The Foreign Corrupt Practices Act: An Overview of the Law and Coverage-Related Issues

The FCPA: An Overview

The FCPA contains two main components: the anti-bribery provisions, which prohibit payments to foreign officials to obtain or retain business, and the accounting provisions that require issuers to make and keep accurate books and records and to maintain an adequate system of internal accounting controls. The accounting provisions also prohibit individuals and businesses from knowingly falsifying books and records or knowingly failing to implement internal controls.

Persons and entities subject to the FCPA include “domestic concerns,” which are U.S. persons and businesses.[6] “Issuers,” which are U.S. and foreign public companies listed on U.S. stock exchanges or which are required to file periodic reports with the SEC, also are subject to the FCPA.[7] In addition, certain foreign persons and businesses acting while in the territory of the United States may be subject to the FCPA.[8]

Enforcement Authority

As noted above, enforcement authority for the FCPA is shared by the SEC and the DOJ. The DOJ has an FCPPA unit within the Criminal Division’s Fraud Section. It has criminal enforcement authority over issuers as well as criminal and civil enforcement authority over domestic concerns for the FCPA’s anti-bribery provisions. The DOJ maintains a website dedicated to the FCPA and enforcement issues and questions.[9]

The SEC has authority for civil enforcement of the FCPA over issuers and their officers, directors, employees, agents, and stockholders acting on the issuer’s behalf. The SEC has a specialized FCPA unit with attorneys in Washington, D.C., and in regional offices. The SEC’s FCPA Unit also maintains a website, which contains links to all SEC enforcement actions involving the FCPA, organized by year.[10] Other organizations involved in enforcement include the Internal Revenue Service, the Department of Homeland Security, and the Federal Bureau of Investigation, which has its own dedicated FCPA unit.

Anti-Bribery Provisions

Generally, the anti-bribery provisions make it unlawful to offer, pay, promise to pay, or authorize payment of money, or to offer, give, or promise to give anything of value to a foreign official in order to obtain or retain business or secure an improper business advantage.[11]

Jurisdiction. The anti-bribery provisions can apply to conduct both inside and outside the United States. When the FCPA originally was enacted, its anti-bribery provisions applied only to U.S. nationals and to U.S. firms and issuers, which can be U.S. or foreign companies. Congress amended the FCPA in 1998 to expand its scope. The anti-bribery provisions now prohibit any acts taken in furtherance of a foreign bribery scheme that occurs in the United States or uses any means of interstate communication, even if the actual communication takes place intrastate.[12] Under the alternative jurisdiction provisions of the FCPA enacted in 1998, U.S. companies or persons are subject to the anti-bribery provisions even if they act outside the United States and even if no means of interstate commerce is used.[13]

Business purpose test. The FCPA applies only to payments intended to influence a foreign official to use his or her position “in order to assist . . . in obtaining or retaining business for or with, or directing business to, any person.”[14] This “business purpose” test has been broadly interpreted to include bribes made in the course of business or to gain a business advantage. For example, in United States v. Kay, the Fifth Circuit held that

To constitute a violation of the FCPA, a payment must be made “corruptly,”[16] which means that there must be intent to wrongfully influence the recipient. Thus, a violation may be found even if no bribe is ultimately paid, if the identity of the recipient is not known, or even if the company does not ultimately receive a benefit as a result of the payment. The intent to influence corruptly is sufficient. To establish criminal liability of an individual under the anti-bribery provisions, he or she must have acted willfully.[17] “Willfully” generally means that the person must act with a “bad purpose” or knowledge that the conduct is unlawful.[18] The person need not necessarily know that his or her conduct violates the FCPA specifically.[19] Proof of willfulness is relevant only to violations by individuals; willfulness is not required to establish corporate criminal or civil liability.

An improper payment may be anything of value.[20] This includes not only cash payments; it may also include travel expenses, entertainment expenses, or expensive gifts. Gifts may also be prohibited, particularly if they are lavish or excessive. Likewise, foreign charitable contributions are not prohibited under the FCPA unless made for the purpose of improperly influencing a foreign official or made without a proper vetting of the foreign charity. Further, an improper payment need not be made directly to a foreign official; payments to friends or family members of an official may also violate the FCPA, if made in order to influence the official.[21]

Who is a foreign official? Under the FCPA, “foreign official” means

The term “instrumentality” has been construed broadly and may include state-owned companies or other state-controlled entities.[23] The ownership, control, status, and function will be examined to determine whether an entity is an agency or instrumentality of a foreign government.

“Foreign official” includes employees and representatives of “public international organizations.”[24] These are organizations that are specifically designated by executive order under the International Organizations Immunities Act, 22 U.S.C. § 288.[25] Currently, this includes organizations such as the World Bank, the International Monetary Fund, the World Trade Organization, and the Organization of American States.

Payments to third parties. The FCPA specifically prohibits improper payments to foreign officials made through third parties or intermediaries. It prohibits payments to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly” to a foreign official.[26] Accordingly, liability may not be avoided simply by outsourcing the payment of the bribe to a third party. Conduct is considered “knowing” if the person is aware that there is a high probability that an illegal payment is going to occur.[27] Congress intended to impose liability not only on those with actual knowledge but also on those who purposefully avoid actual knowledge—“head in the sand” conduct.[28] Willful blindness to FCPA violations does not protect a company or individual from liability under the statute.

Affirmative defenses. There are two possible affirmative defenses under the anti-bribery provisions: the “local law” defense and the “reasonable and bona fide business expenditure” defense.[29] The local law defense is applicable when the company can show that a payment was lawful under the written laws of the foreign country at issue.[30] The “reasonable and bona fide business expenditure” defense applies if the company can show that the money spent was reasonable, bona fide, and directly related to the performance of a contract, or marketing, promotion, or product demonstration.[31]

In addition to these affirmative defenses, the anti-bribery provisions of the FCPA also contain a narrow exception for “facilitating or expediting payments” made in furtherance of routine governmental action that involves nondiscretionary acts.[32] Payments made under imminent threat of physical harm do not violate the FCPA because there is no corrupt purpose, but economic coercion is not sufficient to excuse an otherwise improper payment.[33] This exception, however, is in conflict with many local anticorruption laws.

Statute of limitations. No specific statute of limitations is provided for in the anti-bribery provisions of the FCPA; therefore, the general five-year limitations period applies to substantive criminal violations of the act.[34] In cases involving conspiracies, the government may be able to reach conduct occurring before the five-year limitations period because generally the government need only prove that a single act in furtherance of the conspiracy occurred within the limitations period. The limitations period also may be extended by a tolling agreement, or the government may apply for an extension of up to three years in order to obtain evidence from foreign countries.[35]

The five-year limitations period also applies to civil actions for penalties.[36] However, the SEC may bring actions for equitable relief or disgorgement of ill-gotten gains outside the five-year limitations period. Again, the limitations period may be extended by a tolling agreement, and in cases involving foreign individuals, the limitations period is tolled for any period during which the individuals are not found within the United States.[37]

Accounting Provisions

The FCPA’s accounting provisions contain two main components. First, the books and records provisions require issuers to make and keep records that accurately and fairly reflect an issuer’s transactions and dispositions of assets.[38] Books and records provisions are intended to prevent the mischaracterization or concealment of bribes.

Second, the FCPA contains provisions regulating internal controls, which require that issuers devise and maintain a system of internal accounting controls sufficient to ensure management’s control, authority, and responsibility over the firm’s assets.[39]

There can be civil liability under the accounting provisions for both companies and individuals. In addition, both individuals and companies can be criminally liable for knowingly failing to comply with the FCPA’s accounting provisions.[40] However, the FCPA’s accounting provisions apply only to issuers; the accounting provisions do not apply to private companies.[41]

Penalties, Sanctions, and Remedies

Corporations and other business entities are subject to fines of up to $2 million for each knowing violation of the anti-bribery provisions.[42] Individuals are subject to a fine of up to $100,000 and imprisonment for up to five years for willful violations.[43] For each willful violation of the accounting provisions, business entities are subject to a fine of up to $25 million. Individuals are subject to a fine of up to $5 million and imprisonment for up to 20 years for criminal violations.[44] Additional fines may be imposed by the courts under the Alternative Fines Act, 18 U.S.C. § 3571 (d).

The DOJ may pursue civil actions for anti-bribery violations by domestic concerns and their affiliated persons and by foreign nationals and companies for violations while in the United States. The SEC may pursue civil actions against issuers and their affiliated persons for violations of the accounting provisions. A civil penalty of up to $10,000 per violation is available for violations of the anti-bribery provisions (for both entities and individuals).[45] For violations of the accounting provisions, the SEC may obtain a civil penalty of up to a certain specified dollar amount dependent on the egregiousness of the violation, or the gross amount of the pecuniary gain to the defendant—whichever is greater.[46]

There also may be collateral consequences resulting from FCPA violations, including suspension or debarment from contracting with the federal government, cross-debarment by multilateral development banks (such as the World Bank), and suspension or revocation of certain export privileges.

Insurance Coverage Issues

Notice. Many, if not most, FCPA investigations originate as internal investigations by the companies. After an internal investigation is completed, a company may determine that it should “self-report” to the SEC or DOJ, at which point the SEC or DOJ may commence its own investigation. A company conducting an internal investigation should consider when it is appropriate or necessary to give notice to its insurer of a claim or potential claim. Different policies contain different notice requirements, so it is important for insureds and insurers to be familiar with the notice language and requirements of their policies and to proceed accordingly.

Claim. Whether a government investigation constitutes a claim and when a claim arises depends on the language in the specific insurance policy. Some policies define “claim” to include government investigations, but often only if such investigation is commenced by a formal order of investigation, subpoena, or other such formal document. Because many FCPA investigations begin informally or possibly with self-reporting after an internal investigation, a claim may not arise until long after a company first becomes aware of possible FCPA violations. Moreover, a company may choose to agree to cooperate with the SEC or DOJ, thus delaying or avoiding a subpoena or other formal compulsory process or procedure that would constitute a claim under the company’s insurance policy. Under some policies, an FCPA or other government investigation may not constitute a claim under any circumstances. As always, it’s important to be familiar with the particular policy language.

Worldwide coverage. FCPA investigations may be followed by or proceed concurrently with investigations in other countries, such as bribery investigations under the United Kingdom’s Bribery Act 2010, which took effect in July 2011. Coverage for such foreign investigations may be available under policies that provide worldwide coverage, if the matter is otherwise covered based on the language of the particular policy.

Selection of defense counsel. Insurance policies that do not contain a duty to defend typically provide that the insured must obtain the insurer’s consent to its selection of defense counsel. Because, as noted above, defense counsel may have been retained long before a claim arises and is tendered to the insurance carrier, there may be issues for insurers and insureds to negotiate with respect to the choice of defense counsel, the rates charged, and possible coverage of pre-notice or pre-tender defense expenses.

Fines and penalties. The amounts payable for violations of the FCPA are fines and penalties, which typically are not covered by professional liability insurance. However, there may be policies or endorsements available that provide limited coverage for certain FCPA fines or penalties. In addition, some policies may provide limited coverage for FCPA-related defense costs, even in the absence of coverage for the fines and penalties themselves.

Follow-on litigation. As in other governmental investigations, an FCPA enforcement action often will trigger follow-on actions, such as class actions by shareholders alleging securities fraud, derivative actions alleging breach of fiduciary duty and based on the same conduct alleged in the FCPA investigation, or congressional investigations. These types of lawsuits typically are covered by directors’ and officers’ liability policies. Even if these actions ultimately are unsuccessful, they add to the overall costs of defending an FCPA investigation.

Exclusion for intentional acts and imputation. Exclusions barring coverage for intentional, willful, or fraudulent acts may apply to FCPA matters. Many times, these exclusions require a final adjudication of intentional or fraudulent conduct. However, if such a final adjudication occurs, the insured may be required to reimburse the insurer for any defense costs advanced on its behalf. However, with respect to the application of exclusions, such as the exclusions for intentional acts, insurance policies may contain non-imputation clauses providing that the knowledge or conduct of one insured cannot be imputed to other insureds for purposes of determining whether the exclusion applies. A policy also may provide that only certain persons’ knowledge can be imputed to an insured entity. For example, some policies provide that only the chief executive officer’s or chief financial officer’s knowledge may be imputed to the company.

Conclusion

FCPA investigations and enforcement actions are on the rise and, along with parallel shareholder litigation, may lead to increased exposure for both insureds and insurers. Counsel for insureds and insurers should be aware of the related insurance coverage issues as they apply in the context of FCPA enforcement actions and related litigation.

Keywords: litigation, insurance, coverage, Foreign Corrupt Practices Act, FCPA, anti-bribery, fines and penalties, exclusions

Stacey L. McGraw and Stacey E. Rufe are with Troutman Sanders, LLP.

[1] Stacey L. McGraw is a partner in the Washington, D.C., office and Stacey E. Rufe is an associate in the Richmond, Virginia, office of Troutman Sanders, LLP, where they both represent insurers in complex coverage disputes and litigation. The views stated in this article are the views of the authors and do not necessarily represent the views of Troutman Sanders, LLP, or its clients.
[2] The 2012 Resource Guide to the U.S. Foreign Corrupt Practices Act published by the Criminal Division of the U.S. DOJ and the Enforcement Division of the SEC is the best source for additional information about the FCPA. See also Mike Koehler, “The Story of the FCPA,” 73(5) Ohio St. L.J. 932–38 (2012) (providing history of the drafting and passage of the FCPA).
[3] SEC, SEC Enforcement Actions: FCPA Cases.
[4] Serena Ng & Anna Prior, “SEC Warning Sinks Avon,” Wall St. J., Nov. 1, 2013.
[5] “Alcoa to Pay $384 Million to Settle Bribery Charges,” N.Y. Times, Jan. 9, 2014.
[6] 15 U.S.C. § 78dd-2.
[7] 15 U.S.C. § 78dd-1.
[8] 15 U.S.C. § 78dd-3.
[9] DOJ, Foreign Corrupt Practices Act: An Overview.
[10] SEC, Spotlight on Foreign Corrupt Practices Act.
[11] 15 U.S.C. §§ 78dd-1 (a), 78dd-2(a), 78dd-3(a).
[12] 15 U.S.C. §§ 78dd-2 (h)(5), 78dd-3(h)(5).
[13] 15 U.S.C. §§ 78dd-1 (g), 78dd-2(i).
[14] 15 U.S.C. §§ 78dd-1(a), 78dd-2(a), 78dd-3(a).
[15] United States v. Kay, 359 F.3d 738, 755 (5th Cir. 2004).
[16] 15 U.S.C. §§ 78dd-1 (a), 78dd-2(a), 78dd-3(a).
[17] 15 U.S.C. §§ 78dd-2 (g)(2)(A), 78dd-3(e)(2)(A).
[18] See United States v. Kay, 513 F.3d 432, 447–48 (5th Cir. 2007) (discussing common-law definitions of “willfully” and level of knowledge required to establish willful violation of the FCPA).
[19] See Kay, 513 F.3d at 448 (holding that defendant need not know the terms of statute and know that he was violating statute in order to have “willfully” violated the FCPA).
[20] 15 U.S.C. §§ 78dd-1 (a), 78dd-2(a), 78dd-3(a).
[21] See, e.g., United States v. Liebo, 923 F.2d 1308, 1311–12 (8th Cir. 1991) (sufficient evidence existed for jury to conclude that gifts given to official’s cousin were given “corruptly” to “obtain or retain business” in violation of FCPA).
[22] 15 U.S.C. § 78dd-1 (f)(1)(A), 78dd-2(h)(2)(A), 78dd-3(f)(2)(A).
[23] See, e.g., United States v. Aguilar, 783 F. Supp. 2d 1108 (C.D. Cal. 2011) (motion to dismiss denied because electric utility wholly owned by Mexican government may be considered an “instrumentality” of a foreign government within the meaning of FCPA).
[24] 15 U.S.C. § 78dd-1 (f)(1)(A).
[25] 15 U.S.C. § 78dd-1 (f)(1)(B).
[26] 15 U.S.C. §§ 78dd-1 (a)(3), 78dd-2(a)(3), 78dd-3(a)(3).
[27] 15 U.S.C. § 78dd-1 (f)(2)(A).
[28] H.R. Rep. No. 100-576, at 920 (1988), reprinted in 1988 U.S.C.C.A.N. 1549 , 1953.
[29] 15 U.S.C. §§ 78dd-1 (c), 78dd-2(c), 78dd-3(c).
[30] 15 U.S.C. §§ 78dd-1(c)(1), 78dd-2(c)(1), 78dd-3(c)(1).
[31] 15 U.S.C. §§ 78dd-1(c)(2), 78dd-2(c)(2), 78dd-3(c)(2).
[32] 15 U.S.C. §§ 78dd-1(b), 78dd-2(b), 78dd-3(b).
[33] S. Rep. No. 95-114, at 10–11 (1977).
[34] 18 U.S.C. § 3282.
[35] 18 U.S.C. § 3292.
[36] 28 U.S.C. § 2462.
[37] 28 U.S.C. § 2462.
[38] 15 U.S.C. § 78m (b)(2)(a).
[39] 15 U.S.C. § 78m(b)(2).
[40] 15 U.S.C. § 78ff (a).
[41] 15 U.S.C. § 78m (a).
[42] 15 U.S.C. §§ 78dd-2 (g)(1)(A), 78dd-3(e)(1)(A).
[43] 15 U.S.C. §§ 78dd-2(g)(2)(A), 78dd-3(e)(2)(A).
[44] 15 U.S.C. § 78ff (a).
[45] 15 U.S.C. § 78dd-2 (g)(1)(B), (g)(2)(B); § 78dd-3(e)(1)(B), (e)(2)(B).
[46] 15 U.S.C. § 78u (d)(3).

_{Copyright © 2014, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).}