Focus: Guide on US Foreign Corrupt Practices Act: Relevance to Australian business
23 November 2012
In brief: The US Department of Justice and the Securities and Exchange Commission have issued a resource guide to US foreign corrupt practices legislation. It provides helpful regulatory direction on the enforcement of the legislation, including on issues relevant to its application to Australian business. Partner Louise Jenkins (view CV), Senior Associate Rachel Nicolson and Lawyers Stuti Sethi and Rebecca Grover report.
How does it affect you?
Importantly for Australian corporates, the Resource Guide to the US Foreign Corrupt Practices Act (the FCPA) (the Guide):
- reaffirms the positions of both the US Department of Justice and the Securities and Exchange Commission (together, the Regulators) that the FCPA anti-bribery provisions may be triggered by conduct that has only a minimal connection to the US and provides guidance on the attribution of corporate liability for the acts of subsidiaries and predecessor companies;
- addresses the application and scope of the FCPA in relation to various key issues including the definition of 'foreign official', the provision of gifts and other payments and the maintenance of the facilitation payments exception; and
- reiterates the importance of company anti-bribery compliance programs, identifying 10 'hallmarks' of an effective compliance program and providing insight into US regulatory expectations of the content of such programs.
The FCPA, which is the key US anti-bribery law concerning bribery of foreign public officials, remains the most actively enforced anti-bribery law globally, including against non-US companies that fall within its jurisdiction.
The FCPA addresses bribery in two ways:
- the anti-bribery provisions, prohibiting the payment of money or anything of value to a foreign official in order to influence them to obtain or retain business; and
- the accounting provisions, imposing record keeping and internal control requirements with respect to company finances.
While the Guide is non-binding and the courts remain responsible for the interpretation of the FCPA, it is a comprehensive document providing unprecedented guidance on the Regulators' approach to enforcing the FCPA (including illustrative examples). In this article, we have highlighted some of the key issues raised in the Guide that are relevant to Australian companies and multinationals.
Foreign entities and territorial jurisdiction of the FCPA
The FCPA's anti-bribery provisions apply to three categories of persons and entities:
- issuers (which includes, for example, companies with a class of securities listed on a national US securities exchange and foreign companies with American Depository Receipts listed on the US exchange);
- 'domestic concerns', which includes US nationals and companies with their principle place of business in the US and
- persons and entities acting while in US territory that are not issuers or domestic concerns.
The Guide reiterates that foreign nationals and entities that are not issuers or domestic concerns will be subject to the FCPA's anti-bribery provisions where they have engaged, either directly or through an agent, in the use of 'US mails' or 'any means or instrumentality of interstate commerce' or 'in any other act' in furtherance of a corrupt payment while in the territory of the United States. The Guide notes that this phrase covers the placing of a telephone call, the 'sending of a wire transfer to or from a bank in the United States or otherwise using the United States banking system' as well as a foreign national attending a meeting in the United States to further a foreign bribery scheme.
The Guide notes that foreign nationals and entities may also be liable under the FCPA where they aid and abet, conspire with, or act as agent for issuers or domestic concerns – even if the action did not take place in the US.
It is important for Australian companies and multi-nationals to be conscious of the broad extraterritorial reach of the FCPA, particularly where communications or bank transfers have US connections, as recent case law suggests that the Regulators are seeking to prosecute FCPA violations vigorously.
Parent company liability for subsidiaries
The Guide outlines two circumstances where a parent company will be liable for bribes paid by a subsidiary. The first is where the parent company is directly liable for a subsidiary's actions through its own participation in the conduct. The second is under agency principles and 'control' of the subsidiary is identified as a determining characteristic for liability. This is assessed on factors including the parent company's 'knowledge and direction' of the subsidiary's actions (generally or in the context of a specific transaction) and the 'practical realities' of how the parent and subsidiary interact (and not just their formal relationship).
Accounting and record keeping provisions
The FCPA books and record keeping provisions provide that an issuer's books and records include those of consolidated subsidiaries and affiliates. As a result, the Guide notes that the issuer is responsible for ensuring that 'subsidiaries or affiliates under its control', including foreign subsidiaries and joint venture partners, comply with the accounting provisions of the FCPA. This assists in identifying bribes that have been mischaracterised in company records and the Guide notes that where the requirements of the anti-bribery provisions have not been met, companies may be liable for improper recording of bribes.
The Guide recognises that companies may not have the same control over minority owned subsidiaries or affiliates. In such circumstances, it 'is only required to use its best efforts to cause the minority-owned subsidiary or affiliate to establish and maintain internal accounting controls consistent with the issuer's own obligations under the FCPA'.
Liability of successor companies
The Guide confirms that when a company merges with or acquires another company, the successor company assumes the predecessor company's liabilities, including liability for FCPA violations in which the successor company was not involved.
The Guide emphasises the importance of conducting detailed pre-acquisition due diligence and improving compliance mechanisms for a number of reasons, including that this 'demonstrates a genuine commitment to uncovering and preventing FCPA violations'. The Guide states that the Regulators:
- have 'declined to take action against acquiring companies that have voluntarily disclosed and remediated conduct and cooperated in the merger and acquisition context'; and
- 'have only taken action against successor companies in limited circumstances, generally in cases involving egregious and sustained violations or where the successor company directly participated in the violations or failed to stop the misconduct from continuing after the acquisition'.
Regulators are unlikely to pursue successor companies for breaches of a predecessor company where appropriate pre-acquisition due diligence and disclosure have been undertaken by the successor company.
Definition of 'foreign official' – ownership and control entities
The Guide notes that the FCPA applies to bribes paid to 'foreign officials', including employees or officers of an 'agency' or 'instrumentality' of a foreign government. This is intended to capture corrupt payments to state-owned entities and state-controlled entities.
The Guide notes that the 'ownership, control, status and function' of an entity will determine whether it is a government instrumentality and identifies a number of indicative factors referred to by courts in the US. Importantly, 50 per cent ownership is identified as the threshold at which an entity is likely to qualify as a government instrumentality but the Guide cautions that a foreign government with a minority stake in an entity may nevertheless exercises 'substantial control' (for example, through veto rights) of the entity, making it a government instrumentality. Given this broad definition, companies subject to the FCPA should ensure appropriate due diligence is conducted to identify foreign officials who may be involved in transactions.
The Guide also clarifies that:
- the provisions apply irrespective of the rank of the foreign official involved;
- foreign governments are not considered foreign officials but cautions companies to avoid the appearance of impropriety in any gifts or donations to foreign governments and take steps to ensure that monies are not used for corrupt purposes.
Exception for facilitation payments – routine government actions
The FCPA exempts facilitation payments from the anti-bribery prohibitions where they are made in 'furtherance of a routine government action'. Examples identified are actions such as processing a visa, providing police protection or mail service. Decisions to award new business or continue existing business do not fall within the exception.
The Guide instructs companies to determine the propriety of a specific facilitation payment by focusing 'on the purpose of the payment rather than its value' (although size may indicate the propriety of the payment). Companies may still violate the FCPA books and records provisions if such payments are not completely and accurately recorded in the company records.
Companies should also consider their liability under other bribery legislation that may apply to facilitation payments before structuring compliance programs permitting such payments.
The permissibility of facilitation payments is currently under review at a Commonwealth level in Australia (in addition to being illegal in most Australian states and territories) and the scope of payments that are permissible remains unclear. Further, facilitation payments are illegal under the UK Bribery Act and may also violate local laws as well as the recommendations of the Organisation for Economic Co-Operation and Development's Working Group on Bribery.
Definition of 'anything of value' – intent of hospitality and gifts
There is no minimum threshold for prohibited gifts and payments. The Guide states that the FCPA prohibition on giving 'anything of value' to a foreign official ensures that gifts or other non-cash benefits intended to improperly influence government officials are captured. This 'corrupt intent' requirement is intended to permit the 'legitimate promotion of business' while prohibiting 'bribes disguised as gifts'.
The Guide does not clarify what constitutes 'legitimate' gift giving but notes that extravagance can indicate impropriety. However, small-scale gift giving demonstrating a 'long standing course of conduct' evidencing a 'scheme to corruptly pay foreign officials to obtain or retain business' is also prohibited. Gifts or payments to third parties intended to indirectly influence foreign officials will also be caught by the legislation.
Many companies have already instituted compliance programs with guidelines for gift giving to create an effective and efficient mechanism for controlling gift giving and exposure to FCPA violations.
The Regulators consider the adequacy of a company's compliance program when deciding whether to prosecute and the penalties that will be sought. Effective compliance programs may also contribute to the early detection of violations and assist companies in self-reporting, cooperating with the Regulators and taking remedial actions – all of which are taken into account by the Regulators when enforcement options.
The Guide does not include any mandatory standards or form of compliance programs, but stresses that they are an essential component of internal risk management and identifies the following 10 'hallmarks' of an effective compliance program:
- commitment from senior management and a clearly articulated policy against corruption;
- a code of conduct and compliance policies and procedures;
- assignment of responsibility for oversight to a person with adequate autonomy from management and sufficient resources to ensure effective implementation of the compliance program;
- risk assessments of particular transactions so that unnecessary resources are not devoted to low risk projects;
- training and continual advice for directors, officers, employees, agents and business partners;
- inclusion of incentives and disciplinary measures that are commensurate with the violation and apply across the organisation;
- education of third parties of internal policies and assurances of reciprocal commitments and appropriate due diligence in relation to third parties;
- reporting of misconduct internally and a procedure for internal investigations;
- periodic testing and review to ensure continuous improvement of the compliance program; and
- FCPA due diligence in a mergers and acquisition context, including incorporation of the acquired company into the acquiring company's compliance framework.
This represents a significant addition in regulatory guidance on expected compliance steps. It follows similar guidance provided by the UK Government on what are considered to constitute 'adequate procedures' on compliance under the UK Bribery Act.
The FCPA is of major importance to Australian companies and multinationals that may fall within its jurisdictional reach – particularly in light of the Regulators' aim to enforce the FCPA vigorously. While it is just guidance on the interpretation and enforcement of the FCPA, the Guide provides some clarity as to the circumstances in which Australian companies and multinationals may be subject to the FCPA, including through the extensive jurisdictional reach of the FCPA and corporate liability for the acts of subsidiaries.
The Guide includes examples to illustrate the positions adopted by the Regulators. However, these should not be viewed as restricting the Regulators' enforcement rights in any way. Companies should remain conscious of the Regulators' intent to prosecute violations and take a conservative approach when considering the risk of FCPA violations. This includes implementing comprehensive compliance programs and undertaking due diligence when conducting business or acquiring or merging with a business that operates in jurisdictions of risk.
Further, Australian companies and multinationals should be aware of the different requirements of regulators across the jurisdictions in which they do business and ensure compliance with the requirements of local laws, as well as those laws with extraterritorial reach, such as US, UK and Australian anti-bribery legislation (as applicable).
- Louise JenkinsPartner,
Ph: +61 3 9613 8785
- Rachel NicolsonPartner,
Ph: +61 3 9613 8300
- Ross DrinnanPartner, Practice Leader, Commerical Litigation & Dispute Resolution,
Ph: +61 2 9230 4931
- Guy FosterPartner,
Ph: +61 2 9230 4798
- Marshall McKennaPartner,
Ph: +61 8 9488 3820
- Geoff RankinPartner,
Ph: +61 7 3334 3235