The Foreign Corrupt Practices Act (FCPA) was enacted in 1977 and has been amended twice since its introduction. In its current form, the FCPA makes it unlawful for a U.S. person to make a payment of any kind to a foreign government official for the purpose of obtaining or retaining business or otherwise attempting to influence the foreign official’s purchasing decisions. The FCPA also applies to foreign corporations who have issued securities that are registered in the United States and to foreign companies that cause any act in furtherance of a corrupt payment to take place within U.S. territory.

In prohibiting U.S. persons and certain foreign firms from making payments intended to gain favor with foreign officials, the FCPA attributes to such U.S. persons and foreign firms responsibility for actions undertaken on their behalf by an officer, director, employee, or third party agent, wherever located. Further, the FCPA makes U.S. parent corporations responsible for the actions of foreign subsidiaries when the foreign subsidiaries’ actions were authorized, directed, or controlled by their U.S. parent corporations.

The fact that the FCPA deals only with payments made to foreign government officials acts to exclude from the FCPA’s ambit payments to foreign persons who are not governmental officials. Additionally, the fact that the FCPA deals only with payments that are intended for the purpose of obtaining or retaining business acts to exclude grease or facilitating payments from the scope of the FCPA. A grease or facilitating payment is a payment made to expedite or secure the performance of a routine government action. Routine government actions include obtaining permits or licenses, processing official papers, clearing goods through Customs, loading and unloading cargo and providing police protection. The quid pro quo requirement of the FCPA makes inadvertent violations of the FCPA unlikely.

Jurisdiction for enforcing the FCPA rests with the Securities and Exchange Commission and the Department of Justice. U.S. persons who are accused of violating the FCPA can defend their actions by showing that the payment they made is lawful in accordance with the written laws of the recipient’ s country or that the payment they made is a reasonable expenditure directly related to the U.S. person’s promotional activities in the recipient’s country.

U.S. persons who are unable to defend their actions in light of the FCPA’s anti-bribery provisions face severe penalties. Penalties for violating the anti-bribery provisions of the FCPA vary based on whether the violator is a U.S. company or a U.S. individual. U.S. companies can be fined up to $2 million, while U.S. individuals (including officers and directors of companies that have willfully violated the FCPA) can be fined up to $100,000 and imprisoned for up to 5 years, or both. In addition, civil penalties may be imposed.

Significant FCPA enforcement activities occurred during 2007, and, as a result, 2007 turned out to be a “banner year” in terms of settled cases and penalties imposed. A review of the inventory of pending FCPA cases and FCPA settlements announced through the end of May 2008 indicates that FCPA enforcement during 2008 is likely to match, if not exceed, 2007 results. An analysis of the FCPA enforcement actions and settlements reached during 2007 and 2008 year-to-date reveals the following trends:

• Large monetary penalties for corporate FCPA violations: In 2007, 14 corporate FCPA enforcement cases were settled with corporate fines and penalties totaling more than $130 million and individual corporate penalties ranging from $300,000 to $44 million. For the first 5 months of 2008, a total of 6 cases have settled for total fines and penalties exceeding $66 million, with individual corporate penalties ranging from $300,000 to $32.3 million.
• Requirements for mandatory compliance monitors: In addition to monetary fines and penalties, a number of recent settlement agreements for FCPA violations required the appointment of an outside compliance monitor whose selection is subject to approval by the Department of Justice. The role of the outside compliance monitor is to monitor and review a company’s FCPA compliance efforts.
• Pre-acquisition due diligence of FCPA violations: Successor liability for FCPA violations will pass from the acquired company to the acquiring company. Nonetheless, recent FCPA trends demonstrate that a voluntary disclosure of FCPA violations detected during pre-acquisition due diligence and voluntarily disclosed before an acquisition is completed may cause the Department of Justice to make the settlement agreement with the acquired company rather than the acquiring company. Additionally, recent cases have shown that such disclosures influence the outcome and produce less onerous settlement conditions and a better result for the acquiring company.
• Successor liability provisions included in settlement agreements: Another feature of a number of recent settlement agreements is a successor liability provision, which makes any deferred prosecution agreement binding on the successor in interest, should the company that is the subject of the settlement agreement be sold or transferred in either an equity deal or an asset sale.
• Prosecution by the Securities and Exchange Commission of individuals responsible for FCPA violations: In addition to levying monetary fines and penalties against U.S. persons and foreign companies that make illicit payments in violation of the FCPA, the Securities and Exchange Commission continues to target individuals who had any involvement with such payments.
• Country hot spots for FCPA violations: Thirteen countries were included in the cases settled during 2007 and so far in 2008. These countries are as follows: Bolivia, China, Ecuador, Egypt, Haiti, India, Indonesia, Iraq, Kazakhstan, Mexico, Nigeria, Russia, and the UAE.
• Industry-wide investigations undertaken during 2007-2008: Investigations for 2007 and 2008 focused on the oil and gas services industry and medical device manufacturers. Although not constituting an industry, participants in the UN’s Food For Oil Program were also popular targets for FCPA investigations during 2007 and continue to be targets during 2008.
• Attempts to expand the scope of the FCPA: Several complaints filed by the Securities and Exchange Commission included as FCPA violations certain payments that were not intended to obtain or retain business. Such payments represented payments that were related to ongoing business relationships or payments that were intended to obtain lower taxes and import duties. The inclusion of these payments expands the scope of the FCPA and is currently being contested both in the courts and by the U.S. Chamber of Commerce.

Conclusions and Recommendations

Although all of the recent FCPA trends described above are notable, clearly the expansion of the scope of the FCPA and the size of the monetary fines and penalties levied are the trends that are the most alarming. Given these trends and the fact that they are unlikely to change, U.S. persons and foreign companies who are subject to the ambit of the FCPA are well advised to develop and implement a sound FCPA compliance program and to conduct pre-acquisition due diligence investigations for FCPA violations.

Margaret McClellan Gatti is the Chair of the International Law Group at Dilworth Paxson LLP. She engages exclusively in the practice of Customs law, export control law, international trade law, international tax law, and the Foreign Corrupt Practices Act. Formerly, she was principal of Gatti & Associates, a southern New Jersey-based law firm. Ms. Gatti has more than 30 years of practical international business experience. She started as an international financial analyst and advanced to international banking officer at Mellon Bank, holding at one time the position of Senior Vice-President int he International Banking Department. She also was the founder, owner, and operator of Treaty Impex, an import/export company.

Julien K. Franklin is a summer intern at Dilworth Paxson. He is a rising senior at Trinity College in Hartford, Connecticut. His major is International Studies.