Houston Criminal Attorney: Foreign Corrupt Practices Act

Origins:

 In 1973 America was gripped by the Watergate scandal, one of the largest and most infamous in the Nation's history. Beginning with the arrest of five men for breaking and entering into the Democratic National Committee (DNC) headquarters at the Watergate complex on June 17, 1972, it would ultimately result in the trials and convictions of dozens of President Richard Nixon's top administration officials and the resignation of Nixon himself.


In February 1973 the Senate created the Select Committee on Presidential Campaign Activities (Resolution S.60) to investigate Watergate and other Nixon campaign abuses, and in May Special Prosecutor (Archibald Cox) was sworn in by the U.S. Department of Justice to direct the investigation. During the course of their work, the Office of the Special Prosecutor charged several corporations and CEOs with using corporate funds for illegal political contributions. The U.S. Securities and Exchange Commission (SEC) soon recognized the significance to public investors, and their own subsequent inquiry revealed falsifications of corporate financial records as well as secret “slush funds” being used for illegal foreign payments and other purposes.

The SEC eventually exposed further corporate abuses ranging from the outright bribery of high foreign officials to so-called "facilitating payments" made to government functionaries for certain ministerial or clerical duties. Major examples included officials of the Lockheed Aerospace Company paying over $14 million in bribes to various foreign officials in the process of negotiating the sale of aircraft, and the "Bananagate" scandal in which Chiquita Brands paid over $2.5 million in bribes to the President of Honduras to lower taxes on banana exports. By the culmination of the SEC investigation, over 400 U.S. companies had admitted making questionable or illegal payments in excess of $300 million to foreign government officials, politicians and political parties.

Originally the SEC wasn't directly concerned with the legal implications of bribery: the international business climate of the time had seen such payments as a necessity in order to remain competitive in a rapidly growing corporate environment. Rather, the specific concerns of the SEC were directed at the nondisclosure of such massive payments to investors; the hidden "slush funds" clearly undermined the integrity and reliability of corporate books and records, and the very foundation of the disclosure system established by federal securities laws.

Congress, however, was seriously concerned with the implications these payments had on U.S. foreign policy. The 1975 Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities, chaired by Senator Frank Church, had been conducting their own investigation and in a series of hearings that year outlined the involvement of various government organizations including the FBI and CIA. And beyond issues of foreign policy, a "post-Watergate morality" was rapidly coming into play, causing concerns over international perceptions of the U.S. economic stability and the Nation's position as a global leader.

Between June 1975 and September 1977 approximately twenty bills were introduced to address the issue of foreign corporate payments: in March 1976 President Gerald Ford issued a memorandum to various federal agencies establishing a “Task Force on Questionable Corporate Payments Abroad”. Finally, after more than two years of deliberation, Congress passed the first law in the world governing domestic business conduct with foreign government officials in foreign markets.
The Foreign Corrupt Practices Act of 1977 (15 U.S.C. §§ 78dd-1) was signed into law by President Jimmy Carter on December 19, 1977 with the intended purpose of ending corporate bribery of foreign officials, and the restoration of public confidence in the American business system. It was amended in 1998 by the International Anti-Bribery Act of 1998 to implement the anti-bribery conventions of the Organization for Economic Co-operation and Development.

Actions:

 The Foreign Corrupt Practices Act (FCPA) essentially addresses a) accounting transparency requirements under the Securities Exchange Act of 1934 and b) the bribery of foreign officials by persons connected to the United States, including:

• U.S. businesses • Foreign corporations trading securities in the United States 
• American nationals or citizens 
• Residents acting in furtherance of a foreign corrupt practice whether or not they are physically present in the United States 
• Foreign natural and legal persons in the United States at the time of the corrupt conduct 
• Foreign firms and/or persons who take any act in furtherance of such a corrupt payment while in the United States.

Regarding accounting transparency, 15 U.S.C. § 78m requires companies with securities listed in the United States to meet specific accounting practices intended to operate in tandem with the FCPA anti-bribery provisions. Corporations covered by these provisions are required to keep books and records that accurately reflect transactions and to maintain adequate internal accounting controls.

The anti-bribery provisions of the FCPA are not restricted to monetary exchanges (the focus is on the intent of bribery rather than the amount), and may include anything of value given to a foreign official for the purpose of obtaining, retaining or directing business to any person or company covered by the law. Specifically, the anti-bribery provisions of the FCPA prohibit:

"...the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person." 

The definition of "foreign official" is broad; examples may include doctors at government-owned or managed hospitals or anyone working for a government managed institution. Employees of international organizations such as the United Nations are also considered to be foreign officials under the FCPA. The Act also governs payments to any recipient if any part of the bribe is ultimately attributable to a foreign official, candidate, or party. It does draw a distinction between "bribery" and "facilitation" payments, which are made to an official to expedite performance of the duties they are already bound to perform. Payments may also be legal if they are permitted under the written laws of the host country, or if they relate to product promotion. 

Penalties: 

The U.S. Department of Justice is chief enforcement agency for the FICA, with the Securities and Exchange Commission (SEC) acting in a coordinating role. DOJ involvement in an FCPA matter is guided by the Principles of Federal Prosecution in the case of individuals, and the Principles of Federal Prosecution of Business Organizations in the case of companies. Generally, the following circumstances may trigger an FCPA investigation:

• Unusually large commissions, retainers or fees 
• Refusal to make FCPA-related representations 
• Unusual methods of payments 
• Promises of business by or from a government official 
• Family or business relationships with a government official 
• Payments of unusual contingent fees 
• Political contributions 

Penalties for corporations and other business entities found in violation of the FCPA may include fines of up to $2 million; individual directors, officers, stockholders, employees and agents can be subject to fines of up to $100,000 and imprisonment for up to five years, although individuals are only subject to the FCPA’s criminal penalties for violations if they acted “willfully". These fines are imposed per occurrence, and individuals fined for violations of the Act may not be indemnified by their employer.

Both companies and individuals can also be held civilly liable for aiding and abetting FCPA anti-bribery violations if they knowingly or recklessly provide substantial assistance to a violator. The attorney general or the SEC may bring a civil action for violation of the FCPA, resulting in fines of up to $10,000 per violation against any firm, its directors, officers, employees, agents and stockholders. In addition, the SEC may seek to impose fines not to exceed (1) the gross amount of the pecuniary gain to the defendant as a result of the violation, or (2) an amount of up to $100,000 for individuals and $500,000 for business entities.
Under federal law, individuals or companies that aid or abet an FCPA violation are as guilty as if they had directly committed the offense themselves.

Defense: 

The FCPA contains an exception for "facilitating payments" for "routine governmental action," (also known as "grease" payments) intended as a defense for payments, gifts or tips made in facilitation of non-discretionary acts of lower-level officials as long as they have no discretion to award business to the party making the payment. If a defendant can assert that a payment was legal under the laws of the foreign country in which the payment was made, or that a payment was a reasonable expenditure directly related to promotion, demonstration, or explanation of products or services this may also be used as an affirmative defense.

Enforcing anti-corruption laws has become a major focus of law enforcement and regulatory authorities in the U.S. and other nations. Parnham and McWilliams represents clients in FCPA internal investigations, government enforcement and regulatory actions, and other international white-collar defense matters. For more information visit whitecollarfraudattorney.com or call (713) 224-3967 for a free consultation.

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References:
The Story of the Foreign Corrupt Practices Act; Mike Koehler,Ohio State Law Journal, Vol. 73, No. 5, 2012
A Resource Guide to the U.S. Foreign Corrupt Practices Act: The Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission 
US Attorneys Criminal Resource Manual Chapter 9-27.000: Principles of Federal Prosecution 
Principles of Federal Prosecution of Business Organizations: Title 9,Chapter 9-28.000 

Houston Criminal Attorney: The Dodd-Frank Act and Whistleblowers

While conducting research on ecological issues in the early 1970's, author and activist Ralph Nader coined the term "whistleblower" for citizens who expose misconduct occurring within an organization. Prior to that the press had used terms such as "informers" or "snitches", which carried obviously negative connotations. Attitudes towards whistleblowers still vary widely; they may be seen either as selfless martyrs for public interest, or as traitors solely pursuing personal glory and fame. Nonetheless, whistleblowers perform a vital role in helping the government maintain public safety, corporate transparency and financial regulation.
Most whistleblowers are internal whistleblowers, employees who report misconduct by a fellow employee or superior within their company. External whistleblowers report misconduct to outside persons or entities such as attorneys, the media, law enforcement agencies or specific watchdog groups.
In some cases whistleblowers have been subjected to criminal prosecution in reprisal for reporting wrongdoing; because of these repercussions faced from the organizations or groups they have accused, specific laws have been enacted to protect whistleblowers acting in the interest of the government or public. Private organizations such as the National Whistleblowers Center have also formed legal defense funds and support groups to assist whistleblowers.

The False Claims Act: 

The False Claims Act (31 USC § 3729) is the foundation of the U.S. whistleblower system. It is the most widely used statute employed by whistleblowers to report on corporate fraud and misconduct, and the model for other federal and state whistleblower provisions.
In the midst of the American Civil War, the Union Army found itself facing a horde of unscrupulous contractors passing off rancid food, ailing livestock and defective weapons. Recognizing that the embattled government lacked the capabilities to control the widespread fraud on its own, Congress passed the first US law adopted specifically to protect whistleblowers, the False Claims Act (also known as the "Lincoln Law") on March 2, 1863.
This law establishes liability when any person or entity improperly receives payments from -or avoids payment to- the Federal government (tax fraud is excepted). Importantly, it revived the thirteenth-century English legal tradition of qui tam (derived from a Latin phrase meaning "he who sues on the King's behalf as well as his own"); allowing a private citizen (known as a "relator") to not only bring a lawsuit on the government's behalf, but also to be rewarded with a percentage of any proceeds recovered by the government.
The False Claims Act prohibits: 

• Knowingly presenting, or causing to be presented a false claim for payment or approval; 
• Knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim; • Conspiring to commit any violation of the False Claims Act; 
• Falsely certifying the type or amount of property to be used by the Government; 
• Certifying receipt of property on a document without completely knowing that the information is true; 
• Knowingly buying Government property from an unauthorized officer of the Government, and; 
• Knowingly making, using, or causing to be made or used a false record to avoid, or decrease an obligation to pay or transmit property to the Government. 

The most commonly used provisions are the first two, prohibiting the presentation of false claims to the government and the fabrication of records to get a false claim paid: these cases frequently involve situations in which a corporation or individual overcharges the federal government for goods or services. Other typical cases entail failure to test a product as required by government specifications, or selling defective products. The key factor in determining whether conduct is covered by the False Claims Act is whether that conduct caused the government to suffer a financial loss.

The False Claims Act was amended in 1943, (most notably to reduce the relator's share of recovered proceeds) but its qui tam provisions were largely ignored until an increase in military spending during the Reagan presidency. Amid widespread reports of $1,000 bolts, $7,000 coffee pots and other outrageous abuses by government contractors, the law was amended in 1986 to impose fines of up to $10,000 for each false claim. The amendment also tripled damages on wrongdoers, rewards whistleblowers with up to 30 percent of the government's recovery, and includes significant anti-retaliation protections for employees who blow the whistle.

Yet despite being the primary tool used by the government and whistleblowers to combat fraud, the False Claims Act is limited in scope: primarily, it only applies when the fraud or misconduct has caused the government to lose money. Other congressional Acts which have been passed to strengthen protection for federal whistleblowers include the Lloyd–La Follette Act (5 U.S.C. § 7211) of 1912 which confers job protection rights on federal employees who criticize their superiors, and similar protections included in subsequent federal environmental, health and safety laws.
The Sarbanes–Oxley Act (Pub.L.107–204,116,Stat.745), also known as SOX, was enacted in 2002 in reaction to a number of major corporate and accounting scandals and Section 1107 provides criminal penalties for retaliation against whistleblowers. Until recently however there was no real financial incentive or legal protection available to encourage whistleblowers to expose other types of fraud; i.e., frauds such as those perpetrated against private investors.

The Dodd-Frank Act: 

The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173) was signed into law by President Barack Obama on July 21, 2010 as a response to the late-2000s recession, implementing the most significant changes to U.S. financial regulation since the Great Depression. This Act made changes in the American financial regulatory environment that affect all federal financial regulatory agencies along with virtually every part of the nation's financial services industry.
Dodd-Frank proposed eight areas of regulation, primarily:

• Regulation of credit cards, loans and mortgages is consolidated under The Consumer Financial Protection Bureau. 
• Establishment of the Financial Stability Oversight Council to oversee Wall Street. 
• Establishment of the Volcker Rule banning banks from using or owning hedge funds for the banks' own profit. 
• Requiring that the riskiest derivatives, like credit default swaps, be regulated by the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC).
• Requiring hedge funds to register with the SEC and provide data about their trades and portfolios so the SEC can assess overall market risk. 
• Creation of an Office of Credit Ratings at the SEC to regulate credit ratings agencies. 
• Creation of a new Federal Insurance Office under the Treasury Department, which identifies insurance companies that create risk to the entire system. 
• Allowing the Government Accountability Office(GAO) to audit the Fed's emergency loans during the financial crisis. 

The Dodd-Frank Act also includes important whistleblower provisions in section 922, largely modeled after the False Claims Act; however, a compelling difference between the False Claims Act and the Dodd-Frank whistleblower provisions is that Dodd-Frank does not require the fraudulent activity be committed against the government.
In fact, although the False Claims Act allows whistleblowers to pursue a qui tam action even if the government chooses not to intervene, Dodd-Frank does not supply whistleblowers with the “private right of action” required to bring a lawsuit on behalf of the United States government. If the government opts not to pursue a case under the Dodd-Frank Act, the whistleblower’s claim is terminated.

Whistleblowers are required to provide information that is not publicly known, but Dodd-Frank also rewards SEC whistleblowers who provide unique analysis based completely on public information. For example, if fraud can be demonstrated using public statistics or information a citizen can qualify to become a whistleblower. In further contrast to the False Claims Act, which only rewards the first whistleblower filing a complaint, whistleblowers who provide meaningful information assisting the government in combating securities fraud under Dodd-Frank may be rewarded regardless of whether they were the first to file. Dodd-Frank whistleblowers do not file formal complaints in a federal court, but within the appropriate agency. For example, securities violations are filed with the SEC and commodities violations are filed with the CFTC.
The Dodd-Frank whistleblower provisions also take important steps to protect citizens who report securities fraud with an anti-retaliation provision which prohibits “... adverse action against a whistleblower arising out of disclosures protected under Sarbanes-Oxley; the Securities Exchange Act of 1934; and any other law, rule, or regulation subject to the jurisdiction of the SEC.” 

Filing a whistleblower claim: 

Common examples of fraud or misconduct that may be targeted by a whistleblower claim may include:

• Billing the government for products or services not provided, or that are defective, mislabeled or otherwise different from the products or services the government contracted. 
• Failing to report government over-payments. 
• Obtaining government funds using false certifications of compliance or through violations of law.
• Selling or marketing drugs outside of the FDA approved uses. 
• Accounting fraud 
• Fraud or manipulation of trading in securities or commodities, or the improper sale of securities, bonds, or commodities. 

In order to file any whistleblower claim you must have evidence of fraud or other misconduct that directly causes a financial loss to the government (under the False Claims Act and related statutes), a financial loss to investors from securities or commodities fraud (under the Dodd-Frank Act), or harm to specific employees or the public at large (under various other laws designed to protect the environment, financial markets, health and safety and consumer welfare).

 While a whistleblower does not need to have witnessed the case of fraud or misconduct personally, they must have concrete and specific evidence: suspicions or beliefs are not sufficient. Documentation supporting a claim greatly increases the likelihood that authorities will take it seriously. In some cases public information may be used to support a whistleblower claim, but it must be information that the government does not already possess and could not otherwise obtain from any public source or its own records.

Time is an essential factor in filing a whistleblower claim. The "first to file" rule will preclude any claim if one has already been filed based on the same facts, but multiple whistleblowers may file a joint claim or separate claims based on different evidence. The claim must also be brought within the statute of limitations: generally within six years of the violation under the False Claims Act and within three years of the violation under the Dodd-Frank Act. For violations of the various state FCA and industry specific laws, claims usually must be reported anywhere from 30 days to 6 years after the violations depending on the particular statutes.

In order to take full advantage of the law and to protect yourself from possible risk, it is essential for any prospective whistleblower to have legal representation before going forward with a claim. Parnham and McWilliams can help ensure that your claim is competently and efficiently prosecuted, that you receive the maximum reward available, and that all of the protections afforded to you under the whistleblower laws are implemented. If you feel that you have relevant information relating to corporate wrongdoing and would like to learn more about whistleblower representation, please visit parnhamandmcwilliams.com or contact our Houston offices at (713) 224-3967 for a free consultation.

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 References:
The National Whistleblower Center
OSHA's Whistleblower Protection Program
US Merit Systems Protection Board: Whistleblower Appeals
Securities and Exchange Commission: Office of the Whistleblower
US Commodity Futures Trading Commission whistleblower program