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The Foreign Corrupt Practices Act (FCPA): Second edition at a glance

Historical background into FCPA

In 1977, following the infamous Watergate political scandal, the U.S. Congress enacted FCPA, unleashing series of corrupt practices on an international scale to prohibit and condemn such a form of illicit activity.  The U.S. congress rightfully asserted that the wide-spread phenomenon of corruption to be harmful to the integrity of U.S.-based companies. If such criminal activity was outlawed internally, it surely had to be prohibited internationally.

In retrospect, the first edition of the Foreign Corrupt Practices Act Resource Guide (the “Guide”) was released back in November of 2012, in comparison, the second edition offers and covers new and updated FCPA related enforcement actions and legal changes.

FCPA updates

In its second edition, the FCPA’s scope was enlarged to (1) include payments made to secure “any improper advantage”; (2) reach certain foreign persons who commit an act in furtherance of a foreign bribe while in the United States; (3) cover public international organizations in the definition of “foreign official”; (4) add an alternative basis for jurisdiction based on nationality; and (5) apply criminal penalties to foreign nationals employed by or acting as agents of U.S. companies.

 

Further, the FCPA offers clarification to the definition of “foreign official” to include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.”.

Hence, the term “instrumentality”  under the FCPA, has been elaborated and updated in relation to the recent decision of the case the United States v. Esquenazi. and has been incorporated in order to classify foreign officials” under the anti-bribery provisions.

According to FCPA’s second edition, the term “instrumentality” is a broad and adaptable concept. It may include state-owned or state-controlled enterprises that employ people with business titles lice vice-president and director, instead of government titles like minister or secretary. U.S. Court of Appeals for the Eleventh Circuit issued a ground-breaking decision in which an appellate court defined for the first time the term “instrumentality” of a foreign government as it is used in the definition of a “foreign official” under the FCPA.

Based on the Court’s postulate “an instrumentality must perform a government function at the government’s behest”… But, what functions count as the “government’s business”?

Further, the Court decided to use its stature as the first case deciding this issue to provide a list of factors to help future courts decide if the government controls an entity, i.e. the following indicators for the instrumentality, amongst which are:

  • The foreign government’s formal designation of that entity;
  • Whether the government has a majority interest in the entity;
  • The government’ ability to hire and fire the entity’s principals;
  • The extent to which the entity’s profits, if any, go directly into the governmental fisc;
  • The extent to which the government funds the entity if it fails to break even; and
  • The length of time these indicia have existed.

 

Corporate Compliance programs under the FCPA


The Second Edition of FCPA elaborates on the hallmarks of effective compliance programs. It is important to note that compliance programs have been granted somewhat flexibility in how they decide to execute compliance within their organizations.

In essence, compliance programs shall be tailored to the needs of the company, and by no means employ a “check the box” approach. Given that, the second edition offers a new hallmark “Investigation, Analysis, and Remediation of Misconduct.”, It stipulates, that in order to evaluate the efficiency of a compliance program, the company’s response to certain misconduct must be documented. Following, derived from the incident, the company must document and make appropriate changes to policies, training, and controls in efforts to prevent and alleviate risks in the future.

Tips to reduce risks

In case of a corporate merger, or acquisition FCPA offers precautionary steps that may be followed to reduce and alleviate risks.

Option A is to obtain an opinion from the Department of Justice on a potential acquisition. However, it should be noted that companies taking part in acquisition and mergers shall consider the following according to FCPA’s second edition:

  1. Conduct comprehensive risk-based FCPA and anti-corruption due diligence on potential new business acquisitions;
  2. Certify that the acquiring company’s code of conduct and compliance policies and procedures regarding the FCPA and other anti-corruption laws apply at the earliest possibility to newly acquired companies;
  3. Assure appropriate training of the directors, officers, and employees of newly acquired businesses or merged entities. Following that, train agents and business partners upon relevant FCPA guidelines, internal procedures, and policies;
  4. Organize an FCPA oriented audit of all newly acquired or merged businesses as quickly as possible;
  5. Uncover any corrupt payments exposed as part of its due diligence of newly acquired entities.

In conclusion, the second edition offers a rather insightful and expand guidance due to gained experience since the preceding edition. It is important to understand that the FCPA resource guide is non-binding, however, it steadily remains to be the key guidance for companies in relation to anti-corruption compliance programs.

 

Sources:

The United States. Dept. of Justice. Criminal Division. A Resource Guide to the U.S. Foreign Corrupt Practices Act. Washington D.C.: U.S. Department of Justice: U.S. Securities and Exchange Commission, 2020

Jon Jordan, U.S. v. Esquenazi: U.S. Appellate Court Defines “Instrumentality” Under the Foreign Corrupt Practices Act for the First Time

Doug Cornelius, What is an “Instrumentality” under the FCPA? (www.compliancebulding.com)

25 Sep, 2020