The Foreign Corrupt Practices Act of 1977 (FCPA), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to or bribe foreign government officials to assist in obtaining or retaining business. In other words, FCPA prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business.
As noted by a recent article in the Wall Street Journal, in the past five years, a remarkable run of enforcement of the U.S. law has led to about $4 billion in penalties against corporations. The law prohibits companies from paying bribes to foreign officials to win business. A violation can result in criminal prosecution.
Consequently, in order to address the significant impact prosecution of the FCPA has had on industry, particularly the health care industry, the Chamber of Commerce and several legislators are calling for several changes and clarifications in how the Act is enforced.
Background
Congress passed the law in 1977, after the Watergate scandal revealed the use of corporate slush funds to bribe foreign government officials, but it was sporadically enforced until recent years. Justice Department officials have attributed the recent enforcement push, in part, to the 2002 Sarbanes-Oxley Act, which requires corporate officers to certify the accuracy of their financial statements. That has led to more companies discovering potentially illicit payments on their books and disclosing them to the Securities and Exchange Commission and the Justice Department, they say.
The anti-bribery provisions of the FCPA make it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. This means that paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value is prohibited. FCPA also carries penalties for any publicly-held company that maintains inaccurate books and records or inadequate internal accounting controls (the accounting and record-keeping or “books-and-records” provisions).
The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the anti-bribery provisions or if they conspire to violate those provisions. A U.S. company or national may be held liable for a corrupt payment authorized by employees or agents operating entirely outside the United States, using money from foreign bank accounts, and without any involvement by personnel located within the United States.
The offer or promise of a corrupt payment can constitute a violation of the statute. This means that a corrupt payment does not actually have to take place for a company to be liable under FCPA. The FCPA prohibits any corrupt payment intended to influence any act or decision of a foreign official in his or her official capacity, to induce the official to do or omit to do any act in violation of his or her lawful duty, to obtain any improper advantage, or to induce a foreign official to use his or her influence improperly to affect or influence any act or decision.
DOJ is responsible for all criminal enforcement and for civil enforcement of the anti-bribery provisions with respect to domestic concerns and foreign companies and nationals, and the Securities and Exchange Commission (SEC) handles other matters.
Recent Developments
The Washington Legal Foundation (WLF) traced the growing interest in FCPA to November 12, 2009, when Assistant Attorney General and Department of Justice (DOJ) Criminal Division Chief, Lanny A. Breuer, took the stage to present the keynote address at the Tenth Annual Pharmaceutical Regulatory and Compliance Congress in Washington, D.C. In his speech, Breur described an aggressive FCPA enforcement agenda focused on the pharmaceutical and medical device companies, in the months and years ahead.
WLF explained that, Breuer’s remarks indicate that a substantial portion of law enforcement attention and resources are now focused on the pharmaceutical and medical device industries. For example, he noted how one third of U.S. pharmaceutical companies’ sales, upwards of $100 billion, are generated outside the United States “where health systems are regulated, operated and financed by government entities to a significantly greater degree than in the United States.”
What makes this arrangement unique is that “it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.” This means that the FCPA has a broad mandate to go after companies in foreign countries.
Breuer also explained in his speech how in many of these countries healthcare and government are inextricably intertwined, and when combined with “fierce industry competition,” this environment poses a significant risk of corruption. As a result, he noted that the DOJ has decided to become “intensely focused on rooting out foreign bribery in [the pharmaceutical and medical device] industry.”
Examples of FCPA prosecutions include high-profile settlements involving both U.S. and foreign companies, including Siemens AG, Halliburton Co. and Johnson & Johnson. More recently, Pfizer Inc. is expected to pay more than $60 million by the end of the year to resolve U.S. government probes into whether the drug maker and Wyeth, which it acquired in 2009, paid bribes to win business overseas.
Amending the FCPA
WSJ noted that, “amending the law is a priority for the U.S. Chamber of Commerce.” For example, in the first three quarters of this year, the chamber paid outside lobbyists—including former Attorney General Michael Mukasey, now a partner at Debevoise & Plimpton LLP— a total of more than $700,000 to press for changes to the FCPA and other laws, according to House lobbying records.
“Though they can’t estimate to what extent, the chamber and defense lawyers say they have anecdotal evidence that the law has had a chilling effect, stunting U.S. business interests abroad as companies shun deals for fear of triggering FCPA probes.” Specifically, the chamber and lawyers who support amending the FCPA say there is still substantial confusion over what is legal and what isn’t.
The chamber wants clarity on whether employees of companies with state ownership or control behind them qualify as such. The Justice Department has taken an expansive view, arguing, for instance, that virtually every employee a pharmaceutical company encounters in a state-run health-care system could be considered a foreign official.
U.S. Senators Amy Klobuchar (D-MN) and Chris Coons (D-DE) have said they plan to introduce legislation that would clarify parts of the law. “We certainly don’t want to remove FCPA’s teeth, but if we can make the road map clearer for American companies, we should try,” said Ian Koski, a spokesman for Sen. Coons. Rep. Bobby Scott (D-VA), who sits on the House Judiciary Committee, said he and other committee members are also looking at the law. “If you’re going to have these kinds of penalties, companies ought to know clearly what the rules are,” he said.
In response to industry concerns, DOJ and anticorruption advocates say that any changes to the FCPA, “would send the wrong message to foreign governments that recently passed or updated bans on foreign bribery, including China, Russia and the U.K. “This is precisely the wrong moment in history to weaken the FCPA,” Lanny Breuer. “There is no argument for becoming more permissive when it comes to corruption.”
Despite this response, Mr. Breuer told WSJ that DOJ is planning to introduce “detailed new guidance” on the law sometime next year. Such guidance could provide companies with “leverage they didn’t have before.” Harold Kim, senior vice president at the U.S. Chamber of Commerce, insisted that a change in the law is “the best solution.”
One major change proposed by the chamber would allow companies to avoid liability if they can prove they had robust measures in place to prevent bribes, such as training programs. Another proposal under consideration by lawmakers would give companies a reduction in penalty—as much as 40%—if they self-report a possible violation. Companies could receive additional discounts for informing on other companies involved in corrupt practices.
Robert Tarun of Baker & McKenzie LLP, who authored the discount proposal, said the government needs to “quantify credit for real cooperation so companies and boards can make informed decisions.” Justice Department officials say companies are already given credit for cooperation.
George Terwilliger, a former deputy attorney general and now a partner at White & Case LLP, said companies should have a grace period to investigate new acquisitions and disclose what they find without fear of prosecution.
Heather Lowe, director of government affairs at the anticorruption group Global Financial Integrity, which opposes any changes to the FCPA, said companies should be doing those types of investigations before making acquisitions, adding that if wrongdoing is uncovered, the parties can adjust the purchase price accordingly. “It’s part of the deal,” she said.
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