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A Look Back in Time

Literally, Time Magazine that is.

In connection with my work in progress on the FCPA’s legislative / early history, the below articles from Time’s searchable archives caught my eye. (See here).

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In November 1979, Time carried a piece (here) about the DOJ’s new program to offer advice on the FCPA – what has come to be called the FCPA Opinion Procedure Release. The article contains this quote from Stanley Sporkin, the SEC’s then Enforcement Chief: “We do not have guidelines for rapists, muggers and embezzlers, and I do not think we need guidelines for corporations who want to bribe foreign officials.” Fast forward 30-some years and Sporkin is still on the FCPA scene. It was recently reported (here) that Sporkin is assisting former FBI Director Louis Freeh as the monitor in the Daimler enforcement action. Among the monitor’s duties is “review[ing] and evaluat[ing] the effectiveness of Daimler’s internal controls, record-keeping, and existing or new financial reporting policies and procedures as they relate to Daimler’s compliance with the books and records, interal accounting controls and anti-bribery provisions of the FCPA, and other applicable anti-corrption laws.” (See here Appendix D).

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Almost as soon as the FCPA was passed, concerns were raised that the law was harmful to U.S. business. There was much activity on this issue in the early 1980’s as evidenced in this article from October 1980, this article from March 1981, this article from March 1981 as well, and this article from June 1981.

These articles detail, among other things: (i) that the Carter administration (Carter signed the FCPA into law in December 1977) “sent a hefty 250-page report to Congress on the various ways the U.S. discourages exporters” – one example – “the provisions of the 1977 Foreign Corrupt Practices Act, which have never been clearly spelled out by the Justice Department.” (ii) that the GAO released a report in 1981 (see here for a prior post) detailing how the FCPA “is riddled with complicating ambiguities and shortcomings” including the key “foreign official” element; and (iii) that President Reagan’s “transition team on the workings of the Securities and Exchange Commission […] has recommended decriminalization of bribery.”

At to this last point, Time notes:

“Such a stance by the Administration toward foreign bribery would itself cause problems. By failing to enforce the act as written, the Administration not only would leave the legislation’s ambiguities unresolved, but would show a disrespect for the law, which is itself corrupting. Since the U.S. has adopted a moral position with regard to foreign bribery, neither the Administration nor Congress can now afford to let the subject wither away without compromising its principles in the process.”

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In response to Forbes recent FCPA article (see here), the Wall Street Journal Law Blog asked (see here) “is the FCPA just a full employment act for the private bar.” Such a question as it relates to the FCPA is not new. This March 1981 Time piece notes that the FCPA was “dubbed by one Wall Street wag” as the “Accountants’ Full Employment Act of 1977.”

The 1981 GAO Report

The year was 1981.

The FCPA was a mere infant – approximately 3.5 years old. Those living with it were concerned with its ambiguities and complying with it.

In March 1981, the “investigative arm” of Congress, the Government Accountability Office (GAO) released a report, “Impact of Foreign Corrupt Practices Act on U.S. Business.” (See here and here).

The report was based, in part, on a GAO questionnaire survey of 250 companies randomly selected from the Fortune 1000 list of the largest industrial firms in the U.S.

The questionnaire addressed the FCPA’s relationship to the following four areas: (1) corporate policies and/or codes of conduct, (2) corporate systems of accountability, (3) cost burdens, if any, incurred by management to comply with the act, and (4) corporate opinions regarding the (i) acts effect on U.S. corporate foreign sales, (ii) the clarity of the act’s provisions, (iii) the potential effectiveness of an international antibribery agreement, and (iv) perceived effectiveness of the act in reducing questionable payments.

The GAO also discussed the FCPA’s impact with leading public accounting firms, professional accounting and auditing organizations, professional legal associations and business and public interest groups. In addition, the GAO discussed enforcement of the FCPA with DOJ and SEC officials and examined documentation relating to enforcement activities. Also interviewed by the GAO were officials from the Overseas Private Investment Corporation, Department of Commerce, Treasury, and State.

The GAO report covers all the topics listed above. However, this post relates to the clarity of the FCPA’s provisions.

Chapter 4 of the Report is titled “Issues Surrounding the Act’s Antibribery Provisions.”

The chapter begins by noting that there is “confusion over what constitutes compliance with the act’s antibribery provisions.”

The report notes that “corporate and governmental officials have criticized the anti-bribery provisions as being ambiguous about what constitutes compliance.”

The ambiguities include confusion or uncertainty about a host of issues, including the “definition of ‘foreign official.””

At the time, the term “foreign official” specifically excluded any employee whose duties are essentially ministerial or clerical.” This exclusion was eliminated in the 1988 amendments to the FCPA. Otherwise the definition of “foreign official” the GAO report found to be ambiguous is same today – “any officer or employee of a foreign government or one of its departments, agencies or instrumentalties.” [Note -the public international organization prong was added in 1998].

The report notes:

“This definition has been criticized as unclear. Lawyers we contacted questioned whether employees of public corporations, such as national airlines or nationalized companies, are considered foreign officials. Similar questions have surfaced in countries – particularly developing countries – where there are small and frequently closely related groups, including both business and government relationships as well as families. Individuals within these groups frequently move between the private and public sectors, often without a clear distinction.”

The report then discusses the DOJ’s guidance program and begins by noting that “President Carter expressed concern over the potential effect of the act’s alleged ambiguities in September 1978 – only 9 months after its passage.” “To reduce this uncertainty, he directed the Department of Justice to give the business community guidance concerning its enforcement intentions under the act.”

The report notes that in March 1980, the DOJ implemented its “long awaited guidance program” but that the “program has yet to effectively address the ambiguities, and it is doubtful it will.”

In concluding Chapter 4 of the Report, the GAO notes:

“the act is an expression of congressional policy, and rigorously defined and completely unambiguous requirements may be impractical and could provide a roadmap for corporate bribery. On other hand, companies, whether registered with SEC or domestic concerns under Department of Justice jurisdiction, should be subject to clear and consistent demands by the Government agencies responsible for enforcing the act.”

An option the GAO recommends is that “the Justice Department, SEC, and other interested agencies […] offer legislative proposals which would amend the act to more explicitly define the antibribery provisions and [such an amendment] could cover concepts such as the definition of “foreign official.”

GAO notes “because of the importance of the act and the questions and concerns about the antibribery provisions, close congressional oversight is needed.”

Not surprsingly, both DOJ and SEC disagreed with the GAO’s findings. In its responses, the agencies attack, not the substance of the findings, but the GAO’s methodology.

The GAO report states:

“Both SEC and Justice disagree with our recommendations that they develop alternative ways to address the antibribery provisions. They contend that our statistics suggest that ambiguities in the act are not a sigifnicaint problem.”

In 1981, the investigative arm of Congress found, based on extensive study, that the FCPA’s “foreign official” element was ambiguous.

Here we are some thirty years later having the same discussion.

[Here is another interesting nugget. In June 1981, John Fedders was named to be the SEC’s Director of Enforcement, replacing Stanley Sporkin who left to become general counsel at the CIA. During a news conference, Fedders “pledged to enforce, with discretion, the Foreign Corrupt Practices Act, which he criticized as being ambiguous.” See Owen Ullmann, “Corporate Lawyer Gets SEC Enforcement Post,” Associated Press, June 29, 1981.]

Hiring a “Foreign Official”

Hiring a “foreign official” can be risky. Particularly when the “foreign official” is recommended by a foreign government. These are certain FCPA “red flags.”

However, “red flags” don’t always turn out red and in this case the “red flags” turn a pleasant shade of pink because the “foreign official” recommended by a foreign government is being hired in connection with a U.S. government contract.

That at least appears to be one take-away from FCPA Opinion Procedure Release No. 10-01 (see here).

According to the Release, a U.S. company (the “Requestor”) “entered into a contract with an agency of the U.S. government to perform work in a foreign country.” “Pursuant to that contract, the Requestor is obligated to hire and compensate individuals in connection with that work” and “at least one individual to be hired, and perhaps more, is a foreign official within the meaning of the FCPA.”

Among other things, the Requestor represented that: (i) the foreign country selected the “foreign official” to be hired based upon the individual’s qualifications for the position; (ii) the U.S. government directed the Requestor to hire the “foreign official”; (iii) the “foreign official” will be compensated $5,000 per month to provide services as directed by the foreign country; (iv) the foreign official currently serves as a paid officer for an agency of the foreign country, but the individual’s position does not relate to the work at issue and the services that the individual will perform are separate and apart from those performed by the individual as a “foreign official”; and (v) the “foreign official” will not perform any services on behalf of, or make any decision affecting the Requestor including any procurement or contracting decisions.

Based on this information, the DOJ stated that it “does not presently intend to take any enforcement action with respect to the proposed service contract described in this request.”

According to the DOJ, “[w]hile the Individual is a “foreign official” within the meaning of the FCPA, and will receive compensation as Facility Director, through a subcontractor, from the Requestor, the Individual is being hired pursuant to an agreement between the U.S. Government Agency and the Foreign Country, and will not be in a position to influence any act or decision affecting the Requestor.”

The DOJ further stated:

“The Requestor is contractually bound to hire and compensate the Individual as directed by the U.S. Government Agency. The Requestor did not play any role in selecting the Individual, who was appointed by the Foreign Country based upon the Individual’s qualifications. Moreover, the Individual’s position is separate and apart from the Individual’s position as a Foreign Officer. In neither position will the Individual perform any services on behalf of, or receive any direction from, the Requestor. Accordingly, the Individual will have no decision-making authority over matters affecting the Requestor, including procurement and contracting decisions.”

To read more about the detailed requirements of the Foreign Corrupt Practices Act Opinion Procedure process (see here and here).

For additional FCPA Opinion Procedure Releases on the topic of hiring a “foreign official” or otherwise doing business with a “foreign official” see 80-4 (here), 82-03 (here), 86-01 (here), 93-01 (here), 93-02 (here), 94-01 (here), 96-02 (here), 00-01 (here), 01-02 (here), 08-01 (here)

Benchmarking FCPA Compliance

Over at the White Collar Crime Prof Blog (see here), Professor Ellen Podgor has posted her essay titled “Educating Compliance” (see here) in which she argues that the U.S. government should more actively participate in “promoting compliance with the law.”

In discussing some examples of where the government does pro-actively educate compliance with the law, Profesor Podgor refers to the DOJ’s Lay-Person’s Guide to the FCPA (see here) and the DOJ’s Opinion Procedure Regulations (see here).

While perhaps lacking the “pro-active” label Professor Podgor advocates, an additional resource for companies seeking guidance on FCPA “best practices” is the actual FCPA non-prosecution and deferred prosecution agreements themselves. More often than that, these agreements will contain an appendix that contains the minimum elements of an FCPA compliance program that the DOJ has “signed off on” as part of the settlement process.

Reviewing these agreements, one will find, virtually verbatim, the same elements. For instance, see the Novo Nordisk agreement (here – pgs. 19-21), the Fiat agreement (here pgs. 34-36) and the Faro Technologies agreement (here pgs. 14-16).

While these minimum elements are not the “be-all and end-all” of FCPA compliance, and while any FCPA corporate compliance policy should be specifically calibrated to a company’s risk profile, these elements consistently included by DOJ in resolution agreements are certainly a good initial benchmark for any company’s FCPA compliance policies and procedures.

Baker Hughes – BJ Services Merger

The press (see here among other places) is reporting that Baker Hughes has agreed to buy BJ Services in a $5.5 billion cash and stock deal.

Both companies should be familiar to FCPA followers and there are many FCPA issues present in this announced merger.

For starters, a bit of background.

In 2007, Baker Hughes settled parallel DOJ and SEC FCPA enforcement actions concerning business conduct in Kazakhstan, Nigeria, Angola, Indonesia, Russia, and Uzbekistan. (See here for the DOJ release and related materials, see here for the SEC release and related materials). Combined fines and penalties were a then FCPA-record $44 million.

In 2004, BJ Services consented to entry of an SEC cease-and-desist order finding that it violated the FCPA’s anti-bribery, books and records, and internal control provisions in connection with the business conduct of its wholly-owned Argentinean subsidiary. (See here for the SEC order).

In addition, in its 2008 Annual Report (filed in November 2008 see here) BJ Services indicated (at pgs. 69-70) that it voluntarily disclosed to the DOJ/SEC the results of an internal investigation concerning problematic business conduct in the Asia-Pacific region that could implicate the FCPA. To my knowledge, no enforcement action has yet resulted from this disclosure.

At a minimum, the following FCPA issues are present in the Baker Hughes / BJ Services announced merger.

Baker Hughes settled the 2007 FCPA enforcement action by agreeing to a deferred prosecution agreement (see here). Pursuant to Paragraph 8 of the DPA, Baker Hughes agreed to engage an independent monitor to review the company’s compliance with the FCPA for a period of three years. Thus, per the DPA, Baker Hughes is still under an FCPA monitor – an individual who no doubt has been busy or soon will be busy in ensuring that Baker Hughes properly integrates BJ Services into Baker Hughes’ existing FCPA compliance policies and procedures.

What about the issue of Baker Hughes purchasing a company with disclosed, yet apparently unresolved, FCPA issues? This is one area where the DOJ has offered up substantive guidance to acquiring companies and the following DOJ Opinion Procedure Releases are relevant (in whole or in part): 08-02 (see here), 08-01 (see here), 04-02 (see here), and 03-01 (see here). For additional reading (see here).

I like to tell my students that the business law issues we cover in class are not merely historical, but rather are issues that companies deal with on a daily basis. For all you FCPA students out there, the Baker Hughes – BJ Services merger announcement provides a good real-world “issue-spotting” exam.

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