Violations of the Foreign Corrupt Practices Act

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Situation

In this case, people working for companies provided illegal incentives to foreign officials in an effort to open business development opportunities. Despite the transactions occurring outside the United States, and despite citizenship of perpetrators, US laws still applied. The US government alleged a bribery scheme and charged participants with violating the Foreign Corrupt Practices Act (FCPA), a serious white-collar crime.

All of the information in this case study comes from the Department of Justice press release and other articles referenced below.

State of the Industry

When transacting business in foreign countries, companies can face fierce competition. Local entrepreneurs may have better connections. They may want to exploit American business leaders, charging undisclosed fees to make connections that make business deals possible. American authorities, however, may construe such payments as bribery, in violation of US laws.

In many parts of the world, governments turn a blind eye to corrupt business practices. Sometimes, executives at national companies and government officials require businesses to participate in a “pay-to-play” scheme if they want to generate revenues. For example, an authority figure in a foreign country may require some kind of payment before issuing a contract, or issuing a permit that leads to business.

The United States and numerous other countries with highly developed economies have passed anti-bribery laws to criminalize illicit payments. Laws such as the FCPA seek to create a level playing field for business, while fighting crime and corruption. These laws fight money laundering and overseas graft. The FCPA is a wide-ranging law with broad latitude enabling United States Attorneys to prosecute crimes with any connection to the US. They bring many international transactions under the jurisdiction of the United States regardless of where the crimes take place.

Background and Analysis

Deck Won Kang moved to America from South Korea to pursue his dreams. He founded a couple of small businesses in New Jersey and took up residence in Englewood Cliffs. He intended on leveraging his contacts and relationships in the Korean defense industry with connections he quickly began making in the United States.

FCPA Case Example Number 1:

Kang’s business specialized in sensitive technology, enabling him to grow within his company’s particular niche. Competition for business soon grew fierce. Kang routinely lost out to larger competitors. They out-bid him for contracts. In an effort to improve his chances, Kang turned to an old friend. His friend worked as a government official, within the Defense Acquisition Program Administration (DAPA). DAPA was a division within South Korea’s Department of Defense. Kang curried favor and private information from his friend and co-conspirator by promising to compensate him after he resigned from public service.

From January 2009 through February 2013, Kang’s conspirator helped induce DAPA to approve and maintain contracts with Kang’s companies. As a result, Kang’s companies participated in South Korea’s initiative to update the country’s naval technology. In exchange for the introductions, Kang deposited $100,000 into a nominee bank account that belonged to his co-conspirator.

FCPA Case Example Number 2:

Joseph DeMeneses served as the Managing Partner of Global Strategy for Direct Access Partners, LLC. This company served as a broker-dealer registered with the Securities and Exchange Commission (SEC). Further, DeMeneses’ company served as a member of the Financial Industry Regulatory Authority, the New York Stock Exchange, and NASDAQ. Benito Chinea served as the company’s CEO.

According to the government, DeMeneses and Chinea devised and facilitated sham arrangements to conceal multi-million-dollar kickback payments to the Vice President of Finance at a large Venezuelan bank. In exchange for the kickbacks from DeMeneses and Chinea, the banks offered more business opportunities. DeMeneses and Chinea also orchestrated payments to Jose Hurtado for his role in helping them garner more business from the Venezulan banks. When authorities began to question the bribery, DeMeneses began to delete emails that memorialized communications he had with Venezualan banking officials.

FCPA Case Example Number 3:

Ericsson, a world leader in telecommunications headquartered in Stockholm, Sweden, frequently competed for large contracts against many other global corporations. Several executives at subdivisions of the company sought out illicit advantages. They participated in bribery schemes with local companies and government officials to obtain contracts.

Authorities charged that bribery represented a systemic scheme in at least five subdivisions of Ericksson from as early as 2000 through 2016. During those years, high-level executives at Erickson subdivisions violated FCPA laws in Djibouti, China, Vietnam, Indonesia, and Kuwait. The company and individuals conspired to engage in a longstanding scheme of offering improper incentives. They attempted to cover up the crime by falsifying books and records. As part of the scheme, officials turned a blind eye, purposely choosing not to implement reasonable internal accounting controls.

Ericsson conspired with third-party agents and consultants to directly pay tens of millions of dollars to foreign government officials. They also directed funds to off-the-books slush funds. These agents were often engaged through sham contracts and paid pursuant to false invoices, and the company camouflaged the payments in Ericsson’s books and records. Besides bribing officials with cash, the company offered posh gifts, underwrote elaborate trips, established nominee bank accounts, and succumbed to other schemes that would help the company secure business.

Ericsson’s corporate parent discovered the violations in 2016 and voluntarily disclosed its findings to the SEC.

The Foreign Corrupt Practices Act is a United States federal law that prohibits U.S. citizens and entities from bribing foreign government officials to benefit their business interests. The FCPA applies worldwide.

Any person who has a certain degree of connection to the United States and engages in corrupt practices abroad is susceptible to the FCPA laws. People must abide by the FCPA law whether or not they are physically present in the U.S. The FCPA law aims to prohibit companies and people that work in companies from influencing foreign officials with any personal payments or rewards.

The US government has a long reach. It investigates people and companies, regardless of influence. People in the three cases above sought an unfair competitive edge. They may not have garnered the business without bribing the officials. Despite being tolerated in other parts of the world, bribery can bring criminal charges in the US.

Kang pled guilty in December of 2020. As a result of his conviction, he faced a fine of up to $250,000 and five years of prison time, in addition to disgorgement of his profits.

Demenses’ and Chinea’s penalties included sentences of four years in prison. Their colleague, Hurtado got a three-year sentence pursuant to plea deals in 2015. They also faced fines and had to disgorge profits in excess of $18 million.

Ericsson received a deferred prosecution agreement because of its voluntary disclosure. The case served as a huge corporate distraction for several years. Ericsson paid tens of millions in legal fees and it lost thousands of hours of time from corporate executives. Many people in the company may not have participated in the scandal, but they got dragged into the government investigation. The company paid a fine of more than $1 billion to settle the case in 2019.

The Justice Department specifically announced that Ericsson could have mitigated damages even more had it implemented better compliance enforcement after the fact and more quickly disclosed the discovery of the legal actions to the Department of Justice.

Recommendation

People and companies must abide by the law or face consequences. Bribery, graft and other types of corruption have flourished as accepted business practices in many parts of the world for a long time. International mores and laws began changing decades ago and continue to evolve toward greater transparency in leveling the playing field of commerce.

Businesses that implement compliance practices and a commitment to transparency may lessen their vulnerability to criminal charges. By helping people learn more about acceptable practices under the FCPA, and making it clear that corruption will not be tolerated, companies may show a good-faith effort to comply.

Accepting or giving gifts, honorariums, paid vacations and tokens such as tickets to ball games, rounds of golf and fancy business dinners can lead people into trouble. Officials should have a policy to account for such transactions, and the company should document the policy in its internal Code of Conduct.

Any action that leads to personal enrichment unrelated to direct compensation from a company as a result of employment can violate the basic principles of the FCPA. A prosecutor or government regulator may bring charges for a single violation. Companies expose themselves to higher levels of risk when such practices are protracted and systemic.

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