21st Century Dealmakers — Emerging Legal Business Issues: The Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq., (FCPA) is a law enacted by the U.S. Congress in 1977 that has heavy implications on international business practices. Investigations of leading global companies have recently led to multi-million-dollar settlements with the U.S. Department of Justice (USDOJ). Most recently, Tyco agreed to pay $26 million as a result of actions[1] commenced by the USDOJ and Securities Exchange Commission under the FCPA. The Tyco actions provide a useful case study in the basic provisions of the act to practitioners seeking to learn more.

Tyco was alleged to have violated one of the core operational sections of the FCPA, which prohibits U.S. entities from bribing foreign officials. Key elements of a violation are:

That the violator is a “domestic concern” (i.e. a U.S. citizen or a company that (a) either has its principal place of business in the United States or (b) is organized under the laws of a U.S. state) and that value is transferred to a “foreign official” (i.e.one who is connected foreign government or a public entity in some way).

The Tyco cases involved an indirect subsidiary of Tyco International Limited (TIL), a Swiss entity. The subsidiary, Tyco Valves & Controls Middle East, Inc. (TVCME), sold valves and actuators to the petrochemical and other industries from its headquarters in Dubai. TVCME was incorporated, however, in the state of Delaware, thus creating one of several jurisdictional nexuses that subjected the company to the provisions of the FCPA. Moreover, the ultimate parent company, TIL, had issued securities in the United States, creating another jurisdictional nexus with the United States.

Thus, companies whose headquarters and operations were outside the United States had, through the means described above, subjected themselves to U.S. law, including the provisions of the FCPA. This meant that whatever methods and practices TVCME pursued to obtain favorable transactions in Dubai and the surrounding areas could be seen as improper in the United States and under the FCPA, no matter how conventional such methods and practices were in those other countries.

In the case of Tyco, this meant that money paid to government-owned energy companies and related officials in order to obtain business were allegedly criminal acts and led to Tyco’s payment of the large settlement referenced above. Of course, not all payments to governments are improper; payment of a nominal standard application fee to bid on a government contract, for example, would likely not be a problem.

The USDOJ pleadings claim that Tyco gave government officials cash in order to: 1) get the company removed from supplier “blacklists” (i.e. a list of companies that the government energy company would not do business with), 2) ensure the success of certain project supply bids and 3) obtain approval of certain products for sale. Payments made for these reasons, if true, arguably violated the FCPA. In addition, Tyco was alleged to have made payments to an associated local entity, which in turn then arranged payment to the governments involved. The USDOJ claimed that this local associate then provided fake invoices to Tyco to create records to make the transactions seem legitimate. Taken as a whole, Tyco’s alleged course of conduct is quite different from payments made to governments in ordinary operations under their purview and serves as an example of conduct that will raise concerns with authorities in the United States.

It isn’t only bribery to secure contracts or other business deals that may run afoul of the FCPA. Smaller, more widespread activities can also create problems for companies with the USDOJ. For example, News Corp is currentlyunder investigation for payments allegedly made to U.K.officers to gain information from them in connection with the “phone hacking” scandal. In addition, Pfizer recently agreed to pay$60 million to settle actions[2] regarding payments allegedly made to doctors, hospital administrators and regulators in China, Italy, Russia, Croatia, and other Eastern European countries to entice them to prescribe company medications.

Accordingly, counsel to large companies that operate internationally and that include U.S.-related entities considered “domestic concerns” (as defined in the FCPA) would be well-served to have their companies adopt strict compliance policies to avoid potentially-costly investigations and sizable fines and penalties imposed by the U.S. government.

For further reading, reliable information can be found at the USDOJ FCPA website.

[1] U.S. v. Tyco Valves & Controls Middle East Inc., Case No. 1:12-cr-00418 (E.D. Va., Sept. 24, 2012); SEC v. Tyco International Ltd., Case No. 1:12-cv-01583 (D.D.C., Sept. 24, 2012).

[2] United States v. Pfizer H.C.P. Corp., No. 1:12-cr-00169-ESH (D.D.C.

[2]Aug. 7, 2012); SEC v. Wyeth LLC, No. 1:12-cv-01304 (D.D.C., Aug. 7, 2012).