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Ralph Lauren Enforcement Action Commentary – Hits And Misses

Much of what is written about Foreign Corrupt Practices Act enforcement these days seems to be mere carrying forward of DOJ and SEC statements, as if those comments represent a universal truth.

Last year at this time, Morgan Stanley’s so-called “declination” dominated the conversation.  Why was it a “declination”?  It seemed simply because the DOJ said it was, even though a bit of independent analysis would quickly reveal that there was likely no criminal case to be made against Morgan Stanley based on the DOJ’s own allegations and comments from the judge who sentenced Garth Peterson.  (See here for the prior post “Stop Drinking the Kool-Aid”).

Last week, the DOJ and SEC announced double non-prosecution agreements against Ralph Lauren Corporation (“RLC”).  (See here for the prior post).  Because it was the SEC’s first use of an NPA in the FCPA context, the SEC portion of the enforcement action received the most attention.

Why did the SEC use an NPA to resolve RLC’s alleged scrutiny?  The SEC said that it was because RLC voluntarily disclosed, provided extensive and thorough cooperation, and implemented various remedial measures.

Sensing an avalanche of FCPA Inc. information carrying forward the SEC’s comments, I noted in this post last Tuesday as follows.

“Of course, these are not distinguishing factors.  Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided.  In the Tenaris DPA action, the SEC (see here) said substantively the same thing.  In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.”

The RLC enforcement action was released during the early days of a new era of SEC leadership and one law firm alert on the action stated that “the SEC’s enforcement division is clearly using the NPA with RLC as an opportunity to do some cheerleading for the Enforcement Cooperation Initiative” (see here for more of that initiative launched in January 2010).

Many FCPA Inc. industry participants picked up the pom-poms are started cheering alongside the SEC.

One headline read –  “Self-Reporting FCPA Violations Pays Off: Just Ask Ralph Lauren.”

Another headline read – “Another Example Of The Benefits Of FCPA Self-Reporting.”

A law firm alert stated as follows.  “The NPA in this case resulted from Lauren’s prompt self-reporting and extensive cooperation. Prior to the Lauren NPA, the SEC seemed to provide limited credit to public companies for cooperation in FCPA investigations.”

Another law firm alert stated as follows.   “With the announcement of the Ralph Lauren resolution … the SEC and DOJ have taken pains to highlight that beyond self-disclosure, the expedient and thorough reporting of a potential violation, real-time cooperation, and implementation of effective remedial measures may yield more positive results for companies subject to the FCPA.”

As is often the case, the FCPA Inc. material then closed with marketing pitches concerning FCPA compliance services.

Many others highlighted that the SEC mentioned that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA.  However, as noted in my post last Tuesday, a few minutes of internet research will quickly reveal that RLC made the decision in August 2012 to suspend and wind-down its Argentine operations based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world.  In doing so, RLC joined several other luxury brands Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

Against the backdrop of misses, it was refreshing to read a hit – Covington & Burling’s release titled “The Ralph Lauren Case:  Inadequate Rewards for Exemplary Corporate Cooperation.”  The alert states, in pertinent part, as follows.

“Although the government will no doubt cite these NPAs as an exemplar of the benefits of self-reporting and cooperation, we think they reaffirm the importance of careful consideration before a company decides to self-report potential unlawful conduct.

Based on the facts recited in the SEC NPA, Ralph Lauren appears to have held itself to an extremely high standard of compliance. On its own initiative, the company adopted a new Foreign Corrupt Practices Act policy and distributed it to employees, which led some Argentine employees to raise concerns about the company’s customs broker. The company immediately conducted an internal investigation, which ultimately uncovered improper payments and gifts to government officials. Within two weeks of this discovery, Ralph Lauren self-reported its findings to both the SEC and the DOJ. The NPA also highlights that Ralph Lauren adopted numerous remedial measures, including firing its customs broker and implementing further enhancements to its compliance program, cooperated extensively with the SEC, and undertook a world-wide review of its operations that uncovered no other violations.

It is difficult to imagine a set of facts more deserving of a non-public declination based on the criteria outlined by the SEC and the DOJ late last year in their FCPA Resource Guide: detection of the wrongdoing by the corporation itself; a thorough internal investigation of the misconduct; implementation of remedial measures, including termination of employees engaged in wrongdoing and improvements in internal controls and compliance programs; and voluntary disclosure to the DOJ and/or the SEC.

[…]

The Ralph Lauren NPAs are far less advantageous to the company than a declination, which would have involved no public allegations of wrongdoing and no fines. By contrast, in addition to paying approximately $1.6 million in penalties and disgorgement, under the DOJ NPA, the company had to publicly admit and accept responsibility for the illegal conduct, which potentially exposes it to shareholder lawsuits and reputational damage. The company also was required to agree to toll the statute of limitations, implement further extensive changes to its compliance program, and submit annual reports to the DOJ detailing its remediation efforts. If Ralph Lauren is found to have breached any of the terms of the agreements — determined solely by the SEC or the DOJ — it may still face the original charges by both agencies, plus potentially new charges based on any information collected during the course of the NPAs.

The benefits to the government from entering into these NPAs are clear. NPAs — unlike deferred prosecution agreements and SEC injunctive actions — are not filed with any court, thus escaping the kind of judicial scrutiny that has recently been given to some SEC settlements. Moreover, the SEC and DOJ are able to emphasize, once again, the importance of voluntary disclosure and cooperation, while still requiring significant ongoing obligations on the part of the company.

The benefits to Ralph Lauren, on the other hand, are less clear. It is likely that the government applied a discount when deciding what sanctions to impose based on the company’s self-reporting and cooperation. However, it is not at all clear that any such discount was sufficient to cover the incremental investigative and other costs incurred by the company as a result of the self-report, and the additional burdens the company has agreed to shoulder by entering into the NPAs. For other companies contemplating whether to self-report potential FCPA violations, the case reinforces the importance of closely evaluating the risks and rewards of potential outcomes, especially given the government’s apparent reluctance to grant a declination even when presented with a textbook case of extraordinary cooperation.”

Covington & Burling of course is the law firm former Assistant Attorney General Lanny Breuer recently joined as Vice-Chair (see here for the prior post).  Breuer was not listed as an author of the alert, but several former DOJ and SEC enforcement attorneys, including Steve Fagell (a former member of Breuer’s DOJ senior leadership team) are listed as authors.

The RLC enforcement action involved, per the DOJ / SEC allegations, payments by one person in one of RLC’s approximate 95 subsidiaries.  The payments at issue, involving customs issues, likey did not even violate the FCPA as Congress intended[For more on what Congress intended – including, as to alleged payments to ministerial officials, see my article “The Story of the Foreign Corrupt Practices Act.’).  Indeed, when the government has been put to its ultimate burden of proof in cases occurring outside the context of procurement, the government has an overall losing record.  (See this prior post).  In the only case that the government has won in this context, – the Fifth Circuit decision in U.S. v. Kay- the decision was equivocal and 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.”  Indeed, the Court specifically rejected the DOJ’s contrary argument and stated as follows.  “[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 in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”]

Against this backdrop and as a further sign of just how backwards the FCPA conversation of late has become, the Society of Corporate Compliance & Ethics (SCCE) released this statement praising the DOJ and SEC for its handling of the RLC action.

SCCE representatives stated as follows.

“As with the recent Morgan Stanley case, the government has made it clear that companies who take compliance seriously and are committed to finding, fixing, and solving legal and regulatory problems are in a far better position than those who do not invest in real, robust, and effective compliance programs. I can think of no better proof of the value of strong compliance and ethics programs than the DOJ’s and SEC’s recent actions.”

“When the government visibly acknowledges and credits internal compliance efforts, Boards and management take note of their tangible value and are reminded of the need to support empowered, independent compliance officers and functions.”

When the DOJ (and now the SEC) use resolution vehicles that are not subject to one ounce of judicial scrutiny, this is not something to praise, it is something to lament.

When the DOJ and SEC take action against an entity (one of the world’s most admired companies according to this recent Fortune list) that had an isolated instance of conduct that likely did not even violate the FCPA as Congress intended, this is not something to praise, it is something to lament.

When the DOJ and SEC extract approximately $1.6 million from an entity that acted like a responsible corporate citizen upon learning of an issue, and then imposes annual government reporting obligations on that company, and otherwise “muzzles” the company, this is not something to praise, it is something to lament.

Ralph Lauren Resolves FCPA Enforcement Action Via Double NPAs Based On Subsidiary Conduct In Argentina

Yesterday, the DOJ and SEC announced (here) and (here) a Foreign Corrupt Practices Act enforcement action against apparel company Ralph Lauren Corporation (“RLC”).  The conduct at issue focused on Argentina custom issues and the actions were resolved via a DOJ NPA (here) and an SEC NPA (here).

Although the DOJ frequently uses NPAs and DPAs in the FCPA context, this is only the second instance the SEC has used an alternative resolution vehicle to resolve an FCPA enforcement action.  As noted in this previous post, in May 2011 the SEC used a DPA to resolve an FCPA enforcement action against Tenaris.  For more on the SEC’s use of alternative resolution vehicles, see prior posts here and here.

RLC agreed to pay $1.6 million to resolve its FCPA scrutiny – $882,000 pursuant to the DOJ NPA and $700,000 pursuant to the SEC NPA ($593,000 in disgorgement and $141,845 in prejudgment interest).

The gist of the enforcement action is as follows.

RLC has approximately 95 foreign subsidiaries.  One subsidiary, PRL S.R.L, an indirectly wholly-owned subsidiary of RLC headquartered and incorporated in Argentina, had a General Manager who conspired with a customs clearance agency to make improper payments “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.”

There is no allegation or suggestion that RLC was aware of, or participated in, the alleged conduct.  The resolution documents merely say that “in the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L.”

The simplistic inference would seem to be that General Manager A would not have engaged in the improper conduct had RLC had an anti-corruption program and provided anti-corruption training.  However, this notion would seem to be undermined by reference to RLC’s worldwide FCPA compliance review which “identified no further violations.”

DOJ NPA

The NPA states that the DOJ “will not criminally prosecute RLC … related to violations of the anti-bribery provisions of the FCPA … arising from and related to improper payments in Argentina …”.

The NPA next states as follows.  “The DOJ enters into this Non-Prosecution Agreement based, in part, on the following factors:

(a) the Company’s timely, voluntary, and complete disclosure of the conduct;

(b) the Company’s extensive, thorough, and real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, making voluntary document disclosures, conducting a world-wide risk assessment, and making multiple presentations to the Department on the status and findings of the internal investigation and the risk assessment;

(c) the Company’s early and extensive remedial efforts already undertaken – including conducting extensive FCPA training for employees world-wide, enhancing the Company’s existing FCPA policy, implementing an enhanced gift policy as well as other enhanced compliance, control and anti-corruption policies and procedures, enhancing its due diligence protocol for third-party agents, terminating culpable employees and a third-party agent, instituting a whistleblower hotline, and hiring a designated corporate compliance attorney – and to be undertaken, including enhancements to its compliance program as described in [the compliance features of the NPA); and

(d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures, as described in [the compliance features of the NPA).

In the NPA, which has a term of two years, RLC admitted, accepted and acknowledged responsibility for the conduct set forth in the statement of facts contained in the NPA, and further agreed to a “muzzle” clause in connection with the conduct at issue (see here for the prior post describing such a clause).

The conduct at issue focused on PRL S.R.L “an indirect wholly-owned subsidiary of RLC headquartered and incorporated in Argentina.”  According to the NPA, “PRL S.R.L. marketed and sold RLC merchandise, including merchandise that was shipped from outside Argentina.”  According to RLC’s most recent annual report PRL S.R.L. is one RLC’s approximate 95 subsidiaries.

More specifically, the conduct at issue focused on “General Manager A” described as a “dual U.S. and Argentine citizen … hired by RLC to manage the business of PRL S.R.L. from 2003 until 2009” and “Agent 1” described as a “customs clearance agency that was retained by PRL S.R.L. to assist with customs clearance issues in Argentina.”

According to the NPA, from 2004 to 2009 “PRL S.R.L. and its employees, including General Manager A, together with Agent 1 and others, conspired to make unlawful payments to foreign officials to use the officials’ influence with foreign government agencies and instrumentalities in order to assist PRL S.R.L. in obtaining and retaining business for and with, and directing business to PRL S.R.L.”

According to the NPA, the improper payments were “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.” The NPA states that “these payments were not for routine government action.”

According to the NPA, the improper payments were “disguised” by “having Agent 1 include the payments in Agent 1’s invoice as ‘Loading and Delivery Expenses’ and ‘stamp tax/label tax.”  The NPA states that “General Manager A and others at PRL S.R.L. knew of the true purpose of these expenses and nonetheless approved reimbursement to Agent 1.”

The NPA next states as follows.

“In the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L.”

The approximate three-page NPA concludes as follows.  “In total, General Manager A and PRL S.R.L. paid roughly $580,000 to Agent 1 for the purpose of paying bribes to customs officials in order to obtain improper customs clearance of merchandise.”

Pursuant to the NPA and based on the above statement of facts, RLC agreed to pay a penalty of $882,000.  There is no indication in the NPA as to how this figure was calculated or what it is based on.

SEC NPA

The SEC’s NPA is based on the core set of conduct set forth in the DOJ’s NPA.

The short 2.5 page document does however contain the following additional paragraph.

“In addition to paying bribes to Argentina customs officials, RLC Argentina’s general manager directly provided or authorized several gifts to be made to Argentine government officials to improperly secure the importation of RLC’s products into Argentina.  The gifts provided to three different government officials between approximately 2005 through approximately 2009 included perfume, dresses and handbags value at between $400 and$14,000 each.”

[As to this “statement of fact,” I noted in”Grading the FCPA Guidance” that one of the utilities of the FCPA Guidance issued in November 2012 would be to serve as a useful measuring stick for future FCPA enforcement activity.  As noted in this prior post, this is yet again another FCPA enforcement action based, in part, on such items as perfume, dresses and handbags – in the RLC action – allegedly paid by one employee at one of RLC’s approximate 95 subsidiaries.]

Under the heading “RLC’s Inadequate Internal Controls and Inaccurate Books and Records,” the NPA states as follows.

“As evidenced by the improper payments to Argentine customs officials and gifts to other government officials, the failure to ensure that proper and effective due diligence was conducted on the customs broker and Customs Broker A, and the failure of the review process for authorization or approval of reimbursement payments to Customs Broker A to detect a single improper payment, between 2005 and 2009, RLC failed to devise and maintain a system of internal controls at RLC Argentina sufficient to provide reasonable assurances that (i) transactions were executed in accordance with management’s general or specific authorization; (ii) transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements; (iii) transactions were recorded as necessary to maintain accountability for assets; and (iv) that access to assets was permitted only in accordance with management’s general or specific authorization. RLC’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time of the misconduct warranted further strengthening to ensure effective compliance with the related laws.

Between 2005 and 2009, certain RLC Argentina employees and agents paid bribes which were inaccurately recorded in RLC Argentina’s books, records and accounts, which were consolidated into the books and records of RLC.”

Under the heading “RLC’s Self Report,” the NPA states as follows.

“In or about February 201 0, RLC’ s Board of Directors adopted a new FCPA policy and shortly thereafter the policy was disseminated through RLC’s intranet site. In approximately Spring or Summer 2010 RLC Argentina employees reviewed the FCPA policy and raised concerns about the company’s customs broker in Argentina. As a result, RLC conducted an internal investigation of the allegations and discovered the improper payments to the customs officials and gifts to Argentine government officials. Within two weeks of uncovering the payments and gifts, RLC self-reported its preliminary findings to the both the SEC and the Department of Justice.”

Under the heading “Remedial Measures and Cooperation,” the NPA states as follows.

“Upon discovering the bribes, RLC took steps to end the misconduct, including terminating its customs broker. RLC also thoroughly reviewed its pre-existing compliance program and undertook steps to further update and enhance its compliance program, and successfully implemented those new enhancements. These steps included, in part, adoption of: (1) an amended anticorruption policy and translation of the policy into eight languages, (2) enhanced due diligence procedures for third parties, (3) an enhanced commissions policy, (4) an amended gift policy, and (5) in-person anticorruption training for certain employees. RLC also ceased retail operations in Argentina and is in the process of formally winding down all operations there.

RLC provided extensive, thorough, real-time cooperation with the staff of the Division and the Department of Justice, including: voluntary and complete production of documents and disclosure of information to the staff, including the facts described above; voluntarily providing accurate translations of documents; voluntarily making witnesses available for interviews; and conducting a risk assessment of certain other world-wide operations of the company. The worldwide review included its operations in Italy, Hong Kong and Japan, and identified no further violations. In fact, the revised compliance policies appear to be working, as the world-wide review identified one instance of a bribe solicitation being rejected by the company’s employees after adoption of the company’s revised FCPA policy in 2010.”

Without admitting or denying liability, RLC agreed to enter into the NPA.  At the same time, the NPA states as follows.  “This agreement should not … be deemed exoneration of RLC or to be construed as a finding by the Commission that no violations of the federal securities laws have occurred.”  At the same time, the NPA states that the “facts set forth are made pursuant to settlement negotiations and are not binding against RLC or its directors, officers or employees, or any other person or entity in any other legal proceeding.”

Like the DOJ NPA, the SEC NPA also contains a “muzzle” clause.

The SEC’s release (here) states as follows.

“The SEC has determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company’s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation. Ralph Lauren Corporation’s cooperation saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.”

Of course, these are not distinguishing factors.

Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided.  In the Tenaris DPA action, the SEC (see here) said substantively the same thing.  In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.

The SEC release further states as follows.

“According to the NPA, Ralph Lauren Corporation’s cooperation included:

  • Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
  • Voluntarily and expeditiously producing documents.
  • Providing English language translations of documents to the staff.
  • Summarizing witness interviews that the company’s investigators conducted overseas.
  • Making overseas witnesses available for staff interviews and bringing witnesses to the U.S

“The SEC took into account the significant remedial measures undertaken by Ralph Lauren Corporation, including a comprehensive new compliance program throughout its operations. Among Ralph Lauren Corporation’s remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. Ralph Lauren Corporation also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. Ralph Lauren Corporation has ceased operations in Argentina.”

Thomas Hanusik (Crowell & Moring – and a former DOJ and SEC enforcement official) represented RLC.

*****

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have led to a world-wide risk assessment by RLC?  (See here for the prior post on the “Where Else” question).

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have lead to RLC having a reporting obligation to the DOJ and SEC during the two-year term of the NPA?  (See here for the prior post “A Government Mandated Transfer of Shareholder Wealth to FCPA Inc.?)

*****

It is tempting, based on the SEC’s statements that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA.

However, that would appear to be wrong conclusion.  As noted here and here, when RLC made the decision in August 2012 to suspend and wind-down its Argentine operations, the decision appeared to be based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world.  As noted in the above-linked CNN article, the economic measures caused tourism in Argentina to drop.  Indeed, RLC was one of several luxury brands – such as Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

*****

The RLC enforcement action is just the latest to involve customs and related issues in Argentina.

See here for the Ball Corp. enforcement action, here for the Helmerich & Payne enforcement action, here for the BJ Services enforcement action.

*****

The RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny.  Subject to materiality thresholds (which are rarely triggered in cases of FCPA scrutiny), there is no disclosure obligation, yet most issuers choose to disclose FCPA scrutiny.  Thus, yesterday appeared to be the first instance of public disclosure of RLC’s scrutiny.  The company’s stock closed at $165.93, down 1.9%.

Amendments To Simplify The FCPA For U.S. Businesses

Foreign Corrupt Practices Act reform may be in sleep mode at the moment, but this has not stopped (nor should it) forward-thinking individuals from contemplating FCPA reform.

Case in point, Stephen Clayton, with today’s guest post.  Clayton is currently an attorney in private practice specializing in FCPA services.  Previously, he was an in-house counsel, including for Sun Microsystems.  At Sun, he responsible for all legal work in East and South Asia, Latin America, Australia/New Zealand and Canada, and then became Senior Director, Anti-Corruption Compliance, responsible for Sun’s global FCPA compliance.  Sun was acquired by Oracle in early 2010 at which point Clayton established his private practice.  Clayton also teaches an FCPA-related course for Golden Gate University’s School of Accounting.

*****

Amendments to Simplify the FCPA for US Businesses

Proposals for and against amending the FCPA have been percolating in Congress for the past 2 years. The U.S. Chamber of Commerce took a lead role, advocating that substantial changes are needed to promote international business by U.S. companies. Other groups, including the Open Society Foundations, have opposed any revisions that they say would weaken the FCPA or impede enforcement.   The amendments that would provide the most help US business people have not been proposed by any of the parties lobbying Congress.

Bribery is still very common in international business and US companies are harmed by it every day. Congress should consider common sense changes to the 35-year-old FCPA that would make the law less confusing and more in tune with anti-corruption compliance practices in 2012.  If changes are to be made to the FCPA, they should enable good companies and ethical business people understand and follow the law. It is easier for business people to comply with a clearly worded, strict law than try to deal with a complicated, confusingly worded law that has to be filtered through layers of lawyers. The proposals by the Chamber and its opponents retained all of the complexity and confusion in the current law, so in the end would not benefit business.

There are six changes would substantially reduce the confusion business people and in house lawyers have about the FCPA and thereby enable them to do international business with a clear understanding of their legal risks and implement effective compliance programs.

1. Eliminate the Exception for Facilitating Payments.

This exception creates the illusion that minor bribery of employees of foreign governments can be “legal.” Å corporate policy allowing employees to pay any bribes is morally indefensible. Even if corporate management believes small bribes are a necessary practice, it is extremely difficult to determine which bribes Congress considers “legal.” The facilitating payments exception is offensive to normal US ethical standards for corporate governance. The majority of companies that examine facilitating payments prohibit their employee and agents from paying them.  Congress should eliminate the exception.

2. Eliminate the affirmative defense for bribes that are “lawful under the written law or regulation of the country.”

Countries do not have written laws that permit conduct that is illegal under the FCPA. But business people and non-specialist lawyers see this language in the statute and think it must have some meaning. Here again they are forced to guess which types of bribes Congress considers to be “legal.” What difference does it make to good corporate governance if a country rigs its laws to allow bribery of members of its royal family or specific government employees? It is still bribery and clean, ethical US companies would lose business to the bribe payers. This affirmative defense is essentially meaningless and confusing and there is no reason for it to remain in the law.

3. Add provisions to the FCPA making commercial (private) corruption a federal crime.

The most glaring flaw of the FCPA is that it makes it a crime to bribe only certain people, i.e. “foreign officials” including employees of “instrumentalities” of foreign governments. By making that distinction, Congress created the impression that US companies can legally pay bribes to all other people. The FCPA as it is now written causes companies and their lawyers to spend an extraordinary amount of time trying to determine if corrupt payments made on their behalf are legal or illegal. This is the most confusing aspect of the FCPA and puts company management in an ethical conundrum. Amending the FCPA to criminalize all bribery of anyone in international business will end the confusion. In international business in the 21st century, it should not matter if the recipient of a bribe is a government official or works for an instrumentality of a government or is an employee or officer of a commercial company.

4. Add a U.K. style strict liability crime of failure to prevent bribery to the FCPA and a corresponding affirmative defense for proving an adequate compliance program.

The U.K. Bribery Act of July 2011 contains a new crime that does not exist in the FCPA: Failure by a Business Organization to Prevent Bribery. It’s a strict liability crime – if bribery of anyone occurred in a company’s business, the company has violated this law. To balance strict liability, the UKBA includes an affirmative defense. If the company whose employees paid bribes can prove it had in place adequate processes to prevent bribery before the bribery occurred, it may avoid liability for this specific crime.

Congress should consider amending the FCPA to incorporate this U.K. legal innovation that makes it easy for company management to understand that all bribery by employees and agents is a crime.

5. Amend the FCPA to clarify that a parent company is responsible for the violations of its subsidiaries.  

Executives of US companies create, manage and are responsible for their company’s foreign subsidiaries. US management hires the subsidiary’s managers and gives them their instructions and goals. Subsidiaries exist to generate profits and provide business advantages to the parent company. U.S. law should be unambiguous on the point that subsidiaries and their employees cannot be a convenient and easily manipulated shield from criminal liability for bribery.

Limiting a company’s liability for the FCPA violations of its subsidiaries adds to the list of gray areas that perpetuate the argument that Congress intended that only certain types bribes of certain people are illegal. Congress can remove uncertainty by amending the FCPA so it is impossible to doubt that a parent company is always responsible for the bribery, corruption and false records of any of its subsidiaries.  This is the kind of clear legal guidance US companies need.

6. Widen the scope of the FCPA’s “reasonable and bona fide expenditures” affirmative defense.

Companies should be able to engage normal sales and marketing operations and be confident this will not violate the law.  Congress needs to promote legitimate, properly documented business practices. The current affirmative defense is poorly worded and unnecessarily restrictive. It limits bona fide business expenditures to those “directly related to the promotion, demonstration or explanation of products or services; or the execution or performance of a contract…” That limitation is not necessary and is confusing to business people.

Conclusion:

These six amendments would make it easier for corporate management and in house lawyers to understand what is prohibited by the FCPA and significantly improve their ability to develop reasonable compliance programs. Many major companies already have policies that prohibit facilitation payments, make commercial (private) bribery by their employees and agents a terminable offense and apply their FCPA compliance program to all their subsidiaries. Congress should follow this leadership by business and bring the FCPA into the 21st century.  Congress should not enact a slate of amendments that only serve to perpetuate the most obvious flaw in the FCPA – that it prohibits only certain (poorly defined) bribery of certain (poorly defined) people and therefore permits all other bribery.  Amendments that merely play with the definitions of who can be bribed in what manner will not help US companies. All bribery in international business harms US companies and must be clearly illegal.

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