Archive for the ‘FCPA’ Category

When Export Practices Cross the Line: Hidden Foreign Corrupt Practice Act (FCPA) Violations can Hurt You

Tuesday, July 14th, 2015 by Danielle McClellan

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.

When Export Practices Cross the Line: Hidden Foreign Corrupt Practice Act (FCPA) Violations Can Hurt You

Monday, April 20th, 2015 by Brooke Driver

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.

Weatherford Subsidiaries Pay $252.7 Million for Export Violations and Bribing Government Officials in Violation of the FCPA

Tuesday, December 31st, 2013 by Brooke Driver

By: Brooke Driver

In November, Weatherford International Ltd. broke a BIS penalty record, suffering a fine of $100 million for its subsidiaries’ 174 violations of the regulations. The company was also charged with violating the Foreign Corrupt Practices Act’s anti-bribery provisions and federal export controls regulations. On November 26, Weatherford and three of its subsidiaries pled guilty to these charges, and agreed to pay a massive penalty of nearly $252.7 million, to retain an independent corporate compliance monitor for at least 18 months, and to implement an improved compliance program in order to prevent and detect future FCPA violations. The huge fines demanded by the U.S. Government in this case are a reflection of the company’s repeated (and varied) efforts to intentionally evade U.S. law. According to the Department of Justice, Weatherford International’s subsidiaries:

  • purposely failed to establish an effective system of internal accounting controls designed to detect and prevent corruption, including FCPA violations
  • operated a joint venture in Africa with two local entities controlled by foreign officials and their relatives for the purpose of bribing those officials
  • bribed a foreign official in Africa to approve renewal of a contract in 2006
  • paid $15 million of improper “volume discounts” to a distributor in hopes of establishing a slush fund to bribe a national oil company’s executives

Apparently, these illegal activities earned the company nearly $54.5 million in profits.

Co-director of the SEC’s Enforcement Division Andrew Ceresney described some of the methods Weatherford used to conceal its illegal activities:

“They used code names like ‘Dubai across the water’ to conceal references to Iran in internal correspondence, placed key transaction documents in mislabeled binders, and created whatever bogus accounting and inventory records were necessary to hide illegal transactions.”

Given the extensive measures to which Weatherford went in order to avoid U.S. regulations and the widespread corruption of the organization, it is difficult to believe Chief Executive Bernard J. Duroc-Danner’s statement that:

“With the internal policies and controls currently in place, we maintain a best-in-class compliance program and uphold the highest of ethical standards as we provide the industry’s leading products and services to our customers worldwide.”

If Weatherford’s compliance program is truly “best-in-class” material, the exporting world as we know it is doomed.

FCPA Fines in the News

Friday, February 18th, 2011 by Danielle McClellan

The Foreign Corrupt Practices Act (FCPA) is getting a lot of attention these days after several companies have been fined ranging from $56 million and upwards of $800 million for violating the act. Out of the top 10 cases eight involve non-US companies which is a sign that the government in not just focusing its efforts closely on the US and that there are increasingly large fines that come along with violations. In case you thought that these fines weren’t large enough its likely they will continue to grow as we move into 2011. The FCPA–related charges paid in 2010 were a record $1.8 billion in penalties compared to $641 million in 2009 and $890 million ($800 million of that was the Siemens settlement) in 2008. Anyone see a trend? (more…)

Businessman Pleads Guilty to Illegal Bribes

Thursday, October 22nd, 2009 by Danielle McClellan

Joseph T. Lukas, a partner in Nexus Technologies Inc., has pled guilty in connection with a conspiracy to bribe Vietnamese government officials. Nexus was a privately owned export company that found US vendors for Vietnamese government contracts that involved underwater mapping equipment, bomb containment equipment, helicopter parts, chemical detectors, satellite communication parts and air tracking systems. Lukas was in charge of the negotiations of these contracts with US suppliers. The Vietnamese officials included the commercial branches of Vietnam’s Ministries of Transport, Industry and Public Safety. (more…)

Lucent Agrees to $1 Million Fine for FCPA Violations

Friday, December 21st, 2007 by Danielle McClellan

Lucent Technologies Inc., a global communications solutions provider has entered into an agreement with the Department of Justice to resolve allegations that it violated the Foreign Corrupt Practices Act (FCPA). The company provided travel and other items of value to Chinese government officials and included it as expenses in company books and records. (more…)

Titan Pays for ITAR Failure to Report Commissions and FCPA Illegal Payments

Wednesday, November 29th, 2006 by John Black

So, you always get to the end of your license application and its time to check the box related to whether your company or its agents have paid reportable commissions, fees or political contributions. You never really know if anybody has paid it, and you actually have no information that tells you that they have, so you check “No” like you have for every application for the past five years.

Now, we’ve got an enforcement case that might encourage your company to put in place a reporting network to notify you if it has paid commissions, political contributions or fees related to an ITAR license/agreement application.

In March, 2005, Titan Corporation pled guilty to 3 violations of the Foreign Corrupt Practices Act of 1997. The violations resulted from bribes paid in the form of contributions to the election campaign of the then-incumbent President of the Republic of Benin. Over $2,000,000 in bribes were given in an attempt to maintain a business relationship with Benin , in which Titan would build and operate a wireless telephone network in their county. At Titan’s request, an agent of Benin submitted false invoices to Titan to facilitate the payment of these bribes. Payments were made under the false pretenses of the “betterment of the people of Benin.”

Following Titan’s guilty plea, it was required to pay over $15 million in disgorgement and prejudgment interest, and $13 million in criminal fines, in addition to 3 years of probation. (I’m not sure what a disgorgement is, but I surely wouldn’t want to be involved in one.)

Titan has now decided to settle additional charges that it neglected to report certain commissions in its ITAR export applications. On the applications in question, Titan allegedly made false statements that there were no reportable commissions paid to third parties. According to the DDTC charging letter, on three separate occasions between 2000 and 2003, Titan paid a combined $2,267,000 in commissions with respect to the sales or exports of defense articles to Access International Ltd., SurCom International BV , and AstroDesign, Inc.

If there is good news for L-3 and Titan in all this, it is that the DDTC did not impose the ITAR section 120.1(b) penalty making L-3 ineligible for export licenses due to its Foreign Corrupt Practices Act conviction. Debarment, as a penalty for the commissions charges, could also have been imposed, but was not. The settlement for the commissions charges was in the amount of $1.5 million. That breaks down to a $1 million cash payment and $500,000 to go toward the costs of a compliance program that L-3 will implement as a condition of the Consent Order.

The good news for you is that you now have an enforcement case that gives you a tangible basis for arguing your company needs to put in place communication channels.

Foreign Corrupt Practices Act (FCPA): Another Compliance Headache?

Thursday, June 30th, 2005 by Guest Author

Everyone has probably heard of the FCPA. As a result of SEC investigations in the mid-1970’s, over 400 U.S. companies admitted making questionable or illegal payments in excess of $300 million to foreign officials to secure some type of favorable action by a foreign government. Congress enacted the FCPA to bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system. Several firms that paid bribes to foreign officials have been the subject of criminal and civil enforcement actions, resulting in large fines and suspension and debarment from federal procurement contracting, and their employees and officers have gone to jail.

It is my experience that most U.S. companies’ compliance to the FCPA is no more than “lip service.” The CEO issues a policy that instructs all employees to comply with the FCPA and that bribes of foreign government officials will not be tolerated. Then he/she and other members of the company’s senior management wrap themselves in this cozy “policy security blanket” and they are confident the company is in compliance. After all, everyone knows you can’t bribe government officials. Yeah, right!

On February 22, Titan Corporation (Titan) plead guilty to criminal charges of violating the FCPA, falsifying books and records of Titan, and willfully aiding and assisting in the preparation or presentation of a false or fraudulent tax return for Titan.

Does the case against Titan signal a heightened FCPA enforcement effort on the part of the Justice Department?

(more…)

The Skinny on Political Contributions & Fees

Sunday, February 25th, 2001 by Maarten Sengers

Each year, thousands of license applications enter the processing queue at the Office of Defense Trade Controls (ODTC). Each application, from DSP-5s to Agreements, all require a certification that the application is in compliance with Part 130 of the ITAR regarding payment of political contributions, fees and commissions (hereinafter collectively referred to as “PCFs”). Almost as a matter of routine, companies assert “Neither the applicant nor its vendors have paid, or offered or agreed to pay, in respect of any sale for which a license approval is requested, political contributions, fees or commission in amounts as specified in 22 CFR 130.9(a).” Given that you have to include a painstaking report if you did in fact pay PCFs, rubber stamping this “no payments” box is certainly a tempting thing to do.

But considering the wide net cast by Part 130, this may not be a safe practice.

(more…)