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Why Every EB-5 Issuer Needs an FCPA Compliance Program

by Charles Kaufman & Jor Law

The Foreign Corrupt Practices Act (FCPA) forbids U.S. companies from using bribery to further their business interests abroad. When participants in EB-5 projects raise money abroad, if they or their agents make any kind of corrupting payment or gift to any person who fits a broad definition of “foreign official,” they may face severe penalties – including fines and imprisonment. Because EB-5 offering activities carry a risk of FCPA violation, and the severity of punishment for the company and its officers, directors and managers depends in part on whether the company had an effective program in place to comply with the FCPA, all EB‑5 issuers should take the time to educate themselves about FCPA and implement an effective compliance plan.

Background

Most developed countries have long outlawed bribery within their own borders, but few, if any, had laws preventing their citizens from paying bribes when they went abroad. The United States broke from this legal tradition and adopted the FCPA in 1977 in reaction to revelations of widespread bribery of foreign officials by U.S.-based corporations, including bribery of a sitting Japanese Prime Minister by Lockheed Corporation. At first, many within and without the United States saw the law as a naïve effort that would benefit only competitors from countries less shy about dirtying their hands to gain global economic share. But following the Asian financial crisis of the 1990s, it became evident that, in the long term, a corrupt business climate harms all countries concerned, in addition to frustrating international efforts to foster legitimate economic growth in less developed countries. Some 41 countries have now adopted laws similar to the FCPA under a convention established by the Organization for Economic Cooperation and Development (OECD). Most notably, in 2010 the United Kingdom adopted and began enforcing its Antibribery Act, which is arguably more stringent than the FCPA. Forty years after its adoption, FCPA is not just the law of the land in the United States; it has become an international standard.

Enforcement Under the DOJ and SEC

The U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice share responsibility for enforcing the FCPA. Most enforcement takes the form of criminal prosecution by the DOJ seeking fines and prison sentences. The SEC is limited to civil enforcement actions, and often refers its findings to the DOJ for joint investigation and litigation. The FBI, which is a division of the DOJ, has a team of agents dedicated specifically to investigating FCPA violations.

Since 1991, the Federal Sentencing Guidelines of the U.S. Department of Justice have spelled out the elements of an “effective compliance program.” The guidelines are intended to prevent bribery, but carefully following the guidelines can also reduce or eliminate FCPA culpability for a company and its officers if bribery nonetheless occurs within the organization. In November 2012 the SEC and DOJ jointly issued the Resource Guide to the U.S. Foreign Corrupt Practices Act, which provided much needed additional guidance. Of particular importance to EB-5 issuers, which tend to be small and relatively simple organizations, the Resource Guide counsels tailoring a compliance program to the nature of the business and its real risks.

Enforcement Initiatives

The DOJ has launched targeted initiatives in a number of industries after observing common patterns of foreign corrupt activity, including defense, aerospace, financial services, retail, oil and gas, pharmaceuticals and medical devices. For the last three years the SEC has been coordinating with USCIS in overseeing EB-5 offering activity, and one should assume that any observed pattern of FCPA violation in the EB-5 industry could lead to a similar enforcement initiative. In addition, legislators have sometimes proposed adding specific FCPA provisions to the EB-5 program.1 As a result, EB-5 program participants who ignore the FCPA do so at their peril.

What Does the FCPA Prohibit?

In general, the FCPA prohibits any U.S. company or person from corruptly giving, promising, offering or authorizing payments of money or anything of value to a foreign official, political party or candidate with the intent to influence that official in his or her official capacity or to secure an improper advantage in order to obtain or retain business or to direct business to any person.

By covering “anything of value” in addition to cash payments, the law may prohibit gifts and even lavish entertaining or a donation to an official’s designated charity.

The breadth of the definition of “government official” was demonstrated in 2011, when Johnson & Johnson settled civil and criminal FCPA enforcement actions alleging that it gave cash and gifts of “inappropriate travel” to doctors and administrators employed at state-run hospitals and healthcare facilities in Greece, Poland and Romania to encourage their selection of Johnson & Johnson pharmaceuticals and surgical implants. Because the state owned the healthcare facilities, doctors and administrators employed there were deemed government officials.

Risks for EB-5 Issuers

Focus on Contractors and Agents

The foreign activities of EB-5 issuers consist of raising capital and facilitating the immigration of foreign nationals. This usually involves engaging a local agent who is licensed or authorized by the local government to solicit and assist investors and may involve government permissions in matters such as exit visas and currency transfers. It is not uncommon for local government or party officials to make appearances at EB‑5 marketing events or to be photographed with project sponsors.

The FCPA primarily raises two questions for EB-5 issuers. First, is the issuer directly making a corrupting payment when paying its agents and representatives on the issuer’s behalf? Second, when hiring a local agent or other contractor, is the issuer authorizing the contractor to make a corrupting payment?

Concerns have been raised as to whether government licensing of offshore placement agents or emigration agents would make them “government officials” and prohibit an EB-5 issuer from paying fees to emigration agents. Simply being licensed by the government should not have this effect. However, it remains important to determine whether the agent’s business entity is majority owned by the government, the involvement of political party officials, and whether fees could be construed as illicit payments for official action rather than fees to the agency for legitimate services. The following factors may be helpful in confirming that retention and payment of a foreign agent for bona fide services is not, in itself, a violation of FCPA:

  • If the payment of the agent is permitted under the written law of the foreign country, it is not a violation of FCPA.
  • If the payment of the agent is openly made and reported and is transparent, it is not made “corruptly” and does not violate FCPA.
  • If the services the agent provides are limited to soliciting investors, facilitating their investment and assisting in document preparation, the agent’s fees likely are not made to procure “an official act or decision” or “improper advantage” in violation of FCPA.

The bigger risk for EB-5 issuers is that if the agent pays money or gives gifts to government officials in the course of its engagement, the U.S. company may be deemed to have authorized the agent to pay bribes on its behalf in violation of FCPA. For example, a U.S. company would violate the FCPA if it retained an agent to perform any of the following actions on its behalf:

  • The agent makes an improper payment to secure an exit visa for an investor
  • The agent pays an official to grant permission to market the EB-5 offering in a particular territory
  • The agent pays an honorarium or gives a gift to a local official for the official’s appearance at a marketing event or a “photo opportunity” at which the official expresses government approval or endorsement of an EB-5 investment opportunity
  • The agent bribes or arranges for the bribery of banking or customs officials to circumvent currency controls.

Recipe for an Effective FCPA Compliance Program for EB-5 Issuers

The most recent guidance from the FCPA enforcement agencies on what they consider an effective compliance program appears in the Resource Guide as the 10 “Hallmarks of Effective Compliance Programs.” These hallmarks should be a starting point in designing your company’s program.

While the SEC and DOJ expect a large multinational corporation to have a rigorous and customized compliance and ethics program. Small companies – which would include most EB-5 issuers – may have a simpler and less formal program that is nonetheless recognized as “effective.” For example the smaller company need not have a separate compliance staff, it can provide training in informal staff meetings, and can even model its compliance program on existing programs and best practices of other similar organizations. The following nine[2] elements are based on the Resource Guide’s “Hallmarks” that are most relevant to the typical EB-5 issuer:

  1. Commitment from Senior Management and a Clearly Articulated Policy Against Corruption. Most EB-5 issuers are organized and led by one or two principals. These individuals must have a lead role in developing and communicating the compliance program and set a clear “tone at the top.” A company’s employees or independent contractors may look for signs or signals that the compliance program is purely for show. The company’s leaders must avoid any ambiguity and make it clear that avoidance of corrupt activity – and a determination to follow all laws and regulations – reflects their wishes and is at the core of the company’s culture.
  2. A Written Compliance and Ethics Program. The FCPA compliance policy underlying the program should be in writing, it should be part of the company’s overall code of conduct and ethics, and it should be included in the employee handbook or otherwise made easily available. The written policy can be brief, but should clearly state the nature of the FCPA’s prohibitions and the company’s commitment to abiding by them.
  3. Oversight, Autonomy, and Resources. The company must assign responsibility for the compliance program to specific individuals within an organization, and ensure they have the appropriate authority and sufficient resources for the program to operate effectively. For a small organization like the typical EB-5 issuer, with few layers of management, no dedicated compliance officer is needed. The active engagement of the principals or a chief financial officer or controller may suffice. As the organization grows, it needs to periodically re-evaluate whether it needs to increase the oversight function to maintain an effective program.
  4. Due Diligence Before Engaging Officers and Agents. Because EB-5 issuers are especially exposed to FCPA risk in engaging foreign agents and independent contractors, this will be a key feature of any EB-5 issuers compliance program. The compliance program should provide that the organization will not engage an officer or agent that it knows, or should have known, has a history of illegal or corrupt activity. EB-5 issuers in particular should develop a due diligence process to be followed before engaging any foreign contractors or agents, and agreements with foreign contractors should have covenants requiring FCPA compliance.
  5. Training and Continuing Advice. All officers and staff who interact with foreign officials should receive FCPA training on an annual basis and provide certification that they fully understand the requirements of the FCPA and the company’s compliance program. In small organizations, like most EB-5 issuers, training can be informal, but it must take place and the company must record that it has taken place. Third party providers offer generalized training materials in FCPA, but the key will be training in the specific risks for EB-5 issuers; for example, how to interact with local government officials when marketing an investment, how to conduct due diligence on a potential agent or independent contractor, and how to respond when a contractor proposes an improper payment to expedite a transaction. All officers and staff who interact with foreign officials must know whom they should freely and safely contact for further guidance if they have any questions about the compliance program.
  6. Incentives and Disciplinary Measures. The organization must be consistent in enforcing its compliance program. The structure of a typical EB-5 issuer does not call for a detailed system of incentives and disciplinary measures. But the company should at a minimum ensure that it does not create financial incentives for success “at any cost,” which can encourage circumvention of the compliance program. Nor should the company penalize an officer or employee whose adherence to the program results in a lost opportunity that was only available through payment of a bribe.
  7. Risk Assessment. The compliance program should require, at least once a year, a top-level reassessment of the organization’s risk of FCPA violations. Has the nature or location of the company’s activities created new risks or increased existing risks? Has the company switched from acting directly to using independent contractors, or vice versa? If the company is not proactive in addressing such changing risks, its compliance program will not be viewed as effective.
  8. Confidential Reporting and Internal Investigation. For most EB-5 issuers that have only one or two layers of management, a confidential reporting system may not be practical. Larger organizations may need to have a third-party “hotline” or internal ombudsman to satisfy this element of the program. But even the smallest EB-5 issuer should ensure that an employee or contractor can raise concerns about improper payments without fear of retribution or reprisal, and if such a report occurs the company should ensure that it investigates the issue fully and documents its response.
  9. Continuous Improvement: Periodic Testing and Review. EB-5 issuers are unlikely to require internal audits or testing procedures (such as having an investigator pretend to be a bribe seeker). All that is necessary here is an acknowledgement that the compliance program is never perfect or complete, and periodic, documented steps to evaluate and improve it. This should include monitoring emerging best practices among other players in the industry. According to the Resource Guide, “Although the nature and the frequency of proactive evaluations may vary depending on the size and complexity of an organization, the idea behind such efforts is the same: continuous improvement and sustainability.”[3]

Due Diligence Regarding Third Parties – a Key Concern

For most EB-5 issuers, the most important part of the ethics and compliance program will be conducting due diligence before engaging contractors. Before engaging any foreign contractor, the company should follow pre-established due diligence procedures.

These procedures should include a questionnaire completed by the employee proposing the contract, designed to assure that the contract is for legal, bona fide services and to identify “red flags” for corrupt intent, including the following warning signs:

  • The contractor’s owner or employee is a close relative of a government or party official who can aid the contracting company
  • The contractor’s duties are vaguely defined
  • The contractor lacks demonstrable expertise to perform the services contracted for
  • The contractor’s compensation appears greater than the value of the services described in the contract
  • The contractor will not agree to certify that it will not make a corrupting payment.

Contracts should make it clear that a violation of FCPA or other local or international anti-bribery laws is a material breach of the contract, and should contain a covenant that the contractor will, on request, certify that it has committed no such violation.

It should be noted that the FCPA does have an exception for “grease payments” – small payments to facilitate routine government action. This provides some relief in countries where petty bribery affects even routine activities like getting luggage through customs. The dividing line between grease payments and actual corruption is itself slippery, so an effective FCPA policy should require any employee considering making a grease payment to consult with the company’s compliance officer first.

Gift-Giving and Entertainment

Keep in mind that gifts in general are not prohibited; only those that are disguised bribes are banned. The distinction is often subjective, but in the Resource Guide the DOJ and SEC have clarified that they are not concerned with modest gifts unless they are part of a systemic or long-standing course of conduct that evidences corrupt intent. The Resource Guide states “As part of an effective compliance program, a company should have clear and easily accessible guidelines and processes in place for gift-giving by the company’s directors, officers, employees, and agents.”

The Resource Guide provides examples and further guidance on the line between permissible and prohibited gift-giving and entertaining, which EB-5 issuers should use to develop their own internal policies.

Accounting Provisions – Applicable Only to Public Companies

In addition to the anti-bribery rules, the FCPA contains accounting provisions that apply to public companies. Companies with a class of securities registered under the Securities Exchange Act of 1934 must maintain sufficient control over their assets to prevent any authorized payment. The accounting provisions will generally not apply to EB-5 issuers, but that does not mean that poor accounting controls will excuse officers or directors when an employee or contractor uses company assets for bribery. It means only that the lack of control will not, in itself, be a separate violation of law.

Conclusion

An issuer concerned about the propriety of a payment or gift should take no comfort from the fact that such activity seems to be a common local practice. “That’s the way everybody gets things done over there” has never been an effective defense under FCPA. From its inception, the law has sought to change the way things are done, even in countries where corruption has become deeply rooted in the business and political culture, and even at the cost of U.S. companies losing business in the short term to competitors from countries less concerned about fostering corruption. Well-publicized enforcement actions have been the regulators’ best educational tool for FCPA. EB-5 issuers who want to avoid serving as teaching models should develop an effective compliance program before hiring offshore agents or leaving U.S. shores.

Additional Resources

In addition to consulting with compliance experts, EB-5 issuers can find additional information in the DOJ’s Foreign Corrupt Practices Act Resource Guide at http://www.justice.gov/criminal/fraud/fcpa/guidance/guide.pdf and on the “Spotlight on FCPA” section on the SEC’s website at http://www.sec.gov/spotlight/fcpa.shtml.

1 For example, the proposed American Investment and Entrepreneurship and Investment Act of 2015 (H.R. 616) would make the FCPA applicable to the Program. It is likely that this language reflected a concern that corrupt foreign officials might use the proceeds of corruption to invest under the EB-5 Program and become U.S. residents.

2 One of the ten “Hallmarks” in the Resource Guide involves diligence and integration procedures when acquiring foreign businesses. This will seldom be relevant to EB-5 issuers.

3 Resource Guide, p. 62.

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