Rethinking FCPA Compliance Strategies in a New Era of Enforcement
The recent proliferation of Foreign Corrupt Practices Act (FCPA) enforcement has brought about fundamental changes for companies engaged in international commerce. The FCPA makes it unlawful for American companies, their agents and joint venture partners to make payments to foreign officials to assist in obtaining or retaining business. In this new era of heightened civil and criminal enforcement, manufacturers doing business overseas face the very real prospect of substantial financial penalties, and even imprisonment, for what was once deemed common and accepted conduct.
Many manufacturers responded to this seismic shift by properly recognizing the need to attempt to mitigate these risks by implementing FCPA-specific compliance programs. While compliance strategies run the gamut, all too often they share a common component: An assumption that FCPA violations follow normal, bell-curve distribution, where the majority of employees are responsible for the majority of violations. In reality, however, FCPA violations reflect precisely the opposite configuration: They follow a power law, or "hockey stick" distribution, where a select few individuals -- only those with both the opportunity to run afoul of the statute and the inclination to do so -- commit virtually all of the violations.
Constructing an FCPA compliance program on the faulty premise of bell-curve distribution results in a shotgun approach to program construction, operation and maintenance. Those who employ this method seek to:
- Disseminate broadly what amount to relatively shallow preventative measures;
- Conduct monitoring efforts by drawing and reviewing samples from artificially inflated universes; and
- Mend identified gaps and breaches in the program by simultaneously expanding the audience and diluting the remedy, effectively compounding the problem.
In additional to being ineffectual, these strategies cause actual harm in the form of financial waste and threaten even greater damage by exposing the company, and its individual employees and officers, to potentially catastrophic consequences.
By recognizing and understanding the hockey stick distribution pattern at the outset of compliance program construction process, manufacturers can design or overhaul their strategies to achieve a laser-like focus on the areas presenting the greatest risk. Once that section of the operations has been identified, the company can concentrate both its preventative and monitoring efforts. This concentration allows those strategies to be administered in a more efficient and effective manner.
FCPA violations are different from ordinary deviations from established compliance protocols not just in degree, but in kind. Companies seeking to combat this risk should recognize that while the payment of "anything of value" to a foreign official can assume a variety of forms, there are certain defining characteristics common to virtually all violations. Regardless of the size or type of operational environment where they occur, two properties are common to all FCPA violations:
- Those individuals with the opportunity to interact with foreign officials have the greatest chance to commit FCPA violations.
- Of that group, certain individuals also possess the necessary inclination, whether a personal financial incentive linked to the transaction or the inability to recognize the significant risks attendant to bribery.
To spotlight those with the opportunity to commit FCPA violations, manufacturers must first determine where and how their operations intersect with foreign officials vested with discretionary authority. Depending on the nature and scope of operations, these occasions can ran the gamut from efforts to secure substantial contracts directly with foreign governments or state-owned entities to interacting with lower-level government functionaries on an intermittent basis, and all of the points on the spectrum in between. After identifying the usual place and manner of these interactions, the company needs to identify which of its authorized representatives participate in those scenarios.
The initial examination should use a broad lens, exploring the issue from different angles to ensure a complete inventory. Simply focusing on geographic factors generates a faulty and incomplete result since bribes can be sanctioned and, more importantly, concealed from half a world away. Manufacturers need to consider those who authorize and record disbursements, as well as those who represent the company in situations where they may be solicited for payments. Without question, geographic proximity to locales steeped in corruption matters -- but it should serve as the first element of the analysis rather than its sum total.
After identifying those with the opportunity to violate the FCPA, companies must cull from that crowd those likely to have the inclination to pay bribes on the company's behalf. That proclivity can arise from multiple sources, but most often it stems from the fact that the individual stands to realize a personal gain from the transaction underlying the bribe payment.
This incentive can take the form of a commission or "success" fee from the company directly tied to the contemplated deal or a separate agreement with the foreign official to share in a portion of the illicit proceeds (effectively, a kickback off the kickback). The individual may have a more tenuous but nevertheless equally valuable investment in the transaction, such as where the contemplated transaction is part of the overall volume of business being used as a metric to measure the individual's performance.
Alternatively, individuals may be inclined to violate the FCPA not because they seek to elevate their interests above the company's, but simply because they lack awareness necessary to understand the exposure such violations create. In other words, individuals who have not been properly trained and thus equipped with the knowledge required to recognize illegal activity may reach the flawed conclusion that payments to foreign officials intended to advance the company's interests are permissible, especially when such conduct is commonplace in a given country.
At both stages of the analysis, manufacturers must consider their agents, consultants, joint venture partners and other intermediaries, as well as employees, when seeking to identify those with the opportunity to commit FCPA violations. Those performing functions outside of the company's basic operational structure are much more difficult to train and monitor as a result of cultural and geographic gaps. This is especially true when the intermediary is operating in his native country (a common scenario, since that is often the basis for his being retained in the first place) and is thus far more likely to be impacted by the force of cultural inertia than the dictates of a seemingly obscure American law.
Once the shaft of the hockey stick is identified, companies must devise a compliance strategy which focuses available resources where they are needed most. This means targeting a disproportionate amount of compliance resources -- be they preventative measures like intensive training sessions or focused analysis of key financial transactions -- on those individuals with the opportunity and potential inclination to violate the statute.
When manufacturers begin their FCPA compliance efforts from flawed premises, and are fueled by fundamental misunderstandings about how to gauge program efficacy, their efforts are doomed to fail no matter how well intentioned. To overcome the pitfalls, companies who do business internationally need to rethink their compliance strategies on a fundamental level. Moving on from the bell-curve distribution theory to the hockey stick paradigm represents the best first step in the process. Taking the time to find and focus on the individuals with the opportunity and inclination to commit violations maximizes the financial value and practical worth of compliance efforts.
William C. Athanas is Of Counsel toWaller Lansden Dortch & Davis, LLP, and practices in the firm's Birmingham, Ala., office. Prior to joining that firm, he served as a federal prosecutor in U.S. Attorney's Office in the Northern District of Alabama and the Department of Justice, Criminal Division, Fraud Section in Washington. His practice extends to all facets of the Foreign Corrupt Practices Act, including compliance program counseling, internal reviews and responding to government investigations.
