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Legal Ease by Scott Sinder Is It a Bribe?

Can you buy a foreign government official dinner, or does the U.S. government consider that a bribe? Do your homework before you pick up that dinner tab.

By  Scott Sinder, Lucinda Low, Owen Bonheimer and Negar Katirai

The Justice Department and the Securities and Exchange Commission have recently initiated and settled cases under the widely misunderstood Foreign Corrupt Practices Act. Combined penalties soared to a record-breaking $44 million in a recent case.

What’s going on here?

Although the law has been on the books since 1977, a set of 1998 amendments expanded its reach. The recent spate of enforcement activity has raised the profile of the Foreign Corrupt Practices Act for U.S. companies doing business abroad, as well as for individuals and a growing universe of foreign companies.

The law has two basic sets of elements. The first is a set of prohibitions on making corrupt payments to foreign officials. The second is a mandate that all U.S. or foreign companies traded publicly on a U.S. exchange adhere to prescribed standards of recordkeeping, internal controls and transparency—steps to ensure investors have a true financial picture.

A violation of the law can occur even if the prohibited activity takes place entirely outside the U.S. and does not involve the use of any instrument of U.S. interstate commerce. The activities of non-U.S. companies that do not issue securities in the U.S. are covered only to the extent their activities have a connection to the U.S.

Classic cases involve a money payment to a government official having decision-making authority over the awarding of a contract. However, the act has been wielded much more broadly to cover any sort of inducement—including meals and entertainment—related to almost any sort of government-conferred benefit that ultimately relates to “obtaining business,” including licensure or product approval.
Mergers and acquisitions involving companies doing business abroad raise risks of successor liability either for the past activities of the company that’s being acquired or—even more potentially problematic—for any improper activities that may be ongoing at the time of the acquisition.

There are limited exceptions to the requirements regarding payments to “secure the performance of routine government action,” such as expediting the processing of permits, visas and work orders. The law provides for limited defenses to liability related to certain types of payments, such as those deemed lawful under the written laws and regulations of the foreign official’s country.

Guidance from the federal agencies on how to interpret and comply with the act is limited, making judgment decisions on compliance both complicated and difficult, particularly given the nuanced scenarios faced by most companies operating abroad.

The act also requires publicly traded companies in the U.S. to maintain certain recordkeeping standards and internal accounting controls. These are intended to expose accounting devices designed to hide the existence of bribery payments—such as off-book accounts and slush funds—and to ensure that shareholders receive an accurate picture of the company’s expenditures.

The recordkeeping provisions require companies to make and keep books and records “which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” This requirement applies to all transactions and is not limited to foreign transactions.
The internal controls provisions require companies to “devise and maintain a system” that, among other things, “provide[s] reasonable assurances that…transactions are executed in accordance with management’s general or specific authorization.” The internal control provisions also apply without regard to the existence or extent of a publicly traded company’s foreign operations.

Although the accounting provisions apply only to “issuers” of U.S. securities, the issuers’ responsibilities are broad, extending not just to domestic operations, but also to foreign subsidiaries that are majority-owned. If an issuer holds 50% or less of the voting power of a foreign subsidiary, however, the act requires only that the issuer make a “good faith” attempt to cause the affiliated company to maintain the requisite accounting controls.

The web of domestic, foreign and international laws that apply to international commerce is expanding on an almost daily basis. These complicate your life because they essentially establish multiple layers of compliance requirements and enforcement possibilities. As a result, more companies are investing resources in compliance to avoid embarrassing and costly violations.

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