Wisconsin is home to many companies that do business worldwide, including large multinational publicly traded companies, successful private companies, and entrepreneurial ventures. Expanding internationally is often a stated objective of a growing business and, if done right, it can offer tremendous opportunities.
Operating successfully in another country requires more than finding customers to buy products or employees to work in on-site facilities. Also necessary for succeeding at doing business is knowing how business typically is done. Sometimes, however, customs and practices that are routine aspects of day-to-day commercial dealings in other countries are ones that are not only uncommon in the United States but also illegal. Attorneys who advise Wisconsin companies and individuals that currently do business outside the United States or aspire to do so must be aware of and help their clients comply with nuances of the Foreign Corrupt Practices Act so as to avoid breaking the law while building commercial ties.
Foreign Corrupt Practices Act Provisions
The Foreign Corrupt Practices Act of 1977, as amended (FCPA),1 generally prohibits U.S. companies and citizens, foreign companies listed on a U.S. stock exchange, or certain foreign persons and businesses acting while in the United States, from corruptly paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business – this is commonly referred to as the anti-bribery provision. The FCPA also requires issuers (any company including foreign companies with securities traded on a U.S. exchange, or otherwise required to file periodic reports with the U.S. Securities and Exchange Commission (SEC)), to keep books and records that accurately reflect business transactions and to maintain effective internal controls – this is commonly referred to as the accounting or books and records provision. The term “anything of value” is subjective: there is no de minimis amount and it can take the form of gifts, money, promises to give something, or other benefits; the key element is that there must be an intent to improperly influence the foreign official. The obtain-or-retain-business element also has broad application and covers not only government contracts but such things as efforts to secure special tax or custom treatment, secure government licenses or permits needed to do business in a foreign jurisdiction, or otherwise secure an improper advantage over competitors.
According to the Resource Guide to the U.S. Foreign Corrupt Practices Act (FCPA Resource Guide), published by the U.S. Department of Justice (DOJ) Criminal Division and the SEC’s Enforcement Division,2 the FCPA was enacted in 1977 “in response to revelations of widespread bribery of foreign officials by U.S. companies. The Act was intended to halt those corrupt practices, create a level playing field for honest businesses, and restore public confidence in the integrity of the marketplace.”
The FCPA in Action
Being on the board of directors of a company comes with many significant duties and obligations, including fiduciary responsibilities to shareholders, and in certain instances, independence from management. Directors are not expected to know everything that is going on throughout the company’s global operations that they serve, but they are expected to make sure that management has – and properly implements – effective FCPA tools, controls, and resources to ensure compliance. According to the FCPA Resource Guide, “compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company. Managers and employees take their cues from these corporate leaders.” Boards thus must take a proactive approach to make sure their companies not only talk the walk (simply have policies) but also walk the talk – training, monitoring, enforcing, and making resources available to achieve effective compliance with current and relevant policies.
Thomas L. Doerr Jr., Marquette 2000, is associate general counsel with The Manitowoc Co., where he is responsible for global legal matters for Manitowoc Cranes.
Recent nonprosecution agreements underscore the importance of companies’ managers and board members comprehending how their global operations do business and having in place robust compliance systems. For example, in April 2013, an agreement was announced concerning Ralph Lauren Corp. (RLC),3 which resulted in RLC agreeing with the SEC to disgorge more than $700,000 and paying the DOJ a penalty of $882,000.
The routine use of a customs broker by RLC’s Argentinean operations resulted in RLC’s violations. Multinational companies often rely on the services of third-party providers – such as customs brokers – to help operate in emerging markets, in situations in which they are not familiar, or simply when they do not have the requisite expertise in house. The global economic downturn has also resulted in outsourcing more and more work to third-party service providers. Often third-party providers assist with logistics, freight forwarding, trade consulting advice, marking requirements, or paperwork completion – processes and procedures that are often chock-full with governmental red tape and associated paperwork and formalities.
The RLC matter reinforces that companies should scrutinize and closely monitor all service providers and that it is not simply the payment of commissions to sales agents that should trigger FCPA concerns – instead, it is the use of any third parties to assist in getting something accomplished on the company’s behalf. A company must know who its service providers are and what legitimate qualifications, experience, and skills they bring to the table to complete their assignments – just having “connections” is not enough and in fact, may be problematic.
RLC Nonprosecution Agreement
In 2000, local management in RLC’s Argentinean operations approved paying bribes to Argentinean customs officials, through RLC’s customs brokers, to help with expediting and avoiding paperwork, allowing the clearance of potentially prohibited goods, and avoiding inspections of products by governmental officials. The customs brokers submitted to local management invoices that detailed legitimate items but also itemized payments for such nebulous things as “loading and delivery expenses” and “stamp tax/label taxes.” The nonprosecution agreement asserts that these items were used to hide the bribery payments that were being made and that no supporting documentation to substantiate these expenses was provided. The nonprosecution agreement also contends that in addition to the bribery payments, local management provided gifts such as perfume, dresses, and handbags, with values ranging between $400 and $14,000 each, to further support the illegal activity.
The FCPA’s books and records provisions require companies to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”4 Thus, all payments and gifts made by the RLC Argentinean operations should have been properly described in the operation’s financial books. The SEC concluded that RLC did not have adequate internal controls and accurate books and records:
“As evidenced by the improper payments to Argentine customs officials and gifts to other government officials, the failure to ensure that proper and effective due diligence was conducted on the customs broker and Customs Broker A, and the failure of the review process for authorization or approval of reimbursement payments to Customs Broker A to detect a single improper payment, between 2005 and 2009, RLC failed to devise and maintain a system of internal controls at RLC Argentina sufficient to provide reasonable assurances that (i) transactions were executed in accordance with management’s general or specific authorization; (ii) transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements; (iii) transactions were recorded as necessary to maintain accountability for assets; and (iv) [ ] access to assets was permitted only in accordance with management’s general or specific authorization. RLC’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act … compliance in place at that time of the misconduct warranted further strengthening to ensure effective compliance with the related laws.
“Between 2005 and 2009, certain RLC Argentina employees and agents paid bribes which were inaccurately recorded in RLC Argentina’s books, records and accounts, which were consolidated into the books and records of RLC.”
One might wonder how the managers of the Argentinean operations missed the red flags. For example, it appears that the payments being made to the customs broker were much higher than market practice; the payments were not substantiated with invoices or receipts; and, according to Transparency International,5 Argentina is perceived to be a relatively corrupt country. Someone within RLC should have asked some basic questions because these factors warranted follow-up investigation and analysis. Undoubtedly, lack of proper due diligence contributed to this situation and had there been some basic controls in place, this would have been detected.
For example, the following actions might have helped prevent the violations:
Looking into, and documenting, the customs broker’s history, experience, qualifications, and associations;
Determining if other customs brokers charge similar amounts to accomplish the same work;
Obtaining references for the customs broker from other reputable business organizations (customers or trade associations);
Exploring whether the customs broker’s work could be done in house;
Assessing the customs broker’s understanding of the FCPA and obtaining the customs broker’s agreement to abide by it.
Informing third-party service providers of a company’s internal policies and the fact a company complies with the FCPA and asking the service providers to also comply with the FCPA are essential. According to the FCPA Resource Guide, “meaningful ways to mitigate third-party risk” include informing the service providers of the contracting party’s “compliance program and commitment to ethical and lawful business practices” and seeking assurances from such parties through their certifications.
Taking into consideration the red flags in the RLC matter, in addition to the fact that lavish gifts were being given away to get customs work completed, it is peculiar that alarm bells did not go off somewhere in the organization much earlier. The facts seem to almost suggest that there may have been a conscious decision to ignore what was going on. The intentional ignoring of undesirable information or “turning a blind eye” is unacceptable in the FCPA compliance world. The quip by baseball celebrity Yogi Berra sums it up well: “You can observe a lot just by watching.”
Another recent case in which, it appears, the foreign subsidiary had little or no oversight involved Koninklijke Philips Electronics N.V. (a Netherlands-based company with securities traded on the New York Stock Exchange). The April 2013 cease and desist agreement entered into with the SEC6 explains that from 1999 through 2007, employees of Philips’s operations in Poland (Philips Poland) made improper payments to health-care officials in Poland to win public tenders.
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Employees of Philips Poland entered into arrangements with officials from various Polish health-care facilities under which Philips Poland submitted the technical specifications of its medical equipment to government officials, who then incorporated such specifications into the tenders. Some of the officials also decided who tenders would be awarded to, and when Philips Poland was awarded the contracts, Philips Poland employees gave the officials improper payments. Third-party agents also routinely assisted with the improper payments. The improper payments were then falsely characterized and accounted for in the organization’s books and records as legitimate expenses and were substantiated with false documentation created by Philips Poland employees and third parties. As a result, Philips Poland agreed to disgorge approximately $3 million and pay prejudgment interest of approximately $1.3 million.
In 2012, the SEC charged Eli Lilly with alleged violations of the FCPA for improper payments its subsidiaries made to foreign governmental officials to win millions of dollars of business in Russia, Brazil, China, and Poland. Kara Novaco Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit, reiterated the importance of knowing what a company’s global operations are doing:7
“Eli Lilly and its subsidiaries possessed a ‘check the box’ mentality when it came to third-party due diligence. Companies can’t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.”
Eli Lilly agreed to disgorge almost $14 million and pay prejudgment interest of almost $7 million and a penalty of almost $9 million.
Although management in international subsidiaries may have cultural reasons for being less concerned about FCPA compliance than their U.S. management counterparts, it is crucial that communication as to the significance of vigorous policies comes from the board room down and that policies are actively and effectively put into place – simply talking about the fact that policies exist is no longer enough. The essential take away from these matters is that it is critical that all companies have meaningful compliance programs, that the message of compliance come from the top, and that there be a culture of compliance throughout a company’s global operations. Managers in every part of the world must fully buy into the policies, standards, and procedures and understand their significance.
Instituting and Enforcing Compliance Policies
U.S. companies should take action now to examine the vigor of their compliance programs. Examples of additional compliance and remediation measures taken from the cases mentioned in this article and other DOJ and SEC filings8 that serve as good reference include the following (albeit the scope of every company’s program will be different depending on the type and location of the business):
Require the company’s board and senior managers to provide strong, explicit, and visible support and commitment to the company’s policies, standards, and procedures (hereinafter collectively “policies”) related to anticorruption laws.
Make sure that the policies are translated into all applicable languages.
Ensure that the board and senior managers are committed and use their positions of influence to make sure the policies are implemented.
Make sure that the company takes appropriate measures if the board members or senior managers fail to fulfill their responsibilities.
Implement policies designed to reduce the prospect of violations of anticorruption laws and the company’s compliance policies, governing items such as the following: 1) gifts; 2) hospitality, entertainment, and expenses; 3) customer travel; 4) political contributions; 5) charitable donations and sponsorships; 6) facilitation payments; and 7) solicitation and extortion.
The policies should be developed on the basis of a risk assessment addressing the company’s specific circumstances and the foreign bribery risks facing the enterprise, for example, the geographical organization, interactions with governmental officials, industrial sectors of operation, involvement in joint-venture arrangements, the importance of licenses and permits, the degree of governmental oversight and inspection, and the significance of goods and persons clearing customs and immigration.
Ensure that policies are reviewed no less than annually and, if necessary, updated, taking into account relevant developments in the field and international and industry standards.
Ensure that a senior corporate officer is responsible for implementation and oversight of the applicable policies and that the officer reports directly to the board (or an applicable committee), is autonomous from management, and has sufficient resources and authority to maintain such autonomy.
Effectively communicate the policies to the board, managers, all employees, and, as appropriate, agents and business partners.
Conduct periodic training for the board, managers, all employees, and, as appropriate, agents and business partners, and require annual certifications showing compliance with the training requirements.
Provide guidance and advice to the board, managers, all employees, and, as appropriate, agents and business partners concerning compliance with the policies, including, when needed, advice on an urgent basis or in any foreign jurisdiction in which the company operates.
Put in place proper mechanisms to allow confidential reporting by board members, managers, all other employees and, as appropriate, agents and business partners to report suspected criminal conduct or violations of the policies.
When violations are discovered, ensure that appropriate steps are taken to prevent any further misconduct, including 1) disciplining and terminating employees; 2) convening special committee(s) to do internal investigation(s); and 3) retaining law firms and auditing firms to conduct investigations and design remedial measures to address weaknesses in internal controls.
Policies for situations in which agents and business partners are used include the following:
Follow strict due-diligence procedures (follow up on any red flags).
Properly document the due-diligence procedures (and the follow up) and the oversight of the agents and business partners.
Inform the agents and business partners about the company’s commitment to abiding by laws prohibiting bribery and compliance with the company’s policies and ask the agents and business partners to promise to do the same.
Include representations, warranties, and undertakings from the agents and business partners relating to their compliance with laws prohibiting bribery and compliance with the company’s policies.
Request permission for the company to audit the books and records of the agent or business partner to ensure compliance.
Set commissions and fees that are consistent with market rates.
Provide for termination of the relationship with the agent or business partners in the event of any breach of the agreement or applicable laws.
The FCPA is here to stay and is being actively enforced. In November 2012, then assistant attorney general Lanny A. Breuer9 said that “robust FCPA enforcement has become part of the fabric of the Justice Department: Our global anti-corruption mission has seeped into the Criminal Division’s core. And there is no turning back. The FCPA is now a reality that companies know they must live with and adjust to; and this nation is better off for it.” Breuer noted that since 2009, more than $2 billion in fines and a growing number of convictions and sentences have been imposed.
It is not inconceivable that the FCPA will become even stricter. An example of a more rigorous law is the United Kingdom Bribery Act 2010 (the Bribery Act).10 Crimes covered by the Bribery Act include offenses in relation to bribing another person or being bribed, bribing foreign public officials, and a specific corporate offense of failing to prevent bribery. According to Transparency International, the Bribery Act is “now among the strictest legislation internationally on bribery.”11
No board member or manager of any Wisconsin company that does business outside the United States can afford to ignore the FCPA. The potential consequences for noncompliance can reach the top of an organization. In addition to the company being penalized, there are criminal and civil penalties for individuals, and the FCPA makes directors liable if their company fails to properly comply with the FCPA. The DOJ may pursue criminal actions against officers and directors for anti-bribery violations, and the SEC may pursue civil actions against officers and directors for violations of the anti-bribery and the accounting provisions. If monetary fines are imposed on individuals, the law specifically says that these cannot be reimbursed by the company. These potential consequences alone should be enough to capture directors’ and officers’ attention.
1 15 U.S.C. §§ 78dd-1 et seq.
2 A Resource Guide to the U.S. Foreign Corrupt Practices Act, www.justice.gov/criminal/fraud/fcpa/guide.pdf.
3 United States Securities and Exchange Commission Non-Prosecution Agreement with Ralph Lauren Corporation (April 22, 2013), www.sec.gov/news/press/2013/2013-65-npa.pdf.
4 15 U.S.C. § 78m(b)(2)(A).
5 The mission of Transparency International is to stop corruption and promote transparency, accountability, and integrity. The organization publishes an annual “Corruption Perceptions Index” and a comparative listing of corruption worldwide. www.transparency.org/.
6 United States Securities and Exchange Commission Order Instituting Cease and Desist Proceeding with Koninklijke Philips Electronics N.V. (April 5, 2013), www.sec.gov/litigation/admin/2013/34-69327.pdf.
7 SEC Press Release 2012-273 (Dec. 20, 2012), www.sec.gov/news/press/2012/2012-273.htm.
8 Deferred Prosecution Agreement with the United States Department of Justice and Total S.A. (filed May 29, 2013), www.justice.gov/iso/opa/resources/9392013529103746998524.pdf; Securities and Exchange Commission Order Instituting Cease and Desist Proceedings with Total S.A. (May 29, 2013); United Securities and Exchange Commission Order Instituting Cease and Desist Proceeding with Allianz SE (Dec. 17, 2012), www.sec.gov/litigation/admin/2012/34-68448.pdf.