AMERICAN BAR ASSOCIATION

NATIONAL INSTITUTE ON THE FOREIGN CORRUPT PRACTICES ACT

SPECIAL FOCUS: ISSUES FACED BY SMALL AND MEDIUM ENTERPRISES

WASHINGTON, DC

OCTOBER 17, 2006

 

WHAT THE U.S. GOVERNMENT CAN DO TO ASSIST U.S. COMPANIES

WITH RESPECT TO TRANSNATIONAL CORRUPTION

 

Kathryn Nickerson

Senior Counsel

Office of the Chief Counsel for International Commerce

U.S. Department of Commerce

 

 

Introduction

 

I am very pleased to be here today to talk about the assistance that can be provided by the U.S. Government when companies, especially small and medium sized companies, or SMEs, are faced with problems related to international commercial bribery. Although I’m going to focus on what we do at the U.S. Department of Commerce because that’s where I work, I’ll also be mentioning some very important activities performed by the Justice and State Departments as well as the staff of the Securities and Exchange Commission (SEC).

 

I’m going to cover subjects that fall within four main categories:

 

 

I. Small and Medium Sized Businesses and the FCPA

 

Small and medium sized companies may face particular challenges in getting the information they need to comply with the FCPA. Perhaps due to their limited size and resources, many are unaware of the FCPA, let alone have any kind of compliance program. I often get calls from the public, usually SMEs or in-house counsel representing SMEs, and my own experience with these companies has confirmed to me that many such companies are often unaware of the basic requirements of the statute and the importance of such compliance programs. Some typical FCPA issues that are raised in such conversations include:

 

·      Penalties, including alternative fines

·      Liability for agents, joint venture partners

·      Vetting issues for such agents and partners

·      Affirmative defenses

·      Facilitating payments

·      Statute of limitations

·      Corporate compliance programs generally, the necessity thereof, models

·      Bribery agreements, FCPA clauses in contracts

 

From the above non-exhaustive list of examples, you can see that SMEs generally have the same questions that most firms have when it comes to the FCPA, but it’s surprising that on the 29th anniversary of the statute, these sorts of basic questions are still being asked and some companies are unaware of its existence.

 

So why might SMEs in particular face problems complying with the FCPA?

 

Definitions for SMEs vary, but according to the Small Business Act, a small business is “one that is independently owned and operated and which is not dominant in its field of operations.” The law also states that in determining what constitutes a small business, the definition will vary from industry to industry to reflect industry differences. The SBA website provides that small businesses generally have fewer than 500 employees. Some industries have fewer than 100 employees, and some have up to 1500 employees and still fall within the statutory definition of small business. http://sba.gov/size. Also, small businesses are overwhelmingly privately-owned. Publicly-traded small businesses number no more than one-tenth of one percent of small employers. Note that the FCPA accounting provisions apply only to publicly-traded companies.

 

Yet, according to a 2004 USTR fact sheet, in the United States SMEs make up almost 97% of all direct exporters, and approximately 65% of exporters are businesses with fewer than 20 employees. Moreover, U.S. small businesses typically sell niche products that are more susceptible to higher tariffs and oppressive tariff regimes. Customs policies and delays of foreign countries may pose greater burdens on SMEs and serve as prohibitive barriers to trade, and fixed costs of licensing requirements are more costly on a per unit basis to small businesses. http://www.ustr.gov/assets/Document_Library/Fact_Sheets/2004/asset_upload_file479_6757.pdf

http://www.ustr.gov/assets/Document_Library/Fact_Sheets/2004/asset_upload_file578_6758.pdf

 

So, given that SMEs may face more obstacles to trade, one could conclude that they may be faced with more potential bribery situations. Unlike larger firms, which may have pre-established business contacts in other countries, SMEs may be more dependent upon intermediaries, such as agents or joint-venture partners, to help their business. Using such intermediaries without an appropriate compliance program which would include procedures for vetting them can lead to FCPA problems. Even if SMEs are aware of FCPA rules, SMEs may be less likely to have the resources of time and money to perform the necessary due diligence to investigate the agent’s reputation and track record.

 

Of course, the FCPA applies to all companies, irrespective of size. But criminal penalties will impact a small business in far more devastating ways than a large business because the fines that may be imposed make up a much larger proportion of the business’ profits. Also, as with all companies, FCPA fines imposed on individuals may not be paid by their employer or principal. In addition, a person or firm found in violation of the FCPA may be barred from doing business with the Federal government and ruled ineligible to receive export licenses. Indictment alone can lead to suspension of the right to do business with the Federal government.   

 

II. Advice and Counseling for U.S. Companies

 

A. Counseling by the Departments of Commerce and State

 

The rest of my remarks will focus on what the U.S. Government can do to assist U.S. businesses in complying with the FCPA, and doesn’t apply to just SMEs, although SMEs may use such resources (if they know about them) more often than larger companies.

 

At the Commerce Department, our first and foremost role is as the promoter of U.S. exports, and that is the primary reason for our involvement with the FCPA and related anti-corruption instruments, such as the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Antibribery Convention) and the United Nations Convention Against Corruption.

 

Corruption can be a barrier to international trade. However, FCPA compliance certainly should not be a hindrance or barrier to U.S. exports. In fact when all governments and companies abide by high standards for anticorruption rules, such rules can facilitate trade. Therefore, we want to make sure that exporters and their counsel have the best possible information available to them when they deal with an FCPA question, an anti-corruption issue under foreign laws, or a problem concerning corruption by a foreign competitor.

 

Neither the Commerce Department nor the State Department are law enforcement agencies, and when we are addressing a particular fact situation we make it clear that there are limits to what we can do. We certainly cannot bind the government concerning any interpretation or enforcement action with respect to the FCPA. Although we have no enforcement role, we are part of the government, and that means that if we or any other U.S. Government employee has information about a possible FCPA violation, we may arrange for the information to be transmitted to the Justice Department or the SEC as appropriate. Clearly, we cannot guarantee the confidentiality of information that is given to us about a past, ongoing or proposed violation of law.

 

On the other hand, although we can’t provide fact specific advice like law firms do, we can provide informal, general counseling that firms often find useful concerning the provisions of the FCPA, other countries’ antibribery laws, and international anti-corruption instruments such as the OECD Antibribery Convention, the Inter-American Convention Against Corruption (or OAS Convention), the Council of Europe Criminal Law Convention on Corruption and the United Nations Convention Against Corruption -- all of which we have worked on.

 

We also counsel companies through a number of publications designed to assist U.S. firms in complying with anti-corruption laws. For example, the State Department has published a brochure in conjunction with the Department of Commerce on "Fighting Global Corruption: Business Risk Management" (State Department Brochure). Written specifically for businesses, the brochure contains helpful information on the FCPA, corporate compliance programs, and international initiatives to fight corruption. (The brochure can be found on the State Department’s website at: http://www.state.gov/, as well as our website, at http://www.osec.doc.gov/ogc/occic/tabi.html)

 

The adoption of compliance programs by companies is a key factor in reducing international corruption. Although many of the larger U.S. companies routinely educate and train their employees about the importance of good corporate behavior and stewardship through such compliance programs, the OECD Phase 2 Report of the United States implementation of the OECD Antibribery Convention noted in 2002 (see http://www.oecd.org/dataoecd/52/19/1962084.pdf) that many SMEs apparently did not. As a result, the U.S. Government is taking steps to ensure that more such businesses are aware of such programs and the importance of adopting them. Particularly helpful for SMEs is the section in the State Department Brochure on elements of a compliance program, which provides that such programs should include:

 

 

While recognizing that no one program will suffice for all companies, even small exporters should at least have a policy on the subject of not giving bribes or otherwise violating U.S. and domestic law while engaging in international business. To further assist such SMEs, the Department of Commerce has produced a practical guide for businesses involved in international trade, entitled Business Ethics: A Manual for Managing a Responsible Business Enterprise in Emerging Market Economies, available on-line at www.ita.doc.gov/goodgovernance. This manual is intended to aid enterprises in designing and implementing a business ethics program that meets emerging global standards of responsible business conduct. This manual provides a wealth of information on the subject of ethics and corporate compliance for all enterprises, and is particularly helpful to the SMEs and those new to international trade. Included among the subjects in the manual is practical information on the FCPA, other international corruption instruments as well as the value of corporate compliance programs.

 

There is also a joint Commerce-Justice brochure summarizing the antibribery provisions of the FCPA, which is reprinted in the State brochure I just mentioned and available separately on our website, at http://www.osec.doc.gov/ogc/occic/tabi.html. The joint FCPA brochure was updated after the 1998 amendments to the FCPA implementing the OECD Antibribery Convention. It has been useful to many companies, especially small firms and those that are new to exporting.

 

The Departments of Commerce and Justice and staff from the Securities and Exchange Commission also participate in numerous seminars and conferences on the FCPA and related corporate compliance issues sponsored by professional associations and industry groups, many of which are attended by outside and in-house counsel representing SMEs. In addition, the Department of Justice has required companies to implement rigorous compliance programs as part of plea agreements and consent judgments in FCPA matters. (For example, see the Consent and Undertaking in the Metcalf & Eddy case, at, http://www.usdoj.gov/criminal/fraud/fcpa/Appendices/Appendix%20E.htm#Appendix%20E)

 

Finally, more helpful information for international practitioners is contained in the annual Commerce and State Department Reports to Congress on the implementation of the OECD Antibribery Convention, the last of which was completed in 2004. This information is contained on our website, at http://www.osec.doc.gov/ogc/occic/tabi.html, as well as that of the U.S. Department of Commerce Trade Compliance Center, at www.tcc.export.gov/bribery.

 

B. Department of Justice Opinion Procedure

 

The Department of Justice will provide FCPA advice to U.S. companies and their attorneys only in the context of the Foreign Corrupt Practices Act Opinion Procedure. The Department of Justice is prohibited from rendering any advice with respect to criminal statutes other than as authorized by law or regulation.

 

U.S. companies concerned about whether certain prospective conduct might violate the FCPA may request a written opinion from the Justice Department under the procedure. The opinion procedure is set forth at 28 C.F.R. Part 80. It is also available on the Fraud Section website at: http://www.usdoj.gov/criminal/fraud/fcpa.html

 

Activities for which the Department of Justice has issued an opinion stating that the conduct conforms with its current enforcement policy will be entitled to a presumption of compliance in any subsequent enforcement action under the FCPA.

 

There are a number of positive aspects of the Justice Opinion Procedure. For example, the discussions that often occur between Justice and counsel for the company concerning the application can give counsel an indication of the legal and factual issues that the company needs to be concerned about. I understand that the give-and-take in these discussions often serves to make it unnecessary to take the opinion procedure to a final written conclusion.

It is important to note that an FCPA opinion issued by Justice has no application (i.e., no presumption will apply) to any party which does not join in the request for the opinion nor to any facts not described in the request. Only a well-informed private practitioner can decide whether the procedure will be helpful to an individual client with a particular set of facts and issues.

For more information on the Justice FCPA opinion procedure, as well as published opinions already issued, I recommend that you visit the Department of Justice Fraud Section’s very comprehensive website at: http://www.usdoj.gov/criminal/fraud/fcpa.html

 

At various conferences I’ve spoken at over the years, I’ve often asked businesses whether or not they use the Justice Opinion Procedure. Some have informed me that they are aware of the procedure and they either have used it or might use it. But some have said that it takes time and often business decisions need to be made more quickly than the procedure can afford. In my view, it’s regrettable that the procedure hasn’t been more widely used, as the published opinions provide another great resource from the U.S. Government for guidance on the statute. Unfortunately, if companies do not use the procedure, there will be fewer published opinions to guide companies. (Another reason there may be fewer published opinions is because if Justice notifies the requester of its intention to issue a negative response, the requester may (and typically does) withdraw the request before the formal answer).

 

 

III. Assisting with Due Diligence Information on Specific Companies

 

U.S. companies can be held responsible under the FCPA for acts in furtherance of bribes to foreign public officials by their joint venture partners or agents. The FCPA prohibits corrupt payments made through agents of domestic concerns and issuers. It is unlawful to make a corrupt payment to a third party while knowing that all or a portion of the payment will go directly or indirectly to a foreign official. The term "knowing" includes conscious disregard and deliberate ignorance. As mentioned above, SMEs may be more likely than larger companies to use intermediaries because of their small size and lack of resources. So how should U.S. companies and businesspersons, especially SMEs, go about locating partners or agents who will play by the rules? Options available to U.S. exporters to complement their own procedures include U.S. Department of Commerce Commercial Service programs.

 

A. U.S. Department of Commerce Commercial Service Programs

 

The Commercial Service of the U.S. Department of Commerce (USCS) has several programs that may assist U.S. companies in conducting due diligence when choosing business partners or agents overseas. For example, the International Partner Search Program includes a team of experts in over 80 countries that can be put to work to find you the most suitable strategic partners. You provide your marketing materials and background on your company, and the USCS will use its strong network of foreign contacts to interview potential partners and provide you with a list of up to five pre-qualified partners. This information is available in 30 days or less.

 

But suppose you or your client have already found a potential partner, either on your own or through the Department of Commerce. You may not want to approach such a foreign company before first acquiring some basic background in case this information would change your mind about starting a relationship in the first place. The Department of Commerce Commercial Service can provide you with this background under its International Company Profile (ICP) Program. The ICP Program provides you with background reports on foreign companies in over 80 countries. The U.S. Commercial Service worldwide network of specialists can investigate the financial strength of a company and provide useful information gleaned from the local press, industry contacts, and other sources. For example, the U.S. Commercial Service can provide a detailed financial report on a prospective overseas sales representative or partner in 10 business days or less, including a listing of the company's key officers and senior management, banking relationships and other financial information about the company; and market information, including sales and profit figures, and potential liabilities.

 

The U.S. Commercial Service will also provide you with an opinion as to the viability and reliability of the overseas company or individual you have selected, as well as an opinion on the relative strength of that company's industry sector in your target market. These reports are so valuable that they are often required by many banks and government export financing organizations. The price is $500 per ICP, depending on local market cost factors. The USCS doesn’t offer ICP in countries where Dun & Bradstreet or other private sector vendors are already performing this service.

 

It’s also always a good idea to consider having a detailed face-to-face conversation with a Commercial Service Officer stationed in the U.S. overseas post in the country where you are thinking of doing business. These services are a good start. Again, by themselves they will not fully protect an exporter, but they can complement your compliance and due diligence programs.

 

For more information on these and other related programs, you can contact the U.S. Commercial Service directly through its offices in every major U.S. and foreign city or through its website at: http://www.trade.gov/cs. In addition to the programs discussed above, U.S. Department of Commerce Foreign Commercial Service Officers and State Department Foreign Service Officers receive training on the FCPA and other international anticorruption instruments, and provide general information to U.S. exporters on international corruption issues.

 

 

B.  U.S. DOC Anti-corruption Programs for Advocacy and Trade Missions

 

As a provider of services to the exporting community, the U.S. Government has adopted its own anti-corruption programs. These supplement the FCPA and in certain ways go beyond the requirements of the FCPA.

 

1. Advocacy Support

 

The U.S. Departments of Commerce and State provide worldwide support for qualified U.S. companies bidding for foreign government contracts. This advocacy can give a U.S. company the edge on its foreign competition and can help when unanticipated problems, such as bribery or corruption by a foreign competitor, arise. Support can range from meetings attended by our commercial officers and ambassadors to letters, calls and even visits from high-level officials including the Secretaries of Commerce and State -- and even the President of the United States.

In October 1996, the Commerce and State Departments revised their advocacy guidelines to require an anti-corruption agreement from companies seeking U.S. advocacy. The advocacy guidelines assist USG personnel in determining whether and to what extent USG support is appropriate in connection with a transaction involving U.S. interests.

 

A firm seeking USG advocacy support must agree in writing:

 

(1) that it and its affiliates have not and will not engage in the bribery of foreign officials in connection with the matter for which advocacy assistance is being sought;

 

(2) that it and its affiliates maintain and enforce a policy that prohibits the bribery of foreign officials.

 

The firm must further acknowledge that failure to comply with the terms of this agreement may result in the denial of advocacy assistance.

 

In some respects this policy reaches conduct that is not prohibited by the FCPA. For example, the advocacy guidelines require a firm seeking support to certify not only as to its conduct, but also as to the conduct of its affiliates. We specifically intend the term "affiliate" in the Advocacy Guidelines to include foreign parent firms. The conduct of the foreign parent covered by the certification includes conduct that in many cases falls outside of the jurisdiction of the FCPA--such as bribery of a foreign official where there is no link to the United States. Foreign firms are generally only subject to FCPA provisions when they fall under the definition of an "issuer" or perform acts in furtherance of bribery in U.S. territory.

 

Why did we do this? Some U.S. companies had expressed the view over the years that foreign-owned U.S. companies were able to avail themselves of U.S. Government advocacy support while their foreign parent company or its other subsidiaries were able to continue engaging in the bribery of foreign officials, even in connection with the same transaction.

 

Since we established this requirement, over 1,200 firms have signed the antibribery agreement in connection with applications for advocacy assistance.

 

If you would like U.S. Government advocacy support for a bid on a foreign government procurement, the Advocacy Center can be reached through the Department of Commerce International Trade Administration in Washington (202-482-3896), or its main website at: www.doc.gov.

 

2. Trade Missions

 

We have a similar policy with respect to Commerce-led trade missions. In a statement issued in 1998, the Secretary of Commerce made an anti-corruption agreement a condition precedent for companies wishing to participate in our trade missions. Just as with advocacy assistance, a company wishing to participate in a trade mission must now certify that it and its affiliates:

 

(1) have not and will not engage in the bribery of foreign officials in connection with the company's participation in the mission; and

 

(2) maintain and enforce a policy that prohibits the bribery of foreign officials.

 

Since this requirement was established, we estimate that over 1,250 firms have signed the antibribery agreement in connection with an application to participate in a Commerce-led trade mission.

 

IV. Options When Foreign Competitors Bribe

 

What can be done about the ongoing bribery of foreign public officials by competing foreign firms? We know it is going on, although bribery and corruption are hard to uncover and even harder to prove, as my colleagues from the Justice Department will tell you. There are corruption problems in customs clearances and duties as well as investment licenses and permits, and I am in no way minimizing the crippling effect these forms of corruption have on economies and trade. However, most large transborder bribery allegations are connected to foreign government contracts in several sectors, including military procurement, energy, telecommunications, construction, and transportation. In fact, for the period from May 1, 2004 to April 30, 2005, the U.S. Government estimates that competition for over 53 contracts valued at approximately $15 billion may have been affected by bribery involving foreign firms. Bribery in these types of business transactions is particularly dissuasive to SMEs who can least afford to expend the extensive resources often required to make bids, especially if they must take the chance that the outcome of their efforts will not be determined entirely by commercial considerations.

 

So what are a U.S. company's options when it learns that a foreign competitor has bribed? The Departments of Commerce, State and Justice are available to assist you and your clients when these problems arise. For example, the U.S. Department of Commerce now has a "bribery hotline" accessible from the Commerce website, found at www.tcc.export.gov/Report_a_Barrier, through which U.S. companies can report bribes by their foreign competitors in international business transactions. The Department of Justice also has an e-mail hotline specifically for FCPA complaints, at FCPA.Fraud@usdoj.gov. And of course, all of the old-fashioned methods of communication are still acceptable as well: call us, write us, or fax us. The bottom line is: we’d like to hear from you when you have problems in this area. We worked hard to negotiate the OECD and other international anticorruption conventions, and we'd like to know whether our trading partners are following through on enforcement.

 

In some situations, if the procurement or bribe payment has not actually been completed, it may be appropriate to inform a foreign government that we are aware of the potential corruption of the transaction, in order to try to obtain a "clean" procurement process for any U.S. company involved in the bidding. If a contract has been awarded and the bribe already paid, we may still complain to the procuring foreign government since there might be a chance of re-opening the bidding. Such communications may be made through diplomatic channels by U.S. Embassy officers abroad, or through communications from Washington. In other cases, where we may learn of the bribe after the fact and it is too late to re-open the bidding, the U.S. Government may still alert foreign governments and press for enforcement action.  

 

At a minimum, we want to put countries on notice that we are watching and expect action. So if you think you are about to lose or have already lost business to a foreign competitor because of a bribe to a foreign public official, don't assume that your Government can't do anything about it. We firmly believe that informing other governments of bribery by persons falling within their jurisdiction is an effective way to ensure that cases will be brought against this pernicious practice that we have outlawed since 1977.

 

***

 

Contact information for the speaker:

 

Kathryn Nickerson

Senior Counsel

Office of the Chief Counsel for International Commerce

U.S. Department of Commerce

Telephone: 202-482-0937

Fax: 202-482-4076

E-mail: occic@doc.gov