Same but New: Fresh Tests for Anti-Bribery Provisions of the FCPA

Posted on 10-21-2013 by
Tags: Real Law

Brought to you by the Real Law Editorial Team

Law frequently requires an understanding of Latin. So, too, does the Foreign Corrupt Practices Act (FCPA), inasmuch as it affords an infinite number of opportunities to invoke the adage avaritia facit bardus (“greed makes you stupid”).

At the very least, the FCPA can expose companies to accusations of substantial wrongdoing. Those that violate anti-bribery provisions of the act are particularly at risk.

For example, Wal-Mart has reportedly spent a “whopping” $300 million on matters related to an ongoing FCPA investigation into bribery allegations in Mexico and that figure is climbing, according to FCPA Blog.

In another notable case from 2010, Daimler AG and three of its subsidiaries with strong American ties (putting them under FCPA jurisdiction) settled an investigation by paying more than $93 million in fines and penalties. That wasn’t the end of the financial pain the companies felt. Forfeited profits, plus legal fees and expenses, reportedly ran that figure to well over $500 million.

Of course, there have been other high-profile investigations and headline-grabbing settlements under the FCPA, and many more are likely to occur. Indeed, several recent developments related to anti-bribery provisions of the act have resulted in many companies examining their own practices to ensure that they can withstand close scrutiny.

Friends in High Places

In August 2013, The New York Times reported that federal authorities had opened an investigation into whether JPMorgan Chase had committed a form of bribery by hiring the children of prominent Chinese officials for the purpose of winning lucrative business contracts.

“In one instance, the bank hired the son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate,” the Times declared, citing a confidential U.S. government document the newspaper had obtained, as well as public records. “After the chairman’s son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.”

The newspaper also alleged that the Hong Kong office of JPMorgan hired the daughter of a railway official at a time when a state-controlled construction company that builds railways for the Chinese government “was in the process of selecting JPMorgan to advise on its plans to become a public company.”

That story quickly drew the attention of other news media. “What makes the investigation a little bit shocking,” observed The Washington Post, “is that JPMorgan seems to have done what every company seeking to do business in China (and many other markets, for that matter) do: hire politically connected people to help ensure that you will be able to [conduct] business unimpeded.”

“It’s been happening for the past 20 years,” said a university professor and former banker quoted in a related story on The Huffington Post. He was referring to the hiring of offspring who are known as “princelings.”

The Times story stressed that the civil investigation by the anti-bribery unit of the Securities and Exchange Commission (SEC) did not definitely link JPMorgan’s hiring practices to an ability to win business, and for its part the bank indicated it had disclosed the matter in a filing while fully cooperating with the agency’s investigators.

Still, the news was enough to rattle many in the financial markets and legal community.

Then, within days, The Wall Street Journal added a new twist.

Casting a Wider Net

According to the newspaper, the overseas hiring probe went far beyond just JPMorgan. In fact, U.S. authorities were questioning “numerous banks and hedge funds on their international hiring practices,” the WSJ reported. “The probes are focusing on the hiring of relatives of well-connected foreign officials with the intent of winning business.”

After years of keeping a close eye on energy companies and pharmaceutical firms, the Department of Justice and the SEC are evidently shifting their focus to the financial-services industry. “The government is looking for a test case,” stated one corporate lawyer quoted in the article, who said that many of his clients have received questions about their international hiring from both federal agencies.

All that serves to put a spotlight on a well-established but hitherto largely overlooked aspect of the anti-bribery provisions of the FCPA: they prohibit not only the corrupt “offer, payment, promise to pay, or authorization of the payment” of direct financial incentives, but also “the giving of anything of value” to a foreign official for the purpose of obtaining or retaining business.

That, in turn, highlights the perils that can await companies that fail to implement and closely monitor FCPA compliance measures. Clearly, the U.S. government is taking a hard line on practices that are considered a routine cost of doing business in many countries in the world.

The Focus of the Issue

It’s important to note that the FCPA does not explicitly prohibit the hiring of a child of a foreign government official.

“While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business,” The New York Times quoted Michael Koehler, an assistant professor at the Southern Illinois University School of Law and also the founder of FCPA Professor, an online forum that has been named a Top 25 Business Law Blog by LexisNexis and a Top Law Blog for in-house counsel by Corporate Counsel.

In a post entitled “Regarding Princelings And Family Members,” Koehler noted that the government wouldn’t even have to show a benefit was actually derived from the hiring of a foreign official’s direct family member.

For his part, Michael Volkov, writing in a post entitled “All in the Family: Enforcement Focus on Hiring of Relatives of Foreign Officials” that appeared on his Corruption, Crime and Compliance blog, echoed Koehler’s view when he opined: “The issue boils down to corrupt intent—was the hiring made with the intent to improperly influence a government official? That is not an easy question to answer… but the facts surrounding the hiring can certainly give some insight into what the company’s actor was intending when the relative was hired.”

Next Steps

So where does that leave companies and their compliance practitioners?

According to Volkov, the latest revelations should prompt those with overseas operations to do more than simply reexamine their strategies for Asia or anywhere else that there is pressure to hire politically connected employees. “An overall approach for compliance should be carefully designed, implemented with care, and monitored assiduously to ensure that risks are minimized,” Volkov noted in his blog post.

That also means staying fully abreast of developments and taking a forward-looking view of FCPA-related activities in every way possible.

Otherwise for some, the alternative might be extremely challenging days ahead. And for others, it could be a sudden and unpleasant refresher course in Latin expressions.

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