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What American Social Entrepreneurs Need to Know About the Foreign Corrupt Practices Act

July 22, 2011

With new allegations emerging every day, including the arrest of former chief editor Rebekah Brooks, the News of the World phone hacking scandal is still heating up.  It is alleged that, among other things, newspaper employees bribed U.K. police officers to obtain information for publication in the paper.

The experts are now weighing in on whether they think News Corp., a corporation that is traded in the U.S., may be held liable under the U.S. Foreign Corrupt Practices Act (FCPA) for the newspaper’s actions.  (News of the World is owned by foreign company News International, which is a News Corp. subsidiary.)  Attorney and FCPA expert Richard L. Cassin thinks there “probably is” FCPA jurisdiction over News International and the alleged actions by News of the World, and law professor Mike Koehler has said “I would be very surprised if the U.S. authorities don’t become involved in this [News International] conduct.”).  With the scandal still brewing, I thought this would be a good opportunity to post about a topic that social entrepreneurs need to know about.

What it Says

The FCPA is a U.S. law that applies to all entities, for-profit and non-profit, that are either organized in the U.S. or have their principal place of business in the U.S.  This includes corporations, limited liability companies and nonprofit organizations formed in the U.S.

This law prohibits entities from giving anything of value to a foreign official for the purpose of influencing a foreign government to help it obtain or keep business.  It also applies to payments made to an employee of a public international organization such as the United Nations. 

When the FCPA Applies to You

If your venture is incorporated in the U.S. and operates abroad, you are required to comply with the FCPA.   But even if your venture was created in another country, it may still be subject to the FCPA.  For example, if you have a foreign company that is owned by an American company or nonprofit, your organization is also subject to the FCPA.

This is why, in the case of Rupert Murdoch’s news empire, it won’t be enough for News Corp. to prove it was not aware of the alleged bribery at News International.  As was demonstrated in the Securities and Exchange Commission’s 2004 case against U.S. pharmaceutical company Schering-Plough, a U.S. parent company can be hauled into court for bribes paid by its foreign subsidiary – even when there is no evidence that the U.S. parent company knew about the bribes.

What You Need to Know

Based on the wide net cast by the FCPA, there are plenty of social enterprises that are subject to the FCPA.  If you are a management employee in one of these ventures, you need to understand what your obligations are under the FCPA.

To begin with, it is probably obvious that you’re not supposed to pay a bribe to a foreign official in exchange for a government contract.  But the FCPA prohibits much more than this.  It also prohibits you from bribing an official in exchange for something that would bring you, or keep you from losing, business.  In the case of News of the World, for example, it is enough that reporters paid police for information that would allow the paper to publish juicy tidbits that would presumably result in increased newspaper sales.  So, whether you’re looking for a government contract or you’re just trying to increase your business from elsewhere, payments to foreign officials to help you accomplish your goal are illegal.

The Exceptions

Of course, as a social entrepreneur operating in a foreign country, you will likely encounter plenty of legitimate situations that require you to pay a foreign official to do something that will eventually help your business.  For example, it is entirely likely that you will need to apply for permission to operate a business, and there may be an application fee attached.  The FCPA contains an exception for payments made  to “facilitate” or “expedite” a “routine governmental action.”  This exception allows U.S. businesses to pay the fees associated with typical government services like processing a visa, remitting taxes, and supplying electricity.

The Gray Areas

But as you might imagine, the “routine governmental action” exception becomes gray around the edges.  What about paying an official something extra to do what he or she should be doing anyway?  And what about paying an official to move an application to the top of a pile, essentially bribing him to do something he was supposed to do, but faster than it would otherwise have been done?  For a small social enterprise trying to prove its model, it may not be feasible to wait six months for a business registration application to be processed.

There is certainly room to argue over the application of the FCPA in reality.  But what’s clear is that for social entrepreneurs doing business in countries where corruption is the way things get done, running afoul of the FCPA presents a very real risk.

Note: This article is not intended as legal advice and does not create an attorney-client relationship.  If you are seeking legal advice, you should contact an attorney for advice regarding your specific situation.

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