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Compliance Defense Legislative History

One of the reform proposals likely to make its way into a soon to be expected FCPA reform bill is a so-called compliance defense.  As noted in this previous post, such a compliance defense would be similar to the adequate procedures defense in the new U.K. Bribery Act, and would make the FCPA consistent with the “FCPA-like” laws of several other countries that – like the U.S. and the U.K. – are signatories to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

In short, amending the FCPA to include a compliance defense is not a novel idea.

Nor is it, as I have referenced several times, a new idea.  Several FCPA reform bills in the 1980’s (a period of sparse and measured FCPA enforcement compared to the current era) included a compliance defense and this post provides a summary of the legislative history relevant to the compliance defense.

In connection with my Carson “foreign official” declaration (here), I reviewed the FCPA’s entire legislative history.  The first apparent reference to a compliance defense occurred on October 6, 1983 during a House Hearing of the Committee on Foreign Affairs, Subcommittee on International Economic Policy and Trade, that examined legislation to amend the FCPA.  Testifying at the hearing was Arthur Matthews, a former SEC enforcement official, who was then a partner at Wilmer, Cutler and Pickering.  Although the bill under consideration at the hearing, HR 2157, did not contain such a compliance defense, Matthews stated as follows.  “I would also support some type of affirmative due diligence defense that a corporation would be able to prove to avoid criminal responsibility on a reckless disregard theory.  Since 1933, in the Securities Act of 1933, there has been a due diligence defense for issuers and their officers and directors with respect to whether or not a registration statement is false.  I think comparable language could be placed in the bill so that corporations would have an affirmative due diligence defense.”  FCPA reform, along with Matthews’s suggestion of a compliance defense, fizzled for several years.

It appears that the first FCPA reform bill to include a compliance defense was H.R. 4708 introduced by Rep. Don Bonker (D-WA) on April 30, 1986.  Titled the Export Enhancement Act of 1986 – Title IV of the Act contained the following.

“Due Diligence. – An issuer or domestic concern “may not be held vicariously liable, either civiallly or criminally, for a violation [of the FCPA’s anti-bribery provisions] by its employee, who is not an officer or director, if – (1) such issuer [or domestic concern] has established procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such employee, and (2) the officer and employee of the issuer [or domestic concern] with supervisory responsibility for the conduct of the employee used due diligence to prevent the commission of the offense by that employee.  Such issuer [or domestic concern] shall have the burden of proving by a preponderance of the evidence that it meets the requirements set forth in paragraphs (1) and (2).  The first sentence of this subsection shall be considered an affirmative defense to actions under [the anti-bribery provisions].”

The House Committee on Foreign Affairs favorably reported out H.R. 4708.  See Report 99-580 – Export Enhancement Act of 1986.  (May 6, 1986).   The Report notes that if a “corporation has set up internal controls to avoid illicit payments or has otherwise acted to keep within the law, its ‘due diligence’ can be used as a defense against both civil and criminal liability in cases where its employees have nonetheless engaged in bribery.”  Elsewhere, the Report states as follows.   “A company may not be held vicariously liable if it can show that it has established procedures to prevents its employees from making bribes and that it supervisory employees had used ‘due diligence’ to prevent employees or third parties from making bribes.”

Several other bills containing FCPA reform provisions (such as H.R. 4800 introduced on May 9, 1986;  H.R. 4830 introduced on May 5, 1986; and  H.R. 2150 introduced on April 23, 1987) also contained such a compliance defense – although not all bills containing FCPA reform provisions did include a compliance defense.

The compliance defense was included in H.R. 3, Omnibus Trade and Competitivness Act of 1987, introduced on Jan. 6, 1987.  H.R. 3 was favorably reported out by the House Committee on Energy and Commerce on April 6, 1987.   The House Report noted as follows.  “The bill also provides incentives for self-policing by business, by setting forth standards of due diligence to prevent and detect violations of the law by employee and agents.”

The House Report further stated as follows.

“Under current law, in appropriate circumstances, a firm may be held vicariously liable for violations of the FCPA by employees or agents.  This is the proper result, because firms should be responsible for taking appropriate steps to prevent violations.”

“The lack of enforcement resources at the SEC and the Department of Justice make it clear that the enforcement agencies are able to detect and pursue only a small number of violations of the FCPA, as is true of violations of many other statutes.  Consequently, enforcement agencies under this statute, as well as many other, must depend upon the deterrent effect of the law, and, more importantly, self-policing by responsible businesses.”

“The bill establishes in Section 701 a new, ‘due diligence’ defense for civil and criminal liability of issuers and domestic concerns for violations of the FCPA by employees and agents.  It provides that if the issuer or domestic concern has established procedures for detecting violations, and if the officers and employees with supervisory responsibility for the employees or agent violating the law have exercised due diligence to prevent the violation, then no vicarious liability will apply.  Of course, supervisory responsibility for the actions of a particular employee or agent may be exercised by many officials in an organization and can include, for example, the general supervisory authority of high level corporate officials.  The requirements must be established by a preponderance of the evidence.”

“Although ‘due diligence’ is a familiar concept under the Federal securities laws, the bill does not specifically define the term.  It is intended that what would constitute ‘due dilgence’ would be factual determination by the trier of fact and would vary depending upon the particular circumstances of the transaction at issue.  Due diligence might include many of the steps currently employed by firms seeking to comply with current law:  regular training and updating of all levels of involved corporate personnel; independent investigation of the background and reputation of agents and other participants in the transaction; contract provisions obligating the parties not to violate the Act and voiding the contract if the Act if violated; a right to perform a full or partial audit of the books of agents or other transaction participants; disclosure of the existence and terms of agency relationships to the foreign government purchase; periodic compliance certifications by corporate personnel and participants; and independent opinions of local counsel that local law will not be violated by any part of the transaction.”

“The scope of due diligence may also vary according to the circumstances of the transaction.  Many companies seeking to comply with current law, for example, have indicated that certain factors, such as those set forth below, may indicate the need to undertake additional inquiry on the part of corporate officials:  any unusual proposal relating to the method of payment to any participants in the transaction, particularly through third countries or in currency; any known or suspected family relationships between any participants in the transaction and any foreign government official; refusal by any participants in the transaction to sign affidavits or make representations that they will not violate the FCPA; the size of the commission paid to the agent in relationship to the services performed; any known or suspected misrepresentations by the agent or others in connection with the proposed transaction; requests by any participant in the transaction that the company prepare false invoices or any other type of false documentation; and any negative information developed as part of the independent investigation into the activities and reputation of the agent or other participants in the transaction, including any information developed regarding the financial interests of any foreign government officials in any companies participating directly or indirectly in the transaction.”

“The size of the company and the resources available to it may also be considered in determining the scope of the due diligence steps.  For example, many large multinational companies have the capacity to place corporate officials in foreign countries, while many smaller exporters must rely almost exclusively on foreign agents.  In many cases, it may be impossible for an exporter to determine with absolute certainty that an agent will abide by the law.  In meeting the defense under this section, it must be shown that reasonable steps were taken.  It is perhaps most important that firms create an environment which fosters good business practice and compliance with the law.  In this connection, employees and agents should be encouraged to comply with the law and to report factors that may indicate improper behavior.”

H.R. 3 passed the House and a different bill containing FCPA reform provisions passed the Senate.  Conference Report 100-576 (April 20, 1987) Omnibus Trade and Competitiveness Act of 1988 stated as follows.   “The House bill established a new ‘safe harbor’ defense for civil or criminal liability if issuers and domestic concerns for FCPA violations by their employees or agents.  Under current law, under appropriate circumstances, a firm may be held vicariously liable for violations of the FCPA by its employees or agents.  Under the House bill, a firm could not be held vicariously liable for such violations if it had established procedures ‘reasonably expected to prevent and detect’ any such violation, and the officer and employee with supervisory responsibility for the offending employee’s or agent’s conduct used ‘due diligence’ to prevent the violation.”   The Conference Report notes that the Senate amendment contained no provision and that in conference the house receded to the Senate.

FCPA reform, which for most of the 1980’s was incorporated into omnibus export and trade bills, did not occur in 1987.  FCPA reform was accomplished in 1988 when President Reagan signed H.R. 4848, the Omnibus Trade and Competitiveness Act of 1988.  However the FCPA portion of H.R. 4848 (Title V, Subtitle A, Part I) did not contain a compliance defense.

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