Oakland University
Friday, November 21, 2014

November 2014 Newsletter: Executive-in-Residence News: Butzel Long: "The Foreign Corrupt Practices Act and the Automotive Industry: Why It Should Be a High Priority and How to Manage the Risk"

The automotive industry is no stranger to Foreign Corrupt Practices Act (“FCPA”) enforcement activity. Indeed, the most significant prosecution in the automotive industry generated a great deal of attention and massive fines. Overall, though, the government’s pursuit of automotive-related companies for FCPA violations has been occasional and moderately disorganized, unlike the large-scale antitrust investigation of automotive supply chain companies over the past several years. We believe this will soon change. Companies in this industry would be well-advised to examine their internal ethics and compliance functions, implement recommended changes now, and immediately address potential issues that come to light from compliance efforts.

The Provisions and Purposes of the FCPA

The FCPA prohibits two kinds of conduct: bribery and certain kinds of inadequate internal controls. 15 U.S.C. §§ 78dd-1 et seq. The anti-bribery law is relatively straightforward and very broad. The law covers any company that registers securities in the U.S. or must file reports with the U.S. Securities and Exchange Commission (“SEC”), is organized under U.S. or state law, or otherwise maintains a presence in the U.S., as well as individuals who are U.S. citizens or residents.1 If covered by the law, a company or individual cannot make, promise, or authorize a third-party to make or promise a payment or a transfer of a “thing of value” to a foreign official under specified circumstances. In particular, the law prohibits payments or gifts if they are in any way intended to secure an improper business advantage or induce the official to take official action or forbear in taking official action so any person or company can get or retain business. The law covers any act that might further a corrupt payment or a promise to pay – including any interstate use of wires that took place in the U.S.

The FCPA’s internal controls provisions are even more comprehensive. They apply to corporations (and their agents) and focus on (1) books and records and (2) internal accounting controls. Accounting records must show the transactional business of the corporation accurately and with reasonable detail, and internal controls must be designed and maintained in a way that could help detect FCPA violations. Even if no corrupt payments are actually made, deficient record-keeping practices can support a violation of the law.

The FCPA authorizes harsh penalties. Each violation can be punished by a civil penalty of up to $10,000, a criminal fine of up to $250,000, and up to five years in prison. One must keep in mind that an investigation could unearth multiple payments: a kickback arrangement where individual payments are inflated by a small percentage might represent several separate violations. Most FCPA sentences for individuals have ranged from probation to up to two years in prison, but some executives have received much longer sentences; A former telecommunications executive was sentenced to a fifteen-year prison term in 2011 for FCPA violations.

Summary of Significant FCPA Activity in the Automotive Industry
Risk Factors in the Automotive Industry

The automotive industry is ripe for increased FCPA enforcement activity. The international nature of the business means that companies and their agents routinely come into contact with foreign officials, and foreign governments are potentially significant customers. In addition, the very high level of antitrust enforcement activity among suppliers means that federal prosecutors are paying more attention to the industry, demanding more robust business ethics and compliance programs, and gathering enormous amounts of information from significant participants in the industry through subpoenas and searches that support the antitrust investigation. Finally, internal investigations that arise from a different concern, such as the auto parts antitrust information, can yield information about other challenges, and more robust ethics and compliance generally translates into a higher degree of reporting of any activity that raises ethical or compliance concerns, and generally provides easier reporting mechanisms (such as anonymous whistleblower hotlines).

Five Things Companies Should Do to Address the Challenges Presented by the FCPA

Maintaining an effective compliance program can pay big dividends. Corporations that identify challenges early and voluntarily disclose them are much more likely to get favorable treatment from prosecutors. The United States Sentencing Guidelines that guide federal criminal sentencing specifically note that maintaining an effective ethics and compliance program can affect how a corporation is treated at sentencing. USSG §8B2.1 (detailing basic features of an effective ethics and compliance program); USSG §8C2.5(f)(an effective ethics and compliance program can reduce a corporation’s culpability for criminal conduct). Companies in the automotive industry should undertake the following steps to help limit the risks associated with acts that might violate the FCPA:
Butzel Long has the industry expertise and white collar criminal defense experience, in both Detroit and Washington, D.C., to advise and defend companies and individuals with any of the challenges described above.

1The FCPA is generally acknowledged to have extensive extraterritorial application, and numerous individuals who are not U.S. citizens or residents have been charged under the act. Any use of wires that comes into contact with the U.S. banking system, for example, may support jurisdiction under the FCPA.

2Deferred prosecution agreements avoid a criminal conviction but may involve payments referred to as a “criminal penalty.”
The automotive industry is no stranger to Foreign Corrupt Practices Act (“FCPA”) enforcement activity. Indeed, the most significant prosecution in the automotive industry generated a great deal of attention and massive fines. Overall, though, the government’s pursuit of automotive-related companies for FCPA violations has been occasional and moderately disorganized, unlike the large-scale antitrust investigation of automotive supply chain companies over the past several years. We believe this will soon change. Companies in this industry would be well-advised to examine their internal ethics and compliance functions, implement recommended changes now, and immediately address potential issues that come to light from compliance efforts.

Created by Joan Carleton (jfcarlet@oakland.edu) on Friday, November 21, 2014
Modified by Joan Carleton (jfcarlet@oakland.edu) on Friday, November 21, 2014
Article Start Date: Friday, November 21, 2014