Anti-Bribery Case in China a Wake-Up Call
By Gary D. Anderson and David P. Goodwin
The recent Rio Tinto case in China is a powerful reminder why a vigilant and robust Foreign Corrupt Practices Act of 1977 (FCPA) corporate compliance program is important.
The FCPA imposes civil and criminal penalties on U.S.-listed companies and individuals for bribing, or offering to bribe, foreign government officials.
On March 29, a Shanghai court sentenced four employees of British-Australian mining conglomerate Rio Tinto to 10 to 14 years in prison for accepting bribes and stealing commercial secrets. The court stated that the employees took money from private Chinese steelmakers in exchange for supplying iron ore at better prices than from state-owned steel mills. The court further held that the defendants illegally obtained confidential information from executives of a major Chinese steelmaker which detailed China’s negotiating position in iron ore price discussions and the production plans of key Chinese steelmakers, and then passed that information to Rio Tinto.
The Rio Tinto verdict comes as multinational companies encounter increasingly strict oversight into their worldwide operations, with the United States, China, other industrialized nations and developing countries all expanding anti-corruption enforcement.
In this environment of intense regulatory scrutiny, U.S. companies seeking to do business in China and other foreign markets must understand the FCPA. In general, the act bars companies and their agents from bribing foreign government officials. It consists of anti-bribery provisions and accounting provisions.
Under the anti-bribery provisions, any issuer — a corporation that has issued registered securities or is otherwise within the jurisdiction of the Securities and Exchange Commission — domestic concern or foreign person in the United States is barred from paying money or giving anything of value to a “foreign official” to obtain or retain business. The person making or authorizing the payment must have corrupt intent, and the improper payment must be intended to induce the foreign official to misuse his position to wrongfully direct business to the payer. The FCPA exempts “facilitating payments,” but the burden of establishing the elements for this defense is on the payer, requiring a robust system of authorization and documentation.
The FCPA’s accounting provisions apply only to “issuers” and have two sections: “books and records” and “internal controls.” These requirements bar accounting practices that could conceal corrupt payments. Mere negligence is sufficient to violate the accounting provisions.
In January, the SEC announced the creation of a unit focused exclusively on anti-bribery enforcement, using tactics such as targeted sweeps and industry-wide investigations. One week after this announcement, in the largest single investigation and prosecution against individuals in the FCPA’s history, 22 executives were indicted in a high-profile “sting” operation at an arms industry trade show in Las Vegas. These executives were charged with scheming to bribe foreign officials. Assistant Attorney General Lanny Breuer later commented that this extraordinary enforcement action — dubbed Catch-22 — demonstrated the Justice Department’s aggressive focus on the prosecution of individuals. Breuer stated that extensive prison sentences “should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations.”
As for corporations, Breuer emphasized that Justice would seek guilty pleas or bring criminal charges when the corporate conduct is “egregious, pervasive, and systemic, or when the corporation fails to implement compliance reforms, changes to its corporate culture, and undertake other measures designed to prevent a recurrence of the criminal conduct.”
Mark Mendelsohn, deputy chief of the department’s fraud section and the architect of that agency’s FCPA enforcement program, went so far as to suggest that FCPA enforcement could soon be deemed a national security issue given the potential link between corrupt payments and terrorism.
Here are some recommendations to avoid FCPA pitfalls.
First, enact an effective compliance program. A comprehensive and company-wide internal compliance program is the cornerstone of an FCPA risk mitigation strategy. Maintenance of a sound compliance program is a mitigating factor when U.S. enforcement agencies decide whether to charge a company and the extent of any penalties.
Also, evaluate agency risks. Most FCPA enforcement actions involve improper payments made indirectly through intermediaries. U.S. enforcement agencies focus on the ways companies go about detecting high-risk third parties and their dealings. Accordingly, U.S. and local counsel should be retained to review those relationships; certify that agents comply with the company’s FCPA policy and applicable local laws; employ sound due diligence procedures to fully track agent contacts with government officials; and review compensation arrangements.
In addition, corporate FCPA compliance must include effective training for relevant international and domestic employees such as sales and marketing personnel; employees who interact with government officials and/or maintain agency relationships; human resources personnel with international responsibilities; and appropriate legal and finance personnel.
Lastly, Justice Department policy requires acquiring companies to implement a robust FCPA due diligence plan to avoid enforcement actions stemming from “successor liability.” This means due diligence must comprehensively assess the target company’s internal controls, compliance program, third party relationships and foreign official interface.
Gary D. Anderson is a shareholder (email@example.com) and David P. Goodwin (firstname.lastname@example.org) is an associate with the international law firm of Greenberg Traurig LLP. The views expressed are solely those of the authors.