"How FCPA Applies To Foreign Private Companies"
The indictment by the U.S. Department of Justice of the Federation Internationale de Football Association, located in Switzerland, has attracted renewed interest in the extraterritorial application of U.S. law to foreign corporations. One area of common confusion is the application of the Foreign Corrupt Practices Act to foreign privately held companies with subsidiaries in the United States. Does the mere fact that the foreign parent has a U.S. subsidiary justify the application of U.S. law to the foreign parent?
FCPA's Prohibition
The FCPA makes it illegal for certain individuals and entities to offer, pay, or promise to pay any money, gift or thing of value to any foreign official for a corrupt purpose that aids the actor in obtaining or retaining business.[1] "Foreign official" includes any officer or employee of a foreign government or any department, agency, or any person acting in an official capacity for or on behalf of any such government or department.[2]
Example: Swiss AG owns California Inc., a California corporation. In order to secure the 2016 contract to supply all of the medical devices to the state-operated hospitals in Mexico, California Inc. provides an expensive penthouse suite to the director of the Mexican Health Department, who is charged with granting the contract, and his family. California Inc.'s actions will have violated the FCPA.
FCPA's Scope
Unlike the extraterritorial application of U.S. antitrust law, the application of the FCPA does not require an effect in the United States. Instead, the scope of the FCPA is limited by the type of individuals and entities to which it applies. The FCPA applies to the following categories of individuals and entities:
Issuers: Corporations listed on any national securities exchange in the United States (either stock or American Depository Receipts) or any company whose stock trades in the over-the-counter market in the United States and the company is required to file U.S. Securities and Exchange Commission reports.[3] It is important to note that the FCPA is not limited to U.S. issuers. It can also apply, for example, to foreign issuers with ADRs in the United States.[4]
Domestic concerns: A domestic concern is any business incorporated in the United States; any foreign or domestic business that has its principal place of business in the United States; or any individual who is a citizen, national, or resident of the United States.[5]
Application to U.S. Subsidiary of Foreign Private Companies
It is important to distinguish between the application of the FCPA to a U.S. subsidiary of a foreign parent company and the application of the FCPA directly to the foreign parent. As a U.S. subsidiary of a foreign parent would be considered a "domestic concern," the FCPA would apply to that subsidiary.
Example: The privately owned German GmbH owns a subsidiary in the U.S. called Sales Co. In order to secure the contract for the supply of the seats to the 2022 World Cup Stadium being built in Moscow, Sales Co. pays for a lavish trip for the head of procurement for the director of the Russian State Department responsible for the construction of the Moscow stadium. As a "domestic concern," Sales Co.'s actions will have violated the FCPA.
Application to Foreign Private Companies
In contrast to their U.S. subsidiaries, foreign privately held companies generally do not qualify as issuers or domestic concerns. Nevertheless, they might be exposed to the FCPA in the following ways:
Physical Presence
The FCPA applies to a foreign national or entity that, either directly or through an agent, engages in any act in furtherance of a corrupt payment while physically in the United States.[6]
Example: Chief Financial Officer of Company A, a nonissuer/nondomestic concern incorporated in South Africa, meets with a government official from Japan in Chicago to hand over money so that the U.S. subsidiary of Company A secures the contract to build the new Japanese Consulate in Chicago. Even though Company A is a nonissuer and nondomestic concern, the company, through one of its executives, has engaged in a corrupt practice on U.S. soil. Company A will likely be exposed to the FCPA.
It is important to note that the physical presence in the U.S. of an agent of the foreign parent will suffice to justify the application of the FCPA to the foreign parent.
Example: Company B, a nonissuer/nondomestic concern incorporated in Spain, sends an unaffiliated individual to New York City to deliver a confidential letter to a visiting government official from Qatar regarding a future bribe. Even though Company B is a nonissuer and nondomestic concern, an agent acting on behalf of the company acted in furtherance of a corrupt payment on U.S. soil. Company B will likely be exposed to the FCPA for its direction of the unaffiliated individual.
This raises an important question: Can the U.S. subsidiary be considered an agent of the foreign parent company? The DOJ has made it clear that a parent company may be held liable for its subsidiary's conduct under traditional agency principles.[7] The most fundamental characteristic of agency is control, meaning that the parent company had substantial knowledge of, directed, or even took part in the subsidiary's actions.[8] As such, the DOJ will evaluate a parent company's control when ascertaining liability for the acts of a subsidiary.[9]
While most parent-subsidiary liability cases have involved a U.S. parent with a U.S. subsidiary, or a foreign parent "issuer" with a U.S. subsidiary, a scenario involving a foreign parent company being held liable for the actions of a subsidiary, foreign or American, is not so far-fetched. For example, a Swiss parent company, realistically, could be held liable for the acts of Chinese subsidiary if the Chinese subsidiary falls within one of the three categories above and the parent company had substantial knowledge of the subsidiary's wrongdoings.
Use of U.S. Instrumentality
A foreign national or foreign entity that uses any "means or instrumentality of [U.S.] interstate commerce" in furtherance of a corrupt payment is also subject to the FCPA.[10] Means or instrumentalities include, but are not limited to, placing a telephone call or sending an email, text message, or fax from, to, or through the United States; or sending a wire transfer from or to a U.S. bank or otherwise using the U.S. banking systems.[11]
Example: The chief financial officer of Company A, a privately held company incorporated in South Africa, instead of meeting in Chicago with a government official from Japan, meets in Tokyo to discuss a payment so that the U.S. subsidiary of Company A can secure the contract to build the new Japanese Consulate in Chicago. Although the U.S. subsidiary knows nothing about the illegitimacy of the payment, Company A instructs its U.S. subsidiary to wire transfer the payment from the subsidiary's bank account in Chicago to a private bank account of the Japanese government official in Tokyo. The FCPA could apply to Company A as it used a U.S. instrumentality to facilitate the payment.
Assisting or Abetting
A foreign privately held company may also become exposed to the FCPA if it assists or abets issuers or domestic concerns in their corrupt practices.[12]
Example: Company C, incorporated and headquartered in Japan, enters into a joint venture with Companies D, E and F. Company C is neither an issuer nor a domestic concern. Company D is a U.S. issuer. Company E is a U.S. domestic concern. Company F is neither a U.S. issuer nor a domestic concern. Company D and Company E, on behalf of and with the knowledge of all joint venture partners, uses agents to pay bribes to obtain contracts for a project in Nigeria. Although Company C and F are neither U.S. issuers nor domestic concerns, their knowledge and support of Company D and E's corrupt practices subjects them to liability.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] 15 U.S.C. § 78dd-1, et seq.
[2] Id. 78dd-1(1)(A).
[3] Id. §§ 78dd-1. 78l, 78o(d).
[4] See A Resource Guide to the U.S. Foreign Corrupt Practices Act n.48 (Nov. 14, 2012), available at http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf.
[5] 15 U.S.C. § 78dd-2(h)(1).
[6] Id. § 77dd-3.
[7] See supra note 4 at 11.
[8] Id.
[9] Id.
[10] 15 U.S.C. § 78dd-3(f)(5).
[11] See supra note 4 at 11.
[12] Criminal Information, United States v. JGC Corp., No. 11-cr-260 (S.D. Tex. Apr. 6, 2011), ECF No. 1, available at http://www.justice.gov/criminal/fraud/fcpa/cases/jgc-corp/04-6-11jgc-corp-info.pdf; Criminal Information, United States v. Snamprogetti Netherlands B.V., No. 10-cr-460 (S.D. Tex. Jul. 7, 2010), ECF No. 1, available at http://www.justice.gov/criminal/fraud/fcpa/cases/snamprogetti/07-07-10snamprogetti-info.pdf.