The U.S. government continues aggressively to enforce the Foreign Corrupt Practices Act (FCPA), the federal law that prohibits bribery and corruption by U.S. companies, foreign companies who trade on U.S. securities exchanges, and certain other foreign non-residents. Because of their extensive operations overseas and in countries with high rates of corruption, energy companies often find themselves at risk of an FCPA violation. Indeed, a recent study by the investigative-services firm Kroll Advisory Solutions showed that 73 percent of surveyed compliance managers at energy companies believed their companies were at risk for FCPA exposure. See Ted Knutson, TrustLaw, Financial Compliance Officers See FCPA Risk Low Compared to Other Industries.
The vast majority of FCPA violations arise from work with overseas agents or intermediaries. The riskiest agents tend to be sales agents, distributors and resellers who receive variable pricing and discounts, joint venturers, lobbyists, government employees, and employees of government-owned companies. The Justice Department has identified a number of red flags companies should be aware of when they work with overseas agents and intermediaries. They include:
- an agent’s apparent lack of qualifications, facilities, or ability to perform the scope of work;
- a history of unusual payment patterns or methods on the part of the agent;
- a history of the agent charging or incurring unusually large commissions or fees;
- a history of the agent receiving contingent fees for his or her work;
- a history of the agent making political contributions;
- an agent’s refusal to promise not to engage in bribery or other unlawful activity;
- an agent’s lack of financial or accounting transparency;
- an agent’s family and/or personal relationships with government officials;
- government officials promising to give business to an agent;
- a government official’s request or recommendation to hire the agent;
- a history of the agent engaging in conduct prohibited by local law;
- a history of the agent making misrepresentations in connection with his or her work;
- an agent’s request to falsify invoices or other documentation; and
- an agent’s or country’s reputation for corruption.
The FCPA is construed quite broadly, so a company cannot avoid FCPA liability by willfully ignoring red flags from third-party agents. The broad application of the FCPA combined with the government’s current zeal for prosecuting FCPA violations make it critical for companies to have robust compliance programs that address and prevent potential FCPA violations, particularly those involving third-party agents. However, in the Kroll study cited above, while 99 percent of the respondents said they had anti-bribery provisions in their companies’ codes of conduct, only 73 percent had the same in place for third-party agents. Moreover, only 65 percent of respondents said they verify that third parties follow the company’s code of ethics. See Market Watch, Kroll FCPA Study Finds Gaps in Anti-Bribery Compliance at Multinational Corporations. There are many ways a company can protect itself from corrupt agents and intermediaries, including:
- having written policies on engaging foreign agents;
- researching potential agents to determine their reputations with their clientele, the local business community, and the U.S. embassy;
- requiring agents to sign agreements confirming (1) they have not and will not violate the FCPA or any other anti-bribery law and (2) they are not related to anyone who has served as a government official within the past three years;
- supervising agents and their conduct once they are engaged;
- maintaining awareness of and supervising the activities of overseas distributors, as the Justice Department and the courts have considered distributors to be agents for purposes of the FCPA;
- ensuring that agents are reasonably compensated so as to reduce an agent’s incentive to accept bribes;
- obtaining and exercising audit rights over an agent’s books;
- obtaining termination rights in an agent’s contract if the agent engages in corrupt business practices;
- with respect to joint venture partners, agreeing to terms that insulate the company from liability should the partner violate the FCPA or any other anti-bribery law, such as a put or sale option that is triggered upon a violation;
- requiring U.S.-based officers or directors sitting on the board of a foreign joint venture to ensure that the venture adopts a compliance program and that the officers, directors, and employees of the venture are knowledgeable of the type of conduct that violates the FCPA;
- ensuring that foreign subsidiaries adopt FCPA compliance programs;
- when working with a state-owned entity, ensuring that payments are made directly to the entity and not to individual officials or employees; and
- regularly training employees on the FCPA’s requirements and regularly monitoring employees to ensure their compliance.
See generally U.S. Department of Justice, “Lay-Person’s Guide to FCPA”; Don Zarin, Doing Business Under the Foreign Corrupt Practices Act, Practicing Law Institute, October 2011.
The keys to working with overseas agents and intermediaries are conducting thorough due diligence when vetting potential agents and requiring both employees and agents to strictly adhere to anti-corruption policies. Ensuring these steps are taken can help minimize a company’s potential exposure under the FCPA.