By Gregory A. Brower and Carrie E. Johnson, Shareholders, and Courtney E. Bartkus, an Associate, with Brownstein Hyatt Farber Schreck, LLP. Mr. Brower is a member of WLF’s Legal Policy Advisory Board.
Earlier last month, the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) released an updated edition of their joint Foreign Corrupt Practices Act (“FCPA”) guidance document. Entitled “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (the “Guide”), this second edition includes several important updates to the original version published in 2012. This new edition reflects a continuing effort by both the DOJ and SEC to transparently provide as much information as possible to companies and their counsel on how to effectively navigate FCPA issues. The Guide is intended to provide users detailed information about the requirements of the FCPA, while also offering insight into DOJ and SEC enforcement practices. In the words of those agencies, the Guide “represents one of the most thorough compilations of information about any criminal statute….”1
This Legal Backgrounder provides an overview of certain new material in the second edition, including both updates on caselaw interpreting the FCPA and changes to DOJ and SEC policies applicable to FCPA enforcement.
Before discussing some of the new information included in the Guide, we note the Government’s ongoing focus on corruption as a global problem. The Government set records in 2019 for anti-corruption enforcement, led by the DOJ and SEC. U.S. monetary sanctions reached an all-time high of $2.65 billion, including two of the largest corporate settlements since the FCPA’s passage in 1977. One of these settlements is the largest ever under the law. Swedish multinational telecom company Ericsson agreed to a $1.06 billion resolution of alleged violations of both the FCPA bribery and accounting provisions. In addition, a record five FCPA cases went to trial during 2019, with the Government obtaining convictions in four of those cases and the defendant winning an acquittal in one. The trend toward more FCPA enforcement against foreign companies continued in 2019, with U.S.-based companies accounting for less than half of those targeted for prosecution. Finally, despite ongoing DOJ and SEC efforts to encourage self-reporting, only three companies took advantage of the benefits of doing so, with two obtaining declinations.
The Guide’s introduction emphasizes that FCPA enforcement is a government-wide effort, with many other federal agencies and law enforcement partners working together with the DOJ and SEC. The Guide also mentions the increasingly international nature of FCPA enforcement efforts, with a growing number of countries joining the fight against corruption.
The bottom line is that FCPA enforcement remains a focus for the U.S. and its allies abroad, and this trend is likely to only continue and grow. Domestic and foreign companies must understand what the FCPA permits and prohibits, as well as how the DOJ and SEC interpret the law and prioritize their respective efforts at enforcing the law. Perhaps most importantly, regulated entities must know what the agencies expect from businesses and individuals on detecting and preventing violations, and designing and implementing effective compliance programs.
Below we summarize and comment on five of the more interesting and relevant changes contained in the Guide’s latest edition. We will focus on the following:
- Recent caselaw on the definition of the term “foreign official,” the limitations periods applicable to FCPA actions, and the FCPA’s foreign written-laws defense;
- New DOJ and SEC criminal enforcement policies and their applicability to FCPA actions;
- Updated guidance on corporate successor-liability issues in the context of the FCPA due diligence for mergers and acquisitions, as well as new commentary on corporate compliance programs;
- Revised policy concerning disgorgement of profits applicable to SEC actions to enforce certain provisions of the FCPA; and
- Clarification of the mens rea standard for liability under the books-and-records and internal-controls provisions of the FCPA.
Definition of “Foreign Official”
In 2018, the U.S. Court of Appeals for the Second Circuit held in United States v. Hoskins that a foreign national who does not otherwise fall under “the categories of persons directly covered” by the FCPA cannot be held liable for conspiring to violate the statute.2 While the Guide continues to address the potential criminal liability of a foreign national who attends a meeting in the U.S. that furthers a foreign bribery scheme, it no longer states that “any co-conspirator” can also be liable, “even if they did not themselves attend the meeting.” In Hoskins, the Second Circuit rejected the DOJ’s broad theory of liability for co-conspirators, explaining that the FCPA does not reach nonresident foreign nationals who are not officers, directors, employees, or stockholders of American companies, and concluding that the government’s over-expansive view “would transform the FCPA into a law that purports to rule the world.”3 The Guide clarifies the DOJ’s current view that “(u)nlike the FCPA anti-bribery provisions, the accounting provisions apply to ‘any person,’ and thus are not subject to the reasoning in the Second Circuit’s decision in United States v. Hoskins limiting conspiracy and aiding and abetting liability under the FCPA anti-bribery provisions.” The Hoskins decision arose from one of the few cases in which a defendant has challenged the scope of the government’s ability to prosecute a nonresident foreign national under the FCPA. While this decision’s impact is limited to the Second Circuit, the DOJ and SEC seem to have adjusted their position in response, at least for now.
Statutes of Limitation
As the Guide clarifies, the FCPA itself does not specify a statute of limitations for criminal enforcement actions, and therefore, the general statutes-of-limitations periods apply. Accordingly, the five-year period in 18 U.S.C. § 3282 applies to substantive violations, while a six-year period applies to securities fraud offenses found in 18 U.S.C. § 3301. The Guide makes clear that in cases involving alleged conspiracies, the government may be able to reach conduct occurring before the general limitations period under 18 U.S.C. § 71.
Foreign Written-Laws Defense
The Guide provides updated discussion of the local-law defense under the FCPA. It first explains that in practice, “the local law defense arises infrequently, as the written laws and regulations of countries rarely, if ever, permit corrupt payments.” The Guide goes on to say, however, that “if a defendant can establish that conduct that otherwise falls within the scope of the FCPA’s anti-bribery provisions was lawful under written, local law, he or she would have a defense to prosecution.”
The Guide then references two recent cases in which the defendant unsuccessfully sought to assert the local-law defense. In United States v. Kozeny, the court decided that the defendant could not assert this defense because the local law in question did not actually legalize the bribe payment.4 In the second case, United States v. Ng Lap Seng, the defendant requested a jury instruction under the local-law defense based on the argument that the subject payments were not specifically unlawful under the written laws of the relevant countries.5 The court rejected this argument, explaining that it was inconsistent with the plain meaning of the statute, which provides for the defense only when local law specifically allows the conduct.6 The Guide confirms the agencies’ interpretation of this decision as a judicial narrowing of the local-law defense.
New DOJ/SEC Policies Applicable to FCPA Enforcement
The Guide acknowledges various recent DOJ and SEC policy updates. These include a discussion of the DOJ’s new FCPA Corporate Enforcement Policy, updated in March 2019, which mentions the DOJ’s presumption against prosecution when a company “voluntarily self-discloses misconduct, fully cooperates, and timely and appropriately remediates” that misconduct absent “aggravating circumstances.” The Guide also refers to recent investigations in which the DOJ announced declinations, i.e. instances in which the DOJ has declined to prosecute an alleged FCPA violation due to policy and other considerations. It further includes a discussion of the new DOJ and SEC policy on coordinated resolutions intended to avoid “piling on” situations when assessing punishment for violations. The Guide mentions the DOJ’s new policy on corporate monitors, which are often an important component of FCPA resolutions.
Finally, the Guide addresses current SEC enforcement policies based on the most recent version of its Enforcement Manual as well as a variety of other SEC publications that address the impact cooperation by individuals or companies have on enforcement decisions. The SEC’s considerations in opening an investigation and pursuing enforcement for potential FCPA violations have not been materially updated, but the Guide does include a lengthy discussion of the SEC’s focus on self-reporting, cooperation, and remedial efforts. The Guide makes clear that both the DOJ and SEC place particular emphasis on the strength of a company’s compliance and ethics program, including as it relates to diligence of third-party business practices. The Guide also reiterates the DOJ/SEC view that the “truest measure of an effective compliance program is how it responds to misconduct.” This serves as a reminder of the Government’s opinion that the effectiveness of a compliance program hinges not only on how a company responds to specific instances of misconduct, but also how it integrates lessons learned from that misconduct into company policies, training, and controls.
Corporate Successor Liability and Compliance
The Guide expands upon on the Government’s view of corporate successor liability for FCPA violations. Specifically, the updates include advice on what constitutes adequate due diligence, and offer practical tips for practitioners, while discussing real-life examples and suggested solutions to hypothetical problems. The Guide affirms that the law “prevents companies from avoiding liability by reorganizing,” but also acknowledges that, “[a]t the same time, DOJ and SEC recognize the potential benefits of corporate mergers and acquisitions, particularly when the acquiring entity has a robust compliance program in place and implements that program as quickly as practicable at the merged or acquired entity.” The Guide goes further, stating: “DOJ and SEC also recognize that, in certain instances, robust pre-acquisition due diligence may not be possible. In such instances, DOJ and SEC will look to the timeliness and thoroughness of the acquiring company’s post-acquisition due diligence and compliance integration efforts.” The Guide also includes a detailed discussion of compliance-program best practices, including internal investigations, confidential reporting, and remediation of misconduct, all of which can obviously be critical to preventing problems, and to effectively responding to problems that are discovered.
Disgorgement in SEC Actions
In two recent decisions, Kokesh v. SEC and SEC v. Liu, the U.S. Supreme Court clarified that the civil remedy of disgorgement is subject to a five-year statute of limitations, and critically, that disgorgement is available as equitable relief in certain circumstances.7 In Kokesh, the Supreme Court concluded that disgorgement constitutes a “penalty,” and as a consequence, is subject to the same five-year statute of limitations set forth in 28 U.S.C. § 2462.8 Following Kokesh, the Court again addressed the disgorgement remedy in Liu and upheld its use as an enforcement weapon, stating, “[e]quity courts have routinely deprived wrongdoers of their net profits from unlawful activity,” and holding that disgorgement is permissible equitable relief when it does not exceed a wrongdoer’s net profits and is awarded for the benefit of victims.
Mens Rea Standard
Previously, the government had operated under the assumption that in a criminal case based on the books and records part of the FCPA, the government need not prove that the violation was willful. The Guide now acknowledges that the term “willfully” is not defined in the FCPA, but “has been generally construed by the courts to connote an act committed voluntarily and purposefully, and with a bad purpose.” Pointing to 15 U.S.C. § 78ff(a) which references “willful violations” of the FCPA’s accounting provisions, the Guide now clarifies that a criminal violation does indeed require a “knowing and willful” failure to maintain accurate books and records or implement an adequate system of internal accounting controls.
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Of course, as comprehensive as it is, the second edition of the Guide includes the same caveat as did the 2012 edition, i.e. that it is “non-binding, informal, and summary in nature.” This Legal Backgrounder is subject to the same disclaimer. Despite its now more than four decades of history, there remains a dearth of reported cases interpreting the FCPA. Therefore, many of the statute’s provisions continue to be subject to varying interpretations notwithstanding the best efforts of the DOJ and SEC to articulate their views on the law and influence those subject to the FCPA to adopt the same interpretations. However, despite the Guide’s 86 pages of content, including more than 400 endnotes, it is inevitable that questions, ambiguities, and different interpretations by business people, lawyers, and judges will continue to persist. Nevertheless, this latest edition of the Guide continues to be an incredibly useful starting place for not only understanding the details of the FCPA, but also understanding how the DOJ and SEC interpret every detail of the law and prioritize their enforcement of it.