Key highlights from the FCPA Second Edition Resource Guide

Background

Congress enacted the U.S. Foreign Corrupt Practices Act (FCPA or the Act) in 1977 in response to revelations of widespread bribery of foreign officials by U.S. companies. The Act was intended to halt those corrupt practices, create a level playing field for honest businesses, and restore public confidence in the integrity of the marketplace.

The guide

The U.S. Securities and Exchange Commission (SEC) and Department of Justice (DOJ) originally released the FCPA Resource Guide in November 2012 and quietly revised it in June 2015, with changes that were more technical than substantive. On July 3rd, the 2020 Guidance or the Second Edition was made available, though it does not break new ground by offering any new policy pronouncements. Still, it does contain useful information, including some good examples for companies seeking to comply with the FCPA. The Second Edition guide is designed to provide practical advice about, and useful insights into enforcement considerations.

Although many aspects of the Guide continue to hold true today, the last eight years have also brought new cases, new law, and new policies. The Second Edition of the Guide reflects these updates, including new case law on the definition of the term “foreign official” under the FCPA, the jurisdictional reach of the FCPA, and the FCPA’s foreign written laws affirmative defense. It addresses certain legal standards, including the mens rea requirement and statute of limitations for criminal violations of the accounting provisions. It reflects updated data, statistics, and case examples. And it summarizes new policies applicable to the FCPA that have been announced in the DOJ’s and SEC’s continuing efforts to provide increased transparency, including the DOJ’s FCPA Corporate Enforcement Policy, Selection of Monitors in Criminal Division Matters, Coordination of Corporate Resolution Penalties (or Anti-Piling On Policy), and the Criminal Division’s Evaluation of Corporate Compliance Programs.(1)

The Guide is intended to provide information for businesses and individuals regarding the U.S. Foreign Corrupt Practices Act (FCPA). It has been prepared by the staff of the Criminal Division of the U.S. Department of Justice (DOJ) and the Enforcement Division of the U.S. Securities and Exchange Commission (SEC). The Second Edition reflects the views of the Division of Enforcement, but it is not a statement by the Commission, and the Commission has neither approved nor disapproved its content. It is non-binding, informal, and summary in nature, and the information contained in the Second Edition does not constitute rules or regulations. As such, it is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, that are enforceable at law by any party, in any criminal, civil, or administrative matter. It is not intended to substitute for the advice of legal counsel on specific issues related to the FCPA. It does not in any way limit the enforcement intentions or litigating positions of the U.S. Department of Justice, the U.S. Securities and Exchange Commission, or any other U.S. government agency.

Some key points of focus

The Second Edition builds on the previous Resource Guide’s compliance program guidance and discussion of effective compliance programs.

Investigation, analysis, and remediation of misconduct

A significant addition to the guidance is located within the Investigation, Analysis, and Remediation of Misconduct section, which states:

The truest measure of an effective compliance program is how it responds to misconduct. Accordingly, for a compliance program to be truly effective, it should have a well-functioning and appropriately funded mechanism for the timely and thorough investigations of any allegations or suspicions of misconduct by the company, its employees, or agents. An effective investigations structure will also have an established means of documenting the company’s response, including any disciplinary or remediation measures taken.(1)

The guidance includes additional compliance program resources and guides.

Mergers and acquisitions

The Second Edition suggests essential best practices to be followed regarding a company’s merger with or acquisition of other companies. There is an additional focus on M&A and corporate successor liability. The Second Edition speaks in greater depth to the principles of corporate successor liability under the FCPA, including a detailed discussion of successor liability in the M&A context. Lastly, there is emphasis on pre-acquisition due diligence.

Internal controls

Lastly, the Second Edition clarifies the Resource Guide’s earlier language relating to the FCPA’s “internal controls” provisions. The new writing makes it clear that those provisions apply to a company’s system of internal accounting controls – adding the word “accounting” to the earlier text. Page 40-41 of the Second Edition states:

Although a company’s internal accounting controls are not synonymous with a company’s compliance program, an effective compliance program contains a number of components that may overlap with a critical component of an issuer’s internal accounting controls. Fundamentally, the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as the nature of its products or services; how the products or services get to market; the nature of its workforce; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption. Just as a company’s internal accounting controls are tailored to its operations, its compliance program needs to be tailored to the risks specific to its operations. Businesses whose operations expose them to a high risk of corruption will necessarily devise and employ different compliance programs than businesses that have a lesser exposure to corruption, just as a financial services company would be expected to devise and employ different internal accounting controls than a manufacturer.(1)

Gifts, travel, entertainment and other things

The Second Edition now outlines a framework for evaluating corporate hospitality. To start, the Second Edition explicitly recognizes the legitimacy of the practice, stating that “[a] small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other.” Conversely, the Second Edition states that improper benefits include such things as “a $12,000 birthday trip for a government decision-maker” and a “trip to Italy for eight” officials consisting “primarily of sightseeing” and including “$1,000 in ‘pocket money’ for each official.”

Gifts

Most helpfully, the Second Edition identifies the specific “hallmarks of appropriate gift-giving” as being that the gift is:

• Given openly and transparently,
• Recorded correctly in the giver’s books and records,
• Provided only to reflect esteem or gratitude, and
• Permitted under local law.

Also, the Second Edition suggests explicitly that organizations, particularly large ones, use automated systems “with clear monetary limits and annual limitations” in implementing compliance programs related to “routine gifts, travel and entertainment.”

Travel

The Second Edition provides useful advice to comply with the FCPA’s affirmative defense for “reasonable and bona fide travel and lodging expenses … related to the promotion, demonstration, or explanation of a company’s products or services.” The Second Edition outlines the safeguards it has deemed to be appropriate concerning travel expenditures:

• Do not select the particular officials who will par­ticipate in the party’s proposed trip or program or else select them based on pre-determined, merit-based criteria.
• Pay all costs directly to travel and lodging vendors and reimburse costs only upon presentation of a receipt.
• Do not advance funds or pay for reimbursements in cash.
• Ensure that any stipends are reasonable approxima­tions of costs likely to be incurred and that expenses are limited to those that are necessary and reasonable.
• Ensure the expenditures are transparent, both within the company and to the foreign government.
• Do not condition payment of expenses on any action by the foreign official.
• Obtain written confirmation that payment of the expenses is not contrary to local law.
• Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred.
• Ensure that costs and expenses on behalf of the foreign officials will be accurately recorded in the company’s books and records.

The examples the Second Edition provides regarding gifts, travel and entertainment are instructive, and advises readers that the FCPA is not violated when representatives of a U.S. company:

• Pay for a “moderate bar tab” for customers, including government officials at an industry trade show.
• Present “a moderately priced crystal vase” to the General Manager of a government-owned customer “as a wedding gift and token of esteem.”
• Cover business class airfare for employees of a government customer to inspect company facilities in the United States, consistent with internal company guidelines for reimbursing the cost of lengthy international flights.

By contrast, the Second Edition states that the FCPA obviously would not permit first-class airfare for the officials to travel, with spouses, to Las Vegas on vacation.

Closing

The key changes to the Second Edition reflect developments and issues that are well-known to many practitioners. Nevertheless, the updated Guide emphasizes the importance of effective (and “adequately resourced”) compliance programs, risk-based diligence efforts, and voluntary self-disclosures. A copy of the Guide can be accessed here.

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