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The Securities Edge Securities Blog for Middle-Market Companies

Continued increased enforcement of Foreign Corrupt Practices Act (FCPA) shift toward financial services industry

Posted in SEC Enforcement

Foreign Corrupt Practices Act (FCPA)The Foreign Corrupt Practices Act (“FCPA”), enacted to deter bribery and other corrupt practices in the conduct of international business, originally claimed jurisdiction over U.S. companies and individuals who used the mail or other instrumentalities of interstate commerce to further a bribe.  A 1998 amendment, however, expanded the FCPA’s jurisdictional reach to include, among others, “issuers” of securities listed on U.S. exchanges (including foreign companies so listed).  Thus, as businesses strategize to capitalize on the increasingly global market, those with securities issued in the United States must make sure to stay in compliance with the FCPA.  If companies like Walmart, Ralph Lauren and Tyco International weren’t doing so before, they certainly are now.

So what is the FCPA and what conduct does it proscribe? Well, the FCPA has two separate and distinct prohibitions.  First, the FCPA’s “anti-bribery provisions” prohibit the offer, promise, or payment of “anything of value” to a “foreign official” in order to “obtain or retain business.” Importantly, the FCPA covers payments to consults, agents, and any other intermediaries or representatives when the party making the payment knows, or has reason to believe, that some part of the payment will be used to bribe or influence a foreign official.

Second, the FCPA’s “books and records” provision imposes affirmative duties on issuers to maintain accurate books and a system of internal controls, and prohibits behavior intended to conceal an issuer’s lack of compliance with these duties.  Essentially, issuers must maintain books that accurately and fairly reflect their transactions and disposition of assets, and must have internal accounting controls adequate to provide reasonable assurance of the integrity of the company’s financial systems and its disclosures.

In the last few years, FCPA enforcement has been on the rise as the SEC and the Department of Justice (“DOJ”), the agencies charged with enforcing the FCPA, have re-focused on the FCPA and its prohibitions.  Specifically, the SEC in 2010 created a specialized unit to enhance its enforcement of the act, and has adopted a proactive risk-based approach to target certain perceived high-risk industries (including energy, pharmaceuticals, medical devices, telecommunications and defense).  The SEC has also targeted companies operating in perceived high-risk locations, such as China, Russia, the Middle East and Africa.  The DOJ has also intensified its focus on FCPA cases by increasing resources, working more closely with the SEC and employing undercover tactics.

In the midst of this increased enforcement, other trends have emerged that indicate that the FCPA isn’t going away any time soon.  For example, the SEC and the DOJ have established that they are both willing and able to pursue entities that are not typically thought of as potential FCPA violators by (1) broadly interpreting the FCPA’s terms to include the acts of target entities and (2) bringing charges under other statutes (i.e., the federal aiding and abetting statute or the Travel Act) or through parent and control company liability theories.

Notably, it appears that the financial services industry has and will continue to receive increased scrutiny in the context of bribery and/or international transactions.  In March of 2009, FINRA indicted that FCPA issues have become a priority in the examination process.  Further, and in line with its “industry-wide sweep” strategy, the SEC has recently served as many as 10 financial services firms with information requests regarding their respective dealings with sovereign wealth funds.  Tellingly, the DOJ announced last week the indictment of a managing partner of U.S. broker-dealer Direct Access Partners (“DAP”) for violations of the FCPA, the Travel Act, and anti-money laundering statutes.  This indictment follows on the heels of last month’s indictment of two other DAP employees for the same alleged conduct, as well as the foreign official who allegedly received the bribes at issue.

Also, the statute’s “books and records” provision appears to be an increasing source of major focus.  As demonstrated by the SEC, of the eight corporate enforcement actions brought by the SEC in 2012 for FCPA violations, only four (i.e., Smith & Nephew, Biomet, Tyco and Eli Lilly) included FCPA anti-bribery charges.  The other four FCPA actions only involved books and records and internal controls violations.  Further, FCPA investigations by the SEC and DOJ increasingly stem from companies voluntarily disclosing potential violations as required under their Sarbanes Oxley obligations.  In addition, while U.S. law enforcement has taken the lead and stepped up FCPA enforcement, foreign regulators and prosecutors—particularly in Western Europe—have recently become more active in anti-bribery matters.

In light of the foregoing, issuers must recognize that the reach of the FCPA is broad and that it is rapidly expanding.  As such, in considering the multitude of factors associated with being quoted or listed on an exchange, FCPA compliance needs to be high on the list.  Further, in order to prevent FCPA violations and to mitigate penalties in the event they do occur, these businesses should develop robust compliance programs, which should be tailored to an organization’s specific needs, risks, and challenges.