BY: Travis Albea, Guest Contributor
Editor’s Note: The Campbell Law Observer has partnered with Judge Paul C. Ridgeway, Resident Superior Court Judge of the 10th Judicial District, to provide students from his International Business Litigation and Arbitration seminar the opportunity to have their research papers published with the CLO. The following article is one of many guest contributions from Campbell Law students to be published over the Spring 2015 semester.
In 1974 it was said that “corruption is like sex was in Victorian England: it absorbs intense activity and is the subject of much speculation, but it is seldom considered a suitable topic for serious economic analysis.”1 Forty years later, the United States Government is taking an aggressive stance against corruption by prosecuting individuals and companies that participate in foreign bribery by way of the Foreign Corrupt Practices Act (FCPA or the Act). Although the United States has committed itself to combatting corrupt business practices, the aggressive enforcement by the Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC) (together, “the agencies”), is a relatively recent phenomenon.2 Regardless of the reasons for recent surge in enforcement actions, or the impact the Act has had on United States businesses and the global market, one thing is for certain, “the [United States] government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”3
A Brief History
To understand the evolution of the FCPA, one must first recognize the context in which it was created. Between 1970 and 1977 there were a number of public corporate business and political scandals that became public within the United States.4 Most notable of the scandals was the involvement of United States President Richard Nixon in the Watergate break-in of 1972.5 In addition to the notorious Watergate scandal, the Nixon Administration was also involved in other illegal activities including the creation of overseas slush funds. These slush funds were used to bribe foreign officials and fund illegal contributions to numerous political campaigns.6
In an effort to further expose and reduce corruption, in 1976 the SEC conducted a far-reaching investigation in which the agency asked American companies to self-report violations of United States securities laws in return for the possibility of avoiding punishment.7 In the early part of 1977, the SEC issued a report detailing the disturbing the results of its voluntary disclosure program to Congress.8 The SEC had discovered that “more than 400 companies had made questionable or illegal payments, in excess of $300 million, to foreign officials for a wide range of favorable actions on behalf of the companies.”9 The list of companies included well-known corporations such as Exxon Mobil, Boeing and Gulf Oil.10
Congress was concerned that corporate bribery had reached a level that could undermine public confidence in the business community and negatively impact America’s image abroad.11 Additionally, Congress recognized that corporate bribery could inhibit the global market’s economic growth due to inefficiency. Economic inefficiency has the potential to produce “a race to the bottom [which] consists of competing corporations that will continue to pay larger and larger bribes to win contracts over their competitors and thus are likely to give into the demands of the increasingly greedy foreign official.”12 Moreover, bribery reduces investments by directing resources away from research and development and into the pockets of foreign officials.13 In response to growing number of scandals, concerns of a tainted American public image, and the threat of economic inefficiency, Congress amended the Securities Exchange Act of 1934 and passed the FCPA. President Carter signed the Act into law on December 19, 1977.14
Broadening The Scope Of The FCPA
Since its passage in 1977, Congress has amended the Act twice.15 The first amendment was included in the Omnibus Trade and Competitiveness Act of 1988.16 This amendment was passed in response to critics of the FCPA who claimed the Act put American businesses at a competitive disadvantage because the United States was the only nation subject to the strict anti-bribery laws.17 In an effort to alleviate these concerns, the 1988 amendment included affirmative defenses, a knowledge requirement for violations, and urged other countries to adopt comparable anti-corruption legislation.
The next amendment occurred ten years later within the International Anti-Bribery and Fair Competition Act of 1998.18 The second round of amendments extended the FCPA’s jurisdiction, expanded liability, and clarified the FCPA’s prohibition against foreign payments made to secure improper business advantages.19 These two amendments operated to broaden the scope of the Act.
As it stands today, the Act is expansive enough to address its two main purposes; (1) to prohibit the bribery of foreign officials and (2) to establish certain corporate accounting requirements.20 The FCPA anti-bribery provisions make it illegal to improperly offer anything of value to foreign government officials or political parties for any business gain. The FCPA books-and-records provision requires businesses “to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.” Both provisions apply to any business entity that is organized under the laws of the United States or has its principal place of business in the United States. The provisions also apply to any United States citizen, national or resident, that knowingly violates the FCPA while within the territory of the United States.
The Enforcers Of The FCPA
The FCPA is both a criminal and civil statute, and because it is part of the securities law, both the DOJ and the SEC play a role in enforcing the Act.21 While each agency has the power to enforce the FCPA, their respective authority is not without limitation. The SEC is restricted to civil enforcement of the books and records provision and can only do so if securities are involved. The DOJ is responsible for all criminal enforcement of the statute and civil enforcement of the antibribery provisions. The DOJ has the authority to: “issue guidelines and opinions, bring permanent or temporary injunctions, subpoena witnesses, gather evidence, require production of documents, enforce criminal penalties.”22 Like other securities law violations, the issue of intent and whether the prosecutor has the ability to satisfy the burden of proof beyond a reasonable doubt will determine whether the DOJ or SEC will enforce the Act by determining whether an FCPA violation is pursued with criminal or civil charges.23 However, “[b]ecause improper payments that violate the FCPA’s antibribery provisions are also often disguised or inaccurately recorded on the company’s books and records”, the DOJ and SEC will often bring parallel “actions for both antibribery violations and books and records violations.”24
The Traditional Approach To Enforcing The FCPA
Although the Act is indeed expansive, including a potentially heavy hand for enforcement and a far-reaching jurisdictional grasp, enforcement by the agencies was sporadic for the first thirty years of its existence.25 From 1977 to 1997, only seventeen companies and thirty-three individuals faced prosecution under the Act.26 The low number of prosecutions can, in part, be attributed to the difficulties involved in gathering evidence overseas at the time.27 However, there were also a number of policy concerns that prevented the agencies from vigorously enforcing the law. Since the FCPA was the first law of its kind, there was a fear that enforcing the Act would damage relationships with allies.28 For this reason, the DOJ required its prosecutors to receive permission from Washington before pursuing any bribery charges under the FCPA.29 Therefore, enforcement efforts were focused on cases involving obvious violations.30 For example, under the Reagan Administration, “it was department policy to commence prosecutions only where the evidence of [a violation of the FCPA] was so clear as to constitute actual knowledge of the bribe scheme.” The agencies continued their tradition of hesitantly enforcing the FCPA until the later half of President George W. Bush’s second term in office.31
The Modern Trend Of Enforcement
Between 2004 and 2006, the agencies brought a combined total of thirty-two FCPA actions.32 However, starting in 2007 there was a dramatic shift in the way the Act was enforced and the penalties that were handed down.33 “Between 2007 and 2009 [the agencies] brought [a combined 111] FCPA enforcement actions, . . . almost twice as many as the total number of cases brought in the first twenty-eight years the statute was in force.”34 Not only did the number of enforcement actions increase, but so did the amount of fines. In 2008 the government issued an FCPA criminal fine against a company that was ten times higher than the previous largest civil fine, and seventeen times more than the previous largest criminal penalty. In that same year alone, the agencies brought a combined thirty-three FCPA actions worth a total of $885 million, despite no change in the law. In 2010, under President Barack Obama’s administration, the agencies brought a staggering seventy-four FCPA actions worth a total of $1.8 billion. “The past decade has thus witnessed a remarkable transformation, not as to the FCPA itself (the statute has not changed since 1998), but [rather] as to FCPA enforcement.”35
Offering Explanations For The Increase In FCPA Enforcement
In 2004 United States v. Kay opened the door for the evolution of DOJ and SEC enforcement of the FCPA.36 The issue presented in Kay, whether payments made to Haitian government customs officials for the purpose of reducing import duties fell within the scope of the Act, was in contrast to the common FCPA violation where a United States company would make payments to a foreign official in exchange for a government contract.37 The U.S. Court of Appeals for the Fifth Circuit held that “Congress intended to extend [FCPA] criminal liability to instances where bribes provided a competitive advantage . . . [and] that making payments to a foreign government customs official to reduce taxes and customs duties can provide an unfair advantage to the business and thereby assist in obtaining or retaining business.” Following the holding of Kay, the SEC and DOJ began to aggressively enforce the FCPA in cases involving custom duties and other illegal payments intended to assist in securing foreign government licenses, permits and certifications.38
In addition to the holding in Kay, there were a number of other developments, both domestically and internationally, that have helped lead to the dramatic increase in FCPA enforcement actions. : (1) international anti-corruption developments, (2) the Sarbanes-Oxley Act of 2002 (SOX), (3) the UN Oil-for-Food Program (OFFP), (4) rapid growth and sudden contraction of the global market, and (5) the financial crisis of 2008.39
International Anti-Corruption Developments
When the FCPA was first enacted, it was the only law of its kind.40 However, by the mid-2000s, many countries had also adopted their own anti-corruption legislation.41 This movement helped to “facilitate cross border [FCPA] investigations and enforcement actions with respect to corrupt activity.”42
The Sarbanes-Oxley Act’s reporting requirements on issuers, and its protection of whistleblowers reporting fraud, have helped expand the amount of information to which FCPA enforcers have access.43 Additionally, SOX’s requirement that management certify financial statements creates additional exposure to liability for those in administrative positions.44
UN Oil-for-Food Program
The OFFP humanitarian effort allowed the Iraqi government to sell oil in exchange for supplies needed by the Iraqi people living under international sanctions. Unfortunately, these efforts were plagued by substantial corruption. In 2005 a United Nations investigative body released a report stating 2,253 companies made corrupt payments, in excess of $1.75 billion, to Saddam Hussein’s government. A large number of FCPA actions were initiated as a result of that report45
Global Business Growth
The expansion of worldwide business opportunities during the economic boom of the mid-2000s also increased FCPA enforcement. As many smaller American companies began to participate in the globalized market, more anti-bribery and accounting violations resulted from the enormous amount of capital that was pumped into international economies.46
Financial Crisis of 2008
The financial crisis of 2008 also increased FCPA enforcement. As the pressure to maintain viability became a necessity for many companies, there was a dramatic decline in compliance with the FCPA. The cease in global growth also triggered consolidations, which led to numerous prohibited payments and illegal accounting practices.47 As a result, the agencies brought more FCPA enforcement actions and imposed higher civil fines from 2008 to 2011 than ever before.
Expectations For Future FCPA Enforcement Action
In 2009, former U.S. Assistant Attorney General Lanny Breuer predicted that in the years to come the DOJ and SEC would seek to maximize their impact in reducing foreign bribery and corruption.48 Breuer also acknowledged the DOJ would revamp its resources – to include investigative assistance from the Federal Bureau of Investigation and the Internal Revenue Service’s Criminal Investigation Division – to maximize FCPA enforcement action. The DOJ was not alone in its effort to take FCPA enforcement to the next level. The SEC also vowed to create its own specialized FCPA investigative and enforcement unit to combat corruption. Today this unit focuses on new and proactive methods to identify violations and maximize penalties.
True to their commitment, both of the agencies have stuck to their guns and made enforcement of the FCPA a top priority, and their efforts are paying off. In fact, during Eric Holder’s tenure with the DOJ, FCPA enforcement became so lucrative that fifty percent of the civil fines procured by the Criminal Division of the DOJ in 2010 were from FCPA enforcement actions.49 Although the number of enforcement actions decreased from 2012 to 2013, the total value of fines in 2013 surpassed $700 million, tripling the monetary sanctions from 2012. It appears that the DOJ now equates FCPA success with the ever-growing dollar value of the enforcement actions.
Corruption is defined as “improper and usually unlawful conduct intended to secure a benefit for oneself or another “ often by way of bribery and “it exists where there is . . . lack of enforcement policies.” In the 1970s, corruption in the United States was commonplace. The American people had an undeniable distrust for politicians and corporations alike. Congress responded to this concern in 1977 by passing the FCPA and placing the DOJ and SEC in charge of enforcement. Although expansive, the Act would need another twenty years and two amendments before it developed into its current form. Additionally, it would require another ten years, a landmark case and a number of domestic and international developments before the law became vigorously enforced. Today the FCPA is a valuable tool for the United States Government in its fight against corruption. The Act is also responsible for hundreds of millions of dollars in civil and criminal fines, and with financial incentives this large, aggressive FCPA enforcement is expected to remain a top priority of these agencies for years to come.
Travis Albea is a 2L student and will graduate from Campbell Law School in May 2016. He may be reached by email at firstname.lastname@example.org.