Where Local Customs & The Law Collide: Conducting Business In Developing Nations Under The Foreign Corrupt Practices Act
By: DULCE J. FOSTER & JOHN W. LUNDQUIST
In today's global economy, many growing businesses seek to advance into the attractive markets of other countries. Doing so can be profitable, but it also presents legal challenges that American companies cannot afford to ignore. One such challenge is presented by the Foreign Corrupt Practices Act (FCPA).
Some may assume that business they conduct overseas is between their company and the foreign government - that the United States cannot regulate conduct that occurs outside its boundaries. That assumption is mistaken. The FCPA prohibits companies, their agents and employees from making or authorizing payments to foreign officials to influence business decisions. If the company or individual is a United States resident, this law applies even if the conduct occurs entirely in another country. A conviction carries heavy penalties - incarceration and a fine of up to $2 million per violation.
While the FCPA only covers payments to foreign officials, other laws (such as the federal Travel Act) prohibit similar payments to employees of private businesses in foreign countries. Furthermore, the United States Department of Justice (the DOJ) has taken a broad view of the term "foreign official." According to the DOJ, the FCPA covers not only traditional employees of government agencies, but also employees of any enterprise that a foreign government owns or controls, such as hospitals and medical clinics. In communist (or formerly communist) nations such as China or Russia, this could include many businesses that - if they were located in the United States - typically would be private.
Compliance with the FCPA may be especially difficult in certain "developing" countries, where regulatory standards governing payments to purchasing agents have not yet been implemented or are not enforced. It may be common - or even expected - that every sale will involve a bribe of some sort to the individual responsible for making the purchasing decision. American companies conducting business in such an environment find themselves in a difficult predicament: a failure to comply with the local custom of making payments to buyers' representatives could prevent sales altogether; yet, making such payments could subject companies to significant civil and criminal liability under the FCPA. This situation is particularly difficult when - as is often the case - local competitors face no risk of prosecution for engaging in the same conduct. American companies operating under these circumstances are at a distinct disadvantage as compared to local companies who may fully exploit the uneven playing field.
The FCPA does make some allowances for conduct permitted under foreign law. Businesses charged with FCPA violations may assert in their defense that the transactions at issue are legal under the written laws of the foreign country in which they took place. Unfortunately, some governments have a practice of tolerating widespread bribery despite their written laws. Most countries have laws that affirmatively prohibit the kinds of practices regulated by the FCPA and would not admit to authorizing them, even though enforcement is negligible and these practices are in effect permitted under the unwritten laws of the country. Thus, the circumstances in which a defendant might successfully assert this affirmative defense may be limited.
The FCPA does allow payments that are intended to simply hasten a non-discretionary, ministerial act. These facilitating or "grease" payments are lawful under the FCPA if they are made, for example, to obtain a permit that inevitably would be issued but may be delayed without the gratuity.
The DOJ has signaled that it intends to step up enforcement of the FCPA. In two recent, but separate cases, Asian subsidiaries of U.S. companies made payments to physicians employed at state-owned hospitals in exchange for purchasing their goods and services. The companies were convicted by plea agreement of violating the FCPA under the theory that the physicians were "foreign officials." Another U.S. company recently paid a substantial civil fine but avoided criminal prosecution for allegedly making payments to European physicians, including research reimbursement that was alleged to be inflated to induce referrals.
Prosecution of FCPA cases presents unique challenges to the government because much of the necessary evidence can be obtained only overseas, beyond its jurisdiction. This problem is mitigated significantly by the treaty adopted by the United States and at least thirty other countries under which each has pledged to cooperate in the investigation and prosecution of FCPA violations. The Organization for Economic Cooperation and Development Anti-bribery Convention, however, does not include many developing nations, such as China.
The time-honored practice for many companies doing business in a country where corruption is rampant has been to engage an independent distributor to handle the distasteful details without the direct involvement of the company. That strategy is far from bullet-proof, as the DOJ may allege that the acts of the distributor should be imputed to the company under the concepts of aiding and abetting or conspiracy where the company knew or should have known what was going on. Willful blindness - the "ostrich defense" - is simply no defense at all.
An understanding of the FCPA is critical for companies doing business abroad, as is detailed knowledge of local laws concerning payments to individuals (including reimbursement of training expenses and conference sponsorships). The White Collar Group at F&B has substantial hands-on experience in these areas and would be pleased to consult with you about any concerns.