Your sales agent in Sao Paulo just called with good news: You’ve won that government contract. You just need to wire $15,000 this afternoon for a “license fee” in order to close the deal. Sounds simple enough, but be careful: You might just be walking into a violation of the Foreign Corrupt Practices Act.

  Background: The Foreign Corrupt Practices Act (FCPA) was enacted in 1977 to curb the competitive abuse of influence payments to foreign officials in order to secure or retain business. In the prototypical case, a bidder seeking the award of a government contract for goods or services uses a covert payment or gift in order to curry the favor of an official who has influence over the award. Being sensitive to this legal exposure and responding appropriately are keys in avoiding a costly violation.

Elements of the Act: The FCPA applies to all U.S. persons and any foreign national that issues securities in the United States or files periodic reports with the SEC. In addition, any foreign national that commits an act within the U.S. in furtherance of an improper payment is subject to the Act.

Acts which violate the FCPA include the delivery of anything of value to a foreign official with the intent to induce the official to act favorably in support of the securing or retention of business.  This need not be business with the foreign government and the attempt to induce action need not be successful. Although “corrupt intent” is an element of a violation, conscious disregard or deliberate ignorance of the acts of your representatives will in most cases satisfy this element as well. The concept of “foreign official” includes a foreign political party, a party official and even a candidate for public office.

Routine payments to obtain licenses, permits or other official documents, or for the processing of government documents are regarded as “facilitating payments” and do not violate the Act. However, the nature and purpose of any requested payments should be fully understood before proceeding.

Enforcement & Penalties: The SEC and DOJ have concurrent authority to enforce the FCPA. Violations may be treated as civil or criminal (or both). Criminal penalties imposed against business entities are up to $2 million and against individuals of up to $100,000 with imprisonment of up to 5 years. The Alternate Fines Act can increase these fines to twice the benefit the violator sought to obtain. Civil penalties may be up to $10,000; however, in civil actions by the SEC, significantly greater fines can be imposed based on the gain received. Injunctions may be imposed against violators a well as loss of export licenses and the ability to do business with the U.S. government. Improper acts may trip additional violations such as mail fraud, wire fraud and state commercial bribery statutes. Because the failure to record such payments is a separate violation of the Act, “off book” and “slush fund” accounting can involve a violation of the Sarbanes-Oxley Act.

  Foreign Legislation: U.S.-based enterprises and individuals are not the only ones subject to legal action for the kinds of acts prohibited by the FCPA. In 1997 the Organization for Economic Cooperation and Development adopted a convention to combat the bribery of foreign officials. Thirty-eight (38) countries have ratified this convention.

Examples: Some recent, very blatant violations of the FCPA have gotten the attention of regulators.

In March 2010 BAE Systems plc, one of the world’s largest defense contractors, plead guilty to alleged violations of U.S. trade and export laws including FCPA in a criminal proceeding initiated by the Department of Justice. Using offshore companies and “market advisors”, BAE issued payments to officials in order to secure government defense contracts in Saudi Arabia, The Czech Republic and Hungary. BAE was required to pay $400 million in fines.

In the largest case of its kind, the SEC and DOJ brought companion civil and criminal proceedings against Siemens for an alleged systemic practice of paying bribes to foreign officials to secure business in Venezuela, Mexico, Israel, Bangladesh, Argentina, Vietnam, China and Russia during the period 2001-2007. Products and services involved included medical devices, identity cards, power plants, refineries and a mobile telephone network. The combined sanctions imposed against Siemens were $1.6 billion.

Fines and prosecutions under FCPA in the last 10 years exceeded those occurring over the prior 20 years, suggesting that the authorities are becoming more vigilant in their enforcement efforts.

For more information, contact Greg Murrer, Esq.