US clarifies anti-bribery rules

The US Department of Justice and Securities and Exchange Commission have recently clarified their interpretation of the Foreign Corrupt Practices Act which bars fund managers and businesses from backhand dealing abroad. 

One area of the released guidance particularly relevant to US private equity firms investing overseas is clarification on “instrumentalities of government” – companies not wholly controlled by the state but seen as state-owned entities under the act. The guidelines say that if a government has 50 percent or more ownership of a company then that is a state-owned business, and thus subject to public-sector rules under the act. But it also says that firms must look for evidence of control when companies have 35 or 40 percent state ownership.

In assessing control one should analyse myriad factors, said Paul Berger, litigation partner at law firm Debevoise & Plimpton  “For example, does the government have veto rights over the budget? Does the government have the right to appoint the chief financial officer or chief executive? And are there other indicia of control in which case you would have to treat the company as a government entity?”

In dealing with government entities, the guidance contains a narrow exception for “facilitating or expediting payments” made in furtherance of routine governmental action. “Examples of  routine governmental action include processing visas, providing police protection or mail service, and supplying utilities like phone service, power, and water”, the guidance states. “Routine government action does not include a decision to award new business or to continue business with a particular party”.

Mauro Wolfe, white collar criminal defense lawyer at Duane Morris, described the guidance as “helpful” though not “earth shattering” with respect to eliminating compliance gray zones. He added the US government is indicating a “substance over form” approach to compliance, meaning firms should adopt a risk-based analysis of its anti-bribery protocols, with sufficient senior management/board support for compliance.  

Other areas clarified by the guidance include the successor liability issue. “If the company, which is the acquiring company, does diligence prior to the transaction or post transaction and discovers a problem, but then remediates the problem and self-reports to the agencies, it is highly unlikely that the acquiring company will be prosecuted,” according to Berger. Here the guidance offers what Wolfe describes as a “safe harbour” for certain M&A transactions, but stresses their is no guarantee of non-prosecution. 
 
Gifts and hospitality were also discussed in the guidance, with the two enforcement agencies essentially advising a common sense approach to fancy dinners and token gifts. “Companies are not likely to be prosecuted for small or reasonable amounts of money spent on gifts, travel, and entertainment and so on,” according to Berger.

Wolfe added that prosecutors will take greater interest in “provable intent”. He explained that in circumstances where gifts are given but not properly recorded in the company’s books and records, prosecutors will suspect a guilty conscience. Wolfe continued: “When you give a gift and don’t properly disclose it; when you give a gift and call it something else; or when you conceal a payment; all these are factors prosecutors will construe as evidence of intent to conceal or make a bribery payment”.