ETHICS CORNER DEFENSE CONTRACTING
Ethical Landmines Rife During COVID-19 Crisis
COVID-19 took the world by surprise and continues to spread across the globe. The federal government and a number of hard-hit states were caught off guard, and soon learned that their inventories of personal protective equipment and other life-saving devices such as test kits and ventilators were insufficient to keep pace with the pandemic.
The demand for equipment to fight the disease skyrocketed and government and commercial entities have shifted into high gear to respond. Many state and local governments, companies and individuals are now looking abroad to procure critical supplies on an expedited basis. At the same time, many foreign industrial manufacturers are positioning themselves for the high demand of exports by adapting their facilities to produce the equipment.
In the midst of these exigent circumstances, the global supply chain landscape is replete with Foreign Corrupt Practices Act landmines — and well-intentioned companies hoping to partner with foreign manufacturers could become a casualty if they don’t watch their step.
The FCPA makes it unlawful for any commercial enterprise — or individual representing one — to offer, promise to pay, or direct or authorize another individual to pay money or anything of value to a foreign government official for the purpose of expanding or maintaining their commercial interests. It also requires publicly traded companies “make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”
The statute has a criminal and civil bite; the Department of Justice is responsible for all criminal enforcement of the act and civil enforcement of its bribery provisions, and the Securities and Exchange Commission is responsible for civil enforcement of its “books and records” provisions if securities are involved. The two organizations rarely enforced the FCPA in its first three decades of existence. These agencies, however, have aggressively interpreted and enforced the law since the turn of the century. U.S. companies would be wise to assume the government will persist in its aggressive “a bribe is a bribe” approach to the act, even in the midst of a worldwide health crisis.
The Justice Department has announced its intent to prioritize coronavirus-related fraud schemes. Attorney General William P. Barr on March 20 issued a press release “urging the public to report suspected fraud schemes related to COVID-19” and directing all U.S. attorneys to prioritize investigating and prosecuting such schemes. The department also established the COVID-19 Hoarding and Price Gouging Task Force. Given the global supply chain pressure points and implications of the COVID-19 crisis, it would not be a stretch for the administration to extend its prioritization of such fraud cases to include pandemic-related global anti-corruption and bribery cases.
There are several possible landmines for U.S companies that import goods or supplies from abroad. For example, they frequently rely on customs agents and third-party brokers to assist them in maneuvering the often complex customs process. The use of such agents, however, may expose companies to compliance risks. Numerous enforcement actions brought by the government have focused on improper payments made by third-party agents to government officials to secure customs clearance or additional business.
Further, a company venturing into uncharted terrain by seeking to purchase high-demand and scarce products abroad to compensate for losses in traditional lines of business might face increased risks of bribery and corruption primarily due to inexperience. Indeed, the pressure to maintain business or get back to “business as usual” may lead some employees to get dangerously close to or even cross ethical boundaries by committing bribery or other similar misconduct.
To avoid these landmines, companies seeking to procure supplies from abroad should maintain a strong compliance presence. Company management should reinforce and reiterate the company’s commitment to its anti-corruption and anti-fraud compliance programs. Company management should also conduct anti-corruption training for employees to ensure they are capable of recognizing unethical and potentially illegal conduct, and their responsibilities for reporting it according to company policies and procedures.
Compliance departments should test their reporting procedures to ensure employees are at ease in reporting any suspected violations through multiple avenues, and compliance officers should similarly test their ability to respond appropriately to reasonable suspicions of illegal activity.
Finally, company management should consider increasing due diligence efforts and taking a “deeper dive” when it comes to interacting with new suppliers, agents and distributors. For example, firms should pay particular attention to whether the individual being reviewed is related to any public officials in their country of residence, has a history of employment or business dealings with the government, and whether they previously have been the subject of any corruption complaints, investigations or negative news events.
Further, companies that have instituted quantity, financial, or country of origin thresholds for reviews of transactions, expenses and other aspects of company business for corruption risk, should consider adjusting such thresholds to include a broader and more conservative review process, at least until the COVID-19 pandemic and related equipment and supply demands substantially decrease.
Laura A. Alexander is an associate and Scott F. Roybal is a partner and practice group leader of the government contracts, investigations and international trade practice group at Sheppard Mullin LLP. A complete version of this article can be found at https://www.governmentcontractslawblog.com.