Foreign Corrupt Practices Act (FCPA): Another Compliance Headache?

Everyone has probably heard of the FCPA. As a result of SEC investigations in the mid-1970’s, over 400 U.S. companies admitted making questionable or illegal payments in excess of $300 million to foreign officials to secure some type of favorable action by a foreign government. Congress enacted the FCPA to bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system. Several firms that paid bribes to foreign officials have been the subject of criminal and civil enforcement actions, resulting in large fines and suspension and debarment from federal procurement contracting, and their employees and officers have gone to jail.

It is my experience that most U.S. companies’ compliance to the FCPA is no more than “lip service.” The CEO issues a policy that instructs all employees to comply with the FCPA and that bribes of foreign government officials will not be tolerated. Then he/she and other members of the company’s senior management wrap themselves in this cozy “policy security blanket” and they are confident the company is in compliance. After all, everyone knows you can’t bribe government officials. Yeah, right!

On February 22, Titan Corporation (Titan) plead guilty to criminal charges of violating the FCPA, falsifying books and records of Titan, and willfully aiding and assisting in the preparation or presentation of a false or fraudulent tax return for Titan.

Does the case against Titan signal a heightened FCPA enforcement effort on the part of the Justice Department?

Background on the FCPA

The FCPA makes it unlawful to bribe foreign officials to obtain or retain business. There are five elements which must be met to constitute a violation of the Act (source).

1. Who
   The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the antibribery provisions or if they conspire to violate those provisions.

   Amendments to the Act in 1998 expanded the FCPA to assert territorial jurisdiction over foreign companies and nationals. A foreign company or person is now subject to the FCPA if it causes, directly or through agents, an act in furtherance of the corrupt payment to take place within the territory of the United States. U.S. parent corporations may be held liable for the acts of foreign subsidiaries where they authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, themselves “domestic concerns,” who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

2. Corrupt intent
   The person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce the recipient to misuse his/her official position to direct business wrongfully to the payer or to any other person. It should be noted that the FCPA does not require that a corrupt act succeed. The offer or promise of a corrupt payment can constitute a violation
3. Payment
   The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value.
4. Recipient
   The prohibition extends only to corrupt payment to a foreign official, a foreign political party, or any candidate for foreign political office. This applies regardless of the official’s rank or position.
5. Business Purpose Test
   The FCPA prohibits payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person.

The FCPA prohibits corrupt payments through third parties while knowing the payment will go directly or indirectly to a foreign official. The term “knowing” includes “conscious disregard and deliberate ignorance.” U.S. companies are encouraged to exercise due diligence and to take all necessary precautions to ensure that they have formed a business relationship with reputable and qualified partners and representatives. Firms should be aware of “red flags” when dealing with third party payments.

The Titan Case

In 1998, Titan embarked on a project to develop a telephone system in the African nation of the Republic of Benin and to generate revenue from operating the system for a number of years. In November of 1998, Titan personnel, including a corporate officer traveled to Benin and met with a Beninese national purported to have access to the President of Benin.

In July 1999, Titan acquired from an African company named Afronetwork, Ltd. All of their rights and obligations under various prior agreements with the Postal and Telecommunications Office (OPT) of the Republic of Benin to develop and operate a wireless telephone system in Benin. At this same time, Titan entered into a consulting agreement with the Beninese national. Prior to engaging this agent, Titan employees were aware this person was the “Head of State’s business advisor.”

Only six days after signing the consulting agreement, the agent submitted an invoice to Titan for $399,919. This invoice was paid a week later by wire transfer to a bank account in Benin in the name of a relative of the agent.

Certain of the agreements assumed by Titan required that “social payments” be made. In late December 2000, the Benin Agent and OPT demanded Titan to accelerate the payments and insisted they be made in full before the next election in March 2001.

In late January 2001, the Benin agent submitted two invoices to Titan totaling $2,381,551. Neither invoice reflected the true purpose of the payments: to provide funds for the benefit of the Benin President’s re-election campaign. Titan knew the “social payments” would be used to support the Benin President’s re-election effort. For example, these funds were used to purchase T-shirts bearing a picture of the President of Benin and instructing Beninese citizens to vote for him.

Department of Justice Investigation

In its investigation, DOJ found that Titan never had a FCPA compliance program or procedures. The company’s only related “policy: is a statement in their Code of Ethics stating “employees must be fully familiar with and strictly adhere to such provisions as the Foreign Corrupt Practices Act that prohibit payments or gifts to foreign government officials for the purpose of influencing official government acts or assistance in obtaining business.” Titan did not enforce that policy nor did it provide its employees with any information concerning the FCPA or its purposes. In addition, DOJ found that Titan had a bas debt expense write-off that included some portion of the Benin payments the company made in violation of the FCPA. Hence, the charge of preparing and presenting a false or fraudulent tax return.

Titan’s Penalties as a Result of Their Criminal Guilty Plea

Titan agreed to implement and maintain a compliance and ethics program that includes, at a minimum, the following:

• A clearly articulated corporate policy against violations of the FCPA and other applicable anti-bribery laws and the establishment of compliance standards and procedures to be followed.
• The assignment to one or more senior corporate officials of the responsibility for oversight of compliance with these policies, standards, and procedures. These officials shall have the authority to implement monitoring and auditing systems to detect criminal conduct and have the authority to retain outside counsel and independent auditors to conduct investigations and audits.
• The establishment and maintenance of a committee to review the retention of any agent, consultant, or representative for purposes of business development or lobbying in a foreign jurisdiction. This committee will also review the suitability of all prospective joint venture partners for purposes of compliance with the FCPA, as well as the adequacy of the due diligence.
• Clearly articulated corporate procedures to assure that substantial discretionary authority is not delegated to individuals that have a propensity to engage in illegal activities.
• Clearly articulated corporate procedures to assure that Titan has formed business relationships with reputable and qualified agents.
• The effective communication to all officers, employees, agents, consultants, and other representatives, and to sub-contractors, of corporate policies, standards, and procedures regarding the FCPA.
• The implementation of appropriate disciplinary mechanisms
• The establishment of a reporting system by which officers, employees, agents, consultants, and other representatives, as well as sub-contractors, may report suspected criminal conduct without fear of retribution
• The inclusion in all future contracts with agents, consultants and other representatives an agreement for Titan to have audit rights for purposes of ensuring adherence with the FCPA.
• Titan will conduct periodic reviews, no less than once every five years, of its corporate policies and compliance programs regarding the FCPA and the anti-bribery provisions of each foreign jurisdiction to which it may be subject.

- Chuck Hough