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2004 Was An Important Year In Terms Of Modern FCPA Enforcement

2004

There are many practical (as well as certain provocative) reasons for the general increase in Foreign Corrupt Practices Act enforcement in the modern era. (See Chapter 6 of the book “The FCPA In a New Era” for a full discussion of this topic).

As highlighted in this post, 2004 was an important year that saw three developments relevant to the modern era of FCPA enforcement.

U.S. v. Kay

Prior to the 5th Circuit’s February 2004 decision in U.S. v. Kay (359 F.3d 738), the government was 0-3 when put to its burden of proof in FCPA enforcement actions outside the context of foreign government procurement. (See here for a summary of those three actions).

In Kay, the appellate court (like the trial court) found the FCPA’s “obtain or retain business” element ambiguous and thus consulted the legislative history. Upon doing so, the appellate court concluded that payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.

Even so, the court stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business. In the words of the court:

“[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting is obtaining or retaining business would be unnecessary, and thus surplusage—a conclusion that we are forbidden to reach.”

Despite Kay’s equivocal holding, since the decision there has been a significant increase in FCPA enforcement actions outside the context of foreign government procurement such as in connection with foreign licenses, permits, certifications and the like.

SOX 404

While Sarbanes Oxley was passed in 2002, Section 404 (“Management Assessment of Internal Controls”) went “live” in 2004. Section 404 requires issuers to assess and report on the effectiveness of its internal controls over financial reporting. Among other things, the SOX requirement caused issuers to more actively assess internal controls across its business operations particularly in foreign subsidiaries because such books and records are consolidated with the issuers for purposes of financial reporting.

Such assessments logically result in questionable payments or transactions being reported to corporate headquarters and SOX 404 has been specifically cited by the DOJ as one of the reasons for the general increase in FCPA enforcement in the modern era.

During a 2010 Senate FCPA hearing, a DOJ representative stated:

“We are getting a significant number of disclosures from corporations about their own criminal conduct.  I think that, in part, relates to the passage of Sarbanes-Oxley legislation, which encourages corporations to review their own books and records.”

Similarly, during a 2011 House FCPA hearing, the same DOJ representative stated:

“At least one likely cause for this increase in cases is disclosures by companies consistent with their obligations under the Sarbanes-Oxley Act, which requires senior corporate officers to certify the accuracy of their financial statements.  This has led to more companies discovering FCPA violations and making the decision to disclose them to the SEC and DOJ.”

Alternative Resolution Vehicles

From 1997 to 2004, the DOJ had two options when a business organization was the subject of FCPA scrutiny. It could charge the business organization with FCPA offenses or not charge the business organization with FCPA offenses.

However, in late 2004 the DOJ used an alternative resolution vehicle (a non-prosecution agreement) for the first time in an FCPA enforcement action against InVision Technologies, Inc. and General Electric Company (“GE”). As stated in the InVision non-prosecution agreement, the DOJ “agreed not to prosecute InVision under the Foreign Corrupt Practices Act . . . for conduct that potentially violates the FCPA based on certain foreign transactions and attempted transactions conducted by InVision in [Thailand, China, and the Philippines].”

Shortly thereafter, in January 2015 the DOJ used a deferred prosecution agreement for the first time in an FCPA enforcement action. (See here).

The use of alternative resolution vehicles is one of the more obvious reasons for the general upward trend in FCPA enforcement in the modern era.  For instance, the former chief of the DOJ’s FCPA unit stated that if the DOJ did not have the option of resolving FCPA enforcement actions with NPAs or DPAs the DOJ “would certainly bring fewer cases.” (“Mark Mendelsohn on the Rise of FCPA Enforcement,” 24 Corporate Crime Reporter 35 (Sept. 10, 2010).) Likewise, the OECD Report stated that “it seems quite clear that the use of these agreements is one of the reasons for the impressive FCPA enforcement record in the U.S.” (OECD, “Phase 3 Report On Implementing The OECD Anti-Bribery Convention in the United States” (Oct. 2010)).

In short, 2004 was an important year in the development of the FCPA’s modern era of enforcement.

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