The first installment in this series, which outlines the FCPA, is available here.
III. Issuers, Materiality and Extraterritorial Application of the FCPA
1. Where A Company Is Not An Issuer
A company may potentially limit its FCPA related exposure if it is exempt from registration under section 12(g) of the Exchange Act. For instance, a company who has sold ADRs in the United States Over the Counter (OTC), and not on any national securities exchanges such as the NYSE, which would require registration with the SEC may be exempt. (To obtain such an exemption a company must provide information to the SEC on a yearly basis by completing Form F-6. See Rule 12g3-2.) A company may also be exempt under section 15(d) of the Exchange Act. (See 17 C.F.R. § 240-15d-3.) However, even where a potential defendant is not an issuer within the meaning of the Exchange Act, the definition of “issuers” is sufficiently broad and the risks to potential defendants, including their reputation, too great to ignore FCPA compliance. Instead, it is imperative that all businesses, including their individual officers and directors, institute an FCPA compliance program. Moreover, even where defendants prevail on this particular issue, the DOJ often proceeds under multiple theories of liability, including without limitation, conspiracy, agent liability, and aiding and abetting where more than one company or individual was involved and a U.S. based issuer played even a tangential role.
2. Materiality Is Irrelevant
Unlike section 404 of SOX, which requires SEC registrants to establish an adequate internal control structure and procedures for financial reporting to assist in detecting material misstatements, in the event the SEC or the DOJ where to ever investigate or bring charges, the FCPA has no materiality threshold because there is no financial threshold for compliance with laws.
3. Extraterritorial Application of the FCPA
In the wake of recent decisions by the US Supreme Court, some defendants may be able to argue that they are beyond the extra-territorial reach of the FCPA. The reasons, issues, and analysis of these decisions are substantial and complex and are beyond the scope of this brief note. Nevertheless, it bears mentioning that this is a complex issue, would be fiercely contested in the event of SEC or DOJ related litigation, and would not necessarily protect a corporate or individual defendant from other business risks, such as reputational risks.
In Morrison v. National Australia Bank Ltd. (561 U.S. 247 (2010).) the Supreme Court issued a landmark ruling applying the presumption against extraterritoriality to the Exchange Act, holding that Section 10(b) of the Exchange Act does not apply extraterritorially. Under the presumption against extraterritoriality, “[w]hen a statute gives no clear indication of an extraterritorial application, it has none.” (Kiobel, 133 S. Ct. at 1664 (quoting Morrison, 561 U.S. at 255) (alteration omitted).) The presumption is rebutted only when the statute’s “text, history, and purposes . . . evince a ‘clear indication of extraterritoriality.’” (Id. at 1665 (quoting Morrison, 561 U.S. at 265).) Courts have held that generic terms like “any” or “every” do not rebut the presumption against extraterritoriality, nor do “fleeting reference[s]” to possible international ramifications of an otherwise domestic statute. (Morrison, 561 U.S. at 263. But see United States v. Georgiou, Nos. 10-4774, 11-4587, 12-2077, ___F.3d___, 2015 WL 241438 (3d Cir. Jan. 20, 2015) (determining that wire fraud statute has extraterritorial application and holding that whether a transaction is domestic does not depend on “the place where the deception originated, but [the place where] purchases and sales of securities’ occurred.” Id. at * 5) (quoting Morrison, 561 U.S. at 266).) In Morrison, the Supreme Court limited Rule 10(b)’s application to two types of transactions: “(1) transactions involving ‘the purchase or sale of a security listed on an American stock exchange,’ and (2) transactions involving ‘the purchase or sale of any other security in the United States.’” (Id.) The Supreme Court subsequently issued another important decision, in Kiobel v. Royal Dutch Petroleum Co. (133 S. Ct. 1659 (2013).) holding that the Alien Tort Statute does not apply extraterritorially.
The 2nd Circuit has also held that Morrison applies to both criminal and civil federal statutes. (See United States v. Vilar, 729 F.3d 62 (2d Cir. 2013).) Notwithstanding the foregoing, the DOJ and SEC have continued to take an expansive view of the FCPA’s extraterritorial provisions and construed the territorial provisions of the FCPA to only require the remotest of connections with the US. (See FCPA Resource Guide, n.3 at 13-14.) Additionally, in other cases, the SEC and DOJ have applied agency principles, such as conspiracy, to apply the FCPA to foreign entities with no connections at all to the US. Id.
IV. Concluding Thoughts: Why FCPA Compliance Is Crucial
On November 14, 2012, the DOJ and SEC issued “A Resource Guide to the U.S. Foreign Corrupt Practices Act,” (the “FCPA Resource Guide”), a joint guidance aimed at assisting companies with FCPA compliance. While there is no “one size fits all” approach to designing or implementing an effective compliance or ethics program, the FCPA Resource Guide sets forth in detail what it calls the “hallmarks” of an effective compliance program, and it states quite clearly that implementation of such a program will contribute significantly to DOJ’s and SEC’s determination of an appropriate resolution, including potential declination of any enforcement action.
The stakes in today’s business environment are particularly high and a bad choice about operational risk could be fatal. A robust compliance program and fully integrated ethics program can limit the damage should a violation occur. (Samuel Rubenfeld, SEC Official Touts Compliance to Limit Pharma FCPA Risk, March 3, 2015 Wall Street Journal, (last accessed July 30, 2015).) There are two critical measures that allow any company to protect and enhance its reputation in the face of a corruption incident: a demonstrable commitment from management to doing ethical business and the use of effective internal programs to detect and prevent corruption.
First, an FCPA compliance program can be a tangible means of fulfilling a company’s obligation to prevent unlawful corrupt payments. Such evidence of good business ethics can help a corporation avoid prosecution or reduce the penalty imposed. In point of fact, the DOJ and the SEC have expressly identified the existence of a corporate compliance program as a factor to be considered when deciding whether to bring charges against a company. (FCPA Resource Guide, n.3 at 52.) In the same vein, federal sentencing guidelines in the United States provide for the imposition of lower fines on companies that have effective compliance programs in place. (id.)
Second, corporations and other business entities operating in the modern global economy need to tether their compliance program to an easy to understand and implementable ethics and values program. Why? There are two principal reasons for doing so: first, it is the right thing to do from a business perspective and, second, it is an essential thing to do from a legal and fiduciary perspective. A corporate culture that permits its employees to corrupt public officials ends up corrupting itself. (OECD, UNODC, The World Bank, Anti-Corruption Ethics and Compliance Handbook for Business (2013)) The threat of enforcement action or indictment against a company and/or its employees, including the Board of Directors, poses grave existential risks. (See Andrea Bonime-Blanc. The Reputation Risk Handbook: Surviving and Thriving in the Age of Hyper-Transparency. D Sustainability, 2014; and see Amy Westbrook, Enthusiastic Enforcement, Informal Legislation: The Unruly Expansion of the Foreign Corrupt Practices Act, 45 Ga. L. Rev. 489,531 (2011).)
Finally, in the event that the program is unsuccessful in preventing a corrupt payment, the existence of an adequate document trail will permit the corporation to demonstrate its best efforts to comply with the law.
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