Risky Business in Latin America and the FCPA

Monday, February 27, 2012

By Karen Soto

Latin America is an emerging market which offers a vast array of appealing business opportunities. Free trade agreements signed by the US government[i], and tax exemptions in the foreign country, are promoters of international business. However, Latin American countries have a high level of corruption, as determined by the Transparency International’s Corruption Perception Index from 2010.[ii]

The enforcement efforts of the FCPA

The predecessor of international legislation against corruption is the Foreign Corrupt Practices Act[iii] (“FCPA”), which makes it unlawful for any issuer, domestic concern, or any entity or individual, and certain foreign issuers of securities, using interstate commerce, to make a corrupt payment to a foreign official for the purpose of obtaining or retaining or directing business to any person. Since 1998, it also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the US. The FCPA also requires companies whose securities are listed in the US to meet its accounting provisions.[iv]

American legislation against corruption has an extensive jurisdiction and the US Government is aggressive when charging under the FCPA[v]. Millions of dollars in criminal fines are recovered under this legislation because of the damage it signifies to public confidence in the American system. It is not uncommon for companies under investigation for violations of the FCPA to be fully cooperative and agree to plead guilty of the charges.

In a recent case, Bridgestone Corporation pled guilty, and paid a $28 million criminal fine for its role in conspiracies to rig bids and make corrupt payments to foreign government officials in Latin America.[vi] Misao Hioki, a Japanese citizen, General Manager of Bridgestone’s International Engineered Products Department was sentenced to two years in prison in 2008 after pleading guilty to the conspiracies in this case.[vii]

Recently, FCPA enforcement efforts have seen the first company to be tried and convicted on FCPA violations. Lindsey Manufacturing (“Lindsey”), a California company, was convicted for its role in a scheme to pay bribes to Mexican government officials at the Comision Federal de Electricidad (“CFE”), a state-owned utility company responsible for supplying electricity in Mexico.[viii] Along with the company, convictions followed against the executives of Lindsey, and the directors of the intermediary Mexican company hired by Lindsey to obtain contracts from CFE.

The International efforts against corruption

The Organization of Economic Cooperation and Development Convention on combating bribery of Foreign Public Officials in International Business Transactions[ix] (“OECD Convention”) followed the US initiative against corruption. To implement the OECD Convention, the international community levels the field in business practices, vigorously trying to enact strong domestic anti-corruption legislation. For instance, Mexico –who, as of 2009 is the 12th biggest economy among OECD members and whose 14% of outward flows of foreign direct investment goes to Latin America[x], for construction and communications, both corruption-prone industries-, in implementing the OECD Anti-bribery Convention, has raised the maximum fine for foreign bribery, implemented several changes to its criminal procedure, and introduced an Anti-corruption Bill to Congress in March 2011. The bill provides administrative sanctions for Mexican nationals who bribe Mexican or foreign public officials, allowing for concurrent criminal proceedings against the same individuals for those conducts.[xi]

FCPA due diligence in Latin America: What can you do?

Where corruption is present, the situations which can run afoul of the FCPA are numerous.[xii]  Therefore, to do business in Latin America, companies need to take extra care to ensure a current and aggressive compliance program, which should include:  

  • FCPA assessments to determine high-risk areas and reputational due diligence investigations on high-risk third party agreements
  • To shield against undisclosed business practices that result in violations of the FCPA or Latin American anti-corruption regulations, purchase price adjustment clauses should include compliance with FCPA due diligence and local anti-corruption legislation
  • Requirements that the seller company will be responsible for costs of investigation, remediation, fines, penalties, and such, imposed by the US or the foreign regulators, and
  • A continuing operating compliance department, to follow and conform with the FCPA books and records and internal controls requirements, which is most important when dealing with offshore bank accounts and foreign currency.

Finally, and most importantly, it is advisable to have a lawyer on your side who knows about social customs and business protocol in Latin America in order to make your experience a profitable one.

[i] CBS News, Obama signs 3 free trade deals (October 21, 2011), http://www.cbsnews.com/8301-250_162-20123685/obama-signs-3-free-trade-deals/. See also: Jim Wy, Colombia hails signing of free trade deal with U.S. (October 21, 2011) http://www.miamiherald.com/2011/10/21/2465633/colombia-hails-signing-of-free.html. President Barack Obama signed free trade agreement with Colombia, Korea and Panama that could be worth billions to American exporters and create tens of thousand of jobs in both the Andean nation and the US.

[ii] Transparency International is a non-governmental organization dedicated to monitor and publicize corporate and political corruption, producing each year since 1995 the Corruption Perceptions Index (“CPI”). This tool puts corruption in the International policy agenda and is determined by expert assessments and opinion surveys. The latest CPI was launched 26 October, 2010.

[iii] Foreign Corrupt Practices Act, Pub. L. 95-213, 91 Stat. 1494 (1977), codified as amended at 15 U.S.C. §§ 78dd-1 to -3, 78ff as amended by Foreign Corrupt Practices Act Amendment of 1988 (part of Omnibus Trade and Competitiveness Act of 1988) Pub. L. 100-418, 102 Stat. 1107, 1415 (1988) and International Anti-Bribery and Fair Competition Act of 1998, Pub. L. 105-366, 112 Stat. 3302 (1998).  28 C.F.R. Part 80.

[iv] 15 USC §78m. Accounting provisions are: to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls.

[v] In 1998 the US ratified the Organization of Economic Cooperation and Development Convention on combating bribery of Foreign Public Officials in International Business Transactions (“OECD Convention”), and amended the FCPA to impose extraterritorial jurisdiction over US companies and nationals and territorial jurisdiction over non-US companies and nationals. An example of the ample jurisdiction the US has can be seen in the Siemens case (2008 WL 7836143 (D.D.C.) United States District Court, District of Columbia), where one of the counts the SEC alleged against Siemens based its jurisdiction on a tangible connection to the US: a US correspondent account used for clearing US dollar transactions. Correspondent accounts are not controlled by the parties to a funds transfer and are not apparent to them either. This would satisfy the contact with the US territory requirement in the FCPA provisions that non-US persons while in the territory of the US, corruptly make use of means of interstate commerce or any other act in furtherance of bribery.

[vi] Office of public Affairs, Department of Justice, Bridgestone Corporation agrees to plead guilty to participating in conspiracy to rig bids and bribe foreign government officials, 11-1193 (September 15, 2011) http://www.justice.gov/opa/pr/2011/September/11-at-1193.html

[vii] Department of Justice, Japanese Executive Pleads Guilty, Sentenced to Two Years in Jail for Participating in Conspiracies to Rig Bids and Bribe Foreign Officials to Purchase Marine Hose and Related Products, 08-1084 (December 10, 2008) http://www.justice.gov/opa/pr/2008/December/08-at-1084.html

[viii] United States v. Aguilar, Lindsey Manufacturing Company, Keith E. Lindey, Steve K. Lee, 783 F.Supp.2d 1108 (2011)

[ix] 37 I.L.M. 1 (1998)

[x]  Phase 3 Report on Implementing the OECD Anti-bribery Convention in Mexico (October 2011) p 7

[xi] Id. Phase 3 Report

[xii] On March 19, 2007 Chiquita Brands International Inc. (“Chiquita”) pleaded guilty in a US federal court and agreed to pay a $25 million fine, for engaging in transactions with a specially-designated global terrorist organization, the United Self-defense forces of Colombia (Autodefensas Unidas de Colombia “AUC”). I analyzed in an essay how Chiquita’s transactions with the AUC, could be triggered by the FCPA legislation. By the news, it was voiced that Colombian public officials were part of, or controlled, the AUC. Assuming the media information was truthful, Chiquita’s payments might have ended in Colombian government hands.  Highly corrupt countries were power is not certain to be wholly in the government, where terrorists and government mingle together, can create issues for companies making business in these.