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SECURI,TIES AND EXCHANGE
THE CHAI RMAN
The Honorable Mike Crapo United States Senate 239 Dirksen Senate Office Building Washington, DC 20510 Dear Senator Crapo: Thank you for your June 30, 2011 letter raising certain questions concerning the Foreign Corrupt Practices Act ("FCPA"). As you indicate in your letter, the elimination of COITUpt business practices is critical to restoring confidence in the free market system. The U.S. has been a leader in anti -corruption efforts since the passage of the FCP A in 1977 and other countries have increasingly followed our lead. This year, China criminalized transnational bribery and Russia recently adopted a new foreign bribery law. Continued strong enforcement of the FCPA sends the message that American companies operating abroad will not pay bribes as a "cost of doing business." The deterrence message of the Commission's FCPA enforcement program incentivizes companies to self-assess and update their compliance and internal controls - all of which benefits companies' operations overall and provides greater transparency to investors. While I certainly appreciate and share your concerns about the costs of FCP A compliance in certain circumstances, I believe that the risks to investors and costs to companies posed by outdated or weak FCP A compliance measures are equally significant. With respect to the specific questions you raised in your letter, I have endeavored to respond to each in turn.
1. Should the FCPA be amended to provide an affirmative defense, whiclt may be raised where violations resulted/rom the conduct of individual employees 01' agents who circumvented compliance measures that were reasonably designed to identify and prevent such violations?
The Commission, in deciding whether to approve the filing of an Fep A enforcement action against a public company, already considers as one mitigating factor whether the company's compliance program was reasonably designed and operated in a manner to detect and prevent FCPA violations. In making this determination, the Commission would examine many compliance-related factors, including: (i) the company's corporate culture and whether senior management openly support the anti-corruption program; (ii) the effectiveness of the existing compliance program's ability to detect, monitor, audit, and receive reports of wrongdoing, including regular risk assessments of high-risk conduct, parties involved, and countries of operation; (iii) the effectiveness of any internal investigation initiated upon learning of misconduct; (iv) the manner in which the company corrects misconduct confirmed by any
The Honorable Mike Crapo Page 2 internal investigation, including discipline of persons who violated anti-corruption policies or laws; and (v) the manner in which the company modified its compliance program to better detect and prevent similar misconduct. I Similarly, companies facing FCPA inquiries can obtain credit for cooperation under the Commission's new Cooperation Initiative, in which cooperation is defined to include, among other factors, having reasonable internal controls and compliance measures.' Under this Initiative, companies may be able to secure a Deferred Prosecution Agreement ("DPA"), through which they can avoid an FCPA charge, or be eligible for reduced sanctions, or both, even where an FCP A violation occurred. Indeed, in May 2011, the Commission resolved its FCP A investigation of Tenaris S.A. by entering into a DPA agreement with the company in recognition of its immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption policies, improved internal controls, and enhanced training.' Thus, whether through the Commission's exercise of discretion, or through the Commission's formal Cooperation Initiative, companies currently can receive credit for having strong internal compliance programs. Given that fact, it seems unnecessary - and even counterproductive - to recognize a formal affirmative defense for having such a program, given that there are at least three significant costs associated with such a defense, as outlined below. First, the reasonableness of a compliance program is best measured not by how it exists on paper, but by how it operates in practice. Consequently, the ease with which an employee was able to circumvent anti-corruption controls is some evidence - not sufficient evidence, but some evidence - that internal controls were insufficient. The Commission would not want to be foreclosed from bringing FCP A charges under those circumstances, since holding companies accountable for weak internal controls incentivizes companies to create a robust FCPA compliance environment. Second, providing an affirmative defense for reasonably designed compliance programs allow companies to retain ill-gotten gains. A company could engage in bribery or other behavior, obtain a benefit from such conduct (i.e., securing lucrative contracts), and yet disgorge its ill-gotten gains. Enabling companies to retain proceeds generated from the of bribes would disincentivize those companies from adopting rigorous anti-corruption programs. could corrupt not payment
Third, sanctioning corrupt behavior sends a strong message of general deterrence to all similarlysituated companies that there is a high financial and reputational cost to be paid if they bribe foreign officials. There is often no substitute for the deterrent impact of financial and reputational sanctions, which prevent improper behavior from becoming ingrained as just
See Seaboard Report available at http://www.scc.gov/litigationiinvestrep0J1i34-44969.htm#P 16 499. See announcement of Cooperation Initiative available at http:.!www.scc.gov!spotlight!enfcoopinitialivc.shlml. 3 See announcement ofthe Commission's deferred prosecution agreement with Tenaris S.A. available at http://www.scc.gov/newsipress/2011 !20 11-112.hlm.
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another "cost of doing business." That deterrence message likely would be diluted if such an affirmative defense was adopted. As an aside, while the recently adopted U.K. Bribery Act ("U.K. Act") does provide such an affirmative defense, that law also imposes liability on companies regardless of whether they acted knowingly or intentionally. In contrast, under the FCP A, a company may be charged with a violation only ifit acts "corruptly," which generally means having acted with bad purpose or evil motive (15 U.S.C. §§ 78dd-l, et seq.; S. Rep. No. 95-114, at 10 (1977»). In addition, the Commission gives careful consideration to the reasonableness ofa company's compliance program, and has available means by which eligible companies can obtain reduced sanctions for having such programs. In light of this, amending the FCPA to provide companies with an affirmative defense where employees or agents appear to have circumvented internal controls would minimize corporate accountability for the sufficiency of those internal controls. Providing such a safe harbor could disincentivize companies from engaging in the sort of ongoing risk assessment and training that is the hallmark of a strong compliance program. This informs my view that the costs of such an affirmative defense would outweigh any perceived benefits.
2. Does the Commission believe that regulations or guidance explaining the factors it considers when determining whether an entity's officers or employees are "foreign officials" would be helpful to U.S.firms? Would the Commission support legislation that more clearly defines the term "foreign official" under the FCPA?
I believe that the statute sufficiently defines the term "foreign official." provides: Section 30A(f)(1)
The term "foreign official" means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization. Given the various forms of government found around the world, it would be impractical to articulate each of the myriad ways that one could use to identify a foreign official in particular countries or cultures. In addition, Commission and Department of Justice enforcement actions also provide guidance on the meaning of "foreign official" in various contexts. Finally, companies with a strong compliance culture have policies prohibiting all bribery in order to send a clear corporate message that such practices are not condoned.
3. What are the mechanisms by which the Commission could or does provide guidance on FCPA related matters?
Both the Commission and the Department of Justice (DOJ) have numerous mechanisms for providing guidance on FCP A matters. Perhaps the most important guidance comes from the
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enforcement actions that are brought by the Commission and the Department of Justice. The Commission uses its pleadings and accompanying public news releases to highlight and reinforce the key elements of each case. Additionally, senior staff in the Division of Enforcement speak regularly at industry conferences and provide guidance on the FCPA program. The Departments of Justice and Commerce (DOC) also have numerous mechanisms through which companies can receive guidance on the FCPA, such as DOJ's Opinion Releases and through DOC's Office of General Counsel. The Commission continues to look for new ways to provide guidance in this area of the law. For example, on July 22, 2011, the Director of the Division of Enforcement co-hosted a Business Roundtable with the General Counsel of the Department of Commerce and the Assistant Attorney General, Criminal Division, to listen to the perspective of the business community on issues related to FCP A compliance.
4. Is it tile Commission's policy to hold firms strictly liablefor foreign subsidiaries' actions in violation of tile FCPA?
A U.S. parent company may be liable under the FCPA for bribes paid by its foreign subsidiary in certain circumstances, such as where the parent company had knowledge of the foreign subsidiary's bribery or where the subsidiary acted as the parent's agent. "Knowledge" under the FCPA's anti-bribery provisions encompasses actual knowledge, conscious disregard of, or willful blindness to the subsidiary'S illicit activities." In addition, under agency law, an agent's knowledge can be imputed to the principal (parent)." Accordingly, in the absence of the requisite evidence, the Commission does not charge a U.S. parent company with a violation of the FCPA's anti-bribery provisions in connection with the foreign subsidiary's actions. In addition, the Commission may, based on its analysis of the particular facts and circumstances of some cases, charge the foreign subsidiary directly with violation of the FCPA's anti-bribery provisions while separately charging the parent company with violations of the books and records and internal control provisions of the FCPA.6 This is because the public company parent typically is responsible for the accuracy of the books and records of its overall operations, including those of its controlled foreign subsidiaries.7 While the FCPA's books and records and internal controls provisions do not contain a "knowledge" requirement, the Commission exercises its discretion and flexibility in charging these provisions.
See H.R. Conf. Rep. No. 100-576, at 919-20 (1988), as reprinted in 1988 U.S.C.C.A.N. 1547 (discussing standard of liability for acts of third parties (agents)). 5 See Restatement (Third) of Agency, Section 5.03. 6 See,~, SEC v. ENI, S.p.A. et al. Lit. ReI. 2 I588 (July 7, 20 I0). 7 The FCPA's books and records provisions require public companies to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. The FCPA's internal controls provisions require public companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that include, in part: (i) transactions are executed in accordance with management's general or specific authorization; and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets.
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5. Under what circumstances, if any, is it appropriate for both the Commission and the Department to seek the recovelJl of penalties from the same entity for tile same conduct? The Commission and Department of Justice do not obtain duplicative penalties in FCPA cases. Typically, the Commission will obtain monetary sanctions in the form of disgorgement (illgotten gains) while the Department ofJustice obtains monetary sanctions in the form of penalties. In those rare cases where both the Commission and the Department of Justice obtain penalties, the total penalty assessed against the company is no greater than it would be if either the Commission or DOJ alone obtained the penalty. Again, thank you for your interest. If you have any additional questions, please feel free to call me at 202-551-2100 or have a member of your staff contact Eric Spi tIer, Director of the Office of Legislative and Intergovernmental Affairs, at 202-551-2028.
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