UK Bribery Act – Year One
Today’s post is from Robert Amaee (former Head of Anti-Corruption and Head of Proceeds of Crime at the UK Serious Fraud Office and currently of counsel at Covington & Burling – see here). Amaee is the United Kingdom Expert for FCPA Professor.
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UK Bribery Act – Year One
The UK Serious Fraud Office is yet to take enforcement action under the UK Bribery Act (“Bribery Act”). This is hardly a surprise to those familiar with the demands of an investigation into complex economic crime. The type of bribery cases that the SFO is duty bound to investigate and prosecute are precisely those that involve a heavy commitment of resource and time. The SFO is reported to currently spend an average of three and a half years and £1.5 million ($2.25 million) investigating each bribery case. These are not the Munir Patel type of bribery prosecutions that are typically handled by the UK Crown Prosecution Service (“CPS”).
Some commentators had set unrealistic expectations for the speed at which enforcement actions would appear, predicting a swift procession of dawn raids and arrests. This sense of anticipation and the inevitable anti-climax may well, at least in part, explain the findings of recent surveys, including a poll conducted by Deloitte. The poll found that fewer than one in ten of the 1200 compliance professionals polled expressed any concern about the possibility of a Bribery Act enforcement action being brought against their organisation. There appears to be little to fear from the SFO for the vast majority of those polled. In spite of the undoubted challenges that confront the SFO in the year ahead, it is important for companies and senior individuals to guard against complacency.
In the year since the Bribery Act came into force, David Green CB QC has taken over as Director of the SFO and the UK government has made tangible strides towards the adoption of a UK version of the US Deferred Prosecution Agreement (“DPA”). The new director will have little choice but to continue the SFO’s policy of guiding, assisting and engaging with responsible corporates and senior individuals, but there is no doubt that he will instil a more hard edged prosecutorial approach at the SFO than has been the case in the past. Green is a seasoned barrister who has defended and prosecuted serious economic crime cases during his 25 year career at the criminal bar. He also has prior experience of leading two prosecutions agencies. He was appointed the first director of the Revenue and Customs Prosecutions Office (“RCPO”) in April 2005, and served as director of the CPS Central Fraud Group from January 2010 until his return to the bar in April 2011.
Green began his four year term at the SFO on 23 April 2012. Since then, he has started to articulate his plans for the SFO in interviews with the Financial Times and most recently in a keynote address he delivered at an anti-corruption conference held in London on 26 June. At the conference, Green described this as a “challenging but exciting time” for the SFO. In a likely reference to the Tchenguiz case, he accepted that some of the recent “trenchant” criticism of the SFO has been justified, but stated that the SFO was “here to stay.” He warned against the “dilution” of the SFO brand by chasing “eye-catching quick results or taking short cuts” and said that he will not “sacrifice solid prosecutorial demands for easy headlines.” Green will focus the SFO’s “blood and treasures” on only the “most important cases *** that undermine confidence in UK Plc. and the City of London” and those that “undermine a level playing field.” He said that the SFO would not pursue cases of “crooks overcharging” but would look to use its “unique set up and capabilities to do what others cannot do.”
Green made no reference to the CPS Inspectorate-led review of the SFO that is currently underway, but explained that he has set about re-organising the SFO into four operational divisions; two dedicated to bribery and two to fraud. He is in the process of recruiting four senior civil servants into the “divisional head” roles. In addition, he is seeking to appoint a General Counsel to “shape and critique” cases, and a “Specialist Advisor” to “sharpen cases” and advise him on DPAs and civil settlements. Green made it clear that he is looking to bring external expertise into the organisation. He said that he wants to “foster and encourage a revolving door between private practice and the SFO” and extended an invitation to members of the junior bar, solicitors, investigators and accountants to join the SFO, either on a permanent basis or on secondment.
Green reiterated his support for the introduction of a UK DPA mechanism, stating that prosecutors should have “access to the broadest possible range of prosecutorial tools” so that they are not “outdone by the opposition.” He talked about strengthening his intelligence unit and made it clear that he would welcome a debate on whether UK whistle-blowers should be financially rewarded. He would like to “extend the reach” of the SFO and “encourage and increase self-reporting.” He expressed the view that the “advantages of self-reporting need to be articulated” so that companies are “inclined” to self-report. While he cannot give guarantees, he said that “self-reporting is a strong factor in deciding whether to prosecute or not.” If a prosecution is not in the public interest he said that the SFO is “likely to seek a civil settlement.” It is clear that the civil recovery mechanism, afforded by the UK Proceeds of Crime Act 2002, will continue to play a major role in future SFO enforcement actions.
Anti-corruption enforcement remains a priority for Green’s SFO which will continue to bring cases under the old UK bribery laws as well as the Bribery Act. Green confirmed that the SFO is currently handling four self-referrals and that eleven further cases are “being developed.” He said that most of these involve allegations of corruption. In relation to the Bribery Act, Green expressed his desire to bring cases that would help clarify the boundaries of the “adequate procedures” defence. In respect of the term “carries on business or part of a business in the UK” he warned that, in any court case, the SFO would “argue against an overly technical interpretation.”
The SFO’s priorities in relation to enforcement under the Bribery Act will become clearer in the year ahead. However, companies must not expect early answers on some of the thornier issues under the Bribery Act, such as the extent of the UK’s jurisdiction over non-UK companies; the extremities of third party liability; and the borderline between acceptable corporate hospitality and a prosecutable bribe. The SFO is likely to begin enforcement under the Bribery Act by seeking prosecutions or settlements in cases where there is clear criminal culpability, before it ventures on to tackle cases that test the boundaries of the Bribery Act. As we await further clarity from the UK, the recent US Department of Justice declination in the Morgan Stanley case provides companies with valuable insights into considerations that can successfully persuade a prosecutor not to prosecute. The relevance of this guidance to an assessment of the adequacy of a company’s policies and controls in the context of the Bribery Act will not be lost on readers of this publication. The DoJ is set to provide further assistance to us all when it launches its much anticipated FCPA guidance. This is expected in the next few weeks.
A Focus On Australia
Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery – here). Wyld is the Australia Expert for FCPA Professor. Jasmine Forde (Senior Associate, Johnson Winter & Slattery) also contributed to this post.
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A FOCUS ON AUSTRALIA
For many years, bribery and corruption in Australia has taken a back seat to profitable enterprise. It was all considered a bit too foreign and something Australian companies simply did not do. All of a sudden, that changed in 2006 when the Australian Wheat Board (AWB) wheat sales to Iraq, corrupting the UN Oil-for-Food program, blazed across Australia’s public awareness. Since then, the media has treated us to a never-ending procession of allegations and sagas involving companies of the stature of Rio Tinto (with the corruption prosecution and imprisonment of former Rio Tinto executive Stern Hu in China), BHP and its now abandoned bauxite mining ventures in Cambodia, Leighton Holdings in the Middle East and as a standout, subsidiaries of Australia’s central bank, the Reserve Bank of Australia, engaged in potentially illegal conduct to secure lucrative polymer banknote printing contracts.
So what has been happening over the last few years? In short, a much more focused awareness of the risks that foreign corruption brings to corporations and individual liability and a legislative push to increase investigative powers and penalties to deter errant behaviour.
Legislative Developments Post AWB Wheat Saga in 2005
In 2007, the Australian government tightened up the weaknesses in Australian foreign corruption laws highlighted by the Cole Inquiry and AWB’s conduct. (The Cole Inquiry was a Royal Commission headed by a retired appellate Judge, The Hon Terence RH Cole AO, RFD, QC, who investigated AWB’s conduct and who formed the opinion that the company and various senior executives may have committed criminal and/or civil offences in connection with their wheat sales to Iraq under the UN Oil-For-Food Program.) Those involved:
- ensuring the foreign law defence to bribery was reflected in a written foreign law; and
- criminalising conduct in contravention of United Nations’ sanctions.
Between 2007 and 2010, the Australian Government established a Taskforce to investigate whether any of the identified AWB executives should be prosecuted. The Australian Federal Police (AFP), as the Australian federal investigative policy agency responsible for investigating contraventions of Australian laws, ultimately abandoned any criminal prosecution due to insufficient evidence to warrant a criminal case. The Australian Securities and Investments Commission (ASIC), the Australian corporate regulator, commenced civil penalty proceedings against 6 former AWB directors and officers alleging breach by those persons of their common law and/or statutory duties in connection with the AWB wheat sales and the payment of monies to Iraq and to third parties. The individuals are defending the cases, although in June 2012, both the former AWB Managing Director Andrew Lindberg and the CFO, Paul Ingolby, agreed to a settlement with ASIC and their penalties will be imposed by the Victorian Supreme Court in the future.
In 2010, primarily as a result of increasing focus on Australia’s inadequate penalties by the OECD and Transparency International, the Australian Government revised the applicable penalties for foreign corrupt offences. Those penalties were now set, for conduct post February 2010, as follows:
- for an individual – imprisonment for up to 10 years, a fine of up to 10,000 penalty units (one penalty unit being AU$110, with the maximum fine, AU$1,100,000) or both; and
- for a corporation – a fine being up to the greatest of 100,000 penalty units (or AU$11,000,000), 3 times the value of the benefit obtained directly or indirectly from the conduct or if the benefit cannot be determined, 10% of the corporation’s annual turnover during the period of 12 months ending at the end of the month in which the offending conduct occurred.
Section 70.2(6) of the Criminal Code defines “annual turnover” to be the sum of the value of all supplies that the corporation or any related corporation has made or are likely to make during the 12 month period subject to limited statutory exceptions.
These penalties are similar to the penalty regime which applies to the criminalisation of Australia’s cartel or anti-trust offences. It remains to be seen how they will be applied to a foreign bribery prosecution by an Australian Court.
In 2011, the Australian Government published a Consultation Paper reviewing a number of aspects of Australia’s foreign bribery laws. In particular, the Paper asked:
- whether facilitation payments should remain as a defence to foreign bribery; and
- whether a particular foreign official had to be identified in respect of which the alleged bribe was either paid, offered or promised to be paid.
It is unclear which way the Government will go, but the authors understand that the Government has received conflicting views on both abolishing and retaining the defence.
In April 2012, the Crimes Legislation Amendment (Powers and Offences) Act 2012 amended the Australian Crime Commission Act (ACC Act) to enable Australian statutory and secretive crime agency, the Australian Crime Commission (ACC) to share information with corporations for a ‘permissible purpose’. Features of this new regime include the following:
- section 59AB of the ACC Act enables the CEO of the ACC to disclose information to a prescribed body corporate, but only in circumstances where it would not prejudice the safety, or the fair trial, of a person who has been charged with an offence;
- the ACC can impose conditions on the body corporate to ensure that the information is not used, and further disclosed, in a way that might prejudice the reputation of a person; and
- the overriding purpose of the amendments is to facilitate cooperation between the private sector and the ACC to enable the ACC to combat serious and organised crime, which includes foreign bribery and corruption.
Aside from the privacy issues in connection with the use and disclosure of information, there are a number of practical challenges that arise, and present obvious risks, for a corporation in circumstances where one of its employees is the subject of an ACC investigation and subsequent disclosure, which include:
- whether the information should be disclosed in the first place just to the corporation CEO, Chairman, or a wider group including General Counsel and, if applicable, any Head of Security;
- if a person directly or indirectly makes a record of the information or discloses it to another person (other than for a specified purpose), that person has committed an offence with a potential penalty of up to 12 months’ imprisonment;
- care must be taken to manage the storage of material constituting the disclosed information;
- whether and if so, how the disclosed information interacts with a corporation’s continuous disclosure obligations to the market; and
- whether the corporation should conduct its own internal investigation and if so, the impact that may have on any external official (or covert) investigation.
It remains to be seen how the ACC will handle this new power. It is hoped that the ACC will adopt a sensible and flexible approach, ensuring that any disclosure is undertaken co-operatively with a relevant corporation and the corporation is informed of whether any internal investigation may or may not impact on an official investigation.
Prosecutions
Since Australia criminalised foreign bribery in December 1999, until July 2011, there had been but a few investigations, no prosecutions and no convictions.
In July 2011, the Commonwealth Director of Public Prosecutions (CDPP) laid the first criminal charges against Securency International Pty Ltd and Note Printing Australia Pty Ltd, two subsidiaries of the Reserve Bank of Australia and various individuals, alleged to be involved in corrupt conduct to secure valuable polymer banknote printing contracts. Allegations suggested the Central Bank subsidiaries used foreign agents or intermediaries in various countries to pay or offer to pay bribes to foreign officials to secure the contracts to replace national paper currency with polymer (plastic) banknotes. These proceedings are continuing and are subject to suppression orders by the Courts in Victoria hearing the charges.
The AFP has a number of current referrals involving potential foreign bribing. Whether prosecutions occur in the future remains to be seen.
Current issues under review in Australia
The current anti-bribery regime in Australia still has many practical difficulties which are of concern, particularly in terms of advising and educating corporations on compliance with local and international laws.
The main issues of concern are:
1 Regulatory Body
The AFP investigates foreign bribery. Any prosecution is conducted by the (CDPP).
There is no one identified organisation or agency which can be approached if a corporation wishes to self-report a potential offence. While a potential offence can be reported to the AFP, the present structure simply requires the AFP to investigate and then determine if a brief should be presented to the CDPP. It is only the CDPP who is authorised to offer any inducement to a potential defendant to cooperate.
A regulator modelled on the US DOJ or UK SFO would be better positioned to educate, enforce, facilitate and provide guidance to corporations. Presently, that does not exist in Australia.
2 Facilitation Payments
This is regarded as one of the biggest risk areas. There is confusion in understanding any real distinction between a facilitation payment and a bribe, particularly in relation to hospitality, travel and education allowances. There is very little guidance regarding when these are acceptable commercial relationship activities and when they are considered to be a bribe. This is exacerbated by virtue of the fact that there are differences in the foreign bribery laws around the world where the US permit facilitation payments and offer official “guidance opinions’ while in the UK, facilitation payments do not exist.
The authors consider that facilitation payments should be abolished but until that time, the best advice is to look to the UK Bribery Act as the ‘gold standard’ and as far as possible, ban them from within your organisation.
3 Awareness of Foreign Bribery and Training
Awareness of the foreign bribery regimes outside of Australian Stock Exchange listed corporations is patchy at best. There is a great need for corporations to continually educate their employees and third party service providers so that they can put in place robust procedure and processes. Whilst some global companies now insist on anti-corruption clauses being included in contractual arrangements, it is by no means standard practice.
One need only look to the features of the recent investigation into Morgan Stanley in the US and the non-prosecution of the company in light of the rogue conduct of Mr Petersen in Chinese real estate speculation, to understand what a corporation must be able to demonstrate if it is to satisfy a regulator that it did all it could, in the circumstances, to prevent foreign bribery.
4 Lack of Prosecutions
To date, there has been no judicial enforcement in Australia which has had the effect of sending a message to the market that non-compliance is not an option.
The first prosecution under the legislation has taken 12 years and is still ongoing. The lack of prosecutions in Australia is not likely to be because Australian companies are compliant; rather, the better explanation appears to be that corporations:
(a) are simply not recording facilitation payments in accordance with the law (to do so would essentially be a self- admission with no protection and/or may expose relevant individuals to prosecution if the country they are dealing with does not allow for such payments);
(b) are failing to self-report any potential foreign bribery;
(c) are prepared to take a risk against prosecution, given the inherent complexity and cost associated with foreign bribery investigations; and
(d) accept that such controversial payments (either as a bribe or a facilitation payment) are simply the reality of doing business in some ‘risky’ jurisdictions.
5 Whistleblower Protection
Arguably, it is not considered culturally acceptable in Australia to ‘dob’ in a friend or colleague. However, recent research pioneered by Professor AJ Brown from Griffith University Queensland in conjunction with the University of Melbourne, suggests that over 80% of his sample considered it was more important to support whistleblowers for revealing serious wrongdoing than to punish them. The overall findings, released on 6 June 2012 (see www.newsroommelbourne.edu), suggest Australia is not a country where hostility to whistle blowers is the norm.
Currently, there is no incentive to be a whistleblower; monetary or otherwise and indeed, there can be severe, even criminal sanctions applied to certain individuals (Commonwealth employees) who blow the whistle. There is a need for legislative reform around whistleblower protection as the Australian Public Interest Disclosure Bill presently being considered by the Australian Parliament offers limited protection.
SEC “Obey-The-Law” Injunctions Held Invalid
A guest post today from Debevoise & Plimpton attorneys Paul Berger, Colby Smith, Jonathan Tuttle and Ada Fernandez Johnson.
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SEC “Obey-The-Law” Injunctions Held Invalid
A recent Eleventh Circuit Court of Appeals decision could significantly impact the Securities and Exchange Commission’s (“SEC”) ability to seek broad federal court injunction orders directing defendants to refrain from any future violations of securities laws, often referred to as “obey-the-law” injunctions. In SEC v. Goble, No. 11-12059, 2012 WL 1918819 (11th Cir. May 29, 2012), the Eleventh Circuit vacated the “obey-the-law” injunctions entered against defendant Richard Goble, the founder of North American Clearing, Inc. (“North American”), because the injunctions did not satisfy Federal Rule of Civil Procedure 65(d)(1), which requires that injunctions describe, “in reasonable detail . . . the act or acts [sought to be] restrained or required.” The Eleventh Circuit’s strongly worded opinion and careful analysis could prompt other courts to question the benefit and efficacy of the SEC’s frequent practice of seeking broad “obey-the-law” injunctions. Although the case did not arise in the context of the Foreign Corrupt Practices Act (“FCPA”), such injunctions are fairly typical in SEC actions involving the FCPA, where the agency regularly seeks to impose injunctions that permanently prohibit future violations of the anti-bribery and books and records and internal control provision of the FCPA. Whether or not the SEC will continue to push for broad FCPA “obey-the-law” injunctions, or perhaps employ other available tools in light of the recent Eleventh Circuit opinion, remains to be seen.
Factual Background and the Eleventh Circuit’s Opinion
The SEC brought a civil enforcement action against Goble and others in 2008 alleging that Goble, the founder and owner of North American, had orchestrated a scheme to manipulate the amount of money required to be set aside in North American’s reserve account to protect the assets of its customers in the event the firm failed. After a bench trial, a district judge in the Middle District of Florida found that Goble had directed an employee to make a false entry in the company’s books, and thus found Goble liable for securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”). The Court also found Goble liable for aiding and abetting violations of the Customer Protection Rule, which is Section 15(c)(3) of the Exchange Act, and the books and records requirements in Section 17(a) of the Exchange Act.
On appeal to the Eleventh Circuit, defendant Goble argued, among other things, that the injunctions imposed by the district court were impermissible “obey-the-law” injunctions that violated Rule 65(d)(1) because they did not describe in sufficient detail the conduct that was prohibited. Rule 65(d)(1) states that “Every order granting an injunction and every restraining order must: (A) state the reasons why it issued; (B) state its terms specifically; and (C) describe in reasonable detail – and not by referring to the complaint or other document – the act or acts restrained or required.” In considering the propriety of the district court’s injunctions, the Eleventh Circuit was troubled by the conclusory language that restrained and enjoined Goble from violating cited laws and rules, without specifying the actual enjoined conduct. The Court concluded that the injunctions under Sections 15(c)(3) and 17(a) were impermissible “obey-the-law” commands and vacated them. The Court vacated the injunction under Section 10(b) on other grounds, but also said in dicta that it too appeared to be an impermissible “obey-the-law” injunction.
The Eleventh Circuit explained that because “obey-the-law” injunctions lack specificity, they necessarily deprive defendants of procedural safeguards alerting them to what could be a future charge of a violation of the securities laws. In making its ruling, the Court discussed its previous ruling in SEC v. Smyth, 420 F.3d 1225, 1233 n.14 (11th Cir. 2005), where the Court went out of its way to comment, albeit in dicta, that an SEC “obey-the-law” injunction was “unenforceable.” According to the Circuit Court, the specificity requirements of Rule 65(d)(1) were designed to prevent uncertainty and confusion by those subject to the injunction orders and to “avoid the possible founding of a contempt citation on a decree too vague to be understood.” Goble, at *11 (quoting Schmidt v. Lessard, 414U.S. 473, 476 (1974)). A defendant faced with an injunction should therefore be able to determine from the four corners of the injunction the proscribed conduct. The injunctions ordered by the district court failed this test and therefore had to be vacated. In making this ruling, the Eleventh Circuit acknowledged that in some circumstances, injunctions that order a defendant to comply with a statute can be appropriate where the terms of the statute at issue are specific enough so that the defendant “clearly [knows] what conduct the injunction addresse[s].” In dicta, the Court added that the issue of specifying the prohibited conduct is especially acute in the context of injunctions for Section 10(b) and Rule 10b-5 violations – perhaps the most common of the “obey-the-law” injunctions sought by the SEC – because of the “ever-changing judicial landscape” of rulings on § 10(b) violations.
SEC v. Goble May Signal that Broad Injunctions Face Further Scrutiny
The Goble decision will undoubtedly have a significant impact on the SEC’s ability to continue seeking and enforcing “obey-the-law” injunctions in district courts in the Eleventh Circuit. What remains to be seen is whether the decision will have a more far-reaching impact. In SEC v. Zwick, No. 03 Civ. 2742(JGK), 2007 WL 831812, *19 (S.D.N.Y. Mar. 16, 2007), the District Court for the Southern District of New York expressly rejected the Eleventh Circuit’s analysis in Smyth, and upheld a broad “obey-the-law” injunction. The Zwick court relied on the Second Circuit’s decision in SEC v. Manor, 458 F.2d 1082, 1103 (2nd Cir. 1972), a decision that pre-dated Smyth but which expressly provided that an injunction that mirrored the text of Section 10(b) and Rule 10b-5 was appropriate. Given that the Eleventh Circuit has not backed down from its view in Smyth, and in fact has given it an articulate defense, other courts may be prompted to question future attempts by the SEC to obtain broad “obey-the-law” injunctions. It is also possible that the SEC may shift on its own towards a policy of pursuing more specifically tailored injunctions.
In light of the Goble decision, individuals and companies in active litigation with the SEC, as well as those considering settlement with the agency, may want to consider challenging any attempt by the SEC to impose “obey-the-law” injunctions. Although it is likely that the SEC will continue to pursue vigorously broad injunctive orders, the recent trend by federal judges to scrutinize SEC settlements may result in the SEC being more open to the suggestion that injunctions should be narrowly tailored and sufficiently specific so as to comply with Rule 65(d)(1). On the other hand, the SEC could respond in the FCPA context by turning more aggressively towards deferred prosecution-type remedies or by resorting to administrative actions where the agency can seek broadly worded cease and desist orders without the need for federal court approval. Those alternative remedies, however, lack the in terrorem effect of a broadly-worded legal prohibition that is backed by the ever-present threat of a federal contempt citation.
A Focus on Korea
Today’s post is from Nathan McMurray (an attorney with Barun Law in Seoul, South Korea). In the post, McMurray discusses “Korea’s FCPA” and an important recent case in which the court held that the prosecution failed to meet its burden and prove beyond a reasonable doubt that China Eastern Airlines was a state owned enterprise, and, therefore, the president of the Korean subsidiary was a foreign public official. McMurray previously touched upon these issues on his Korea Law Today website (see here).
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Korea’s FCPA
In 1999, the Republic of Korea (South Korea) enacted the Act on Preventing Bribery of Foreign Public Officials in International Business (FPBA) (see here for the English translation). It is Korea’s version of the Foreign Corrupt Practices Act (FCPA). But unlike the FCPA, not many people gave much attention to the FPBA, at least until recently.
As Korea has taken steps to increase transparency and stamp out corruption, Korean prosecutors have started pursuing those who have allegedly violated the FPBA. In particular, in May, the Incheon District Court (Incheon is an important port city close to Seoul) heard a case involving two men who were charged with violating the FBPA. This was the first trial ever under the FPBA, but it is not likely to be the last.
Because of the sudden interest in the FPBA and the passage of the U.S. – Korea Free Trade Agreement, it seems like this is the right time to take a closer look at the act and at this recent case. Focusing first on the text of the act, you may notice that its long name belies its brevity. The FBPA is only a short five articles long (two pages).
What’s in the FPBA.
Article 1 summarizes the purpose of the act, namely “the establishment of sound practice in international business transactions” and “criminalizing the act of bribery of foreign public officials.” In other words, the act prevents you from bribing foreign public officials to gain an improper business advantage.
Article 2 defines the term “foreign public official.” Specifically, a foreign public official is any person who:
- is engaged in a legislative, administrative, or judicial work for a foreign government (including local government);
- conducts official business on authority delegated by a foreign government;
- conducts the business of a public organization or agency established by a foreign government to engage in a specific business;
- is an executive or employee of an enterprise into which a foreign government has contributed more than 50% of the paid-in-capital or a foreign government exercises substantial control over the management (not including enterprises that operate on a competitive basis in the private economy without preferential treatment); or
- conducts the business of a public international organization.
Article 3 specifically defines the crime under the FBPA. It says that any person (meaning a natural person) may be liable for offering a bribe to a foreign official in relation to their official business to gain an improper advantage for the conduct of international business. The penalty for the crime may be up to 5 years’ imprisonment and a fine of up to 20 million Korean Won (KRW). If the profit obtained through the offense exceeds 10 million KRW, the penalty may be higher: up to five years’ imprisonment and a fine of up to twice the amount of profit.
There are a few exceptions in Article 3, which are similar to the FCPA exceptions. Payments that are lawful under the law of the foreign public official’s home country are permitted as well as facilitation or grease payments used to speed up the process of obtaining something from a foreign official that a person is already entitled to receive, such as (depending on the circumstances) getting a utility turned on.
Article 4 addresses the responsibility of the company (legal person) for which the person offering the bribe either works or represents. The company may be subject to a fine of up to 1 billion KRW. If the profit obtained through the offence exceeds 500 million KRW, the fine may be up to twice the amount of the profit. But there is another exception, if a company has “paid due attention or exercised proper supervision to prevent the offence” (i.e., reasonable care), it can escape liability.
Article 5 says that the authorities can confiscate any bribe amount still in the possession of the person who committed an offence. There is also a short addendum to the FBPA that says it came into force at the same time as Korea’s OECD obligations under the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which indicates when and how the FBPA was originally enacted.
What the Recent Case Teaches About the FPBA.
As referred to above, last year the Incheon Prosecutor’s Office charged two individuals with bribing a foreign public official under the FBPA. The president of the Korean subsidiary of China Eastern Airlines was offered the bribes. The two men charged were the president of a shipping company and the president of a travel agency. The shipping company president wanted more favorable rates, and the travel company president wanted China Eastern Airlines to assign it more tickets for sale.
A key issue in the case was whether the Korean president of China Eastern Airlines was a “foreign official” under Article 2 of the FBPA. The prosecution argued the government of the People’s Republic of China controls China Eastern Airlines. Apparently, the key evidence it offered for this claim was certain documents linking China Eastern Airlines to the Chinese government. The defense used employee testimony to challenge the truth, accuracy, and relevance of the documents.
The court held that the prosecution failed to meet its burden and prove beyond a reasonable doubt (or more precisely the Korean equivalent, which is the relevant standard in criminal trials in Korea) that China Eastern Airlines was a state owned enterprise, and, therefore, the president of the Korean subsidiary was a foreign public official. The court based its reasoning in part on the exception in Article 2 of the FBPA regarding enterprises that operate on a competitive basis in the private economy without preferential treatment.
The Ruling and Its Aftermath.
Because the prosecution was unable to prove that the president of China Eastern Airlines was a foreign public official, the two men were found not guilty under the FBPA. But unfortunately for all three men, they were found guilty of bribery under Article 357 of the Korean Criminal Code. The prosecutors, perhaps looking to establish a precedent, have appealed the court’s ruling on the FBPA charges.
This was a test case involving small companies and a prosecution team that seemed unprepared to prove a key element of the crime. But as we await the appeal and anticipate additional cases, what seems clear is that this once overlooked law is not going vanish into obscurity once again.
Many in the business community here are uncomfortable about where this may eventually lead. Korea is an exporting nation with limited natural resources. Major Korean companies (chaebols) have invested in nearly every corner of the world. You cannot help but wonder if Korean prosecutors are contemplating eventually applying the FPBA to these big fish, rather than smalltime operators looking for petty favors and extra tickets.
Also, it is unclear why in the China Eastern Airlines case the prosecution decided to focus on the individuals only and not the companies involved. Does their decision mean that the reasonable care exception for company liability applied, that the two companies were simply too small to focus on, or that the prosecution was concerned that the applying the FBPA to the companies would not withstand court scrutiny for some other reason? We can only speculate.
About Korean Court Precedents.
This post was produced with the help of my Korean colleagues, and the information about the court case summarized above was obtained from publically available sources. The case, however, was never officially published by the court, so we cannot verify all of the facts. Indeed, only Supreme Court cases are regular published in Korea. Lower court cases are sometimes published, but not always. This is in part because Korea is a civil law country. So although court precedent is an important source of law, it is still not treated the same way as it is in the U.S or other common law countries.
Still, court precedents are increasingly important to lawyers trying to understand the application of law. The courts have an internal record keeping system, and there are legal databases like West Law or Lexis Nexis in Korean. The website www.scourt.gov.kr is run by the Korean Supreme Court and is considered official. The site www.lawnb.com is a commercial reporter that provides more data than the official site. You can read more about this and many other issues in English on my blog at www.korealawtoday.com.
Foreign Official And The Missing Link
A guest post today from Paul Rose (here – Associate Professor of Law, The Ohio State University Moritz College of Law). Professor Rose presented his scholarship “State Capitalism and the Foreign Corrupt Practices Act” (here) in March at a symposium hosted by the Ohio State Law Journal titled “The FCPA at Thirty-Five and Its Impact on Global Business.” (See here for a previous guest post concerning the symposium).
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“Many thanks to Professor Koehler for the opportunity to talk about my work. His research on the FCPA has been crucial in illuminating the many issues surrounding the DOJ’s enforcement of the FCPA, and particularly useful for me in focusing attention on the “foreign official” definition. My research interests include state-controlled enterprises and funds, including state-owned pension funds and sovereign wealth funds. The application of the FCPA to such funds—the managers and employees of which would almost certainly be considered “foreign officials” by the DOJ and SEC—raises a host of issues that are only just beginning to be addressed in the growing literature on the FCPA. My short article “State Capitalism and the Foreign Corrupt Practices Act was prepared as part of the Ohio State Law Journal’s symposium on the Foreign Corrupt Practices Act and it attempts to sketch out some of the issues.
First, it is unclear whether the FCPA can or should be read to cover state-owned funds. There are several practical reasons for arguing that it should not, among them a recognition that most of these enterprises and funds operate as quasi-independent entities that should not be viewed as direct agents of their respective governments. These funds also typically (but admittedly not always or exclusively) serve economic and financial purposes, rather than a political or governmental purpose.
Second, even if foreign enterprises and funds can be viewed as foreign instrumentalities, it is not clear that the FCPA provides the best remedy for the type of harm that occurs when a state-controlled fund employee is bribed. In non-FCPA contexts, the SEC has characterized the acceptance of bribes by fund managers as a breach of fiduciary duty to the fund investors. Cast in these terms, the harm was an agency cost, and the SEC assists the fund investors by applying their enforcement resources to cover some of the investors’ costs of monitoring the fund managers. If the fund investors are the beneficiaries of this shifting of agency costs from private investors to public enforcers, who are the beneficiaries of a similar shift when foreign officials are bribed?
A third concern, related to the foregoing, is the apparent enforcement agency and judicial drift away from the original purpose of the FCPA as a tool to prevent corruption that affects foreign policy. If this original purpose is to have any meaning in the context of state-controlled enterprises and funds, there must be a link between the foreign government, the instrumentality of the government, and the foreign officials who work for the instrumentality. Each of these entities must be connected like three links of a chain—the foreign government linked to the instrumentality, and the instrumentality linked to the foreign official. In this way, the acts of the foreign government have an effect on the foreign official, and the acts of the foreign official have an effect on the government. Only if there exists this linkage between the foreign official and the foreign government—in the case of state-controlled enterprises and state-controlled funds, through their respective links to an instrumentality—should we expect to find the kind of foreign policy effect that the FCPA was designed to police. Current SEC and DOJ interpretations, as well as the scant jurisprudence that has tested these interpretations, tends to look only at the connection between the foreign government and the instrumentality. The legislative history of the FCPA, however, suggests that because foreign policy concerns are central to the FCPA, the link between the instrumentality and the foreign official must also be tested. To more directly rephrase the question of who is benefitted when the U.S. government pays for foreign fund agency costs, why are U.S. taxpayers paying for enforcement that serves to reduce agency costs for foreign governments, their citizens, and in some cases, the stockholders of partially state-controlled enterprises, but has no effect on U.S. foreign policy considerations?
My article attempts to get at the core issue of the proper scope of the FCPA by considering who is an “instrumentality” and “foreign official” under the statute. Additional clarity could be brought to this question by looking first at the link between the foreign government and alleged instrumentality. Other areas of the law, including foreign investment law, have developed a substantial base of knowledge on the issues of foreign government control of state-affiliated enterprises and funds that could help inform FCPA jurisprudence. As noted above, however, the more significant problem concerns the unidirectionality of current tests for “instrumentality” and “foreign official” status. The tests used by the few courts addressing the issue have tended to look only at the issue of governmental control, but have ignored the link between the foreign official and the instrumentality—in other words, does the foreign official exercise control over the instrumentality so that there is a meaningful connection between the foreign government and the foreign official? This analysis is key because if one takes the legislative history of the FCPA seriously, an FCPA prosecution is predicated on the ability of the foreign official to affect foreign policy.”