Category: Foreign Corrupt Practices Act

Committee on Foreign Investment in the United States

The Foreign Investment and National Security Act of 2007, Pub. L. 110-49, which amends section 721 of the Defense Production Act of 1950 (50 USC §2170) authorizes the President to review merger, acquisitions and takeovers by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States to determine the effects of such transaction on the national security of the United States.

FINSA codifies the structure, role, process and responsibilities of the Committee on Foreign Investment in the United States. Previously, CFIUS had existed only by executive order. FINSA establishes CFIUS in statute.

FINSA provides for a 30 day review period of a “covered transaction” to determine the effect of the transaction on national security.

The system is based on voluntary notices to CFIUS by parties to a transaction, although CFIUS can review a transaction regardless of whether it has been notified.

The term ‘control’ has the meaning given to such term in regulations which the Committee shall prescribe.

The term ‘covered transaction’ means any merger, acquisition, or takeover that is proposed or pending after August 23, 1988, by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.

The term ‘foreign government-controlled transaction’ means any covered transaction that could result in the control of any person engaged in interstate commerce in the United States by a foreign government or an entity controlled by or acting on behalf of a foreign government.

The Department of the Treasury issued proposed regulations for the CFIUS on April 21, 2008. You can also get the comments on the proposed CFIUS regulations.

The key part of the proposed regulations is section 800.302(c) (on page 54) stating that a “transaction that results in a foreign person holding ten percent or less of the outstanding voting interests in a U.S. business (regardless of the dollar value of the interests so acquired), but only if the transaction is solely for the purpose of investment” is not a covered transaction.

Section 800.203 helps to clarify “control.” Even though an investor has some investor protection rights associated with their investment, that does not necessarily create “control” under section 800.203(c). Having the power to limit insider deals and selling the company’s assets do not in themselves confer control of the entity.

Section 800.224 expands the term transaction to include the acquisition of an ownership interest in an entity, the formation of a joint venture and certian types of long term leases.

Sovereign Wealth Funds Adopt Voluntary Best Practices

Adam O. Emmerich of Wachtell Lipton Rosen & Katz put together a summary published on The Harvard Law School Corporate Governance Blog on the Santiago Principles and the potential impact of these on investments by sovereign wealth funds: Sovereign Wealth Funds Adopt Voluntary Best Practices.

Intended to demonstrate that SWFs are soundly established and that investment decisions will be made on an economic and financial basis, the Santiago Principles address three broad areas of concern regarding SWFs: (i) their legal structure and relationship with the state, policy and investment objectives, and degree of coordination with their sovereign’s macroeconomic policies; (ii) their institutional structure and governance mechanisms; and (iii) their investment and risk management framework. While much will turn on how SWFs actually implement these aspirational guidelines (and it is worth noting that all of the principles are well caveated and subject to home country laws, regulations, requirements and obligations), the Santiago Principles may help reduce political influence in SWF investing and encourage the flow of sovereign wealth across borders.

Are Sovereign Wealth Funds State-Owned Enterprises?

Steve Tyrrell, Chief of the Fraud Section in DOJ’s Criminal Division, has observed that the DOJ may treat employees of sovereign wealth funds as government officials for purposes of the FCPA

Sovereign wealth funds have been playing a larger role in the domestic securities markets as companies search for increasingly scarce supplies of capital. Mr. Tyrrell was quoted: “recent boom of sovereign wealth funds is an area at the top of the Justice Department’s hit list.”

Mr. Tyrell told Financial Week that “the DOJ was looking at both passive and active investments by U.S. securities firms into sovereign funds, and vice versa.” [Cash crunch could result in more corruption cases. October 7, 2008]

At a recent Securities Industry and Financial Markets Association conference, Mr. Tyrell indicated that securities firms should treat employees of sovereign wealth funds as government officials for purposes of the FCPA.

Who Is a Foreign Official After the Government Bailout of Financial Instiutions?

We have all read about the bailout of US financial institutions by the US government. This is not happening in other countries.  This complicates the analysis under the Foreign Corrupt Practices Act.

As Joel M. Cohen, Michael P. Holland, and Adam P. Wolf of Clifford Chance examined in Under the FCPA, Who Is a Foreign Official Anyway?, the FCPA does not define a foreign official. An employee of a state-owned enterprise is a foreign official. But the FCPA does not define a state-owned enterprise. The Anti-Bribery Convention of OECD does a better job of defining. See International Standards for the Bribery of Public Officials.

In some of these government bailouts, the governments are purchasing equity and equity-like interests in the financial institutions. Is AIG a state-owned enterprise? The US government has the right to purchase majority ownership!

Morgan Lewis put out LawFlash on this issue: Financial Turmoil and the Expanding Reach of the FCPA.

Morgan Lewis points out that the DOJ will likely treat sovereign wealth funds as state-owned enterprises and therefore their employees are foreign officials under the FCPA.

If a government has a small passive interest in a company, then the company is probably not a state-owned enterprise. As the ownership interest increases and the management control increases the company starts looking more like a state-owned enterprise.

Merely buying assets (like crappy CMBS and CDO interests) or guaranteeing loans should not affect the treatment of the company.

KMPG Survey Shows Lack of FCPA Due Diligence

KPMG Forensic released aurvey of 103 U.S. executives with FCPA duties. The survey found:

only one-third of respondents reported having an adequate due diligence process, and 27% said such compliance was only “minimal.” The survey also found that while 40% of companies include anti-corruption certifications in their normal business dealings, most of those companies apply the certifications only to their own employees. Only 24% reported using the certifications for outside vendors or suppliers and 35% for outside contractors, both of which are often cited by FCPA experts as a leading cause of briberies.

I could not find this survey on the KPMG websites.

Avon Fall-Out

We are starting to see some of the fall-out from the Avon FCPA investigation [Ding Dong, FCPA Calling]. The Wall Street Journal [Regulators Detained by China in Probe] and Reuters [China probe may curb foreign deals: sources] are both reporting the detention of two officials from the Commerce Ministry.

The Wall Street is reporting that there is an investigation of Zhang Yudong, a “well-known” attorney at a Beijing law firm that helps companies get licensed in China. Reuters is reporting the detention and investigation of two lawyers at eh Chines Law firm Seafront (known as Si Feng in Chinese).

Reuters is also investigating at least two other U.S. law firms.

FCPA Allegation Against McCain Fundraiser

Republican fundraiser Harry Sargent III is subject to a suit from Supreme Fuels that Sargent’s company International Oil Trading Company made illegal payments to Jordanian officials. IOTC has an exclusinve license to move military fuel through Jordan.

IOTC’s response, according to the NBC News Investigates story:

. . .in an email to NBC News, a spokesman said that there were no bribes and only a legitimate “fee” paid to the government of Jordan. “What Supreme [Fuels] calls a ‘bribe’ was a required fee for importing and transporting military fuel through Jordan,” a spokesman for Sargeant and IOTC said. “The fee was paid to an official agency of the Jordanian state and thoroughly documented. This and any other related charge have been shared with the Department of Defense (and to Congress) as part of our transparent disclosure of any and all costs related to the fuel delivery process.”

Under the Foreign Corrupt Practices Act, payments to agencies of a foreign government are not illegal. The FCPA is only applicable to payments to foreign officials. Foreign governments are free to extort as much money as they can. It is the personal gain by a government official that is a problem.

The other unusual part of the suit is that it is filed by a private party. There is no right for a private party to bring suit under the FCPA. Only the DOJ and SEC have the power to enforce the statue. The party is suing under RICO.

The leading case on private actions under FCPA is Lamb v. Philip Morris, Inc. (6th Cir. 1990) 915 F.2d 1024, cert. den. (1991) 498 U.S. 1086:

Since we find that no private right of action is available under the Foreign Corrupt Practices Act of 1977 (FCPA), 15 U.S.C. Secs. 78dd-1, 78dd-2, we affirm the dismissal of the plaintiffs’ FCPA claim.

SEC Prosecutions under the Foreign Corrupt Practices Act

sec-sealAccording to Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, in a Forbes Article [The SEC in 2008: A Very Good Year?], the SEC filed 15 FCPA cases in 2008. Since January 2006, the SEC has brought 38 FCPA enforcement actions. That number is more than were brought in all prior years combined since 1977 when the FCPA became.

International Standards for the Bribery of Public Officials

The Foreign Corrupt Practices Act is the U.S. standard for bribery of public officials by U.S. concerns or international concerns with a presence in the U.S. The international standard is the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions promulgated by the Organization for Economic Co-Operation and Development.

The convention sets a criminal offense for:

any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official, for that official or for a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.

A foreign public official means:

any person holding a legislative, administrative or judicial
office of a foreign country, whether appointed or elected; any person exercising a public
function for a foreign country, including for a public agency or public enterprise; and any
official or agent of a public international organisation.

A public enterprise means:

any enterprise, regardless of its legal form, over which a government, or governments, may, directly or indirectly, exercise a dominant influence. This is deemed to be the case, inter alia, when the government or governments hold the majority of the enterprise’s subscribed capital, control the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise’s administrative or managerial body or supervisory board.