By: Stephen Wagner
Your company exports and ships its products all over the world through a small, local third-party logistics provider. The export manager at the shipping company, who is a close personal friend, has been handling your company’s products for years and has been doing a perfect job. The products arrive at your foreign customer locations on time, without problems, and you just pay the invoices for the shipping costs without question. In fact, international shipping is the one part of your company’s operations at which you have never needed to take a second look.
Until today… Today two special agents from Homeland Security Investigations (HSI) arrived at your office to ask about your company’s export activities. They were vague about the nature of the investigation, but asked a lot of questions about your shipping practices. As they were leaving, they handed you a subpoena for five years’ of export records. You started gathering your documents together and now, reviewing your export shipping invoices for the first time in years, you see line items and charges for a “Customs Clearance Fee” in certain countries and an “Import Commission” in other countries. When you called your friend at the shipping company to ask about these charges, he said that the receiving shipping companies in these countries must pay these fees “so your products can sail through customs.”
What are you really seeing when you look at these charges?
Depending on the exact nature of these payments, you may end up seeing federal criminal charges.
The Foreign Corrupt Practices Act, as amended (15 U.S.C. §§ 78dd-1, et seq.) (“FCPA”), was enacted in 1977 and makes it illegal for U.S. companies (including their foreign affiliates) to make payments to foreign government officials. The “anti-bribery provisions” of the FCPA prohibit “any offer, payment, promise to pay, or authorization of the payment of money … directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage[.]” 15 U.S.C. § 78dd-1(a). Additionally, the “accounting provisions” of the FCPA require companies whose securities are listed in the United States to “make and keep books and records that accurately and fairly reflect the transactions of the corporation” and “devise and maintain an adequate system of internal accounting controls[.]” 15 U.S.C. § 78m(b)(2).
Yet, the world of international business is not so black and white. There are myriad court cases, attorney general opinions and legal theories that seek to define a “foreign official.” While someone working for a foreign government (like a uniformed foreign customs officer) is clearly such an “official,” what about employees of a nationalized, or government-owned company? What about employees of private companies that conduct government functions (such as processing customs paperwork) under a contract with the government? What about agents, consultants or lobbyists who “grease” the foreign government processes on your behalf?
Furthermore, recognizing that sometimes payments must be made to foreign government officials just to move paperwork along or obtain routine approvals, the anti-bribery provisions of the FCPA contain an exception for “facilitating payments.” This narrow exception applies to payments made for non-discretionary actions, like processing customs paperwork or import permit applications; actions which would take place even without the payments, but would probably take much longer to occur.
Therefore, looking at your company’s “Customs Clearance Fee” or “Import Commission,” several critical questions arise: who is being paid, and for what?
Even if you think you have found the logical answers to these questions, you will need to consult with your company’s general counsel or a qualified outside attorney, because you may not be able to interpret these answers correctly. Indeed, sometimes, the law does not apply logically to the way businesses operate, and sometimes, the language used in the statutes and regulations can be ambiguous or subject to multiple interpretations. For example, if you think the “fee” or “commission” would qualify as a facilitating payment, the U.S. government’s FCPA Guidance warns, “while the payment may qualify as an exception to the FCPA’s anti-bribery provisions, it may violate other laws, both in Foreign Country and elsewhere. In addition, if the payment is not accurately recorded, it could violate the FCPA’s books and records provision.”
And you cannot stop your investigation with just these “fees” and “commissions,” because no federal government investigation will stop there either. Many exporters may pay intermediaries to obtain business in foreign countries. Whether these payments to “middlemen” are labeled as “sales commissions” or “distribution fees” or “licensing payments,” they may all still be bribes as that term is interpreted by enforcement agencies under the FCPA.
As an example of how broadly the FCPA can be interpreted, in May 2014 a federal appeals court ruled in the case of United States v. Esquenazi (752 F.3d 912 (11th Cir. 2014)), that the FCPA’s definition of “foreign official,” which includes “any officer or employee of a foreign government or any department, agency, or instrumentality thereof,” also includes officials working for “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” Esquenazi, 752 F.3d at 925. Therefore, if your company is doing business with a foreign state-owned or state-controlled business, certain payments to officials of that foreign company could be illegal under the FCPA, because such businesses can be interpreted as being “instrumentalities” of the foreign government.
It is also important to note that FCPA enforcement is expected to be on the rise in 2015. Violations of the FCPA can result in criminal and/or civil charges from the U.S. Department of Justice (DOJ) and (if your company is a “reporting company” under the Securities Exchange Act of 1934) civil or administrative cases from the U.S. Securities and Exchange Commission (SEC). While enforcement actions by these two agencies had been relatively stable over the last three years, there has been a recent uptick in the number of potential FCPA violations reported to the U.S. government. This is due in large part to stronger anti-corruption laws and enforcement measures around the globe, which is increasing corporate awareness of anti-bribery issues. As companies are reporting more to the enforcement agencies, actions under the FCPA should increase as well.
And the stakes in FCPA compliance measures and enforcement actions can be enormous. For 2014, the average value of monetary resolutions in government FCPA enforcement actions against corporations was over $150 Million. And those are just the fines and penalties. On the compliance side the costs can be staggering for businesses as well. In one well publicized case, Walmart self-reported possible FCPA violations to the DOJ and SEC after a New York Times investigation. According to filings with the SEC, Walmart is now spending between $10 Million and $35 Million per quarter for its “global [anti-bribery and anti-corruption] compliance program and organizational enhancements.” In its fiscal 2014 Global Compliance Program Report, Walmart reported it had spent an overall total of $439 million in legal fees and other costs associated with the on-going investigations of alleged FCPA violations, and to revamp its global compliance protocol.
While smaller companies may not have the breadth of operations (and the financial resources) of Walmart, having an effective and robust FCPA compliance program is just as critical. A combination of a strong, written program together with its robust use and periodic audits can help prevent exactly the type of situation that has befallen the company in the scenario above. Moreover, an effective FCPA program can be a critical factor in mitigating possible penalties in any FCPA enforcement action that may arise.
So what does this mean for your company? In the short-term, you should conduct an immediate self-assessment to check foreign transactions for both export violations and FCPA violations. It is common for a company lacking in FCPA internal controls to also be lacking in effective export controls and vice versa. (You also need to have legal counsel carefully review all of the responsive subpoena documents for possible export and/or FCPA violations.) In the long-term, your company must become more vigilant with respect to FCPA issues. Your company’s overall compliance program must address anti-corruption and anti-bribery programs, just as company contracts with foreign entities or with respect to export-related operations should contain standard provisions requiring FCPA compliance.