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Part I — Converging practices for bribery, export controls and sanctions anti-evasion regimes
2023 PRINDBRF 0316
• Practitioner Insights Commentaries
• June 22, 2023
(June 22, 2023) - In the first of a two-part series, Hughes Hubbard & Reed LLP partners Michael Huneke and Jan Dunin-Wasowicz explain the historical Foreign Corrupt Practices Act context for the U.S. Justice Department's recent statements that sanctions are the "new FCPA."
In-house teams who have historically prioritized anti-corruption compliance can leverage their experience to mitigate their companies' export controls and international economic sanctions risks — and in so doing meet U.S. authorities' expectations
Introduction
Companies are on the front lines of fighting attempts by counterparties to evade anti-corruption laws, export controls, and international economic sanctions.
U.S. authorities recognize this and have made clear their expectation that companies rise to the occasion. For example, on March 2, 2023, the U.S. Departments of Justice ("DOJ"), Commerce, and the Treasury issued a "Tri-Seal Compliance Note" emphasizing the critical role that companies and financial institutions play in fighting efforts to evade U.S. export controls and international economic sanctions.1 On May 3, 2023, the Principal Associate Deputy Attorney General recognized specifically the challenges facing in-house legal and compliance teams responsible for managing these risks, stating:
Make no mistake: companies in the private sector are on the front lines of the geopolitical and national security challenges that mark today's global environment. . . . Simply put, times have changed. Our adversaries — terrorist groups, oligarchs, malign nation-states, and more — are engaging in novel ways to raise money and sow discord, through cybercrime, crypto-laundering, sanctions evasion, export control circumvention and technology theft. To meet the moment, companies must pay a new level of attention to a wider range of national security compliance issues than ever before.
. . . .
Where in years past a compliance team might have mitigated national security risks through sanctions-screening software and attention to a few sanctioned countries, today a new level of diligence and attention is required. In this way, to quote Deputy Attorney General Monaco, sanctions truly are the new [U.S. Foreign Corrupt Practices Act ("FCPA")].2
Indeed, the Deputy Attorney General has described international economic sanctions repeatedly as "the new FCPA" and cautioned that "[s]anctions have been considered by some as a concern mainly for banks and financial institutions. As companies grapple with the fallout of Russian aggression and the new intensity of sanctions enforcement, though, they are recognizing that the risk of sanctions violations cuts across industries and geographic regions."3
What is the "new way" that is now required? How are sanctions "truly" the new FCPA? The history of FCPA enforcement and companies' compliance practices in response thereto (Part I) is the baseline against which to consider these questions' implications for export controls and sanctions enforcement today (Part II).
Part I: What are the "old" FCPA enforcement regime and compliance practices to which export control and sanctions enforcement are now being compared?
The legal regimes for fighting international corruption, controlling exports, and complying with international economic sanctions remain otherwise extremely technical, dynamic, and structurally different. Yet the Tri-Seal Compliance Note and recent DOJ statements remind companies that time-tested methodologies historically deployed by companies' in-house legal and compliance departments to assess and mitigate the risk that persons subject to the FCPA's anti-bribery provisions would attempt to evade those provisions by diverting bribes through third parties ("FCPA evasion risk") are also what the Departments collectively recommend (and expect) companies to deploy to mitigate export controls and sanctions evasion risks as well.
To fully embrace the guidance of the Tri-Seal Compliance Note and DOJ officials' recent public statements — particularly for companies who have adopted a policy of reducing any and all business with Russia or Russian interests — it is useful for companies to consider what about the FCPA drove the establishment of such risk-mitigation methodologies, how those work in practice to meet anti-corruption authorities' expectations, and how companies can now leverage existing anti-corruption experience and expertise on their legal and compliance teams to ensure their methods for reducing export controls and sanctions evasion risk are on par with those for reducing FCPA evasion risk.
FCPA primer: awareness of a high probability of FCPA evasion
The FCPA prohibits not only directly paying bribes, but also efforts to evade this prohibition via payments routed indirectly through any third party.
As originally enacted in 1977, the FCPA prohibited bribes to (1) foreign officials, (2) foreign political parties or officials thereof or any candidate for foreign political office, or (3) "any person, while knowing or having reason to know that all or a portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to any [such] foreign officials, to any [such] foreign political party or official thereof, or to any [such] candidate for foreign political office" for certain improper purposes enumerated in the FCPA.4
This "knowing or having reason to know" standard was criticized as vague and unworkable.5 The FCPA was amended in 1988 to drop the "having reason to know" language and — adopting language from the American Law Institute's Model Penal Code — redefining "knowing" as follows:
A person's state of mind is "knowing" with respect to conduct, a circumstance, or a result if . . . such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur . . . . When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist."6
The members of Congress who settled on this language reported an intention that the new definition of knowledge "reflect existing law," i.e., the "concepts of 'conscious disregard' or willful blindness.'"7
This amended language's effects have exceeded any modest intention. The 1988 amendments are a critical factor underpinning the past two decades of heightened FCPA enforcement and companies' extensive devotion of effort and resources over the same time period to anti-corruption due diligence on third parties.
Essentially, under pain of costly criminal investigations and fines that now reach into the billions for individual cases, liability turns on whether a third party was proposed or engaged under circumstances indicating a "high probability" of corrupt payments to a foreign public official, and if so whether risk-based anti-corruption due diligence can nonetheless establish an "actual belief" that this is not the case.
Enforcement actions and experience working under the amendments have resulted in a developed practice today of scoping and implementing risk-based anti-corruption due diligence on third parties, including practices and methodologies for the repeated, objective application of a framework in which companies can make informed — but still inherently subjective — judgments about the relative corruption risks posed by specific third parties, and then allocating resources appropriately.
The "awareness of a high probability" formulation was grafted onto the FCPA with only a passing reference to a failed effort nearly a decade earlier to incorporate the Model Penal Code's proposed culpability and scienter standards into U.S. criminal statutes wholesale.8 Today, 35 years after the 1988 amendments, the FCPA's anti-bribery provisions remain the only federal criminal statute to use this language.9
Layered on top of this knowledge standard is the potential for criminal prosecution of individuals for violations of the FCPA's anti-evasion provisions (and other anti-bribery provisions). For such prosecutions, however, the prosecutors would have to prove that the individual acted "willfully," generally meaning that "in order to establish a 'willful' violation of a [criminal] statute, 'the Government must prove that the defendant acted with knowledge that his conduct was unlawful.'"10
The impact of modern enforcement & guidance on compliance practices
It was not until the modern era of FCPA enforcement began around 2004 that the FCPA's unique knowledge standard had a significant impact. Once coupled with a dramatic increase in anti-corruption enforcement, the "awareness of a high probability" knowledge standard had the several practical repercussions as companies reacted to the increasing risk of significant fines and penalties:
•The so-called "ostrich" approach was dead; companies could not avoid potential consequences by simply taking steps not to acquire actual knowledge (or "reason to know") of whether a bribe was paid or even if a bribe were intended;
•Companies needed to develop practices for identifying, assessing, and mitigating corruption risks;
•These practices necessarily included the development and application of judgment in making inherently subjective estimations of relative corruption risks, given finite resources and the DOJ's expectations that companies devote the greatest attention to the greatest risks;11 and
•The development of processes to protect against ad hoc or haphazard application of such subjective judgments — and thereby protect decision-makers and their companies from perceptions of an uneven application of company processes — has been recognized in settlement documents as an appropriate methodology for managing corruption risks.12
To help companies and individuals make such subjective judgments, the U.S. Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC," which enforces the FCPA in a civil or administrative context against certain issuers of securities), have issued guidance as to what circumstances they consider might indicate the presence of a "high probability" of corruption.
These include "excessive commissions to third-party agents or consultants; unreasonably large discounts to third-party distributors; third-party 'consulting agreements' that include only vaguely described services; the third-party consultant is in a different line of business than that for which it has been engaged; the third party is related to or closely associated with the foreign official; the third party became part of the transaction at the express request or insistence of the foreign official; the third party is merely a shell company incorporated in an offshore jurisdiction; and the third party requests payment to offshore bank accounts."13
Today, such practices for anti-corruption due diligence on third parties and related guidance compel in-house legal or compliance experts to ask themselves, What do I think is really happening here? Do the underlying economics make sense? Do the explanations of why and how a particular third party was identified make sense? Does it make sense that the company would need a third party to perform the services offered, or that it would pay the proposed remuneration for them?
While decades ago some companies might have simply adopted a code of ethics with a general policy against corruption, run credit checks, and (maybe) included anti-corruption representations in their agreements with third parties, today those or similar "check-the-box" types of compliance programs would be inadequate, particularly in instances where the circumstances indicate a high probability of corruption.
What does all of this mean for export control and sanctions compliance practices today? We will explore this in Part II.
Notes
1 U.S. Dep't of Commerce, Dep't of the Treasury, and Dep't of Justice Tri-Seal Compliance Note, Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls (Mar. 2, 2023).
2 U.S. DOJ, Principal Associate Deputy Attorney General Marshall Miller Delivers Remarks at the Ethics and Compliance Initiative IMPACT Conference, Remarks as Prepared for Delivery (May 3, 2023).
3 U.S. DOJ, Deputy Attorney General Lisa O. Monaco Delivers Keynote Remarks at 2022 GIR Live: Women in Investigations, Remarks as Prepared for Delivery (June 16, 2022); see also U.S. DOJ, Deputy Attorney General Lisa Monaco Delivers Remarks at American Bar Association National Institute on White Collar Crime, Remarks as Prepared for Delivery (Mar. 2, 2023).
4 Pub. L. No. 95-213, §§103(a) (Exchange Act §30A(a)(3)), 104(a)(3) (as enacted)) (emphasis added).
5 See U.S. General Accountability Office, Report to the Congress of the United States: Impact of Foreign Corrupt Practices Act on U.S. Business, at 39 (1981); To Amend and Clarify the Foreign Corrupt Practices Act of 1977: Joint Hearing on S. 430 before the Subcomm. on Int'l Finance and Monetary Policy and the Subcomm. on Securities of the Comm. on Banking, Housing, and Urban Affairs, 99th Cong. 44–45 (statement of Hon. Malcolm Baldridge, Sec'y of Commerce); id. at 64–65 (statement of John C. Keeney, Dep'y Assistant Att'y Gen.); id. at 97 (statement of Allen B. Green on behalf of the Public Contract Section of the American Bar Association).
6 FCPA §§103(a) (Exchange Act §30A(f)(2)), 104(h)(3), 104A(f)(3) (codified at 15 U.S.C. §§78dd-1(f)(2), 78dd-2(h)(3), 78dd-3(f)(3)) (as amended).
7 H.R. Rep. No. 100-576, at 919–920 (Conf. Rep.).
8 See H.R. Rep. No. 100-576, at 919–20 (1988) (citing to H.R. Rep. No. 96-1396, at 35 (1980)).
9 Based on the authors' searches of the United States Code, U.S. House of Representatives, Office of the Law Revision Counsel, http://uscode.house.gov/browse.xhtml (as of May 23, 2023).
10 Bryan v. U.S., 524 U.S. 184, 191–92 (1998) (quoting Ratzlaf v. U.S., 510 U.S. 135, 137 (1994)).
11 U.S. DOJ & SEC, A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 60 (2nd ed., 2020).
12 See U.S. v. Airbus SE, Deferred Prosecution Agreement at 4 (para. 4(d)), 1:20-cr-00021 (D.D.C. Jan. 31, 2020).
13 U.S. DOJ & SEC, A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 23 (2nd ed., 2020).
Michael H. Huneke is a partner in Hughes Hubbard & Reed LLP's anti-corruption and internal investigations practice group. Huneke helps clients navigate multijurisdictional anti-corruption investigations, design and execute risk-based strategies for due diligence on third parties, and conduct pre- and post-acquisition anti-corruption due diligence and integration. He is based in Washington, D.C., and can be reached at [email protected]. Jan Dunin-Wasowicz is a partner in the firm's sanctions, export controls and anti-money laundering, anti-corruption and internal investigations, and arbitration practice groups. He has experience navigating economic sanctions, export controls and trade compliance issues from both European Union and U.S. perspectives in a variety of contexts. He is based in Paris and can be reached at [email protected].
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