In just the last few weeks I have become aware of two potentially harmful myths regarding the United States’ Foreign Corrupt Practices Act (FCPA). The first myth relates to who makes the payments and it was set out my someone who I greatly respect for his deep knowledge and experience with China business:
Dan, when I was in Beijing last week, a Chinese employee of a US company suggested to me that there are easy ways around the FCPA, including hiring a third party to do the “dirty work” that US companies aren’t allowed to do. I was shocked to hear that such a massive loophole may have been left in US law. As far as you know, is this really possible? Have you ever heard of such a maneuver being used in practice? If so, is anyone in DC even aware of the gaping hole left in this law? (Feel free to quote my question anonymously if this topic is worthy of a blog post!). I think the implications of this are pretty serious. Chinese, in general, tend to view the law as an obstacle to be surmounted. I’m not sure most US companies really understand the cultural differences, and are, therefore, running a bigger risk than they realize. A Chinese employee will look you in the eye, tell you what you want to hear, then go off and do whatever will result in his/her getting promoted.
The FCPA most emphatically does not allow US companies to go around it simply by retaining a third party to do “the dirty deed.” I turn to the FCPA Professor for the answer:
Q. Can a third-party subject a company to anti-bribery violations?
A significant percentage of anti-bribery violations against business organizations are based on the conduct of agents, representatives, distributors, or even joint venture partners (collectively third-parties). Utilizing third-parties in foreign markets is very common as third parties best know the local business landscape and how to get things done. However, knowing the local business landscape and how to get things done can also mean making improper payments on a company’s behalf in violation of the anti-bribery provisions.
The anti-bribery provisions prohibit not only direct payments to a “foreign official” to “obtain or retain business,” but also payments to “any person” (such as a third-party) “while knowing that all or a portion of such money or thing of value” will be provided to a “foreign official.”
The anti-bribery provisions state that “a person’s state of mind is ‘knowing’ with respect to conduct, a circumstance, or a result if (i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or (ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur.”
The anti-bribery provisions further state as follows. “When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.”
As evident from these provisions, whether one can be subject to FCPA liability for the actions of a third-party based on “knowledge” of the third-party’s conduct is a highly fact-dependent analysis.
Because of the FCPA’s “third-party payment provisions,” it is important for those subject to the anti-bribery provisions that utilize third-parties to conduct pre-engagement due diligence and to adopt policies and procedures regarding the engagement and post-engagement obligations of the third-party.
The second myth, and one I heard from two really good lawyers, is that the FCPA does not apply to government officials who work in the “private sector,” perhaps for a State Owned Entity (SOE). The FCPA requires that the payments be to a foreign official and this myth has apparently arisen based on the belief that someone working for a company cannot be working is not, at least at that point, working in their official capacity. This too is wrong, or at least certainly could be, as per Mike Koehler’s FCPA Professor Blog:
Q. What does “foreign official” mean?
A. The FCPA defines “foreign official,” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.”
The FCPA does not define “department,” “agency,” or “instrumentality.”
The term “foreign official” includes traditional foreign government leaders as well as employees of various foreign government “departments” and “agencies” such as tax officials, customs officials, and others tasked with issuing foreign government licenses, permits, certifications, etc.
The enforcement agencies maintain that state-owned or state-controlled enterprises (so-called SOEs) in foreign countries can be an “instrumentality” of a foreign government such that all SOE employees are “foreign officials” under the FCPA. The enforcement agencies have taken this position in certain actions even if the foreign government is a minority investor in the enterprise, and the enterprise has publicly traded stock; does business outside of its own borders; employs non-nationals; and has other attributes of a commercial business. Approximately 50% of recent FCPA enforcement actions are based, in whole or in part, on this enforcement theory.
Recently, in the first challenges to this enforcement theory, certain district court judges have concluded that the question of whether SOEs qualify as “instrumentalities” of a foreign government under the FCPA is a question of fact that is dependent on a number of factors. (See here for the opinion). These factors may include the following: the foreign state’s characterization of the entity and its employees; the foreign state’s degree of control over the entity; the purpose of the entity’s activities; the entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions; the circumstances surrounding the entity’s creation; and the foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).
At present, there is no precedential case law on the meaning of “foreign official.” See here for an extensive overview of the FCPA’s legislative history as to the “foreign official” element.
If you are an American company doing business in China, you owe it to yourself to become at least somewhat knowledgeable about the FCPA.
Any more out there?