After the Watergate scandals in the U.S. during the 1970s, the United States enacted the Foreign Corrupt Practices Act (the “FCPA”) in 1977 in response to revelations that U.S. companies had engaged in widespread bribery of foreign public officials. The FCPA was intended to halt the corrupt practices that had been revealed in the 1970s; create a level playing field for honest businesses; and restore public confidence in the integrity of the marketplace. When the FCPA was enacted, the U.S. House of Representatives stated that: “Bribery of foreign officials by some American companies casts a shadow on all U.S. companies.”
Although the FCPA originally banned payments from specific individuals or entities in the U.S. to foreign officials as part of a business transaction, FCPA’s scope has expanded dramatically and is now enforced more robustly. Rachel Brewster, a law professor at Duke University, persuasively argues, “that officials, desiring to maintain industry support for the FCPA, prosecuted both foreign and domestic corporations, thereby minimizing the statute’s competitive costs for American companies”.
The FCPA is jointly enforced by the U.S. Department of Justice (DOJ”) and the U.S. Securities and Exchange Commission (“SEC”). The DOJ has:
FCPA enforcement authority over “issuers” (i.e., public companies) and their officers, directors, employees, agents, or stockholders acting on the issuer’s behalf. DOJ also has both criminal and civil enforcement responsibility for the FCPA’s anti-bribery provisions over “domestic concerns”—which include (a) U.S. citizens, nationals, and residents and (b) U.S. businesses and their officers, directors, employees, agents, or stockholders acting on the domestic concern’s behalf—and certain foreign persons and businesses that act in furtherance of an FCPA violation while in the territory of the United States.
The SEC is responsible for civil enforcement of the FCPA over issuers and their officers, directors, employees, agents, or stockholders acting on the issuer’s behalf. An “issuer” is defined as a company that “has a class of securities registered” with the SEC pursuant to the securities laws or when a company is “required to file reports” with the SEC under securities laws.
A violation of the FCPA can trigger investigations and fines by anti-corruption agencies in other jurisdictions. For example, a Swiss-based mining conglomerate, Glencore, agreed to pay over US$ 1.1 billion to resolve” investigations into violations of the FCPA and a commodity price manipulation scheme. A DOJ press release states: “[t]hese guilty pleas are part of coordinated resolutions with criminal and civil authorities in the United States, the United Kingdom, and Brazil.” In other words, this matter did not only involve U.S. authorities.
That same DOJ press statement says:
The scope of this criminal bribery scheme is staggering,” said U.S. Attorney Damian Williams for the Southern District of New York. “Glencore paid bribes to secure oil contracts. Glencore paid bribes to avoid government audits. Glencore bribed judges to make lawsuits disappear.”
Although not as “staggering” as the FCPA charges in the Glencore case, FCPA charges have previously been raised against businesses operating in Thailand. For example, in 2004, the United States Securities and Exchange Commission (SEC”) charged InVision Technologies, Inc. (InVision), a California-based manufacturer of explosive detection machines used in airports with authorizing improper payments to foreign government officials in violation of the FCPA. The DOJ also criminally investigated InVision for foreign sales transactions and attempted transactions conducted by InVision in the Kingdom of Thailand, the People’s Republic of China, and the Republic of the Philippines. The DOJ’s investigation of InVision was settled in an agreement between InVision and the DOJ. (The alleged improper conduct by InVision occurred before InVision was acquired by General Electric). The settlement of the SEC investigation of InVision is particularly interesting because it expressly refers to distributors.
…in each of these transactions, InVision was aware of a high probability that its foreign sales agents or distributors made or offered to make improper payments to foreign government officials in order to obtain or retain business for InVision. Despite this, InVision allowed the agents or distributors to proceed on its behalf, in violation of the FCPA. The Commission also charged that InVision improperly accounted for certain payments to agents or distributors and failed to have an adequate system of internal controls to detect and prevent violations of the FCPA.
Before InVision and other cases, many US companies viewed distributors as different from other types of sales representatives such as agents, resellers, or even joint venture partners, for FCPA liability. InVision and other cases disabused US companies from these misconceptions about the scope of the FCPA.
Last year, in 2022, Dutch medical supplier Philips to agreed pay more than $62 Million to settle FCPA charges. The SEC website states:
For several years, employees at Philips’ Chinese subsidiaries, distributors, or sub-dealers sought to improperly influence government hospital officials, including through the use of price discounts that increased the risk of payments to the government officials, to increase the likelihood that Philips’ products would be selected in public tenders. They further corrupted public tenders by colluding with other manufacturers’ employees to create false accompanying bids to give the appearance of a legitimate public tender.
The FCPA is a U.S. law, but Philips is not a U.S. company. Philips is a Dutch company that is headquartered in Amsterdam, Holland. But Philips is also listed on the Euronext Amsterdam and the New York Stock Exchange. Because the FPCA applies to “issuers”, and Philips is an issuer, it is subject to the FCPA.
Similarly, Toyota Motor Corp. (“Toyota”) is not a U.S. company. Toyota is a Japanese company that is headquartered in Toyota City, Aichi, Japan. And like Philips, Toyota is an issuer.
The Stanford Law School’s Foreign Corrupt Practices Act Clearinghouse states that in a “424B5 filing on 18 March 2021, Toyota disclosed that it had reported possible anti-bribery violations related to a Thai subsidiary to the SEC and DOJ in April 2020.” Reuters reported in 2021 that “Toyota Motor Corp said [that it had] reported possible violations of anti-bribery laws involving a subsidiary in Thailand to the SEC and the DOJ.”
Toyota’s subsidiary in Thailand is Toyota Motor Thailand Co Ltd (TMT), with Toyota holding 86.4% of TMT’s shares. If there were “possible violations of anti-bribery laws involving a [Toyota] subsidiary in Thailand”, why did Toyota report this to the SEC and DOJ in the U.S.?
Little information is available now, but it seems likely that Toyota is the subject of the investigation because it is subject to U.S. jurisdiction. Toyota is listed on the New York Stock Exchange and its North American headquarters are based in Texas, which is where a grand jury investigating these matters has apparently been impaneled.
The FCPA guidelines provide that parent companies may be held liable for their subsidiaries’ activities under general agency principles. As an article in the New York University Law Review on the use of agency principles explained:
A principal-agent relationship arises when a principal “manifests assent” to an agent that the agent will act on the principal’s behalf and be subject to the principal’s control, and the agent “manifests assent or otherwise consents so to act.” In other words, agency requires a consensual relationship in which one person, to a certain degree, acts as a representative of or on behalf of another person “with power to affect the legal rights and duties of the other person. The person represented has a right to control the actions of the agent.”
All businesses should have strong compliance systems even if they believe, correctly or not, they are not subject to the FCPA. Even if their belief about the jurisdictional reach of the FCPA is correct, they may be subject to the jurisdiction of the compliance jurisdiction requirements of another jurisdiction. More countries are adopting and strengthening their compliance obligations.
Tale aways and questions all companies should ask of themselves:
- Are all directors, officers, and employees (U.S. and otherwise) sufficiently trained in their FCPA compliance responsibilities?
- Is your company keeping books and records that would satisfy U.S. regulators?
- Determine whether your company is selling U.S. products or providing services on behalf of a U.S. company.
- Do you have a plan to address non-compliance?
- Is your company regularly conducting compliance audits? Are those audits documented?
- Does your company regularly conduct compliance training? Does it maintain records of that training and attendance at the training sessions?
This is often missed, but all contracts should be reviewed for compliance obligations. Many companies now require their distributors, agents, and suppliers in foreign jurisdictions to sign contracts obliging them to comply with the FCPA and other anti-corruption laws. If those contracts are well drafted, they require parties in countries such as Thailand to not only certify that it met their compliance obligations but also provide proof that it has done so. A failure to comply with this requirement typically allows termination of the contract and triggers an indemnity for damages caused by non-compliance. The dispute resolution clauses in these contracts often provide for arbitration in English in a jurisdiction outside of Thailand, such as Singapore.