Directorate, Org. forEcon. Co-operation and Development, Annual Report 121 (2000) available athttp://www.oecd.org/publications/e-book/0100331e.pdf.

69 Argentina, Brazil, Bulgaria, Chile, and the Slovak Republic. See Comm. On Int'l Investment and MultinationalEnterprises, Org. for Econ. Co-operation and Dev., Report by the Committee on International Investment andMultinational Enterprises: Implementation of the Convention on Bribery in International Business Transactionsand the 1997 Revised Recommendation 6, OECD Doc. C/MIN(2000) available athttp://www.oecd.org/daf/noncorruption/instruments.htm [hereinafter "CIME Report"].

70 One OECD member, Australia, did not sign the OECD Convention at that time, but rather signed later, onDecember 7, 1998, because of certain domestic law requirements. See Convention on Combating Bribery of


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negotiations within the OECD,71 has been hailed by the U.S. government as a "bold and historicstep in the fight against international commercial bribery,"72 and as "a major milestone in U.S.efforts over more than two decades to have other major trading nations join us in criminalizingthe bribery of foreign public officials in international business transactions."73

B. The OECD Convention. The OECD Convention entered into force on February15, 1999.74 On July 27, 2000, the U.S. Senate gave its [advice] and consent to ratification of theOECD Convention, clearing the way for the U.S. to join its second international anticorruptiontreaty. The U.S. deposited its instrument of ratification with the Organization of AmericanStates ("OAS") on September 29, 2000. The OECD Convention entered into force as to theUnited States on October 29, 2000.

The OECD Convention is a consensus document that balances the competing interestsand concerns of more than thirty countries. As such, it fails to address some issues, such as thecoverage of foreign political parties and officials, that are part of the bribery problem. Moreover,the OECD Convention itself will not end international bribery; the parties must still passdomestic implementing legislation and establish effective enforcement procedures.Nevertheless, the OECD Convention is – by a very wide margin – the most significant stepforward in the battle against international corruption since enactment of the FCPA more thantwenty-five years ago.

Ratification of the OECD Convention by the U.S. required no changes to U.S. law. Inconnection with U.S. ratification of the OECD Convention in 1998, the FCPA was amended inseveral respects; no further amendments to the FCPA were deemed necessary. The mostcontroversial provision of the OECD Convention for the United States was its illicit enrichmentprovision; the U.S. ultimately decided to exercise an "opt out" right built into the OECDConvention with respect to that provision because of the constitutional conflict that would arisefrom implementing its presumption of guilt. This "opt out" is reflected in an understanding thatemphasizes that the U.S. uses other means to combat the illicit enrichment of public officials.

As of January 2001, 29 countries, including the U.S., had deposited their instruments ofacceptance for approval or ratification of the OECD Convention.75 Ministers of OECD member

Foreign Public Officials in International Business Transactions, Dec. 17, 1997, S. Treaty Doc. No. 105-43(1998), 37 I.L.M. 1 [hereinafter "Convention"]. See also S2375, 105th Congress (1998), Pub. L. No. 105-366.

71 See United States Dep't of State, Second Annual Report on Combating Bribery of Foreign Public Officials inInternational Business Transactions 1-2 (2000) available at http://www.state.gov/www.issues/economic/anti-bribery-index/htm1 [hereinafter "Annual Report"].

72 Press Statement, Office of the Spokesman, United States Dep't of State, OECD Anti-Bribery Convention, para 2(Nov. 21, 1997), available at http://secretary.state.gov/www/briefings/statements/971121.html.

73 Annual Report, supra note 70 at v.74 CIME Report, supra note 68, at 6.75 See Org. for Econ. Co-operation and Dev., Steps Taken and Planned Future Actions by Each Participating

Country to Ratify and Implement the Convention on Combating Bribery of Foreign Public Officials inInternational Business Transactions (2000). Per Article 15 of the Convention, the OECD Convention, once in


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states have urged that all signatories ratify the OECD Convention and implement it fully as soonas possible.76 The signatories include most of the major exporting countries in the world,77

whose companies account for the lion's share of international contracting.78

The OECD Convention requires that parties criminalize the bribery of foreign publicofficials for the purpose of obtaining or retaining business.79 Parties must establish jurisdictionover this offense on the basis of territoriality 80 and, in some cases, nationality.81 However, theOECD Convention does not directly address acts of bribery by foreign-incorporated subsidiariesof companies that are subject to the parties' national laws proscribing the bribery of foreignpublic officials.

Under the OECD Convention, each party is obligated to take necessary measures thatestablish that it is a criminal offense under its law for any person intentionally to offer, promiseor give any undue pecuniary or other advantage, whether directly or through intermediaries, to aforeign public official, for that official or for a third party, in order that the official act or refrainfrom acting in relation to the performance of official duties, in order to obtain or retain businessor other improper advantage in the conduct of international business.82

Parties are also required to take necessary measures to criminalize "complicity in,including incitement, aiding and abetting, or authorization of an act of bribery of a foreign publicofficial."83 "Foreign public official" is defined broadly as "any person holding a legislative,administrative or judicial office of a foreign country, whether appointed or elected; any personexercising a public function for a foreign country, including for a public agency or publicenterprises; and any official or agent of a public international organization."84

force, becomes effective for those acceding to it sixty days after the deposit of the appropriate instrument. SeeOECD Convention supra note 65 art. 15. The following countries have deposited their instruments ofacceptance, approval, or ratification of the Convention as of January 2001: Australia, Austria, Belgium, Brazil,Bulgaria, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Italy,Japan, Korea, Mexico, Norway, Netherlands, Poland, Slovak Republic, Spain, Sweden, Switzerland, Turkey,Portugal, United Kingdom and the United States.

76 See Org. for Econ. Co-operation and Dev., Shaping Globalization, para 30 Doc.PAC/COM/NEWS(2000)70(2000)(ministerial communique).

77 Org. for Econ. Co-operation and Dev., The OECD Guidelines for Multinational Enterprises: Review 2000 at 5,OECD Doc. DAFFEE/IME/WPG (2000).

78 Id.79 Convention, supra note 69, art. 1(1).80 Convention, supra note 69, art. 4(1).81 Convention, supra note 69, art. 4(2).82 Convention, supra note 69, art. 1(1).83 Convention, supra note 69, art. 1(2).84 Convention, supra note 69, art. 1(4)(a).


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The OECD Convention also requires that bribery of foreign public officials be punishableby "effective, proportionate and dissuasive criminal penalties," comparable to those that apply tothe bribery of a party's domestic public officials.85 The OECD Convention addresses the "supplyside" of the bribery equation in that it reaches only the conduct of the briber, and not the conductof the bribe recipient, or the "demand side".86

Article 4 of the OECD Convention, which pertains to jurisdiction, takes into account thefact that parties' legal systems may have different jurisdictional bases. The starting point isterritoriality: "Each Party shall take such measures as may be necessary to establish itsjurisdiction over the bribery of a foreign public official when the offense is committed in wholeor in part in its territory."87 The Commentaries to the Convention, adopted concurrently with thetext of the Convention, 88 provide that "[t]he territorial basis for jurisdiction should be interpretedbroadly so that an extensive physical connection to the bribery act is not required."89

The OECD Convention also provides in Article 12 for a process of "self and mutualevaluation", pursuant to which: (1) States Parties will report to the OECD on steps taken in theircountry to implement and enforce the OECD Convention and the OECD's 1997 RevisedRecommendation of the Council on Combating Bribery (which also urges promptimplementation of its Recommendation on Tax Deductibility of Bribes to Foreign PublicOfficials, adopted 11 April C(96) 27/FINAL)), and (2) other States Parties will assess the extentto which those States Parties have in fact implemented the OECD Convention and are enforcingit effectively. Thus, the process envisioned is a peer review process. The OECD Convention didnot detail how that process was to occur but left its elaboration to the Working Group.

By the end of 2001, the OECD Convention was in force for all thirty OECD MemberCountries except Ireland, plus five non-member countries – Argentina, Brazil, Bulgaria, Chile,and Slovenia (which acceded to the OECD Convention in 2001).90 During the year 2001, theOECD Convention entered into force for the following countries: Argentina, Chile, Italy,Luxembourg, the Netherlands, New Zealand, Portugal, and Slovenia. Implementing legislationfor the OECD Convention entered into force for Luxembourg, the Netherlands, New Zealand,Poland, Portugal, and Ireland.

The monitoring procedures for the OECD Convention developed by the OECDConvention Working Group consist of two phases, for self-evaluation and mutual evaluation, 85 Convention, supra note 69, art. 1(3).86 Convention, supra note 69, art. 1(1).87 Convention, supra note 69, art. 4(1).88 Commentaries on the Convention on Combating Bribery of Foreign Public Officials in International Business

Transactions, Dec. 17, 1997, para. 25 S. Treaty Doc. No. 105-43 (1998), 37 I.L.M. 8.89 Id. at 83.90 See OECD Convention on Combating Bribery of Foreign Public Officials in International Business

Transactions ("OECD Convention"), available at http://oecd.org/oecd/pages/home/displayedgeneral/0,3380,EN-document-31-nodirectorate-no-6-7198-31,FF.html (last visited June 25, 2002).


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respectively. The objective of Phase One is to evaluate: (1) whether implementing legislationmeets the OECD Convention's standards; and (2) initial actions to implement the RevisedRecommendation on Combating Bribery in International Business Transactions, a call foreffective measures to deter, prevent, and combat bribery of foreign public officials issued by theOECD Council in 1997. The purpose of Phase Two is to study the structures each country putsin place to enforce the laws and rules implementing the OECD Convention and to assess theirapplication in practice, with the goal of improving the parties' capacities to fight bribery.91

Both the Phase One and Phase Two Reviews are conducted by two States Partiesdesignated as peer reviewers and personnel from the OECD Secretariat. In both Phases, theOECD reviewers submit detailed written questions to appropriate authorities of the countryunder review and receive written responses. The Phase 2 process also includes a site visit to thecountry under review. The reviewers prepare a draft report, which is discussed in the OECDWorking Group on Bribery. The final report, once it has been transmitted to the OECD Council,is a public document that can be found on the OECD's website.92

C. Summary of the Impact of the 1998 Amendments to the FCPA. While the FCPAwas in most respects consistent with the terms of the OECD Convention, full implementation ofthe OECD Convention required several changes to the FCPA, and the Clinton Administrationused the occasion to expand the penalties for foreign nationals under the FCPA. The 1998 FCPAAmendments made five changes to the FCPA: (1) broadened the jurisdictional reach of theFCPA over non-U.S. persons acting within the United States; (2) broadened the jurisdictionalreach over U.S. persons outside the United States; (3) expanded the FCPA to cover paymentsmade to secure any improper advantage, incorporating a broader definition of business activitiescovered by the FCPA; (4) expanded the definition of foreign officials; and (5) eliminated theexemption of certain non-U.S. nationals from criminal penalties. In keeping with the terms ofthe Senate's advice and consent, the 1998 FCPA Amendments also provide for monitoring of theOECD Convention's ratification and implementation process.

In general, rather than asserting the broadest possible U.S. jurisdiction, the 1998 FCPAAmendments adopt a "mirror-image" approach. This approach is designed to assert U.S.jurisdiction to the same extent that other OECD signatory states will in their own implementinglegislation. Because of legal principles common to most European countries, their domestic lawsgenerally apply to their nationals acting anywhere in the world, but not to foreign subsidiaries oftheir domestic corporations. Accordingly, the FCPA 1998 Amendments refrain from unilaterallyextending the FCPA's scope to include foreign subsidiaries of U.S. companies. Rather, this issueis left for future multilateral negotiations.

Perhaps the two changes to the FCPA of greatest potential importance to U.S. companiesare the formal extension of FCPA coverage to U.S. persons outside the U.S. when there is nonexus with U.S. commerce, and the addition of the term any improper advantage to the FCPA. 91 See OECD, Bribery Convention: Procedure of Self- and Mutual Evaluation, Phase 2, available at

http://www.oecd.org/pdf/M00007000/M0007223.pdf.92 See http://www.oecd.org (click on "Corruption").


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The term any improper advantage is taken directly from the OECD Convention text, but is anundefined term as to which there is no agreed upon interpretation. The other changes broughtabout by the FCPA 1998 Amendments expand the coverage over, and increase the penaltiesapplicable to, foreign nationals present in the U.S.

D. Detailed Discussion of Amendments to the FCPA Brought About by 1998Amendments. As alluded to earlier, the FCPA 1998 Amendments, which implement U.S.obligations under the OECD Convention, amends the FCPA in the following respects:

1) Broader Jurisdiction. The FCPA's original jurisdiction, although broadlyconstrued by enforcement authorities, was to some degree limited in itsreach. The FCPA's prohibitions only applied to issuers of U.S. securitiesand to domestic concerns (essentially "U.S. persons" and entities).Violations occurred only if the prohibited activity involved an instrumentof "interstate commerce." Thus, the FCPA's jurisdiction was a mixture ofnationality and territoriality, with territoriality serving as a limitation in allcases.

The 1998 FCPA Amendments broaden both the territorial and nationality-basedjurisdictional reach of the FCPA. First, they provide that "any person" - including a foreignperson or firm - who commits a corrupt act while in the U.S. will be covered by the FCPA.Second, the 1998 FCPA Amendments expand the reach of the FCPA under an alternativeprovision to cover all actions of U.S. persons and businesses, even if no territorial link existswith the U.S. In fact, the territorial nexus requirement was interpreted so broadly by U.S. law -in one case government prosecutors relied on e-mails sent by employees back to the U.S. - thatthe amendment of the jurisdictional provisions will not represent a major change for U.S.companies. The assertion of territorial jurisdiction over all foreign persons will, however,represent a major change for foreign companies.

2) Beyond "Business" - Securing "Any Improper Advantage". The FCPAoriginally covered payments made to a foreign official in three situations:(a) to influence an act or decision of the official in his official capacity;(b) to induce the official to violate his lawful duty; or (c) to induce theofficial to use his influence to affect a government decision. The 1998FCPA Amendments expand this "quid pro quo" requirement by adding afourth situation: payments to secure "any improper advantage." At thesame time, the FCPA's requirement that the payments be made to obtain,retain or direct business has been kept unchanged. The placement of theimproper advantage requirement is analytically confusing, since its role inthe OECD Convention is to expand the "business" element, rather than thequid pro quo requirement. U.S. enforcement authorities have interpretedthe "business" element broadly enough to include activities beyond theprocurement and retention of business deals, such as payments for specialtax dispensation and the obtaining of payments owed under contractsalready performed. The improper advantage language, notwithstanding


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its apparent misplacement in the FCPA, provides a more concrete basis forthat enforcement posture and may allow for further expansion into otheractivities.

3) Payments to International Officials. The OECD Convention specificallyincludes officials of public international organizations, such as the WorldBank, the International Monetary Fund, or the World Trade Organization,within the definition of public officials to whom corrupt payments areprohibited. The 1998 Amendments modify the FCPA's original definitionof "foreign officials" to include such persons within the scope of itsprohibitions, as well.

4) Non-U.S. Persons Now Fully Covered by Criminal Penalties. Prior to thepassage of the 1998 FCPA Amendments, the FCPA covered foreignnationals employed by or acting as agents of U.S. companies only if theywere "subject to the jurisdiction of the United States." This language,although never tested by the courts, was interpreted as subjecting non-U.S.employees or agents to criminal penalties only if they were U.S. residents.(Non-U.S. officers, directors, and shareholders have always been subjectto criminal liability under a separate provision.) Whether or not this wasthe correct reading, the 1998 FCPA Amendments eliminate thisrestriction, thus subjecting all employees or agents of U.S. businesses toboth civil and criminal penalties.

5) Application to U.S. Persons Abroad. The FCPA now applies to U.S.nationals and U.S. companies for illicit conduct that takes place whollyoutside the U.S., without any use of an "instrumentality of interstatecommerce." Moreover, principles of vicarious liability will apply to U.S.companies for acts taken on their behalf by their officers, directors,employees, agents or stockholders outside the U.S., regardless of thenationality of that person.

E. Implications of 1998 FCPA Amendments for U.S. Companies. The 1998 FCPAAmendments will have some implications for U.S. companies, although not dramatic ones. Forexample, the 1998 FCPA Amendments will require most U.S. companies to modify their FCPAcompliance programs to reflect the expanded reach of the FCPA. The necessary modificationsmay be less significant than may appear at first blush, however. For many companies, theexpansion of the FCPA's jurisdictional reach beyond the territorial nexus requirement will likelynot require any change in behavior, because few U.S. companies have based their compliancestrategies on avoiding a U.S. nexus. However, the expanded definition of "foreign official" andthe concept of improper advantage must be factored into written programs and the education andtraining of company personnel.

Of far greater potential importance, of course, is the promise of laws comparable to theFCPA in most of the leading industrial countries of the world. The completeness of


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implementation and the commitment to enforcement can be expected to differ significantlyamong signatory countries. Nonetheless, the OECD Convention will give U.S. companies a newweapon in dealing with third parties from signatory states. Affected third parties will include notjust competitor companies from countries that have ratified the OECD Convention, but alsoprospective agents, consultants, or partners from those countries. In dealing with such thirdparties, the OECD Convention will be a rational basis for urging common compliance standardsand for rejecting requests for illicit payments.

In short, after a 21-year period in which a unilateral U.S. law was the only meaningfulprohibition against making corrupt payments abroad, the OECD Convention should help levelthe proverbial playing field. To the extent that other countries implement and enforce the OECDConvention's requirements, major companies from other countries will face a risk of criminalliability for transnational bribery.

The other new dynamic will be international monitoring of compliance with the OECDConvention. Although vigilant monitoring may become an important factor in fulfilling thepromise of the OECD Convention, at this point it remains simply a stated, but untested,objective. And, as with all of the foregoing, monitoring is contingent on entry into force of theOECD Convention, which in turn depends on ratification by the requisite number of signatories.

F. Future Developments Under the OECD Convention. The OECD Working Groupon Bribery continues to meet, and interested parties continue to identify and discuss objectivesfor future negotiations. Perhaps the most immediate priority for Transparency International, thenon-governmental organization that has been a pivotal moving force behind the OECDConvention, is the monitoring process. Beyond monitoring, money laundering and offshoremoney centers are subjects the Working Group has identified as important to effectiveimplementation of the OECD Convention. There has also been discussion of seeking to amendthe OECD Convention to apply to foreign subsidiaries of companies in signatory states and toencompass corrupt payments to political candidates and political parties, as well as to publicofficials. Outside the U.S., there is considerable interest in the former, almost none in the latter.

G. United Nations Convention Against Corruption. In December 2003, 97 countriessigned the new United Nations ("UN") Convention Against Corruption ("UN Convention"). Thisis the latest in a series of moves to force the international community to take action againstbribery and other forms of corruption. The new UN Anticorruption Convention will come intoeffect upon ratification by 30 of its signatories.

Like the OECD Convention, the new UN Convention is not self-executing. Each party tothe UN Convention is required to adopt domestic legislation implementing the UN Convention'srequirements. Unlike the OECD Convention, however, the UN Convention goes far beyondbribery of public officials. It covers bribery in the private sector as well and includes suchadditional topics as embezzlement, money laundering, corporate record-keeping, obstruction ofjustice, extradition and international law enforcement cooperation. Implementation is to bemonitored by a UN watchdog committee.


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Among the more interesting features of the new UN Convention is the wording used todescribe what constitutes bribery of a government official. The essence of the offense under theUN Convention is "[t]he promise, offering or giving . . . of an undue advantage . . . in order thatthe UN official act or refrain from acting in the exercise of his or her official duties." Thisformulation is quite different from the formulation that appears in the FCPA where the essenceof the crime is promising or giving something of value in order to obtain or retain business.

As alluded to previously above, shortly after the United States ratified the OECDConvention in 1998, the FCPA was amended to bring it into conformity with the OECDConvention. The 1998 amendments, among other things, added the concept of a seeking anundue advantage in order to obtain or retain business as a basis for prosecution. Now that theUN Convention has gone one step further by eliminating the business goal as an element of thecrime, it will be interesting to see if the Bush Administration proposes legislation to eliminatethat requirement from the FCPA as well. It will also be interesting to see if the BushAdministration proposes to eliminate the FCPA's exceptions for payments to secure routinegovernmental action or reasonable business promotional expenditures because neither of thoseexceptions appears in the UN Convention.

VI.Prudent Selection of Foreign Consultants

A company's use of foreign consultants or other service providers creates opportunity forFCPA violations. Areas of particular vulnerability include assistance in obtaining a contract withthe government or a government owned corporation, acquiring government-owned real estate,and securing favorable legislation or regulations.

Two basic precautions can substantially reduce the possibility of violating the FCPA as aresult of payments to or action by a consultant. First, obtain as much information as possibleabout the consultant. Second, require the consultant to execute a written agreement withadequate representations and warranties, and a full discussion of his duties and responsibilities.

The country desks at the U.S. State and Commerce Department are useful for conductingbackground checks on consultants, as are the commercial attaché at the local U.S. Embassy,business and banking references, local law firms, U.S. branches of law and accounting firmsbased in the country, international investigative agencies, newspapers and other publicdisclosures, trade associations, Chambers of Commerce, and officers at local offices of U.S.corporations. Further, the consultant should be asked to complete and sign a questionnaire onbehalf of himself, his company, and all principal associates (collectively, the consultant).

The questionnaire should request complete information about the consultant's company(including copies of any annual reports and audited financial statements); references (includingbanking and legal); business plan describing the consultant's activities and resourcescommitment; a statement regarding other employment, business interests, or other businesses inwhich the consultant is engaged; a description of the consultant's experience in a company'sbusiness or in providing similar services; and a description of the consultant's language skills and


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other credentials. In addition, there should be a series of questions specifically addressing areascovered by the FCPA (for example, any official position with or duties for the foreigngovernment; any office in any political party; any candidacy for political office; any member ofthe consultant's family who is an official of the foreign government or political party or acandidate for political office; assistance in the project from third parties; and previousemployment by the foreign government). This information should be carefully reviewed andretained for at least five years.

The consultant should execute a written agreement with the company he is being hired bythat includes representations and warranties aimed at ensuring FCPA compliance. One approachis to incorporate the consultant's signed questionnaire into the representations and warrantiessection of the agreement with the consultant. In addition, the consultant should state that he isfamiliar with the FCPA; has read it and understands it; has not and will not violate it; knows andunderstands the company's policy on FCPA compliance; and willfully supports the company'sactivities to prevent violations of the FCPA.

The agreement should also contain representations that the consultant has conducted andwill conduct his affairs regarding the venture in accordance with all applicable laws; that theconsultant has not made, authorized, or offered any payment or the giving of anything of value(directly or indirectly) to any foreign official, political party, or officer thereof, candidate forpolitical office, or to any third party knowing the payment will be made to someone in the abovelist to influence that entity to use his or her authority to sway any government act or decision toobtain or retain business for the company; and that all financial records and billings regardingthe venture for which the consultant is responsible will accurately and fairly reflect the facts,activities, and transactions relating thereto.

The agreement should prohibit assignment to third parties of fees paid to the consultant;state that all payments will be made by check directly to the consultant; and obligate theconsultant to indemnify the company for damages and fines incurred as a result of theconsultant's violations of the FCPA (including the recovery of previous payments).Additionally, the company should be allowed to terminate the agreement immediately if FCPAviolations occur. Even if the consultant speaks and writes English well, the agreement andbackground questionnaire should be translated into the consultant's primary language (along withEnglish versions) to be executed.

When U.S. companies join with foreign companies to pursue various projects, theyshould conduct the same due diligence in investigating their foreign partners as they do withforeign consultants. This is especially critical when the foreign partner will be working directlywith local authorities on behalf of the venture and when the foreign partner has among itsprincipals government or party officials or political candidates.


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VII.Enforcement of FCPA

A. DOJ Opinion Procedure. The DOJ has a formal opinion procedure93 pursuant towhich companies may seek a statement from the DOJ of its present enforcement intentions withrespect to a proposed transaction. As long as the facts which form the basis of the opinion areaccurate and do not materially change, the issuance of a favorable opinion, in effect, immunizesthe recipient from prosecution. These opinions are not made public. These opinions do not haveany value as binding precedent and are strictly limited to the facts of the particular proposedtransaction, and the DOJ rarely explains its reasoning.

In practice, the opinion procedure has been infrequently used since the enactment of theFCPA. Since the opinion procedure was started in 1980, the DOJ has averaged fewer than twoof these opinions per year. As one might expect, the DOJ has been somewhat conservative inproviding "no action" assurances, although recent opinions have shown a readiness to adopt apractical approach in reviewing increasingly complex international transactions, even suggestingacceptable alternatives. In the absence of a significant body of case law or of any guidelines,counsel with a specialist FCPA practice have regularly looked to the DOJ opinions for guidance.

As a practical matter, companies evaluate benefits, costs and risks when filing an opinionrequest. First, if the transaction is not cleared by DOJ, the requestor must, in all likelihood,decline to go forward with the proposed course of conduct: proceeding under thesecircumstances could be tantamount to admitting that the party had the requisite knowledge that acorrupt payment would be made. Hence a company is unlikely to request an opinion if it is notready to refrain from the envisaged action in case of a "negative" indication. Second, DOJrulings are technically not binding on other federal agencies (although the SEC has publiclystated that it will refrain from prosecuting issuers that have obtained a positive DOJ opinion, i.e.an indication that DOJ would not take enforcement action with respect to the matter raised in theopinion).94 Third, in today's fast-paced commercial world, the thirty days within which the DOJmust render an opinion may be, in some circumstances, too long to make this a practicalalternative; in fact, the opinion procedure can take longer than thirty days as the DOJ mayrequest additional information after the initial request is filed. The DOJ, however, has shownitself somewhat sensitive to the time constraints of a commercial transaction and has acceleratedits review when appropriate, on one occasion taking only five days. Fourth, although thematerials submitted are exempted from disclosure under the Freedom of Information Act("FOIA"), confidentiality cannot be assured because the DOJ retains the right to release asummary indicating, in general terms, the nature of the requestor's business and the foreigncountry in which the proposed conduct is to take place, and the general nature and circumstancesof the proposed conduct. Fifth, the facts submitted, if acted upon, may raise the possibility of a 93 See Foreign Corrupt Practices Act Opinion Procedure, 65 Fed. Reg. 7675 (codified at 28 C.F.R. pt. 80).94 A 1980 interpretative release (No. 34-17099, Aug. 28, 1980) stated that the SEC would take no enforcement

action with respect to which an issuer had obtained a Release Letter from the DOJ prior to May 31, 1981. Asubsequent interpretative release (No. 34-18255, Nov. 12, 1981) extended this policy "until further notice."This statement of policy has not been revoked since 1981.


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DOJ investigation. Prosecution is still possible even after the issuance of a positive opinion, asobtaining clearance only establishes a rebuttable presumption that a requestor's conduct is incompliance with those provisions of the FCPA. The risk is greater if the facts change, and thetransaction goes ahead in a form which does not correspond exactly with the description suppliedto the DOJ and on which the opinion was based.

Few of the proposed transactions that have led to the DOJ giving an opinion that it doesnot intend to take enforcement action have been obvious borderline cases. Obviously, as apractical matter, no company will approach the DOJ to seek a review of a transaction that mightclearly involve an illegal payment. Officials in the Fraud Section of DOJ are prepared to discussissues and alternatives informally with counsel and company representatives in situations thatinvolve gray areas, in order to provide a higher degree of comfort to companies facing questionsunder the FCPA. This factor, along with the desire of a growing number of companies to seekguidance in structuring international mergers, acquisitions and joint ventures in such a way as tominimize the risk of inheriting liability, may well encourage the broader use of the opinionprocess in the future.

B. Fines and Penalties. Enforcement responsibilities of the FCPA are dividedbetween the DOJ and the SEC. The DOJ is responsible for all criminal enforcement of theFCPA provisions and for civil enforcement of the anti-bribery provisions with respect todomestic concerns and foreign companies and nationals. The SEC is responsible for civilenforcement of both the anti-bribery and accounting provisions with respect to issuers.Generally speaking, it is the SEC that enforces the record-keeping and accounting provisions ofthe FCPA, while the DOJ enforces the anti-bribery part. In practice, the SEC enforces the lawsagainst entities under its jurisdiction, including those requiring companies to file appropriateproxy statements and make appropriate disclosures. If, in the course of that enforcement, theSEC considers that the company has done something that amounts to an FCPA violation, it willadd that count as an additional ground upon which to prosecute the company. The Fraud Sectionof the DOJ's Criminal Division has had, since 1994, sole control over the criminal enforcementof the FCPA. In spite of the fact that over the history of the FCPA there have been relatively fewprosecutions, there has been a continuing serious commitment and dedication on the part of theDOJ to detect, investigate and prosecute bribery cases under the FCPA. Resources have beenconsistently assigned to deal with allegations of FCPA violations. Prosecutorial expertise hasbeen developed and applied.

Despite an abundance of articles and commentaries that have been written on the FCPA,there is only a limited amount of authoritative or official guidance available on compliance withthe FCPA. There are few litigated cases - civil or criminal -- which test the outer limits of theFCPA or deal with the difficult questions raised by the business purpose test, payments to thirdparty beneficiaries, the exercise of nationality jurisdiction, the scope of the definition of a foreignofficial, and other areas of uncertainty. Much of the authority or guidance regarding the FCPAcomes from speeches from DOJ and SEC officials, DOJ opinions, DOJ and SEC complaints,settlements that have been filed, and informal discussions of issues between companies' counseland the DOJ or the SEC. Some general publications are also available.


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There is also an anti-corruption brochure issued by the Department of State and abrochure offering guidance on the FCPA published by the DOJ and the Department ofCommerce, as well as annual reports to Congress made by the Departments of Commerce andState, that also include a summary and analysis of laws, by country, that have been passed toimplement the OECD Convention. These publications are produced in consultation and co-operation with the other agencies involved. There is also information on the tax deductibility ofbribes. Attorneys and trade experts of the U.S. Departments of Justice, State and Commerce, aswell as websites maintained by each of these Departments, are also available to assist U.S.companies under the FCPA. The status of these various sources of information is often not clear.

Although the number of prosecutions and civil enforcement actions for FCPA violationshas not been great, the enforcement history of the FCPA demonstrates a willingness on the partof the DOJ and SEC to prosecute large and medium-sized companies, and often high-levelofficers of those companies, alleged to have been involved in violations of the FCPA throughoutthe world. Since the inception of the FCPA, enforcement cases have arisen out of activities inover twenty different countries such as Argentina, Brazil, Canada, Colombia, the Cook Islands,Costa Rica, the Dominican Republic, Egypt, Germany, Haiti, Iraq, Israel, Italy, Jamaica, Mexico,Niger, Nigeria, Panama, Russia, Saudi Arabia, Trinidad and Tobago, and Venezuela.

Most of the criminal cases brought under the FCPA have involved direct and overtlycorrupt payments to foreign government officials. The DOJ has prosecuted a variety ofschemes, companies and individuals under the FCPA. Cases have involved industries such asthe aircraft industry, the automotive industry, the construction industry, the energy industry, andthe food and agriculture industry. For example, in one early group of cases, the DOJ prosecuteda company and its high-level officers for bribing the officials of Pemex, the national oil companyof Mexico, in order to gain several multimillion dollar contracts with Pemex. In another case,the DOJ prosecuted employees of a bus company for bribing officials of a provincial governmentin Canada to secure a contract to provide buses to the transit authority. Major companies such asGeneral Electric, Goodyear, IBM, Baker Hughes, Halliburton and Lockheed Corporation andtheir high-level employees have been the subject of criminal FCPA prosecution for variousbribery schemes.

Since 1988, the FCPA has permitted both criminal prosecutions and civil actions againstoffenders. Statutory criminal penalties for individuals include fines up to $100,000 per violationor imprisonment for up to five years, or both. As a result of the 1988 Amendments to the FCPA,individual officers, directors and employees of companies may be prosecuted even if thecompany for which they work is not liable.95 Fines assessed against individuals may not bereimbursed by the company.96 Business entities may be fined up to $2 million per violation.97

Because the alternative fine provisions of the Sentencing Reform Act apply,98 these penalties can 95 See generally H.R. CONF. REP. NO. 100-576.96 15 U.S.C. § 78dd-2(g)(3).97 15 U.S.C. § 78dd-2(g)(l).98 See 18 U.S.C. § 3571 (1994).


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be increased significantly.99 In a prosecution involving the Lockheed Corporation, for example,the alternative fine provisions led to a combined civil and criminal fine of $24.8 million.100 TheFCPA also allows for a civil fine of up to $10,000 against any officer, director, employee oragent of a firm who willfully violates the anti-bribery provisions of the FCPA.101 In addition tothe foregoing statutory penalties, the collateral consequences of a mere indictment can includeloss of export privileges, suspension and debarment from U.S. government contracting, and lossof benefits under government programs, such as financing and insurance.

Over the years, there have been advances in the sophistication of the mechanisms used inbribery itself as well as in the techniques of enforcement. Generally, the pattern has changedfrom the classic suitcase filled with cash to more subtle scenarios involving intermediaries,complex transactions with government entities, and misstatements of business or promotionalexpenses. This has multiplied the suspicious indicators or so-called 'red flags' companies need tolook for - especially in the joint venture context and in foreign mergers and acquisitions - and hasled to the need for an increasingly broad array of safeguards to be deployed.

Allegations of FCPA violations come to the attention of the U.S. authorities by a numberof routes. No central mechanism exists for recording, tracking or compiling statistics about theinitial complaints or who makes them. Sources of allegations include competitors, formeremployees, companies that have an internal audit process and have discovered suspiciouspayments, subcontractors, joint venture partners, agents, foreign government officials or partyrepresentatives, overseas representatives of the U.S. including FBI agents posted overseas, andnewspapers and journalists. Allegations are made in person, by telephone, facsimiletransmission, mail, or through the bribery hotlines of the DOJ and Commerce Department(although the Commerce hotline is primarily intended as a means for U.S. companies to reportallegations of bribery by foreign companies), or the SEC Complaint Center. Each federalagency's Inspector General also maintains confidential hotlines to report suspected fraud andabuse.

Anonymous complaints have been an increasing source of allegations of FCPA violationsin recent years. Where the identity of the complainant is known, enforcement authorities cannotguarantee that it will not be disclosed during the course of an investigation or prosecution.Whistleblowers have brought their allegations directly to the DOJ Fraud Section, to the FBI, tothe SEC or to other agencies.

Since the enactment of the FCPA, the DOJ has brought a relative small number ofenforcement actions and these typically allege violations of § 78dd-1 and § 78dd-2 of the FCPA(i.e. corrupt payments by an issuer or domestic concern): approximately 32 criminalprosecutions and seven civil enforcement actions have been brought by the DOJ under the anti-

99 See 1988 U.S.C.C.A.N. 1957 (1988) (indicating that the FCPA penalty provisions do not override the

alternative fine provisions).100 United States v. Lockheed Corp., 3 FOREIGN CORRUPT PRAC. ACT REP. (Bus. Laws, Inc.) 699.175.101 15 U.S.C. §§ 78dd-2(g); 78dd.


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bribery provisions of the FCPA. Only in a few cases has the DOJ brought prosecutions forviolations of the accounting and record-keeping provisions, aside from its role in prosecutingviolations of the bribery provisions of the FCPA. Since only some thirty separate alleged briberyschemes have been prosecuted during 30 years under the FCPA, it is difficult to draw broadconclusions about enforcement. There are no reliable statistics or other information availablewhich would reveal the number of allegations received, the number of investigationscommenced, terminated or abandoned, or that might shed light on the reasons which led todecisions not to proceed.

Between 1977 and 2001, twenty-one companies and twenty-six individuals wereconvicted for criminal violations of the FCPA. Corporate fines have ranged from US$ 1,500 toUS$ 3.5 million (the agreement by Lockheed in January 1995 to pay a record fine of US$21.8 million being the only instance in which this range was exceeded). Fines imposed onindividuals have ranged from US$ 2,500 to US$ 309,000. Before the 1994 sentencing of aLockheed executive and of a General Electric international sales manager to, respectively, 18and 84 months of imprisonment, no director, officer or employee of a company had gone to jailfor an FCPA violation. Since then, two individuals have been sentenced to jail, in U.S. vs.David H. Mead and Frerik Pluitners (four months of imprisonment) and in U.S. vs. HerbertTannebaum (one year of imprisonment), both in 1998. Fines levied under the FCPA will mostprobably increase in the future and it is likely that more directors and officers will receivemandatory prison terms for their involvement in bribery.

The FCPA's anti-bribery provisions contain no period of limitations for criminal actions.As a result, the general five-year federal limitation period provided by 18 U.S.C. para. 3282applies for the filing of an indictment. The period can be extended for up to three years, upon arequest by a prosecutor and upon a finding by a court that additional time is needed to gatherevidence located abroad. However, the period is not suspended by any act of investigation priorto the indictment.

For businesses, adverse publicity, investigation, indictment and prosecution may be amore important deterrent than fines or imprisonment. News of a FCPA investigation can affectthe ability of a company to do business and can prove embarrassing or damaging to relationshipsin the country where the alleged bribery has occurred. From a public relations standpoint, anallegation of bribery can be disastrous for a company once it emerges in the news media that anFCPA investigation is under way. The potential consequences of any criminal indictment arewell illustrated by the ongoing action against Arthur Andersen LLP arising out of the criminalinvestigation into the affairs of Enron.

Beyond the public relations concerns, the costs in terms of legal fees and managementtime of having to defend a FCPA Enforcement action are themselves far from negligible. Worsestill, in the view of large private companies and their counsel, is the threat of suspension ofexport privileges, as happened to the Lockheed Corporation in 1994, or the withdrawal ofeligibility to bid for government contracts or apply for government programs. A mereindictment for an FCPA violation is grounds for suspension, as happened to the HarrisCorporation which was tried – and acquitted – on FCPA charges in 1991. Once an agency bars


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or suspends a company from federal non-procurement or procurement activities, other agenciesin turn are required by the Code of Federal Regulations under its Title 48: "Federal AcquisitionRegulations System" to exclude the company. Furthermore, the U.S. will not provide advocacyassistance unless the company certifies that it and its affiliates have not engaged in bribery offoreign public officials in connection with the matter, and maintain a policy prohibiting suchbribery. Corporate violators of the FCPA may also be excluded from participating in trademissions.

Conduct that violates the bribery provisions of the FCPA may also give rise to a privatecause of action for treble damages under the Racketeer Influenced and Corrupt OrganizationsAct (RICO),102 or to actions under other federal or state laws. For example, an action might bebrought under RICO by a competitor who alleges that the bribery caused the defendant to win aforeign contract. In W. S. Kirkpatrick v. Environmental Tectonics,103 the U.S. Supreme Courtheld that the act of state doctrine does not bar a suit alleging that a bribe caused the defendant towin a foreign contract. Violating the FCPA may also invite costly lawsuits. For example, afterthe DOJ had prosecuted a company for bribing officials of Pemex, the national oil company ofMexico, the Mexican company itself filed a major civil action against some eighteen knowndefendants "and other unknown" conspirators seeking more than US$45 million in directdamages under the Sherman Act, the Robinson-Patman Act, RICO, and further counts ofcommercial bribery and fraud.

Taken together, the potential collateral consequences operate as a strong disincentive tohaving the corporation indicted, let alone contesting the case to trial. There are many compellingreasons for companies to settle with the DOJ and the SEC, and this may explain the highpercentage of cases which end in plea agreements. Given the commercial impact of an allegationof an FCPA violation, companies do not have much appetite to take on the risks of going to trial.

VIII.Implementing an Effective FCPA Compliance Program

An important effect of the FCPA is that it encourages the development of corporate legalcompliance programs ("compliance programs"). Compliance programs are probably the singlemost important measure contributing to prevention and deterrence. A recent practice has beenthe frequent imposition of a compliance program on the defendant corporation as a condition of aplea agreement under the FCPA. Beginning in the Metcalf & Eddy matter, the government hasrequired annual certifications directed to the DOJ, and has also required the company itself toconduct a periodic review of its compliance program to ensure that it took into account anychanges in the company's organization and lines of business. In addition, in a case involving aviolation of the FCPA, the existence of an effective corporate compliance program is, accordingto the sentencing guidelines, a mitigating factor.

102 18 U.S.C. §§ 1962-1968 (1998).103 110 S. Ct. 701 (1990).


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The main features of a successful FCPA compliance program are strong commitmentfrom senior management in creating and communicating a 'compliance culture', regular andthorough training, and consistent enforcement. The components of a FCPA compliance programmight include internal controls coupled with review by an internal Audit Committee,implementation of a policy prohibiting discretionary payments, training and familiarization ofemployees with the main provisions of the FCPA, a requirement that all employees regularlysign an undertaking to be bound by the corporate conduct policy, and the systematic screening('due diligence') of the technical capability, background, connections, reputation and financialstability of any potential foreign business partner in order to reduce the likelihood of bribery byan agent for which the company would be liable. Among larger U.S. corporations it is commonfor the FCPA compliance program to form part of an overall corporate compliance policy whichalso addresses insider dealing, antitrust and export regulations.

Compliance programs are by now well-developed and well-understood among largepublic companies. The indirect or collateral damage that would be inflicted on such companiesby an indictment for violation of the FCPA of itself operates as a powerful incentive to enforcecompliance throughout the entire organization. Many larger companies insist on a single world-wide policy which they apply equally to their foreign subsidiaries and their U.S. operations.

U.S. companies doing business in foreign countries should be proactive in their FCPAcompliance, especially in light of the impact of the U.S. Federal Sentencing Guidelines.Numerous steps should be taken, including the following:

• The company's Code of Business Conduct and Compliance Manual shouldstate explicitly that it is the company's intent to comply with all laws,including the FCPA, in conducting business.

• A separate policy statement on FCPA compliance should be adopted anddistributed to all employees or, at the very least, to those who have anypossible connection with foreign business or contact with foreign officials.

• A team should be created or a person designated to implement the FCPAcompliance program.

• Regular briefings and interactive training sessions should be given to theboard of directors, senior management, and all employees who have anypossible connection with foreign business or contact with foreign officialswith regard to "Red Flags". In addition, each employee in this latter groupshould be required to sign an affidavit annually that he or she has noinformation regarding violations of the FCPA. A brief memorandumexplaining the key provisions of the FCPA should be distributed with theaffidavit.

• Internal auditors, the board of directors' Audit Committee, and thecompany's outside auditors should be informed on an ongoing basis about


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the FCPA, its requirements, the company's foreign activities, thecompany's intent and efforts to comply with the FCPA, and any suspectedviolations of the FCPA.

• Effective reporting and disciplinary mechanisms should be established.

• Effective procedures should be developed for screening foreignconsultants and all business partners.

• All of the company's books and records should be maintained so that theyalways accurately and fairly reflect the company's transactions anddisposition of assets.

• FCPA provisions should be drafted for inclusions in agreements withconsultants and joint venture partners.

IX.Summary of Some Recent FCPA Enforcement Actions and Cases

A. Settlement of Suit Against Baker Hughes by Alan Ferguson.

On or about October 7, 2003, Baker Hughes settled a lawsuit brought against it by aformer employee who said he was fired because he refused to bribe a Nigerian official to win acontract in 1999. Ferguson, a British national, was regional operations manager of BakerHughes' oil and gas drilling operations in Nigeria. He sued Baker Hughes in a state court inHouston in March of 2002, contending he lost his job five months after refusing to give theNigerian a share of the company's revenues from a job it was bidding on. Within days of thelawsuit, the SEC and the DOJ launched a formal investigation of Baker Hughes' businessactivities in Nigeria to determine if there had been any violations of the FCPA. In August 2003,the investigation was expanded to include Baker Hughes activities in Angola and Kazakhstan.

Baker Hughes has stated that it had begun its own investigation into its Nigerianoperations prior to the allegations by its former employee and basically completed theinvestigation during the first quarter of 2003. Baker Hughes also launched its own investigationof its Angola and Kazakhstan operations and is cooperating fully with the SEC. Baker Hughes'completed internal investigation identified apparent deficiencies with respect to certain of itsoperations in Nigeria in its books and records and internal controls, and potential liabilities togovernmental authorities in Nigeria. The potential liabilities are not believed to be large enoughto have a material effect on Baker Hughes' financial condition.

B. ExxonMobil and ChevronTexaco Subpoenaed In Connection With FCPAKazakhstan Bribery Case.

The central Asian republic of Kazakhstan is an increasingly important source of oil andgas production for U.S. energy companies. In September 2003, ChevronTexaco received a


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subpoena from the DOJ, which is investigating allegations of bribery and violations of the FCPAin Kazakhstan's oil industry. ChevronTexaco is complying with the subpoena.

On June 12, 2003, a former senior Mobil Oil Corp. executive pleaded guilty to evadingtaxes on more than $7 million he received for negotiating oil deals, including pacts betweenKazakhastan officials and U.S. executives. J. Bryan Williams, 63, entered the plea in U.S.District Court in Manhattan to charges of conspiracy and tax evasion, agreeing to serve at leastthree years and two months in prison with a maximum of four years and nine months in prison.Judge Harold Baer set sentencing for September 18, when Williams will also face potential finesand restitution of millions of dollars. During the plea, Williams said he did not disclosepayments he received to Mobil Oil. A prosecutor two months ago said Mobil Oil was a subjectof the government's ongoing investigation in the case.

During the plea, Williams said he opened two bank accounts in Switzerland in 1993 inthe name of a British Virgin Islands corporation. He said he used the accounts between 1993 and2000 to hide more than $7 million from the Internal Revenue Service. He said money included a$2 million payment he had received from people, organizations or governments he did businesswith on behalf of Mobil Oil. During the plea, Williams did not mention James H. Giffen, a NewYork businessman accused of making more than $78 million in unlawful payments to two seniorKazakh officials.

James Giffen, a U.S. investment banker, was indicted in March 2003 on bribery charges.He is accused of transferring $78 million in payments in 1996 from Mobil Oil Corporation("Mobil") to senior Kazakhstan government officials, including President Nursultan Nazarbayevand oil minister Nurlan Balgimbaev. Prosecutors have asserted that Giffen paid off seniorofficials in six separate oil transactions, including Mobil's $1.05 billion investment inKazakstan's Tengiz field. In April 2003, former Mobil executive J. Bryan Williams was indictedfor taking a $2 million kickback in connection with the Tengiz transaction.

Mobil, which merged with Exxon in 1999 to form Exxon Mobil Corporation, has alsobeen subpoenaed as part of the bribery investigation. Exxon Mobil has stated that it has noknowledge of any illegal payments. ChevronTexaco, a 20 percent investor in Tengiz, has alsodenied any wrongdoing.

C. Halliburton FCPA Violation in Nigeria.

Nigerian President Olusegun Obasanjo has ordered an investigation into the $2.4 millionin improper payments a Halliburton Company unit made to a Nigerian tax official. Halliburtonhas revealed in recent filings with the SEC that it made payments to an "entity owned by aNigerian national who held himself out as a tax consultant, when in fact he was an employee of alocal tax authority." Halliburton could owe as much as $5 million in back taxes. Halliburton iscurrently being investigated by the DOJ in the U.S., the French government and the Nigeriangovernment.


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After discovering the improper payments, Halliburton officials fired several employees,although no senior officers lost their jobs. The payments were made between 2001 and 2002.Halliburton has acknowledged that it had given some money to a Nigerian government official inexchange for favorable tax treatment.

D. Saybolt v. Schreiber.

On April 21, 2003, the U.S. Court of Appeals for the Second Circuit vacated a decisionby the District Court for the Southern District of New York and held that the attorneyrepresenting a U.S. company could be sued by the former shareholders of that company forincorrectly advising it that certain activities would be permissible under the FCPA. Although theoutcome of this case was determined by the legal principles of collateral estoppel and privity, thedecision is important to companies doing business overseas because it is a reminder that thedetermination of whether a payment would be legal under the FCPA can have a significantimpact not only on the company itself, but also on the attorneys who assist the company inmaking FCPA compliance decisions.

Saybolt International was a privately-held Dutch company with various worldwidesubsidiaries involved in the testing of bulk commodities; one of its subsidiaries was SayboltNorth America (Saybolt N.A.), a U.S. company incorporated in Delaware and headquartered inNew Jersey. All the officers and directors of Saybolt International were also the officers anddirectors of Saybolt N.A.; David Mead, for example, was the CEO of Saybolt N.A. and also adirector of Saybolt International.

In 1995, another of Saybolt International's subsidiaries under David Mead's supervision,Saybolt de Panama, needed to acquire a parcel of land in Panama but could not do so unless itpaid a $50,000 bribe to a Panamanian government official. Mead raised the issue at a SayboltN.A. board meeting; Phillippe Schreiber, a director of Saybolt N.A. who also occasionallyprovided legal advice to the company, told Mead that it would be illegal under the FCPA forSaybolt N.A. to pay this bribe; however, Schreiber later advised Mead, and others at thecompany, that although Saybolt N.A. was prohibited from bribing the official, the company'sDutch parent (Saybolt International) could legally make the payment. Apparently based on thiserroneous advice, Saybolt N.A. arranged for the bribe to be paid out of Saybolt Internationalfunds in December 1995.

One year later, U.S. government officials investigating possible environmental infractionsby Saybolt N.A. discovered evidence of the bribe in Panama and shortly thereafter broughtcriminal proceedings against both the company and its officers. Mead was arrested in January1998 and was released from his duties at Saybolt; he was indicted by a grand jury for violatingthe FCPA and was convicted, despite his argument that he believed the payment was legallymade based on Schreiber's advice. Saybolt North America was also charged with violating theFCPA, pled guilty, and paid millions of dollars in criminal penalties.

Shortly after the criminal proceedings were concluded, the former shareholders ofSaybolt N.A.—sold to another company while the proceedings were pending—brought suit to


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recover damages from the attorney who had incorrectly advised the company that thePanamanian official could be legally paid through a foreign affiliate. Plaintiffs complained thatthe bribe would not have been made but for Schreiber's advice, and that he breached his fiduciaryduty to the company by providing this erroneous counsel, resulting in the loss of millions ofdollars in criminal fines assessed against Saybolt N.A. In his motion for summary judgment,Schreiber argued that because the company affirmed in its guilty plea that it paid the bribe withknowledge of the corruptness of its actions, Saybolt N.A.'s assignees cannot now argue that thecompany believed its acts to be lawful. The lower court agreed with Schreiber and concludedthat because the company had already pled guilty to the FCPA violations, and because its CEOhad already been convicted for his own role in the alleged bribery despite trying to argue thatSchreiber was actually responsible for the violation, the company's former shareholders wereestopped from now claiming that the harm to the company was caused by the lawyer's incorrectadvice.

On appeal, the Second Circuit overturned the district court's decision and allowed theshareholders to sue the lawyer. It reasoned that because the statutory elements of the FCPA donot include knowledge that the act is a violation of the FCPA, Saybolt N.A.'s guilty plea does notpreclude the company from asserting now that it did not know it was violating the FCPA when itpaid the Panamanian official through its Dutch affiliate. Second, the Court of Appealsdetermined that at the time of his trial, David Mead (who had been relieved of his duties whenarrested) did not have a sufficiently close relationship with the company to legally attribute hisconviction to Saybolt N.A. The result was that neither the CEO's conviction nor the company'sguilty plea could be cited to prevent the company's shareholders from alleging that it believed itsactions were legal when it arranged the payment to the Panamanian official, and would not haveviolated the FCPA if not for the erroneous advice of the company's lawyer. This case has beenremanded for further proceedings in the District Court for the Southern District of New York.

E. United States v. Basu.

In a case arising from facts very similar to those in U.S. v. Sengupta, Ramendra Basu, anIndian national and former Task Manager with the World Bank's office in Washington, D.C.,pled guilty to one count of conspiracy to commit wire fraud and one count of violating theFCPA. In his plea, entered December 17, 2002, the defendant, who had been responsible forawarding funds for consulting contracts in connection with World Bank development projects,admitted to facilitating the payment of a $50,000 bribe to a Kenyan government official via anAmerican and a Swedish consultant. Jurisdiction was premised on a January 1999 e-mail sent bythe defendant, in Washington, D.C. to the Swedish consultant. The e-mail included the bankaccount number of a Kenyan company that was working with the American consultant on aWorld Bank urban transport project in Kenya. The defendant admitted that he sent the e-mailwith the knowledge that the money would be funneled by the American consultant to theSwedish consultant and eventually to a Kenyan official. The defendant is required to pay$127,000 in restitution and currently faces a possible maximum sentence of five yearsimprisonment and a $100,000 fine.


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Interestingly, in both Sengupta and Basu, the DOJ apparently received substantialcooperation from both the Swedish and Kenyan authorities.

F. United States v. Syncor Taiwan, Inc.

On December 3, 2002, Syncor Taiwan, Inc, a Taiwanese company indirectly wholly-owned by Syncor International Corp., a California provider of high technology health careservices, pled guilty to one count of violating the FCPA and agreed to pay a $2 million criminalfine – the maximum statutory penalty for a single violation of the FCPA. The same day, SyncorInternational Corporation, the issuer-parent, entered into a consent decree with the SEC relatedto Syncor Taiwan's conduct and agreed to pay a $500,000 civil fine – the largest fine imposed asof that date in an FCPA civil enforcement action by the SEC.

Syncor International Corporation voluntarily disclosed in November 2002 that its plannedmerger partner, Cardinal Health Inc., had, in the course of its merger due diligence, discoveredevidence of possible improper payments to state-owned healthcare facilities abroad. Accordingto public papers in the case, Syncor Taiwan paid physicians employed by state-owned hospitalsin Taiwan in order to secure sales of radiopharmaceuticals and to obtain referrals of patients tomedical imaging centers owned and operated by Syncor Taiwan. The improper payments, whichtotaled $457,117, were made with the authorization of the chairman of the board of directors ofSyncor Taiwan. The payments were recorded as "promotional and advertising expenses."

Syncor Taiwan, Inc. was the first case in which the DOJ criminally prosecuted a foreignsubsidiary of a U.S. company under the 1998 FCPA Amendments to section 78dd-3 of theFCPA, which extended the FCPA's prohibitions on improper payments to foreign officials tocover any act in furtherance of such payments by "any person," including foreign corporations,"while in the territory of the United States."104 The plea agreement states that on severaloccasions the Chairman of Syncor Taiwan sent e-mails from California to Taiwan approvingbudgets for Syncor Taiwan that incorporated amounts to be paid to officials of state-ownedhospitals.

G. United States v. Sengupta.

In June of 2002, Gautam Sengupta, a former Task Manager with the World Bank'soffices in Washington, D.C., pled guilty to one count of wire fraud and one count of violating theFCPA in a prosecution by the DOJ in federal district court in Washington, D.C. The DOJcharged that Sengupta entered into an agreement with a Swedish consultant to direct WorldBank-funded projects to that consultant in exchange for kickbacks. Sengupta received a requestfor a payment from a Kenyan government official in connection with a World Bank-fundedproject and agreed to pass the request on to the Swedish consultant, who later paid the official.

The DOJ asserted jurisdiction over Sengupta based on the new prohibition on foreignpersons making corrupt payments while on U.S. territory.

104 See 15 U.S.C. § 78dd-3(a).


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H. U.S. v. David Kay and Douglas Murphy (S. Dist Texas - Houston).

In the Spring of 2002, Defendants Douglas Murphy and David Kay were charged by atwelve-count indictment with violations of the FCPA. The indictment alleged that defendants, aspresident and vice president of American Rice, Inc. ("ARI"), made improper payments toofficials in the Republic of Haiti to reduce customs duties and sales taxes allegedly owed by ARIto the Haitian government. Defendants moved to dismiss the indictment under Federal Rule ofCriminal Procedure 12(b)(2). Defendants presented the following arguments in support ofdismissal:

• The plain language of the FCPA does not prohibit payments to reduce customsduties or tax obligations.

• The legislative history of the FCPA confirms that Congress intended to limit thetypes of acts made criminal by the FCPA.

• Under the rule of lenity, the Court must resolve all ambiguities in the statute infavor of the Defendants.

• The FCPA does not provide fair warning that the alleged conduct is prohibited.

The central question before the court was whether payments to foreign governmentofficials made for the purpose of reducing customs duties and taxes fall under the scope ofobtaining or retaining business concept found in the text of the FCPA. The defendants contendthat the FCPA, on its face, does not prohibit such payments. Rather, the FCPA only prohibitspayments made to obtain or retain business, which, according to defendants, limits the scope ofthe FCPA to payments to secure new business or to renew existing business. Defendants furtherargue that they did not make the alleged payments to Haitian officials to obtain new business orto renew existing business.

In responding to the defendant's arguments, the U.S. government argued that the FCPAapplies, without any textual limit, to all bribes made for the purpose of obtaining or retainingbusiness. The government further argued that defendants' payments to reduce customs dutiesand sales taxes were essential to ARI to be able to conduct business in Haiti and, thus, thepayments, therefore, constituted prohibited payments made to retain business. In addition, thegovernment argued that other provisions in the FCPA demonstrate that the statute is not aslimited in its scope as defendants suggest. In support of this last argument, the governmentpointed specifically to the fact that the FCPA provides for an exception to liability for "routinegovernmental actions."

On April 16, 2002, the district court dismissed the indictment against Murphy and Kay onthe grounds that it failed to state the elements of an offense under 15 U.S.C. §§ 78dd-1(a) and78dd-2(a). The court reasoned that improper payments made to reduce customs duties and salestaxes were outside the scope of the FCPA because they were not made to obtain or retainbusiness. In so doing, the court rejected the government's argument that the FCPA applies to all


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bribes made for the purpose of obtaining or retaining business, not just those payments made tosecure new business or renew existing business. The court relied heavily on the legislativehistory of the FCPA, particularly what it cited as Congress' failure to amend the obtain or retainbusiness language to cover payments made for other improper advantage as well.

The DOJ appealed the court's decision to the United States Court of Appeals for the FifthCircuit. Recently, on February 4, 2004, the Fifth Circuit issued an opinion holding that thedistrict court had erred in finding that, as a matter of law, an indictment alleging illicit paymentsto foreign officials for the purpose of avoiding substantial portions of customs duties and salestaxes to obtain or retain business are not the kind of bribes that the FCPA criminalizes.105 TheFifth Circuit held instead that such payments could (but do not necessarily) come within theambit of the FCPA. In light of this finding, the case was remanded to the District Court forfurther proceedings.

After the DOJ's prosecution was dismissed, the SEC filed a civil action against Murphy,Kay, and Lawrence Theriot, a company consultant, also in federal district court in Texas. TheSEC complaint alleges that Kay authorized over $500,000 in bribery payments to Haitiancustoms officials and directed that those payments be recorded as routine business expenditures.Mr. Theriot is alleged to have aided and abetted Kay's and Murphy's violations. The complaintfurther alleges that Mr. Murphy knew of the bribery scheme but took no action to stop it and isliable as a "control person" for Kay's actions.

I. Baker Hughes.

In a series of related cases, the SEC and DOJ extended their reach under the FCPA toparties and circumstances not covered by previous FCPA enforcement actions. These cases, oneof which included an unprecedented joint enforcement action by the DOJ and SEC, involveBaker Hughes, a Texas oilfield services company, two former officers of Baker Hughes, anIndonesian affiliate of a "Big Five" accounting firm (KPMG), and an Indonesian national who isa partner in the affiliate accounting firm. The government has settled the cases against thecompany, the outside accounting firm, and its partner; the individual cases are being litigated.

As described below, the court papers in these cases, filed in Houston on September 11,2001, allege jurisdiction in one of the cases on the grounds that a foreign national is an "agent"of an "issuer," even though there is no evident nexus to U.S. commerce. Also invoked was aprovision of the FCPA, adopted in 1998, that covers non-U.S. persons who take actions withinU.S. territory. On the facts in the public record, both the Indonesian accounting firm and itsindividual partner appear to have been outside U.S. jurisdiction. And in two instances cited inthe complaint against Baker Hughes, involving payments to third-party intermediaries, thelanguage of the court papers suggest that the government may have imposed something close tostrict liability for third-party actions.

105 See United States of America v David Kay and Douglas Murphy, 2004 W.L. 223918 (5th Cir) (Tex).


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1) Facts Alleged by the SEC.

The cases arose out of a single set of facts. Court documents allege the facts to be asfollows. Baker Hughes, an issuer under the FCPA, controls PT Eastman Christiensen ("PTEC"),an Indonesian corporation headquartered in Jakarta, Indonesia. In February 1999, the Indonesiantax authority notified PTEC that the company owed $3.2 million in taxes to the Indonesiangovernment. Soon after, PTEC retained KPMG Siddharta Siddharta & Harsono ("KPMG-SSH")to represent PTEC before the authority.

During KPMG-SSH's meetings with an Indonesian tax official to discuss the merits of thetax assessment, the tax official repeatedly requested that PTEC make a payment to the official.In exchange for the payment, the tax official stated that he would reduce PTEC's tax assessment.The KPMG-SSH employee (an Australian citizen) responsible for the PTEC case ("KPMG-SSHManager") met with Sonny Harsono, a KPMG-SSH partner, to discuss the tax official's requestfor payment. Harsono suggested that if Baker Hughes wished to make the payment, KPMG-SSHwould make the payment, and they discussed generating a false invoice for KPMG-SSH'sservices that would cover money for the improper payment.

The KPMG-SSH Manager subsequently informed Baker Hughes' Asia-Pacific TaxManager (the "BH Tax Manager") of Harsono's suggestion and noted that the Indonesian taxofficial was willing to reduce the assessment from $3.2 million to $270,000 in exchange for apayment of $75,000. The BH Tax Manager allegedly relayed that information to James W.Harris, Controller of Baker Hughes, and to Baker Hughes' unnamed FCPA advisor. The FCPAadvisor informed Harris and the BH Tax Manager that the payment would violate the FCPA andthat KPMG-SSH must provide written assurances that it would not make illegal payments.Subsequently, Harris informed Baker Hughes' General Counsel and Eric L. Mattson, BakerHughes' Chief Financial Officer, about the situation. The General Counsel instructed Mattsonand Harris not to enter into the transaction, and to work with the FCPA advisor to resolve theissue.

Contrary to the instruction, Mattson and Harris allegedly subsequently authorized theBH Tax Manager to proceed with the payment to the Indonesian official. Under the direction ofHarsono, KPMG-SSH created and sent a false invoice to PTEC for $143,000, which comprisedthe $75,000 to be paid to the tax official and the remainder for KPMG-SSH's actual fees. PTECpaid KPMG-SSH the $143,000 and improperly entered the transaction on its books and recordsas payment for professional services rendered. Soon thereafter, PTEC received a tax assessmentof approximately $270,000 from the Indonesian tax authority.

Upon discovering the payment to the Indonesian tax official, Baker Hughes' GeneralCounsel and FCPA advisor undertook immediate corrective action, including the following stepscited by the SEC: attempting to stop payment; reporting to the Audit Committee, voluntarilydisclosing the payment to the SEC and the DOJ, correcting Baker Hughes' books and records;firing KPMG-SSH; obtaining resignation of senior management officials responsible for theaction; challenging the $270,000 tax assessment as erroneous and paying $2.1 million, which itbelieved to be the correct tax assessment, to the Indonesian government; and implementing more


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comprehensive FCPA procedures. Baker Hughes also cooperated with the SEC's investigation,including declining to assert attorney-client privilege with regard to its communications duringthe period of the Indonesian transaction.

In investigating the Indonesian payments, Baker Hughes discovered that it also had madepayments to agents in India and Brazil without ensuring that money would not pass to foreignofficials. The transaction in India related to the activities of a wholly-owned subsidiary of acompany, Western Geophysical Corporation, which Baker Hughes acquired in August 1998. InOctober 1998, an agent of the subsidiary paid $15,000 to obtain shipping permits in India thatwould normally require a "no objection certificate" from the Indian Coastal Commission andlater sought reimbursement from the company. The subsidiary paid the agent and recorded thepayment without determining to whom the money ultimately would be paid, inaccuratelydescribing it as payment for a "Shipping Permit."

In Brazil, Baker Hughes approved a $10,000 payment made by its Brazilian agent toobtain approval from the Brazilian Commercial Registry for the restructuring of Baker Hughesentities in Brazil. Baker Hughes recorded this $10,000 payment without determining to whomthe money ultimately would be paid and inaccurately described it as an "advance payment forexpenses related to the commercial registry board of Rio de Janeiro."

2) The Baker Hughes Consent Decree.

The SEC found that Baker Hughes violated the books and records and internal controlsprovisions of the FCPA. As a result of the settlement, the SEC ordered Baker Hughes to ceaseand desist from committing or causing any violation of the FCPA, but imposed no fine. Thesettlement terms highlight the mitigating effects of Baker Hughes' aggressive internalinvestigation and remedial action, including termination of senior management officialsresponsible for the payments and the company's cooperation with U.S. enforcement authorities.Cooperation included the waiver of attorney-client privilege regarding advice during the timeperiod under investigation, a requirement being asserted with increasing frequency by the DOJand the SEC. Possibly because, as part of its response to the payments, Baker Hughesimplemented "enhanced FCPA policies and procedures," the consent decree imposed noadditional compliance obligations on the company.

The consent decree also reinforces the SEC's position that an accounting violation can bebased on qualitative (as opposed to quantitative) materiality. The amount of the payments atissue in all three countries may very well not meet purely quantitative thresholds of materialityfor the company. In addition, the public documents do not explicitly say that the payments inIndia and Brazil were actual bribes. The violation seems to be based on the company's failure toperform due diligence sufficient to ensure that the payments, whatever their size, were notbribes. In public statements, SEC officials have suggested that the payments may not have beenaccompanied by back-up documentation sufficient under generally-accepted accountingprinciples. The consent decree includes a specific requirement that due diligence be conductedin the future.


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Finally, the India payment highlights the potential risks that arise in the wake of anacquisition. The payment occurred only two months after Baker Hughes acquired WesternGeophysical, and was not discovered until much later, a circumstance that underscores theimportance of implementing FCPA compliance controls on acquirees' operations as quickly aspossible.

3) Action Against KPMG-SSH and Harsono.

The combined action by the SEC and DOJ against KPMG-SSH and Harsono has severalstriking features. It is an unprecedented joint action by the two enforcement authorities.Without admitting or denying the allegations against them, KPMG-SSH and Harsono consentedto an order that enjoins them from violating and aiding and abetting the violation of theantibribery provisions, the internal controls provisions, and the books and records provisions ofthe FCPA. Significantly, the decree imposes no financial penalty against the firm or Harsono.

This case raises interesting jurisdictional issues because of the nationality of thedefendants. Harsono is an Indonesian citizen, and KPMG-SSH is an Indonesian firm and anaffiliate of KPMG International, a Swiss association with member firms in 159 countries. Thejurisdictional issue is also complicated by the decision of the SEC and DOJ to file a joint civilaction.

With respect to the jurisdiction of the SEC, the complaint alleges that Harsono violated15 U.S.C. § 78dd-1(a) and that KPMG-SSH and Harsono aided and abetted Baker Hughes'violation of the books and records and internal controls provisions of the FCPA.Section 78dd-1(a) prohibits issuers and their "agents" from using the means or instrumentalitiesof interstate commerce in furtherance of an improper payment to a foreign official. Thisprovision is facially broad enough to prohibit the activities of non-U.S. nationals that useinterstate commerce. Rather than citing any facts implicating such activities, however, theconsent decree merely alleges that Harsono and KPMG-SSH "directly or indirectly" used theinstrumentalities of interstate commerce. The complaint only describes KPMG-SSH's contactswith the Baker Hughes' Asia-Pacific Tax Manager, who was based in Australia. Further, even ifthe requirements of Section 78dd-1(a) are met, the SEC must still establish personal jurisdictionover a defendant. It is unclear from the complaint what leverage was brought to bear toencourage Harsono and KPMG-SSH to submit to U.S. jurisdiction.

With respect to the jurisdiction of the DOJ, the complaint alleges KPMG-SSH andHarsono violated 15 U.S.C. § 78dd-3(a) of the FCPA. Section 78dd-3(a) prohibits "any person"from using the instrumentalities of interstate commerce in furtherance of an improper payment toa foreign official "while in the territory of the United States" (emphasis added). The complaintalleges no facts that indicate that Harsono or KPMG-SSH officials engaged in any activitieswithin the territory of the United States; indeed, the public papers do not make clear why theDOJ chose this section as the basis for jurisdiction. Although from a purely legal perspective,KPMG-SSH and Harsono would have had strong arguments against the assertion of both subjectmatter and personal jurisdiction, their consent to jurisdiction ensured a quick settlement withoutrisking financial or criminal penalties or a protracted legal struggle.


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Finally, the case is also noteworthy because it is one of the first FCPA cases against anoutside accounting firm. Such cases are common in the general securities fraud area, and theirappearance in the FCPA arena reinforces the view from recent cases that U.S. enforcementagencies are willing to target outside professional advisors.

4) Action Against Former Company Officers.

The SEC civil complaint against Mattson, former Chief Financial Officer of BakerHughes, and Harris, former Controller of Baker Hughes, for their activities related to theIndonesian payment alleges that they violated both antibribery and accounting provisions of theFCPA. The two are also charged with aiding and abetting the Baker Hughes accountingviolations. Although the allegations suggest willful disregard or intent on the part of theindividuals, to date no criminal proceedings have been instituted against them. Harris iscontesting the charges. Litigation could test the obtain or retain business prong of the FCPA,which has been expansively construed by enforcement officials to include any financial benefit,but, like many aspects of the FCPA, has never fully been litigated. The statements in the pressby Harris' attorney suggest a potential argument based on reliance on KPMG-SSH, so this mayalso be an issue in any litigation.

First, the company allegedly authorized a payment to influence an official to reduce aninaccurate tax assessment. The company was not seeking to obtain new business but merely anaccurate tax assessment. The culture of corruption that permeates the governments of manycountries is a challenge for U.S. businesses. It is quite apparent that no one involved in thisincident believed that the proposed tax assessment was accurate. Nonetheless, the unappealingchoice was either to pay the bribe and receive an accurate tax assessment or not pay the bribe andreceive an erroneous tax assessment which likely could not be overturned. The FCPAcommands that companies and individuals subject to the FCPA choose to forego paying bribes.

Second, charges were filed against KPMG's Indonesian affiliate and one of its seniorpartners, an Indonesian national. This is an example of how U.S. law enforcement authoritiescan bring enforcement actions against foreign entities and nationals under the extended reach ofthe FCPA.

Third, as noted above, the SEC and the DOJ filed a joint civil action against KPMG-SSHand Harsono. Joint governmental investigations, through which the SEC and DOJ can pool theirresources, provide a potent enforcement tool.

Fourth, it is noteworthy that the parent company, Baker Hughes, avoided criminalsanctions and settled administrative proceedings by the SEC, agreeing to the entry of a cease-and-desist order. Baker Hughes received this comparatively lenient treatment because itpromptly took a number of corrective actions upon discovery of the FCPA violation, whichincluded instructing KPMG-SSH not to pay the Indonesian tax official, firing KPMG-SSH,engaging outside counsel to report to its Audit Committee regarding the matter, voluntarilydisclosing the illicit payment to the SEC and DOJ, disclosing the matter to its outside auditorsand correcting its books and records, obtaining the resignation of the relevant executives,


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implementing enhanced FCPA procedures, and cooperating with the SEC's investigation by notasserting its attorney-client privilege with respect to relevant communications. Althoughvoluntary disclosures have many perils, this disclosure was rewarded with a decision by the SECand DOJ not to proceed with criminal charges or an injunction in federal court.

J. U.S. v. Cantor.

In June 2001, the U.S. Attorney for the Southern District of New York charged Joshua C.Cantor, former president of American Banknote Holographics, Inc. ("ABNH"), with conspiracyto violate the accounting and recordkeeping provisions of the FCPA, and on unrelated facts,conspiracy to violate the antibribery provisions of the FCPA.

ABNH and its parent company American Banknote Corporation ("ABN") design andmanufacture products that include counterfeit-resistant technology. In an effort to boost the priceof ABNH stock prior to a public offering of the company, Cantor and unnamed coconspiratorsdevised and put into effect a scheme to inflate the revenue and earnings of ABNH. The reportsof the increased revenues and earnings were then reported to the public and the SEC. Byincluding sales to customers that did not occur or that were incomplete as of the time they wererecorded, ABNH showed an upward trend in its revenue and earnings when in fact revenue andearnings were in decline.

The government separately alleged that Cantor conspired with unnamed individuals toviolate the antibribery provisions of the FCPA, in making payments through its UK sales agentto a Swiss bank account for the benefit of the Director of Issues and Vaults, a department of theSaudi Arabian Monetary Agency ("SAMA"), an agency of the Kingdom of Saudi Arabia.Cantor allegedly paid the official $239,000 to obtain a contract to supply holograms forcommemorative banknotes, and SAMA ultimately awarded the bid to ABNH.

The case alleges only a conspiracy to violate the FCPA antibribery provisions, eventhough the information states that the government official in question did receive at least aportion of the amount intended for him. The conspiracy charge may reflect potential problems ofproving the second-leg payment to the foreign official.

K. U.S. v. King and Barquero.

On June 27, 2001, the U.S. Attorney for the Western District of Missouri indicted RobertKing and Pablo Barquero Hernandez ("Barquero") on charges of FCPA antibribery violations,conspiracy, and acts in interstate and foreign commerce in aid of racketeering. King, a U.S.citizen and stockholder in Owl Securities & Investments, Ltd. ("OSI") (a "domestic concern"incorporated in Nevada with its principal place of business in Kansas City, Missouri), andBarquero, a Costa Rican national and "agent" of OSI, allegedly made payments to Costa Ricanofficials, political parties, party officials, and candidates for public office to obtain a landconcession to develop new port facilities in Costa Rica. The defendants attempted to acquire theland concession on behalf of OSI Proyectos, a Costa Rican affiliate of OSI.


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The indictment hints at some interesting jurisdictional issues. The government describesBarquero as "an agent of OSI" and cites instances when he apparently used the mails orinstrumentalities of interstate commerce in furtherance of the scheme. The indictment indicatesthat the assertion of jurisdiction over Barquero is based on Sections 78-dd(2)(a) and (g) of theFCPA, but not Section 78-dd(3), which targets foreign nationals based on a territorial nexus.Prior to the 1998 Amendments, the FCPA did not permit the imposition of criminal penalties onforeign agents of domestic concerns. This case appears to be the first time criminal liability hasbeen asserted against a foreign national under Section 78-dd(2)(a) and the expanded penaltyprovisions of 78-dd(2)(g).

King and Barquero is also one of the few FCPA cases to involve political contributions.The prohibition against illicit payments to candidates and political parties has been problematicbecause the line between legitimate and illicit political contributions is often not clear and thecompliance with local law defense may be available.

L. U.S. v. Halford; U.S. v. Reitz.

In addition to King and Barquero, DOJ also targeted other officers of OSI. On August 3,2001, Richard Halford, former Chief Financial Officer of OSI, agreed to plead guilty toconspiracy to violate the FCPA and three counts of tax evasion for his participation in raisingfunds for the payment of the Costa Rican officials. Also on August 3, Albert Reitz, a formerofficer and director of OSI, agreed to plead guilty to conspiracy to violate the FCPA, mail fraud,making of a false statement, and filing a false tax return, for his participation in raising funds forthe Costa Rican officials. Sentencing has not yet taken place.

M. U.S. v. Rothrock.

On June 13, 2001, the DOJ entered into a plea agreement with another corporateexecutive, Daniel Rothrock, in District Court for the Western District of Texas for criminalviolations of the accounting provisions of the FCPA. Rothrock agreed to plead guilty to onecount of knowingly and willfully falsifying and causing to be falsified, books, records, andaccounts of his former employer, Allied Products Corporation ("Allied") in violation of15 U.S.C. § 78m(b)(2)(A).

Cooper Division, an operating division of Allied (an issuer within the meaning of theExchange Act), manufactured and sold workover rigs and other oilfield well serving equipment.Rothrock served as Vice-President of Cooper Division and was an officer, employee and agentof Allied. In August 1991, Cooper entered into a contract to sell approximately 20 workover rigsfor $5.5 million to RVO Zarubezhneftestroy ("Nestro"), an entity owned by the government ofthe USSR and later by the government of the Russian Republic and, therefore, an"instrumentality" of a foreign government under the FCPA.

The Director General of the Russian buyer, Nestro, also served as a director of Trading &Business Services, Ltd. (TBS), an entity owned equally by Nestro and Comco, a Swiss company.Cooper Division agreed to pay a sales commission of $300,000 to TBS "for the ultimate benefit


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of the Director General of Nestro" to obtain the contract for the sale of workover rigs. Tofacilitate the payment, Rothrock and TBS created a fake invoice for a company called "Educa,"and Rothrock labeled the payment to Educa as a "consultation fee and market study" in Allied'sbooks.

As part of the plea agreement, Rothrock agreed to cooperate fully with U.S. lawenforcement agencies. The government agreed to concur with Rothrock's request for probation.A criminal violation of the accounting and internal controls provision of the FCPA carries amaximum sentence of imprisonment of five years, a $250,000 fine, and a mandatory assessmentof $100.

The terms of the plea agreement suggest that the government's likely strategy is to obtainthe cooperation of a corporate officer to facilitate prosecution of the company or other corporateexecutives.

N. Chiquita Brands International.

The SEC announced on October 3, 2001, that Chiquita Brands International Inc. hadconsented to the entry of a cease-and-desist order for a books and records and internal controlsviolations relating to two improper payments totaling $30,000 allegedly made by employees ofits wholly-owned subsidiary located in Colombia to customs officials in exchange for a licenserenewal. In addition to agreeing to a cease-and-desist order, Chiquita has assented to pay a fineof $100,000. The case provides an example of the SEC's interest in pursuing FCPA cases, and ofthe effective strict liability the accounting provisions create for issuers with respect to the acts oftheir foreign subsidiaries.

O. DOJ Opinion Procedure Release 2001-01.

The DOJ addressed the issue of past payments by a foreign joint venture partner inOpinion Procedure Release 2001-01. In this release, a U.S. company requested clarification ofhow DOJ would view a fifty-fifty joint venture with a French company and, in particular, howDOJ would view certain provisions of the joint venture that address contracts entered into by theFrench company prior to the enactment of French Law No. 2000-595 Against Corrupt Practices("FLAC").

The U.S. company's representations to DOJ included assurances by the French companythat: (1) none of the contracts were originally procured in violation of any antibribery laws;(2) all agent agreements entered into prior to January 1, 2000, had been terminated, and acompliance program for all future agency relationships had been adopted; and (3) the U.S.company retained the right to terminate the joint venture if the French company were convictedof, or admitted, violating the FLAC or if, in the opinion of the U.S. company, the Frenchcompany has violated antibribery laws in such a manner as to have a "materially adverse effect"on the joint venture. While the DOJ agreed not to pursue enforcement action, it qualified itsdecision in a number of respects.


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The DOJ first noted that, even if the French company did not violate the FLAC orprevious French antibribery laws but did contribute contracts that were in violation of anotherantibribery law (such as the domestic law of the country of a foreign official who may havereceived a bribe), the U.S. company could face FCPA liability for any continuing payments tothose foreign officials. The DOJ also specifically declined to endorse the "materially adverseeffect" standard because it may not be sufficient to allow the U.S. company to remove itself fromthe joint venture in the case of continuing bribes, which would expose it to FCPA liability.Finally, the DOJ commented favorably on the U.S. company's FCPA compliance program;however, it refused to endorse any specific parts of the program, and, in fact, the release did notdiscuss any of the compliance program's details.

This case confirms the value of measures designed to avoid an allegation that a currentpayment to a joint venture may be viewed as reimbursement of a party's past illicit payment.The DOJ caveats highlight DOJ's aggressive views regarding withdrawal obligations intransactions where corruption issues have arisen.

P. Metcalf & Eddy.

On December 9, 1999, the DOJ released a consent agreement resolving a civil actionbrought under the FCPA against Metcalf & Eddy, a Massachusetts environmental engineeringcompany (M&E). This case is one of the most important FCPA agreements ever issued on thesubject of travel and entertainment expenses provided to foreign officials and their families, anissue that many U.S. corporations face on a regular basis. The draft complaint reflects anaggressive DOJ position on a number of key issues, and the consent agreement incorporates anonerous and far-reaching array of compliance requirements.

1) The Alleged Facts.

M&E is a "domestic concern" (not an "issuer") under the FCPA. The DOJ complaintalleged that a predecessor to M&E provided benefits to the chairman of an Egyptiangovernmental instrumentality responsible for sewage and wastewater treatment facilities in thecity of Alexandria. The benefits were allegedly provided to induce him to use his influence tosupport the granting of two contracts funded by the U.S. Agency for International Development(USAID) (worth approximately $11 million and $24 million, respectively) to M&E. Althoughthe chairman was not the actual decisionmaker in the contract award process, the decisionmakerswere his subordinates, and DOJ alleged that M&E provided benefits to the chairman knowingthat he could influence the contract awards directly through his subordinates or indirectly toUSAID.

The benefits provided were the costs of travel, lodging, and entertainment for two trips bythe chairman, his wife, and his two children from Egypt to the United States. The first tripinvolved stops in Washington, Chicago and Orlando; the second included stays in Paris and SanDiego. In addition, M&E paid the chairman per diem at 150 percent of the rate authorized by theFederal Travel Regulations, and it paid the per diem in a lump sum in advance of the travel.Although USAID approved the per diem amounts, the complaint noted that the per diem


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amounts were not "necessary expenses" and that the payment of the additional 50% had not beenjustified or documented by M&E. Moreover, despite having advanced the per diem, M&Eseparately paid most of the travel and entertainment expenses actually incurred during the trips;the complaint notes that the advanced per diem lump sums thus became "unrestricted cashpayments." Finally, M&E paid to upgrade the chairman's airline tickets to first class and boughtfirst class tickets for his family. The total monetary value of the benefits provided is unstated.

In addition, the DOJ alleged that M&E failed to maintain accurate books and records andeffective internal controls (notwithstanding that, as a non-issuer, the company was not legallyrequired to do so by the FCPA) and lacked an effective FCPA compliance program, although itis not clear whether these failures form a separate basis for FCPA liability.

2) Implications of M&E.

a) Liability for Excessive Travel and Entertainment. This case issignificant, first, simply because the FCPA is used to punish theprovision of travel and entertainment expenses, which typically donot entail very large sums. The FCPA provides an affirmativedefense for the payment of "reasonable and bona fide" businessexpenses related to certain marketing and contracting activities, astandard that frequently raises interpretive issues. In this case,DOJ used the Federal Travel Regulations as a benchmark formeasuring justifiable travel expenses, but challenged USAID'sapproval of the per diem payments, and, in light of the additionalreimbursement of expenses, characterized the per diem as "ineffect, unrestricted cash payments."

b) Liability for Payments to Family Members. The complaintexplicitly alleged that paying for the first class travel of thechairman's immediate family members was "a payment of a thingof value to the Chairman." While the 1991 Liebo case alsoinvolved in part a gift of airline tickets to an official and his fiancé,the focus of liability was the gift to the official himself and itseffect on influencing the official's cousin, the key decisionmakerfor the contract at issue in that case.

c) Books and Records Requirements for Domestic Concerns. Thecomplaint specifically cited a failure to keep proper books andrecords as a partial basis for liability, even though it describedM&E as a "domestic concern," not an "issuer." Implicit in thisallegation is the contention that domestic concerns may be subjectto the FCPA requirement to keep books, records, and accounts inreasonable detail so that they fairly reflect transactions anddispositions of assets.


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d) Successor Liability. The case is also unusual in that it involvesliability of a company for the acts of its predecessor. It is possiblethat this explains the civil rather than criminal nature of the case.

e) Sanctions Imposed. The consent agreement imposes a civil fine of$400,000 on M&E, plus an additional $50,000 charge to cover thecosts of the investigation. It also permanently enjoins the companyand its officers and agents from violating the FCPA in the future.

In addition to fines, the undertaking imposes an aggressive panoply of complianceobligations on M&E. In nine pages of detailed discussion, the DOJ enumerates the complianceelements that M&E must satisfy. Although some element may be punitive, they also reflectDOJ's views of policies, procedures, and safeguards that are appropriate, at least under thecircumstances of this case. They include:

� a "clearly articulated" corporate policy� assignment of responsibility for compliance to one or more senior company officers� establishment of an independent committee to review contracts retaining agents and

consultants� due diligence procedures for potential agents, consultants, and business partners� procedures designed to inhibit discretion of corporate authority to persons at risk of making

payments� regular training, including training of agents, consultants, and other representatives� an effective reporting system for company employees to report possible violations� appropriate disciplinary mechanisms for employees violating policies� antibribery clauses in all contracts with consultants or business partners, including periodic

certifications, prior approval of any subcontractors, and termination clauses for violations� books and records and internal accounting requirements identical to requirements imposed on

issuers under the FCPA� periodic certifications on FCPA compliance to USAID and other U.S. government entities

based on independent outside audits� periodic reviews of the FCPA compliance program by outside law firms or auditors� full disclosure of future and past payments activities to the DOJ, and� availability of company directors and officers to law enforcement officials

Q. Saybolt.

On August 18, 1998, Saybolt, Inc. ("Saybolt"), a petroleum inspection company, andSaybolt North America, Inc. agreed to plead guilty to charges of violating the Clean Air Act,FCPA violations, and conspiracy to violate the FCPA. Pursuant to the plea agreement, thecompanies agreed to pay a total fine of $4.9 million. Of the total fine, $3.4 million (includingnearly a million dollars in disgorgement) was for falsifying petroleum test data and $1.5 relatedto the FCPA charges. In addition, the companies will be placed on probation for five years andhave agreed to cooperate with the authorities in the investigation and prosecution of theindividuals implicated in the violations. During the period when the violations occurred, Saybolt


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and Saybolt North America, Inc. were U.S. subsidiaries of Saybolt International, B.V., aNetherlands-based company. In May 1997, Core Laboratories, N.V., also a Dutch company,acquired Saybolt International.

The Saybolt indictment stemmed from charges that Saybolt, Inc.'s former President andCEO, David Mead, and its former Chairman of the Board, Frerik Pluimers (who was also thePresident and CEO of Saybolt International), authorized a subordinate to pay a $50,000 cashbribe to certain Panamanian government officials within the Panamanian Ministry of Industriesand Commerce who had requested such a payment in October 1995. Specifically, theindictments charge that on December 20, 1995, an individual acting at the behest of Mead andPluimers paid $50,000 to the Panamanian Minister of Mines and Materials in a Panama City bar.The indictment alleges further that Pluimers and Mead approved the $50,000 disbursement fromfunds controlled by Saybolt International, Saybolt's Dutch parent company.

The payment was allegedly made in exchange for certain concessions from theGovernment of Panama, including: government contracts for Saybolt's Panamanian affiliate,Saybolt de Panama, S.A.; a lease of prime real estate along the Panama Canal; and expedited taxbreaks. Subsequent to the payment, the Government of Panama approved these concessions.

On January 29, 1998, Mead, a British citizen with U.S. resident alien status, was arrestedin Houston on five charges: two counts of violating the FCPA, one count of conspiracy to violatethe FCPA, and two racketeering counts. After a trial held in October 1998, a jury convictedMead on the conspiracy and racketeering charges. In March 1999, Mead was sentenced to fourmonths in prison, four months of home detention, three years of probation, and the payment of a$20,000 fine. Pluimers, a Dutch national and resident at all times material to the indictment, wasindicted on identical charges; however, he remains at-large in The Netherlands.

The Saybolt case is significant in several respects. First, it represents the first case inwhich a non-resident foreign national was indicted for violating the FCPA.5 Second, the $1.5million fine imposed on Saybolt is large in comparison to the amount of the bribe paid ($50,000).Third, a substantial amount of incriminating evidence against Saybolt and its officials consistedof e-mails discussing the payment. Fourth, evidence of the FCPA violations was discovered inthe course of an unrelated criminal investigation arising from an Environmental ProtectionAgency audit. Finally, prosecutors noted that Mead's sentence should put U.S. executives onnotice that U.S. enforcement authorities will seek jail terms for bribery offenses.

R. United States v. Tannenbaum.

On August 5, 1998, Herbert Tannenbaum entered into a plea agreement with the DOJ andthe U.S. Attorney for the Southern District of New York in which he agreed to plead guilty toone count of conspiracy to violate the FCPA. The criminal information alleged that from 1996until March 25, 1998, Herbert Tannenbaum, the president of Tanner Management, and hiscoconspirators conspired to violate the FCPA by offering to make clandestine payments to anundercover agent posing as a procurement officer of the government of Argentina to induce theagent to purchase garbage incinerators on behalf of Argentina. To disguise the offered


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payments, Tannenbaum allegedly opened a bank account in the name of a fictitious entity.Although the indictment does not mention the amount of the offered bribe, the plea agreementnotes that the value offered payment was between $120,000 and $200,000.

One particularly significant aspect of the Tannenbaum case is the plea agreement'sdetailed illustration of how the U.S. Federal Sentencing Guidelines ("Guidelines") are applied inthe context of the FCPA. Tannenbaum's stipulated Guidelines range was twelve to eighteenmonths incarceration.

S. Triton.

1) Background.

Triton Energy is an international oil exploration and production company headquarteredin Dallas that is now owned by Amerada Hess. Although it had been a public company for sometime when it became involved in oil exploration in Indonesia, it was still run by its founder andretained the enterprising outlook and informal procedures that one so often finds in smallercompanies where the original entrepreneurs remain in control. As a result, Triton Energy at thetime lacked the kinds of comprehensive and detailed FCPA compliance programs and generalinternal controls that have since become prevalent in well-managed concerns.

In 1988, Triton Energy, through its subsidiary, Triton Indonesia, acquired control of anoil field in Indonesia from a Canadian company known as Nordell. Indonesia then had anotorious reputation for corruption. In connection with the transaction, Triton Indonesia, atNordell's insistence, retained as its agent one Roland Siouffi, a French expatriate who had beenliving in Indonesia and who had been a Nordell officer. Triton was told that Siouffi would be anessential intermediary between Triton Indonesia and Indonesia government bureaus, includingPertamina, the national oil company, for such matters as government approval of the transactionand government approval of various other aspects of operating the concession. Triton Indonesiaentered into contracts with Siouffi and entities he controlled; the contracts did not contain FCPAcompliance clauses, although drafts proposed by Triton had included such clauses.

Over the ensuing years, Triton Indonesia made substantial payments to Siouffi and hiscompanies for his assistance in obtaining various kinds of government approvals and actions, forexample expediting government audit reports and obtaining relief on disputed tax issues.Siouffi's invoices, however, did not refer to these missions, but rather referred inaccurately tosuch things as "rig repairs." Triton Indonesia booked the payments in accordance with Siouffi'sinvoices. Thus, to that extent, its books and records were inaccurate. A Triton Indonesia managerkept a side record of the true purposes of the payments; he also kept a diary in which he recordedthe true nature of the payments. The diary contained some entries which could be construed asindicating that Siouffi had said that a government official received some of the money TritonIndonesia had paid Siouffi.

A Triton Energy internal auditor visited Triton Indonesia and thereafter prepared amemorandum for senior Triton Energy management expressing concerns about possible


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improper payments and bookings. He gave the memorandum to Triton Energy's then Presidentand then chief financial officer. On receipt and out of concern for the possible impact on Triton'srelations with the Indonesian government, the then President directed that all copies of thememorandum be collected and destroyed. As is so often the case, a copy survived. Some effortswere made to pursue the underlying concerns, but they were ineffectual.

In the meantime, Triton and Nordell had fallen into a bitter dispute. At the same time, adisgruntled Triton Energy employee who had been involved in internal audit work sued thecompany for wrongful discharge. In both disputes, Triton's antagonists made accusations thatTriton had been engaged in corrupt practices in Indonesia.

Soon thereafter, Triton heard from both the DOJ and the SEC. Former management'sinitial reaction was to provide limited information, but the old management was on the way outfor other reasons. New management (new CEO, CFO, and General Counsel), with the support ofa board that was being transformed, decided to cooperate more fully with the authorities. As partof its cooperation and in connection with related shareholder derivative litigation, the companyformed a special board committee, composed of outside directors and directed outside counsel toundertake an internal investigation.

2) The Settlement.

Initially, both the DOJ and the SEC indicated that they would investigate the matter, andboth did so at the outset. Over time, the SEC took the lead. Although Triton Energy wascooperating, the SEC insisted on its own thorough document review and deposition program. Inthe meantime, Triton's board and management had been transformed. The "old guard" who hadbeen in charge when the underlying events had taken place were all gone. The new board andmanagement instituted comprehensive and up-to-date FCPA compliance procedures.

After years of investigation and arduous negotiation, the matter was resolved with theSEC with the understanding that the DOJ would take no further action. Pursuant to thesettlement, the SEC brought a civil injunctive action in federal court against Triton Energy andtwo former managers of Triton Indonesia. The complaint alleged violations of the antibribery,books and records, and internal controls provisions of the FCPA and sought an injunction as toeach. The complaint did not allege that Triton Indonesia had made payments in order to obtaingovernment business in the narrow sense of the word; rather, it alleged that Triton Indonesia hadmade the payments in order to obtain such things as tax relief.

Triton Energy and one of the managers entered into consent judgments simultaneouslywith the filing of the complaint. Neither one admitted or denied the allegations. Triton Energyconsented to the entry of an injunction only with respect to the books and records and internalcontrols provisions of the FCPA; the manager consented to an injunction with respect to thoseprovisions and the antibribery provisions. Triton Energy paid a civil penalty of $300,000; themanager paid $50,000 (which Triton Energy reimbursed with the SEC's consent). The secondmanager, who was separately represented, entered into a settlement some time later.


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The SEC also brought administrative proceedings against various Triton Energy andTriton Indonesia personnel, including the former President of Triton Energy (who also had beena director), the former chief financial officer of Triton Energy, and two lower level employeeswho had been involved in preparing and auditing Triton Energy's books and records. Theseadministrative cease and desist proceedings targeted the books and records violations. Theactions against the former President and CFO focused on their failure to take proper action whenconfronted with the memorandum Triton's internal auditor had circulated to them concerningpotential corrupt activities in Indonesia. All four consented to cease and desist orders barringthem from committing or causing future violations of the FCPA's books and records provisions;the former President and CFO also consented to an order barring future violations of theantibribery provisions.

X.Conclusion.

The FCPA is a federal statute criminalizing the bribery of foreign public officials andcertain others106 for a business benefit. It also is the source of the generally applicable securitieslaw obligations that publicly traded companies maintain complete and accurate books andrecords and systems of internal controls. Although U.S. parent companies are not automaticallyliable for the acts of their foreign subsidiaries under the FCPA's antibribery provisions, thesecurities laws hold U.S. companies strictly liable for the recordkeeping and control practices oftheir majority-owned or controlled foreign subsidiaries.107 Moreover, parent companies riskantibribery liability if they authorize an improper payment by a foreign subsidiary or fund theactivities of that subsidiary with knowledge that an improper payment may be made. Under theFCPA, the concept of knowledge extends beyond actual awareness of a payment and intocircumstances indicating a parent's willful ignorance, for example, through disregard of "redflags," of an improper payment or transaction.108

The effect of the FCPA, the OECD Convention and the UN Convention has been to createstrong incentives for U.S. parent companies, especially publicly-traded companies, to adoptcorporate-wide antibribery policies and compliance procedures as well as accounting andinternal control standards that flow down not only to their domestic U.S. subsidiaries, but also totheir foreign subsidiaries. These incentives have been reinforced by developments in federal

106 These others include officers or employees of state-owned enterprises and of certain public international

organizations, as well as foreign political parties and candidates for office. 15 U.S.C. §§ 78dd-1(a), 78dd-2(a),78dd-3(a).

107 See SEC v. Syncor Int'1 Corp., (D.D.C. 2002), Lit. Rel. No. 17877 (Dec. 10, 2002); In the matter of ChiquitaBrands Int'1, Inc., Admin. Proc. Rel. No. 34-44902 (Oct. 3, 2001); In the Matter of International BusinessMachines Corp., Admin. Proc. Rel. No. 34-43761 (Dec. 21, 2000); SEC v. Triton Energy Corp. (D.D.C. 1997),Lit. Rel. No. 15266 (Feb. 27, 1997), FCPA Rep. 699.471. For minority-owned subsidiaries, only a good faitheffort on the parent's part to secure compliance by the foreign subsidiary is required. However, where the parentcontrols the foreign subsidiary, compliance will be expected. In the Matter of BellSouth Corporation, Admin.Proc. Rel. No. 34-45279 (Jan. 15, 2002).

108 15 U.S.C. §§ 78dd-1(a)(3), 78dd-1(f)(2), 78dd-2(a)(3), 78dd-2(h)(3), 78dd-3(a)(3), 78dd-3(f)(3).


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criminal law penalty standards, most notably the Guidelines109. The Guidelines provide for areduced culpability score (the basis for the calculation of penalties in the event of a criminalviolation of law) for corporations that maintain "an effective program to prevent and detectviolations of law."110 In addition, the DOJ and the SEC, the two agencies with enforcementauthority over the FCPA, both expect that responsible companies will, among other steps, havein place an FCPA compliance program.111

Although enforcement officials have not defined the precise elements of an FCPAprogram, settled prosecutions such as the Metcalf & Eddy case in 1999112 provide companies andtheir counsel with a road map with respect to the elements they will typically expect to find.These elements include not only an antibribery policy, but also more detailed guidelines andprocedures that are specific to the FCPA. For almost every company, it will be critical to have apolicy and procedures regarding the engagement of third parties, such as agents, consultants,joint venture partners, representatives, and even subcontractors, to ensure that those relationshipsdo not become vehicles for the making of improper payments. Additional risk areas treated inpolicies and procedures often include gifts and entertainment, travel and travel-related expenses,events sponsorship, political contributions, and facilitating payments.

Under the Guidelines, however, it is not enough to have FCPA policies and procedures.It is critical that relevant personnel within the organization be properly trained in these policiesand procedures, and that they be policed and enforced, for example, through internal or externalaudits, internal or external FCPA legal audits, or the like.

In the wake of the Sarbanes-Oxley Act, issuers need to redouble their efforts to maintaineffective FCPA compliance controls not only at the parent level but also in their foreignsubsidiaries. Although prevention has its costs, the cost of an FCPA violation has always beenmuch higher, and recent events have caused that cost to escalate even further. Now more thanever, Board of Directors and Audit Committees will play a key role in internal corporateinvestigations involving potential improper payment issues abroad, and will exercise theirbusiness judgment in favor of making voluntary disclosure of FCPA violations.

FCPA violations can have severe repercussions on a company and its employees. Inaddition to heavy fines and potential jail time for company officers and employees, violations ofthe FCPA can also cause adverse results under other laws. For example, the facts in an FCPAcase could point up violations of other federal antifraud provisions (such as the RacketeerInfluenced and Corrupt Organizations Act); federal agencies will debar FCPA violators from 109 Federal Sentencing Guidelines Manual, ch. 8.110 Federal Sentencing Guidelines § 8C2.5(f).111 Memorandum From Larry D. Thompson, Deputy Attorney General, to Heads of Department Components,

United States Attorneys, Re: Principles of Federal Prosecution of Business Organizations (January 20, 2003);Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and CommissionStatement on the Relationship of Cooperation to Agency Enforcement Decisions, Rel. No. 34-44969 (Oct. 23,2001).

112 U.S. v. Metcalf & Eddy (D. Ma. 1999), FCPA Rep. 699.749.


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participating in federal purchases; FCPA violators may be precluded from obtaining exportlicenses: and adverse publicity and other lawsuits, including shareholders' actions, may begenerated.

Foreign Corrupt Practices Act(1)

Documents

Transcript of Foreign Corrupt Practices Act(1)