The Foreign Corrupt Practices Act

A recent special report on corporate social responsibility in The Economist magazine noted that the next wave of trouble on that front might be corporate corruption, citing the heads that have rolled at two of Germany’s biggest companies, Siemens and Volkswagen, because of corruption scandals. Heightened scrutiny of corporate accounts under the Sarbanes-Oxley Act, and due diligence activities in the course of mergers and acquisitions, are also contributing to greater awareness of bribery issues and the uncovering of corruption-related business accounts.

Since 1969, the U.S. has denied tax deductions for bribes paid overseas. The Foreign Corrupt Practices Act (“FCPA”) was passed in 1977, in response to several U.S. bribery scandals involving the Mexican oil company PEMEX and the Tanaka government in Japan. In the early years, criminal prosecutions under the FCPA were few and far between. That has changed markedly. U.S. cases in the last few years have involved Monsanto, DaimlerChrysler, Titan, GE/Invision, and many others. There is now special scrutiny by the Justice Department into specific industries, including pharmaceuticals and medical devices.

The FCPA prohibits paying bribes to foreign government officials. It covers two types of activities.

First, it forbids U.S. companies, issuers or persons anywhere in the world, or foreign persons while within the U.S., from corruptly offering or paying anything of value, directly or indirectly, to a foreign government official, party or candidate, in order to influence an official act or secure improper advantage, to obtain or retain business. Willful violations of the anti-bribery provisions are punishable by criminal penalties of up to $2 million for companies and $100,000 plus 5 years imprisonment for individuals, including directors, corporate officers, employees, agents or stockholders. Civil penalties may also be applied of up to $10,000 for companies or individuals found liable, and a “disgorgement” penalty may be twice the amount gained. Note: The company may not pay fines against an individual. The anti-bribery provisions are enforced by the Department of Justice.

The anti-bribery provisions contain an exception for “grease” payments, defined as small payments made to facilitate or expedite “routine governmental actions” such as obtaining licenses and permits to do business in a country, providing police protection, processing visas or government work orders, scheduling inspections, and the like. There are only two affirmative defenses: 1) payments are allowed if they are legal under the written laws of the foreign official’s country (but good luck finding a country that publicly allows its officials to be bribed...); and 2) payments made as reasonable or bona fide expenditures directly related to the promotion, demonstration or explanation of products or the execution or performance of a contract with a foreign government or agency.

Second, the FCPA also contains accounting provisions, enforced by the SEC, which require companies to: 1) keep books and detailed records that accurately reflect transactions and the disposition of corporate assets; 2) devise and maintain an adequate system of internal accounting controls; and 3) conduct a periodic review of recorded and actual assets. In other words, disguised slush funds set up or maintained for illegal bribes are not allowed. Willful falsification of records attracts criminal penalties of up to $25 million against a company, and up to 20 years imprisonment and/or fines of up to $5 million against an individual.

To minimize your company’s risk in this area, do a thorough investigation of all potential sales reps, agents and distributors. Include an FCPA clause in all contracts with agents, distributors and consultants (although this alone is not enough to foreclose an investigation). Ensure that your company policies include FCPA principles and educate staff, especially sales and accounting personnel, about FCPA “red flags.”

ARTICLES

Arbitration Clauses – Why Use Them in International Contracts?

Arbitration is a method of dispute resolution that has become very popular in the last twenty years or so for commercial disputes as well as in other areas such as securities, labor, employment, construction and other distinct sectors.

In the international commercial contracts area, arbitration has been a preferred method of dispute resolution for at least thirty years, but most people don’t know why or what advantages there are in using arbitration instead of going to court.

Arbitration is essentially private litigation. In contrast to one party suing the other in a court system in a particular country, arbitration is consensual; that is, the parties must both agree to submit a dispute to arbitration. This agreement to arbitrate can be done up front in the contract by inserting an arbitration clause, or even entered into after a dispute begins.

Arbitration is favored over going to court for several practical reasons. Generally speaking, it takes less time than going to court, although critics (especially litigators) like to point to arbitration cases that have been drawn out and expensive. Of course, the key to keeping the process timely is effective oversight and management of the process. One of the reasons that arbitration is shorter is because there is either no up-front legal discovery (the process of document production and witness depositions) or very limited discovery. Most arbitral bodies which provide procedural rules and administration, such as the American Arbitration Association’s International Centre for Dispute Resolution, have rules with expedited time periods for filings and responses, and make it part of their mission to provide timely dispute resolution. The award is final and binding, so there are no appeals. So, even though you are paying for the arbitrator’s time, the whole process is generally shorter and less costly overall.

Arbitration is also favored because it is private—there is no official court record to be made public. If you have a dispute with another party with whom you may need to do business again, this is a major advantage.

The parties can stipulate that the arbitrator or arbitrators--usually one arbitrator for small disputes and a panel of three for large disputes--have expertise in particular areas that would be relevant to their businesses or the type of dispute.

Particularly in the international contracts area, arbitration is used to bypass the fear (real or perceived) of not getting a fair hearing in another country’s courts, or fear of corruption in such courts.

But one of the most important—and little-known--reasons to use arbitration clauses in your international contracts is enforceability. Court judgments are

much more difficult to enforce than arbitral awards, because there are relatively few international treaties between or among countries regarding enforcement of foreign court judgments. However, since 1958 we have had the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” for short), which has now been ratified by 137 countries. (See http://www.uncitral.org/uncitral/en /uncitral_texts/arbitration/NYConvention.html) The United States is a party to the New York Convention and ratified it in 1970. So any award entered in the U.S. would be enforceable in 136 other countries, and vice versa. The U.S. also has a federal law, the United States Arbitration Act, which favors and promotes the use of arbitration by making arbitral awards enforceable within the U.S. and only challengeable for narrow reasons.

Full Disclosure: The author has been on the Panel of International Arbitrators of the American Arbitration Association/ICDR since 1999.

Letters of Intent: A Rose is a Rose is a Rose...

I’ve encountered several legal myths in my career—firmly held beliefs about what is legal and what is not. One that keeps popping up regularly is the belief that putting the title of “Letter of Intent” or “Memorandum of Understanding” on a document will automatically make that document non-binding, or preferably, non- binding on the party who wrote the document, but binding on the other side.

You can’t have it both ways. A document is either a contract, which describes the agreement and contains essential elements like price, goods or services description and delivery terms, and which is binding on every person or entity that signs it, or it isn’t a contract since the essential elements of the deal are not finally agreed to and spelled out in the document. A document that falls short of a contract could be some notes on a napkin, or a negotiating draft, a Letter of Intent or a Memorandum of Understanding.

Letters of Intent (“LOIs”) and Memoranda of Understanding (“MOUs”) are legally the same thing. They are both expressions of the intent of negotiating parties that fall short of a final agreement that rises to the level of a legal contract. (Other names for the same type of document include Memorandum of Agreement, Heads of Agreement, etc.)

LOI’s and MOU’s are most often used, in my experience, to record the progress made in a negotiation before final agreement is reached. They are useful in a cross-cultural context, to make sure that everyone is “on the same page” (literally) and also in long, complex negotiations such as joint ventures, that take place over a period of time and may involve multiple negotiators. They could be used to describe cooperative efforts by the parties to generate a market survey in order to determine whether a business plan could be generated to support a joint venture, manufacturing license, or the like. In a large construction deal, they can be used to get a project started before all of the terms are agreed to.

Lawyers don’t like LOI’s and MOU’s. They can be ambiguous documents that lead to confusion and even to court. That is because what often happens is, someone decides to put the handshake agreement down on paper, and it ends up including all of the essential elements of a contract. Then somebody decides to call it a LOI or MOU, thinking that this will magically make it non-binding. However, most courts won’t look at the title; they will look at whether the essential elements of a contract are set forth in the document. So a party trying to avoid being bound by the terms in the LOI/MOU, finds themselves a party to a binding contract. A contract by any other name, is still a contract.

If you find yourself in a situation where a LOI/MOU is called for or useful, keep the document short and include a statement that it is not a binding agreement, and is subject to execution of a final agreement between the parties.

Ask your favorite contracts lawyer to look the document over before anything is signed.

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