By Edward T. Kang
In recent years, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have aggressively enforced the anti-bribery and accounting provisions of the Foreign Corrupt Practices Act, targeting industries as wide-ranging as energy, health care and Hollywood. Since 2009, FCPA settlements have netted more than $2 billion in penalties from companies and individuals.
With FCPA enforcement continuing to rise, the natural question to ask is: which industry could be the next target for FCPA regulators? If recent events are any clue, it may be the agribusiness industry. On November 5, 2012, Archer-Daniels-Midland Company (ADM) disclosed that it had initiated discussions with DOJ and the SEC to resolve FCPA matters relating to suspect transactions relating to grain and feed exports.
Although ADM is the first agribusiness company to publicly disclose an ongoing FCPA investigation, that announcement may indicate more such investigations to come within the industry. Historically, FCPA “industry sweeps” have grown from an investigation into one company that led regulators to explore the existence of a broader industry-wide pattern of wrongdoing. Those efforts are frequently facilitated by information volunteered by companies under investigation. ADM’s disclosure may thus signal more enforcement actions to come in the agribusiness industry. Companies in this industry should therefore consider taking steps to minimize their exposure under the FCPA.
Overview of the FCPA
The FCPA prohibits individuals and companies subject to U.S. jurisdiction from bribing, offering a bribe or promising a bribe to a foreign official for the purpose of influencing an official act in order to obtain or retain business. The FCPA has two components: (1) the anti-bribery provision, which applies to all companies that are traded on a U.S. exchange (“issuers”), or which have U.S. offices (“domestic concerns”), as well as their officers, directors, employees and agents; and (2) the accounting provision, which imposes recordkeeping and internal control requirements on issuers and prohibits individuals from falsifying an issuer’s books and records or circumventing a system of internal controls.
Companies and individuals can be held criminally or civilly liable under either component of the FCPA. Penalties can be severe. For each violation, companies can be fined up to $25 million and individuals can be incarcerated for up to 20 years and fined up to $5 million. Other consequences of violating the FCPA include disgorgement of profits or the forced return of profits gained through the alleged bribery, debarment or suspension from doing business with the federal government, the risk of private lawsuits, reputational damage and the loss of good will.
FCPA Risks for Companies in the Agribusiness Industry
The primary areas of FCPA risk for companies in the agribusiness industry are (1) direct liability for violations of the anti-bribery provision; (2) derivative liability for the acts of third-party agents or intermediaries; (3) liability for the conduct of joint ventures and acquisitions; and (4) violations of the accounting provision.
Direct Liability for Violations of the Anti-Bribery Provision
The FCPA broadly prohibits the corrupt giving, offer or promise of anything of value to a foreign official, with the intent to influence an official act for the purpose of obtaining or retaining business. DOJ and the SEC, in November 2012, issued a joint 120-page compendium called “A Resource Guide to the U.S. Foreign Corrupt Practices Act,” which summarized the government’s position on many important issues relating to the FCPA. In the Resource Guide, for example, the government reiterated that the term “anything of value” includes cash, gifts, travel, entertainment expenses and other items of hospitality.
This definition could pose a challenge for companies in the agribusiness industry that import and export agricultural commodities to countries with known high rates of corruption, such as China, Mexico and Brazil. Companies doing business in those countries or emerging markets may face expectations that payments to foreign officials are required to facilitate the performance of a wide range of official acts, such as processing export or import licenses, reducing customs duties and sales taxes, or making decisions on government contracts. However, even if bribes are customary, expected or solicited by foreign officials, companies may still be liable under the FCPA.
Companies in the agribusiness industry also need to be aware of DOJ and the SEC’s broad interpretation of the term “foreign official,” which includes officers or employees of an “instrumentality” of a foreign government. Such instrumentalities include state-controlled entities, even where the foreign government is not the sole owner of the entity and the business is performing a nongovernmental function. Therefore, in countries where the government is heavily involved in the private agribusiness sector, employees of foreign companies could be considered “foreign officials” and a U.S. agribusiness company that interacts with those employees could be implicated under the FCPA.
That being said, the Resource Guide confirms that items of nominal value, such as cab fare, cups of coffee or reasonable meals are unlikely to ever manifest the level of corrupt intent required to constitute an FCPA violation. The same applies to the payment of business travel and entertainment expenses: these expenditures will not be a violation of the FCPA if they are reasonable, bona fide and directly related to the promotion, demonstration or explanation of products or services or the execution or performance of a contract. Nevertheless, larger gifts (e.g., sports cars, fur coats and other luxury items), widespread gifts of smaller value or reimbursement of travel and entertainment expenses that are primarily personal in nature could potentially lead to an enforcement action.
Derivative Liability for Acts of Third-Party Agents or Intermediaries
In addition to prohibiting direct bribes to foreign officials, the FCPA also bans the indirect payment, offer or promise of things of value to foreign officials to influence an official act to obtain or retain business. A company can be liable under the FCPA if a third-party agent or intermediary makes a corrupt payment to a foreign official on the company’s behalf, even if the company did not have actual knowledge of such payment. Under the FCPA, “knowledge” of a third-party’s corrupt payment can be established if the company is found to have been aware of facts suggesting that there was a high probability that an improper payment would be made, offered or promised by a third-party agent working on the company’s behalf. Therefore, companies—as well as their officers, directors and employees—that deliberately ignore red flags involving third-party agents may be liable under the FCPA’s anti-bribery provision just the same as if they had made, offered or promised the corrupt payment themselves.
Some of the common red flags may include (1) excessive commissions or unreasonably large discounts demanded by third-party agents; (2) contracts that only vaguely describe the services provide by the third party; (3) close association of the third party with a foreign official; and (4) requests by the third party that payments be directed to offshore bank accounts. Companies encountering any of these, or similar, red flags should consult with their legal department.
Liability for the Conduct of Joint Ventures and Acquisitions
Improper conduct of a joint venture could also expose a company to FCPA liability. DOJ and the SEC impute the activities of a joint venture to each member irrespective of the members’ ownership stake, as long as the member is found to have had sufficient “knowledge” of the activity (including actual knowledge or reckless disregard). Thus, any company in the agribusiness industry considering entering into a joint venture should be cognizant of the risk that actions of the joint venture may create potential liability for all members.
Companies may also face FCPA liability when acquiring a new entity under the principle of successor liability. Generally, an acquiring company inherits the legal liabilities of its target, which include violations of the FCPA prior to acquisition. Agribusiness companies seeking to acquire another company should therefore take steps to mitigate the possibility of successor liability, which may include conducting pre-acquisition due diligence, implementing a robust FCPA compliance program after the acquisition, conducting a post-acquisition audit and timely alerting the government to any FCPA issues that are uncovered either before or after the acquisition.
Violations of the Accounting Provision
Companies in the agribusiness industry that are U.S. issuers—as well as their officers, directors, employees and agents—may also be liable for violations of the FCPA’s accounting provision. The accounting provision, which is meant to prevent the concealment and mischaracterization of bribe payments, has two components. Under the “books-and-records” component, issuers are required to make and keep accurate books, records and accounts that, in reasonable detail, accurately and fairly reflect the issuer’s financial transactions. Under the “internal controls” component, issuers are required to maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.
Some of the more common violations of the FCPA’s accounting provision have involved mischaracterizing bribe payments as commissions or royalties, consulting fees, sales and marketing expenses, scientific incentives, travel and entertainment expenses, rebates or discounts, after-sales service fees, miscellaneous expenses, petty cash withdrawals, free goods, intercompany accounts, supplier/vendor payments, write-offs and customs intervention payments. Companies encountering any suspected mischaracterizations in books and records should consult with their legal department about potential FCPA violations.
Managing FCPA Risks
Given the risks described above, companies in the agribusiness industry should consider taking proactive steps to minimize their potential liability, particularly if they have significant overseas business. As an initial matter, companies should consider implementing, reviewing and assessing their own internal FCPA compliance programs. While there are is no one-size-fits-all approach, robust FCPA compliance programs may involve some or all of the following components:
- written FCPA compliance policies, standards, and procedures available to all employees of the company, and appropriate translations made into local languages;
- periodic FCPA training for employees, as well as for third-party agents and business partners;
- a designated and independent chief compliance officer;
- written requirements that require reporting of all actual or suspected FCPA violations;
- an effective reporting structure for misconduct, including a method by which employees can submit anonymous tips;
- a written system of discipline that provides for consequences, up to and including termination, for conduct that violates the FCPA;
- periodic compliance certifications from appropriate employees, third-party agents and business partners;
- contractual representations and warranties with third-party agents and business partners that require compliance with all U.S. laws, including the FCPA, and that allow for oversight and audits of all business activities;
- a compliance monitoring program.
FCPA compliance monitoring must be an ongoing process. As businesses grow and change, new risks may arise, and additional compliance efforts to address those risks may be necessary. If a company identifies a possible FCPA violation, the legal department should be contacted. By promptly investigating any potential violations, companies in the agribusiness industry can determine the proper strategic course—which may include consideration of a voluntary self-disclosure—and attempt to minimize, or eliminate altogether, any potential FCPA liability.
(Edward T. Kang is a partner in Alston & Bird’s Government & Internal Investigations Group, where his practice focuses on white collar criminal, regulatory, and compliance matters. He joined the firm after serving for eight years as a federal prosecutor at the U.S. Department of Justice. Alston & Bird also has an agribusiness practice team, which represents producers and distributors of many agricultural products.)
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