Following our last publication, this article aims to provide a detailed analysis of the main updates introduced by the Second Edition of the Resource Guide to the U.S. Foreign Corrupt Practices Act (the "Second Edition") released by the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) in 3 July 2020.
The Second Edition includes changes and corrections, along with more substantive updates regarding case law and DOJ policy pronouncements issued during the last 8 years.
Incorporation of the term "instrumentality" into the definition of "foreign official"
The Second Edition includes a clarification of the term "instrumentality" through the case United States v. Esquenazi. Under the U.S. Foreign Corrupt Practices Act (the "FCPA") foreign officials include officers or employees of a department, agency or instrumentality of a foreign government. In Esquenazi it was concluded that an “instrumentality” under the FCPA is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” Although the court noted that this test is a fact-bound inquiry, it provided a non-exhaustive list of factors to determine whether the government “controls” an entity.
However, the Second Edition still qualifies the term “instrumentality” as broad and still considers that in order to define if a particular entity constitutes an “instrumentality” under the FCPA, it is required to proceed with a fact-specific analysis of such entity’s ownership, control, status, and function.
"Investigation, Analysis and Remediation of Misconduct" as a new hallmark of an effective compliance program
The Second Edition not only clarifies the hallmarks that an effective compliance program should have, but also incorporates, as a new hallmark, how corporations should respond to misconduct.
According to the Second Edition, an effective compliance program should have a "well-functioning and appropriately funded mechanism for the timely and thorough investigations of any allegations or suspicions of misconduct by the company, its employees, or agents". The company's response may include, among other remediation measures, disciplinary measures, which will have to be duly recorded and documented.
Furthermore, the company should also integrate "lessons learned" from any misconduct into the company’s policies, training, and controls. To achieve this goal, a company will need to analyse the root causes of the misconduct to timely and appropriately remediate those causes and prevent the repetition of such type of misconduct.
Updates of M&A and corporate successor liability
The Second Edition points out that mergers and acquisitions can be a risk -if the company does not perform an FCPA due diligence- or an opportunity -when the acquiring entity has a robust compliance program in place and implements that program as quickly as practicable at the merged or acquired entity-.
The aim of conducting an effective FCPA due diligence is to evaluate more accurately each target’s value and negotiate the assumption of the costs of any corrupt misconduct to be borne by the target and avoid its continuation, which may harm a business’ profitability and reputation, as well as involving potential civil and criminal liability.
Notwithstanding the above, the Second Edition also notes that DOJ and SEC recognizes that in certain circumstances a robust pre-acquisition due diligence may not be possible. In those cases, DOJ and SEC will look to the timeliness and thoroughness of the acquiring company’s post-acquisition due diligence and compliance integration efforts, as well as into all of its internal controls, including its compliance program. Moreover, the Second Edition states that corporations should consider training new employees, re-evaluating third parties under company standards, and, where appropriate, conducting audits on new business units.
Inclusion in the Second Edition of policies applicable to the FCPA
The Second Edition includes specific references to several policies that refer to the FCPA and that have been adopted by the DOJ and SEC in recent years, including, for instance, the FCPA Corporate Enforcement Policy (the "CEP").
In connection with mergers and acquisitions, the Second Edition specifically states in relation to the CEP that "in appropriate cases, an acquiring company that voluntarily discloses misconduct may be eligible for a declination, even if aggravating circumstances existed as to the acquired entity".
To such extent, the Second Edition, by incorporating the CEP, contemplates that there will be a presumption that DOJ will decline prosecution of the company absent aggravating circumstances, where a company voluntarily self-discloses misconduct, fully cooperates, and timely and appropriately remediates. The CEP also provides definitions of the terms “voluntary self-disclosure,” “full cooperation,” and “timely and appropriate remediation” and which are the potential benefits for those corporations that voluntary self-discloses misconduct.
Beyond the CEP, the Second Edition also includes references to other policies referring to the FCPA and that have been adopted by the DOJ and SEC since 2012, including the Policy on Coordination of Corporate Resolution Penalties (the Anti-Piling On Policy), the FCPA Corporate Enforcement Policy, the Selection of Monitors in Criminal Division Matters and the Evaluation of Corporate Compliance Programs.
Updates to the statute of limitations for criminal violations of FCPA's accounting provisions
The Second Edition still states that for substantive violations of the FCPA anti-bribery provisions, the five-year limitation still applies. However, criminal violations of the accounting provisions and DOJ's position on the limitation period for FCPA violations are further clarified, by stating that a criminal violation requires a "knowing and wilful failure to comply with the FCPA’s books and records or internal controls provisions". Moreover, for the violations of the FCPA accounting provisions, which are defined as “securities fraud offense[s]” under 18 U.S.C. § 3301, the limitation period is increased from 5 to 6 years.
Incorporation of new and relevant case law
The Second Edition also incorporates a number of substantive updates on case law adopted since 2012. The most relevant case law includes both conspiracy theory (United States v. Hoskins), SEC's authority to seek disgorgement as a remedy in judicial enforcement actions (Kokesh v. SEC) and a brief reference to a defendant's unsuccessful attempt to assert local law affirmative defense (United States v. Ng Lap Seng). The Second Edition also updates or replaces various case examples with more current ones.