The European public procurement market is enormous. Governments in the European Union (EU) and in non-EU member states in Europe will invest approximately €4trn in government contracts in 2011. This is also an intriguing market environment for investors outside of Europe, which, as of recently, include those from the United States particularly.
Despite these opportunities, Transparency International, the leading global organisation tracking corruption trends, ranks various Central and Eastern Europe (CEE) countries particularly poorly on the issue of corruption among politicians and public officials. This presents significant risks for US companies doing business in the CEE when competing for government contracts and otherwise interacting with local officials.
ANTI-BRIBERY ENFORCEMENT IS RAPIDLY INCREASING
At the same time, anti-bribery enforcement is rapidly increasing in the CEE. This enhanced enforcement atmosphere emanates broadly from two directions: firstly, many countries in the CEE are currently tightening their national anti-corruption laws when it comes to the bribing of government officials. Secondly, countries outside the CEE have increased their efforts to enforce (national) anti-corruption laws over those companies bidding for government contracts in the CEE where the respective countries’ authorities have jurisdiction.
The most prominent example in this regard applies to the United States in connection with the US Foreign Corrupt Practices Act (FCPA). Although the FCPA was enacted in 1977, it has only recently gained momentum. Its objective is to create a level playing field for US companies operating at a disadvantage compared to foreign companies who routinely pay bribes. In 2010 and 2011 alone, the US Department of Justice (DoJ) and the Securities Exchange Commission (SEC) aggressively pursued alleged violations and charged dozens of companies with FCPA-related offences; as a result, they collected billions of dollars in penalty payments. In today’s environment of enhanced enforcement of anti-corruption laws, every company doing business in the CEE must thus be aware of the larger trend of vigilant FCPA enforcement.
WHY SHOULD I BE AFFECTED BY ANTI-CORRUPTION EFFORTS OF THE US? THE SCOPE OF THE FCPA
There is a popular misconception that the FCPA only applies to US companies. In fact, the FCPA has a broad so-called ‘extra-territorial jurisdictional reach’ and can thus cover both US and non-US entities. In a nutshell, the FCPA prohibits a broad range of persons and businesses from making – or offering to make – a corrupt payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA also applies to foreign persons and companies that engage in any act in furtherance of making such a corrupt payment while in the US. In addition, the FCPA also stipulates that companies with securities listed in the US must comply with provisions on record keeping and internal accounting controls.
The FCPA’s extra-territorial jurisdictional reach is, in particular, reflected in its broad provisions, under which the actions of foreign subsidiaries can result in FCPA liability to a parent company. The FCPA may thus be applicable also in cases in which the prohibited activity takes place entirely outside of the US. Furthermore, it is essential for any US company to remember that the actions of third parties on its behalf (ie indirectly through agents, representatives or distributors) can lead to exposure to major liability, if those third parties act corruptly in violation of applicable law.
The last year has impressively proved that the FCPA’s extra-territorial jurisdictional reach is anything but mere theory. The DoJ and the SEC made clear that the FCPA’s extra-territorial jurisdiction is extremely broad. The result: various settlements with the DoJ by way of so-called deferred protection agreements (DPA) involving several companies suspected of corruption overseas:
- In United States vSiemens Aktiengesellschaft , the Germany-based Siemens AG’s status as an ‘issuer’ was used as the basis for asserting jurisdiction over the company; Siemens AG was a non-US ‘issuer’ listed on the New York Stock Exchange (NYSE) and agreed to pay an astounding $800m due to FCPA violations.
- In United States vSSI International Far East Ltd , a non-US company whose relevant employees were located outside the US agreed to pay a $7.5m penalty for violations of the FCPA. The DoJ alleged that SSI Korea (a subsidiary of a US company) was subject to the FCPA when it transmitted requests to the US parent company for approval, along with requests to wire transfer funds to make illicit payments. Thus, the basis for US jurisdiction was merely the fact that ‘transmitted requests’ had been sent to persons located in the US.
- In United States v Alcatel-Lucent, SA , a Paris-based company agreed to pay a total of $137m in civil and criminal fines for violations of the FCPA for actions in Costa Rica, Honduras, and elsewhere. Although none of the Alcatel entities are incorporated in the US, the DoJ asserted jurisdiction, because Alcatel was registered with the SEC and traded its securities on the NYSE.
- In United States v AGCO Ltd , the US-based AGCO Corporation paid nearly $20m in penalty payments to resolve charges stemming from allegations that its wholly-owned subsidiaries in Denmark, the UK and France paid kickbacks to the Iraqi regime.
- In United States v Syncor Taiwan, Inc , a Taiwanese company was sentenced to pay a $2m penalty for a payment made in Taiwan to Taiwanese officials. The basis for this was that the chairman of Syncor was in the US when authorising such cash payments; and
- In SEC v Johnson & Johnson , US-based Johnson & Johnson agreed to pay $78m in penalty payments, given that subsidiaries in Greece, Poland and Romania ‘compensated’ government-employed physicians and hospital administrators for procuring Johnson & Johnson products.
Not only does the recent settlement of Johnson & Johnson show that the US does not refrain from enforcing the FCPA due to corruption in the CEE, but it is also indicative of an upward trend. US companies, including their subsidiaries, are not insulated from FCPA risks by doing business in foreign countries in the CEE.
THE FCPA AND EUROPEAN PUBLIC PROCUREMENT LAW
The question now is how a violation of the FCPA interacts with a company’s interest in bidding in public tenders in the CEE, in particular, if the right to participate in a tender is curtailed due to FCPA violations.
The legal framework for government contracts in the EU is set up by the so-called EU Public Procurement Directives (the Directives). The Directives have to be implemented into national law by EU member states (which include a growing number of countries in the CEE). The Directives provide the basis for the mandatory exclusion of companies convicted of corruption from bidding in public tender procedures. Accordingly, any:
‘… candidate or tenderer who has been the subject of a conviction by final judgment […] for corruption […] shall be excluded from participation in a public contract.’
The debarment framework under the Directives is thus very broad. The bribing of a foreign government official covered by the FCPA will also fairly clearly constitute ‘corruption’ within the meaning of the Directives. As mentioned above, the default for settling charges by the DoJ and/or the SEC is entering into a DPA. However, what is less clear, is whether entering into a DPA constitutes a ‘final judgment’ in the meaning of the Directives. There are strong arguments in support of the notion that a DPA does not actually constitute a ‘final judgment’. It thus appears that entering into a DPA with the DoJ and/or the SEC could (arguably) obviate the risk of mandatory debarment in a public tender procedure in the EU. It is likely that this alone was the reason that Siemens (in 2008) was not willing to plead guilty to a final charge of bribery, but rather chose to enter into a DPA.
RIGHT TO RE-ENTER THE PROCUREMENT MARKET IN CASE OF AN UNDERTAKING’S ‘SELF-CLEANING’ MEASURES?
It seems that, according to the Directives’ language, a company pleading guilty to a final charge of bribery must be excluded from a tender procedure (the language used in the Directives is ‘shall be excluded’). The question in this regard then becomes whether a (mandatory) exclusion is also required for companies which have undergone so-called ‘self-cleaning’ measures, ie made sure that corruption will not occur in the future. This issue relates, in particular, to the implementation of a rigorous anti-corruption compliance code to prevent misconduct in the future.
US companies doing business in the CEE should be cautious and vigilant in their business dealings: non-US companies may also be subject to the FCPA. A violation of the FCPA may also have serious consequences in the CEE, because European public procurement law requires a mandatory exclusion from tender procedures if a candidate or tenderer has been convicted of corruption in a final judgment. The lesson to be learned from today’s enhanced FCPA enforcement atmosphere is that companies doing business in the CEE must maintain robust and well-documented FCPA compliance programs. Furthermore, it appears that entering into deferred protection agreements with the DoJ instead of pleading guilty to a final charge of bribery could obviate the risk of mandatory debarment in public tender procedures in the EU.