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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.

It’s Been A While … DOJ Issues FCPA Opinion Procedure Release

Thousands of companies face FCPA risks every single day. Many of these companies have legitimate questions as to how its operations in foreign countries could implicate the FCPA. If only there was a procedure in place for companies subject to the FCPA to receive guidance from the DOJ as to its enforcement stance as to particular conduct!

Well … actually there is, but if you haven’t heard about it, don’t feel bad, because the Opinion Procedure Release provisions of the FCPA (15 USC 78dd-1(e)) are often overlooked.

After a year hiatus, (the last opinion was released on July 11, 2008), DOJ has penned Opinion Procedure Release 09-01 (see here).

Given the extent to which the health-care sector has come under FCPA scrutiny, it is not a surprise that the “Requestor” is a “domestic concern” “which designs and manufacturers a specific type of medical device.”

Big picture … the Requestor wants to provide a product sample to a foreign government so that government medical centers can evaluate the product to see if it would be eligible for the government subsidized medical device program. Requestor no doubt was nervous about this given that its competitors were already doing business with the foreign government (whereas Requestor was not) and given that the 100 product samples cost $19,000 each – amounting to a $1.9 million donation.

Based on a number of representations from Requestor, including that none of the product samples would go to government officials, the DOJ stated that it did not intend to take any enforcement action with respect to the proposed conduct because “the proposed provision of 100 medical devices and related items and services fall outside the scope of the FCPA in that the donated products will be provided to the foreign government, as opposed to individual government officials, for ultimate use by patient recipients selected in accordance with specific guidelines …”

Requestor, it would seem, got the certainty it was looking for and can proceed with the arrangement free of FCPA worries.

All of which begs the question … why isn’t the FCPA Opinion Procedure process used more frequently? Common answers often include (i) the opinion expresses only the DOJ’s opinion, but not the SEC’s (obviously relevant to issuers); (ii) the procedure takes too long and the proposed business conduct is time sensitive (note that in 09-01 the Requestor made two supplemental disclosures); and (iii) the Requestor may receive an answer it doesn’t like and thus needlessly raises its FCPA profile.

To read more about the detailed requirements of the FCPA Opinion Procedure process (see here).

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