DOJ and SEC Release Second Edition of FCPA Resource Guide: Key Updates and Takeaways
- On July 3, the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) published the Second Edition of A Resource Guide to the U.S. Foreign Corrupt Practices Act. A link to the Second Edition is available here. The Resource Guide is considered the quintessential resource for the government’s interpretation and position on various FCPA-related issues. It was first published in November 2012 to give companies, practitioners, and the public detailed information on the statutory requirements of the Foreign Corrupt Practices Act (“FCPA”), along with insight into DOJ and SEC enforcement practices. It was published to provide transparency and uniformity to a process that was often criticized as being opaque. For your convenience, we have run a redline comparison—available here—between the original Resource Guide and this new Second Edition.
- The Foreword to the Second Edition recognizes that although “many aspects” of the original Guide “continue to hold true today,” the nearly eight years since its original publication have “brought new cases, new law, and new policies.”
- Accordingly, the Second Edition contains updates on various aspects of the FCPA, including, among others, the meaning of the term “foreign official” under the FCPA’s anti-bribery provisions; the jurisdictional reach of the FCPA; the application of the local law affirmative defense; clarified legal standards, including the mens rea requirement and statute of limitations for criminal violations of the FCPA’s accounting provisions; and guidance on new DOJ and SEC policies, including, among others, the DOJ’s FCPA Corporate Enforcement Policy and Anti-Piling On Policy.
- The Second Edition remains “non-binding, informal, and summary in nature.” Nonetheless, it provides meaningful interpretative guidance directly from the enforcement authorities. Some of the most notable changes and updates to the Second Edition are summarized below by category.
Anti-Bribery Provisions of FCPA
Aiding and Abetting & Conspiracy: The Second Edition acknowledges limits on the scope of conspiracy and aiding and abetting liability under the FCPA’s anti-bribery provisions. At its core, the FCPA establishes three categories of “persons” who are covered by its provisions, including (1) issuers of securities registered pursuant to 15 U.S.C. § 78; (2) American companies and American persons using interstate commerce in connection with the payment of bribes; and (3) foreign persons or businesses taking acts to further certain corrupt schemes, including ones causing the payment of bribes, while present in the United States. See United States v. Hoskins, 902 F.3d 69, 71 (2d Cir. 2018).
Citing United States v. Hoskins, the Second Edition acknowledges that, at least in the Second Circuit—which encompasses New York, Connecticut, and Vermont—an individual may be criminally prosecuted for conspiring to violate the FCPA’s anti-bribery provisions or aiding and abetting such a violation only if he or she belongs to one of those three specifically enumerated categories. Second Edition at 36. Specifically, as the U.S. Court of Appeals for the Second Circuit reasoned in Hoskins, “the presumption against extraterritoriality bars the government from using the conspiracy and complicity statutes to charge [a defendant] with any offense that is not punishable under the FCPA itself because of the statute’s territorial limitations.” 902 F.3d at 97.
However, the Second Edition also recognizes conflicting authority on the question and that “[a]t least one district court from another circuit has rejected the reasoning in the Hoskins decision.” Second Edition at 36 (citing United States v. Firtash, 392 F. Supp. 3d 872, 889–892 (N.D. Ill. 2019) (holding, in the face of an absence of “binding precedent on this issue,” that a defendant may be charged under the conspiracy and complicity statutes even when he does not “belong to the class of individuals capable of committing a substantive FCPA violation”)).
This firm recently published an OnPoint on the Hoskins decision, available here.
Definition of “Instrumentality”: The FCPA’s anti-bribery provisions proscribe corrupt payments to any “foreign official,” a term defined to include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” Although the Second Edition reiterates that the term “instrumentality” “is broad and can include state-owned or state-controlled entities,” it incorporates the holding from the U.S. Court of Appeals for the Eleventh Circuit on what qualifies as an “instrumentality” of a foreign government. In United States v. Esquenazi, a decision from 2014, the Eleventh Circuit held that an “instrumentality” under the FCPA is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” 752 F.3d 912, 925 (11th Cir. 2014). The Second Edition refers to the list of five non-exhaustive factors described in Esquenazi that inform whether an entity is “controlled by” a foreign government and four non-exhaustive factors that bear on whether the entity “performs a function the controlling government treats as its own.” Second Edition at 20 (citing Esquenazi, 752 F.3d at 925–26).
Accounting Provisions of FCPA
Criminal Liability for Accounting Violations: Citing 15 U.S.C. § 78ff(a), which proscribes “willful violations” of the FCPA’s accounting provisions, the Second Edition makes clear that criminal liability may be imposed on companies and individuals for violations of the FCPA’s books and records and internal controls provisions that are knowing and willful, and not merely knowing. Second Edition at 45.
The Second Edition acknowledges that “[t]he term ‘willfully’ is not defined in the FCPA, but it has generally been construed by courts to connote an act committed voluntarily and purposefully, and with a bad purpose, i.e., with ‘knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law.” Id. at 13 (quoting, inter alia, United States v. Kay, 513 F.3d 432, 448 (5th Cir. 2007)). As the Supreme Court explained in Bryan v. United States, “in order to establish a ‘willful’ violation of a statute, the Government must prove that the defendant acted with knowledge that his conduct was unlawful.” Id. (quoting Bryan v. United States, 524 U.S. 184, 191–92 (1998)).
The Second Edition provides two new examples of U.S. entities—a hedge fund in 2016 and an electronics company in 2018—that entered into deferred prosecution agreements with the DOJ after knowing and willful books and records violations. Id. at 45–46.
Internal Accounting Controls: Commonly termed the FCPA’s “internal controls” provision, 15 U.S.C. § 78m(b)(2)(B) provides that issuers must “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed in accordance with management’s general or specific authorization,” that the issuer’s financial statements are “in conformity with generally accepted accounting principles,” and that management “maintain[s] accountability for assets.” The Second Edition makes explicit that this provision refers to “internal accounting controls.” Second Edition at 40 (emphasis added).
The Second Edition offers some additional commentary on the interplay between an issuer’s internal accounting controls and its compliance program, noting that “[a]lthough a company’s internal accounting controls are not synonymous with a company’s compliance program, an effective compliance program contains a number of components that may overlap with a critical component of an issuer’s internal accounting controls.” Id. As in the original Resource Guide, it reiterates that “the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business,” but also adds that “[j]ust as a company’s internal accounting controls are tailored to its operations, its compliance program needs to be tailored to the risks specific to its operations.” Id. at 41.
Affirmative Defenses
The Local Law Defense: The Second Edition includes additional case law that clarifies the FCPA’s local law affirmative defense. Under the FCPA’s local law affirmative defense, “if a defendant can establish that conduct that otherwise falls within the scope of the FCPA’s anti-bribery provisions was lawful under written, local law, he or she would have a defense to prosecution.” Second Edition at 24; see 15 U.S. Code § 78dd–1(c)(1) (“It shall be an affirmative defense . . . that . . . the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country.”).
The Second Edition discusses the 2017 decision in the Southern District of New York in United States v. Ng Lap Seng, a case in which the defendant, a Chinese national and real estate developer, allegedly bribed two United Nations ambassadors to use one of his properties for an annual U.N. conference. Specifically, in Ng Lap Seng, the defendant requested a jury instruction that the payments at issue were not unlawful under the written laws and regulations of Antigua and the Dominican Republic. Second Edition at 24. At trial, the district court denied his request, finding that the proposed instruction was “inconsistent with the plain meaning of the language of the written laws and regulations affirmative defense contained in the FCPA.” Id. (citing Trial Transcript 715–18, United States v. Ng Lap Seng, No. 15-cr-706 (S.D.N.Y. July 26, 2017)).
Following a five-week jury trial, the defendant was found guilty on all counts, sentenced to 48 months’ imprisonment, and fined US$1 million. He appealed his conviction on grounds unrelated to the law local defense, and the U.S. Court of Appeals for the Second Circuit affirmed his conviction on all counts. See United States v. Ng Lap Seng, 934 F.3d 110, 116 (2d Cir. 2019).
Limitations Periods for FCPA Violations: The Second Edition also clarifies that substantive violations of the FCPA’s anti-bribery provisions have a five-year limitations period under 18 U.S.C. § 3282, whereas violations of the FCPA’s accounting provisions, which are defined as “securities fraud offense[s]” under 18 U.S.C. § 3301, have a six-year statute of limitations. Second Edition at 36.
DOJ and SEC Policies and Remedies
Corporate Enforcement Policy (CEP): The Second Edition’s updated chapter on the DOJ’s “Guiding Principles of Enforcement” includes a discussion of the DOJ’s FCPA Corporate Enforcement Policy—contained in the Justice Manual and updated in March 2019—and how it informs the DOJ’s declination decisions. The Second Edition describes that enforcement policy as providing that “where a company voluntarily self-discloses misconduct, fully cooperates, and timely and appropriately remediates, there will be a presumption that DOJ will decline prosecution of the company absent aggravating circumstances.” Second Edition at 51. Some of the aggravating circumstances that “may warrant a criminal resolution instead of a declination” include “involvement by executive management of the company in the misconduct; a significant profit to the company from the misconduct; pervasiveness of the misconduct within the company; and criminal recidivism.” Id. at 51. The Second Edition describes three specific cases in which the DOJ announced declinations under its FCPA Corporate Enforcement Policy. Id. at 52–54.
Coordinated Resolutions and Avoiding “Piling On”: The Second Edition includes a separate discussion of the DOJ and SEC’s approach to coordinated resolutions to avoid “piling on” or imposing duplicative penalties, forfeiture, and disgorgement for the same conduct. It recognizes that the “DOJ has coordinated resolutions with foreign authorities in more than 10 cases, and [the] SEC has coordinated resolutions with foreign authorities in at least five.” Second Edition at 71.
Forfeiture and Disgorgement: The Second Edition includes a discussion of the forfeiture and disgorgement remedies available to the DOJ and SEC and recognizes that “[i]n addition to criminal and civil penalties, companies may also be required to forfeit the proceeds of their crimes, or disgorge the profits generated from the crimes.” Second Edition at 70. It highlights the holdings in the Supreme Court’s recent decisions in Kokesh v. SEC and Liu v. SEC on the application and limits of the civil disgorgement remedy. Id. at 71. In Kokesh, the Supreme Court held that the civil disgorgement remedy is subject to a five-year statute of limitations as a “penalty” under 28 U.S.C. § 2462. 137 S. Ct. 1635, 1639 (2017). In Liu, the Court held this June that “a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under § 78u(d)(5).” 2020 WL 3405845, at *2 (June 22, 2020).
Successor Liability: The Second Edition includes additional commentary on the DOJ and SEC’s approach to successor liability. Although reiterating that successor liability “prevents companies from avoiding liability by reorganizing,” in an important development, it adds that “[a]t the same time, DOJ and SEC recognize the potential benefits of corporate mergers and acquisitions, particularly when the acquiring entity has a robust compliance program in place and implements that program as quickly as practicable at the merged or acquired entity.” Second Edition at 29. Further, “DOJ and SEC also recognize that, in certain instances, robust pre-acquisition due diligence may not be possible. In such instances, DOJ and SEC will look to the timeliness and thoroughness of the acquiring company’s post-acquisition due diligence and compliance integration efforts.” Id.
Corporate Compliance
Compliance: The Second Edition includes a fuller discussion of best practices for any compliance program, including how to approach confidential reporting and internal investigations; periodic testing and review; pre-acquisition due diligence and post-acquisition integration; and the investigation, analysis, and remediation of misconduct. Second Edition at 66-67. Among other observations, the Second Edition notes that “a good compliance program should constantly evolve” and that “[t]he truest measure of an effective compliance program is how it responds to misconduct.” Id. at 67.
The Second Edition also points to recent guidance published by the DOJ on the Evaluation of Corporate Compliance Programs. That guidance is intended to explain how effective compliance programs work, and what factors make them effective. It also provides important insights into what prosecutors evaluate when deciding whether a company’s compliance program should factor for or against criminal prosecution when employees commit serious violations. This firm recently analyzed the DOJ’s guidance and a link to that OnPoint is available here.
Key Contacts:
Chicago
Andrew Boutros, David Kistenbroker, Jay Schleppenbach
Hong Kong
London
Roger Burlingame, Matthew Mazur
New York
Jeff Brown, Mauricio España, Michael Gilbert, Hector Gonzalez, Shriram Harid, David Kelley, Andrew Levander, Benjamin Rosenberg, Jonathan Streeter
Paris
Philadelphia
Benjamin Barnett, Michael McGinley, Sozi Pedro Tulante
Washington, D.C.
Vincent Cohen, Jr., Amanda DeBusk, Darshak Dholakia, Melissa Duffy, Christina Guerola Sarchio, Jeremy Zucker, Dennis Lawson
