The Foreign Corrupt Practices Act (FCPA) holds individuals and companies liable for failing to maintain adequate accounting and financial data about their international transactions (books and records provisions) and for the bribery of foreign officials undertaken by themselves, their subsidiaries and agents thereof (anti-bribery provisions). Penalties for violating the statute range from fines and disgorgement to jail time for executives. And with increasing enforcement of the FCPA by both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), companies and organizations lacking adequate compliance programs are at more risk for prosecution than ever before. Additionally, the DOJ has said that it will vigorously prosecute not only companies directly violating the statute, but will continue to hold parent companies liable for the actions of their subsidiaries and agents. This intent is also born out in the 2012 resource guide put out jointly by the DOJ and SEC.
Companies may be held liable for the acts of their subsidiaries for anti-bribery violations where either (1) the parent directed the subsidiary's illicit activities, or (2) under "traditional agency principles." Though highly fact intensive, an agency relationship will likely be found where the parent and subsidiary agreed for the subsidiary to act on the parent's behalf, and the parent accepted the benefit of those actions. Additionally, parent companies may be held liable for the books and records violations of their subsidiaries where they are majority stakeholders in the entity.
Within the past 18 months, two prominent cases based in large part upon subsidiary liability are those of Smith & Nephew plc and of Tyco International Ltd. Smith & Nephew, the parent company ended up paying $5.4 million for improper bribes paid by its subsidiary to Greek officials. Tyco International, which faced charges for both books and records violations and for bribery ultimately settled with the SEC and DOJ for $26 million. In particular, the bribery charges concerned improper payments made by a subsidiary to Turkish officials. As these cases illustrate, ignoring the FCPA can have long term consequences and high costs – both financial and reputational. To avoid such issues, companies are encouraged to design and implement robust compliance programs, to self-disclose issues when they are discovered, to cooperate with subsequent government investigations and to quickly remediate any issues.
The full article was originally published on March 31, 2013 through Thomson Reuters in Practical International Corporate Finance Strategies.
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