The FCPA: To Whom Does It Apply?
The emergence and growth of the global marketplace offers tremendous new business opportunities for companies of all sizes and across all industries. These new opportunities also present a number of new challenges. As organizations enter new markets they are often confronted with unfamiliar legal standards, business practices, and cultural norms. These variations greatly increase an organization’s bribery and corruption risk as conduct that may be tolerated or accepted in a foreign market may nonetheless be sanctioned as a corrupt business practice. This exposure is especially significant given that agencies across the globe have targeted bribery and corruption for serious enforcement action in recent years.
The United States, with the passage of the Foreign Corrupt Practices Act (“FCPA”), led the way in the effort to eradicate corruption in the global marketplace and to encourage ethical business practices. Enacted in 1977, the FCPA bans the practice of bribing foreign government officials for the purpose of gaining an unfair business advantage. A common misconception is that the FCPA’s prohibitions apply only to large multinational organizations in certain industries. This is not the case. While global companies in the defense, oil and gas, and pharmaceutical industries may grab the majority of the headlines, the FCPA has a very broad reach and exempts no one based on an organization’s revenue, the number of employees, or the industry in which it operates.
Because the FCPA carries significant penalties, an organization engaged in international business must carefully asses its exposure under the FCPA and ensure that its compliance program adequately mitigates its risk of a violation. A critical first step in this analysis is to determine whether, and to what extent, the FCPA applies. This article will describe the FCPA’s scope of applicability.
The scope of the FCPA
The FCPA is comprised of two parts: (1) anti-bribery provisions; and (2) accounting provisions. The anti-bribery provisions, as the name implies, prohibit the bribing of foreign government officials for the purpose of gaining a business advantage. The accounting provisions require companies governed thereby to record transactions accurately and with reasonable detail so that they fairly reflect the underlying exchange or transfer. They also require companies to devise and maintain a system of controls that provides reasonable assurances that an organization’s transactions are properly recorded in their financial books and records. While both sets of provisions are within the FCPA, they do not have the same scope of application. In fact, the anti-bribery provisions have a much broader reach.
Anti-bribery provisions. The FCPA’s anti-bribery provisions cast a wide net and reach the conduct of many participants in the global marketplace. These provisions apply to three categories of persons: issuers, domestic concerns and non-U.S. citizens and companies meeting certain territorial requirements. The first two categories are defined as follows:
- Issuers are any company, foreign or domestic, with a class of securities listed on a national securities exchange in the United States.
- Domestic Concerns are individuals who are citizens, nationals or residents of the United States and entities organized under the laws of, or that have their principal place of business in, the United States.
The anti-bribery provisions also include, and cover the conduct of, officers, directors, employees, and agents acting on behalf of issuers and domestic concerns. Thus, any person or entity affiliated with an issuer or domestic concern can be sanctioned (monetary penalty and/or imprisonment) for violating the anti-bribery provisions.
It is important to note, under the original text of the statute, the anti-bribery provisions applied only when issuers and domestic concerns made use of the mails or any means or instrumentality of interstate commerce in furtherance of the prohibited act. While this jurisdictional hurdle is not particularly onerous as it is difficult to imagine a scheme that would not involve the use of emails, telephone calls, wire transfers or other methods of interstate commerce, it is nonetheless important because it conditioned liability on some part of the corrupt scheme occurring within the United States. The 1998 amendments to the FCPA, however, substantially altered this condition to liability by adding the alternative jurisdiction section. This section effectively eliminates the interstate commerce requirement when applied against any national of the United States or any entity organized under the laws of the United States. In other words, the alternative jurisdiction extends the FCPA’s reach to cover conduct based entirely on a person or organization’s “nationality” – even where every aspect of the corrupt scheme takes place outside of the United States. For foreign issuers, however, the alternative jurisdiction provisions do not apply and the interstate commerce requirement remains. Foreign issuers, therefore, can only be sanctioned under the anti-bribery provisions if some part of the corrupt scheme occurs within the United States.
The 1998 amendments further expanded the FCPA’s reach by adding a third category of persons subject to the prohibitions of the anti-bribery provisions. Specifically, foreign individuals or entities that do not qualify as issuers or domestic concerns are still liable if any act related to their corrupt scheme occurred within the United States or made use of an instrumentality of interstate commerce. This territorial requirement is broadly interpreted and does not require a significant connection between the United States and the underlying corrupt scheme. This third category provides the basis for applying the anti-bribery provisions against foreign nationals and foreign non-issuer entities.
Despite the common misconception that the FCPA’s anti-bribery provisions apply only to large multinational organizations in certain industries, the statutory language simply does not support this contention. In fact, as is evident from the above discussion, all United States citizens and organizations and a majority of foreign nationals and organizations are covered by these provisions. That is not to say, however, that certain organizations are not at greater risk of a violation. Indeed, there are a number of factors that can significantly impact an organization’s bribery and corruption risk. For example, the following factors can impact an organization’s FCPA risk:
- Does the organization transact business in a highly regulated industry?
- Does the organization directly transact business with a governmental entity? If so, how frequently?
- Does the organization rely heavily on third-party agents, consultants, vendors or suppliers in transacting business in foreign markets?
- Does the organization transact business in new or emerging markets?
- Does the organization transact business in countries or territories with a low Corruption Perceptions Index (“CPI”) ranking?
- Does the organization have frequent interactions with government officials related to permitting, inspections, licensing, visas, customs, security, setting up utilities, taxes, etc.?
- Does the organization transact business in a country or territory where it has no prior experience?
An evaluation of these and other factors will give an organization a good idea of the extent to which it is exposed to FCPA liability under the anti-bribery provisions. This assessment will also provide a good road map for how best to allocate resources to mitigate this risk.
Accounting provisions. The accounting provisions have a much narrower scope of application. These provisions apply only to issuers –i.e., companies, foreign or domestic, with a class of securities listed on a national securities exchange in the United States. While these provisions apply only to issuers, they provide a helpful framework for good governance to all organizations.
The FCPA standards have broad application and reach companies of all sizes and across all industries. It is critical for an organization to determine whether, and to what extent, these standards apply to their business. From there, the organization must understand what conduct may violate the FCPA and take affirmative steps to mitigate the risk of a violation. In our next article, we will describe the FCPA’s prohibited conduct and explain how these standards are interpreted and enforced.
 For purposes of this discussion the United States also includes U.S. territories.
 The CPI ranks countries on how corrupt they are perceived to be using a scale of 0 (highly corrupt) to 100 (very clean). To review the 2015 Corruption Perceptions Index published by Transparency International click here.
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