By: Aylin Daldal

 

As startups begin to grow their business by moving into new markets, international trade and participation in international markets becomes a natural next consideration for many. However, most startups are leanly staffed with small teams and do not have the infrastructure to address the risks and complications associated with international trade.[1] This is because most startups have limited resources to explore international trade options or to gain a full understanding of best practices as proscribed by U.S. laws and regulations.[2] Despite their limitations, such as a lack of general in-house counsel or compliance officers, startups are held to the same standards as large corporations under U.S. laws.[3] Thus, compliance is of utmost importance. One simple violation of the Foreign Corrupt Practices Act (FCPA) can break a startup – ending its business for good.

 

What is the FCPA?

 

The FCPA was enacted in 1977 and contains two main parts: an anti-bribery provision and a books and records provision. While both provisions are important, this post will concern itself with the anti-bribery provision. The act was created in response to widespread bribery of foreign officials by U.S. Companies, with a goal to curb bribery and encourage ethical business practices.[4]

Many startups hold the common misconception that if they are not a public company, the FCPA does not apply to them – instead thinking that the FCPA only applies to “issuers” whose securities are publicly traded.[5] In fact, the FCPA’s anti-bribery provision applies to three broad categories of persons and entities:

 

  1. “issuers” and their officers, directors, employees, agents, and shareholders;
  2. “domestic concerns” and their officers, directors, employees, agents and shareholders; and
  3. “certain persons and entities,” other than issuers and domestic concerns, acting while in U.S. territory.[6]

 

The FCPA defines a “domestic concern” as any individual who is a U.S. citizen, national, or resident, or any corporation, partnership, association, joint stock company, business trust, unincorporated organization, or sole proprietorship that is organized under U.S. laws, or that has its principal place of business in the United States.[7] Officers, directors, employees, agents, or stockholders acting on behalf of the domestic concern, including foreign nationals or companies, are also covered under this defined term.[8] As such, this section captures many, if not most, startups. Furthermore, the FCPA defines agents broadly to extend to third-party agents, consultants, distributors, joint-venture partners, and subsidiaries.[9] This means that anyone in a foreign country that is partnered with the startup can hold the startup subject to the FCPA’s anti-bribery provisions as well.

The anti-bribery provision of the FCPA applies to payments intended to induce or influence foreign officials to use their position to assist in “obtaining or retaining business for or with, or directing business to, any person.” This definition is very broadly interpreted to catch payments to secure, among other things, favorable tax treatment, government contracts, reduce customs duties, and circumvent international licensing or permit requirements.[10] Even if a startup partner or third-party agent commits the act of bribery, the startup can still be held liable.

Penalties in the form of criminal sanctions and civil sanctions (including fines) can be brought by the Securities Exchange Commission (SEC) or the Department of Justice (DOJ). Under criminal penalties, the FCPA provides that corporations and other business entities are subject to a fine of up to $2 million for each anti-bribery violation.[11] Under civil penalties, the FCPA provides that corporations and other business entities are subject to civil penalties of up to $16,000 per violation.[12] Companies can also face collateral consequences including, but not limited to, loss of export privileges, debarment from government contracts, and may be required to institute a monitorship.[13]

 

What Can Startups Learn from Uber’s FCPA investigation?

 

Uber, a car-sharing service and well-known startup expanded abroad to more than 70 countries after its initial success in the U.S.[14] However, it was alleged by the DOJ that this rapid expansion was in violation of the FCPA. In order to expand rapidly, Uber gave regional teams in the countries the authority to adapt to local markets which sometimes involved violating laws – both international as well as U.S.[15] Allegations lead the DOJ to believe that Uber may have bribed local officials in order to expand as rapidly as possible.[16] Additionally, Uber was found to be in violation transportation laws in South Korea and France.[17] In Singapore, local Uber managers were using defective vehicles.[18] The DOJ opened a preliminary investigation to determine whether Uber had violated the FCPA and international laws.

Uber is the perfect example of a startup that entered the international markets without having its compliance department in order.[19] Prior to its expansion abroad, the risk of FCPA violation was low for Uber, however as the company’s growth took it into foreign markets the risks grew tremendously. Without a solid anti-bribery component to its compliance program, Uber ultimately put itself at risk and subjected itself to unwanted investigation by the DOJ. Had Uber reassessed its compliance program and updated it as the company expanded overseas, it could have avoided the costly investigation and potential FCPA violations it faced.

 

What Can Startups Do to Mitigate Risk?

 

In addition to understanding the provisions of the FCPA, startups can take some other concrete steps to reduce the risks they face when beginning to take their business to international markets.

 

  1. The first step for startups to take is to understand the specific corruption risks that their company faces. Many startups believe that they have no corruption risk because they are U.S.-based, have few employees, and have not yet sold products.[20] However, simply having contractors and consultants abroad can put a startup at risk.[21] Assessing risk does not look the same for each startup and will ultimately vary depending on several factors including the resources the startup has.

 

  1. Assessing risk is not a one-time event. Rather, it is incredibly important for startups to reassess their risk as changes in the business occur as well as at specific time intervals.[22] For example, an annual risk assessment is fairly standard among businesses. However, assessments should also be completed when specific events transpire – such as when a company enters a new market for the first time.

 

  1. A startup should develop and adopt internal compliance programs.[23] Regardless of a startups size, it is never too early to start to think about guidelines and a basic compliance infrastructure. At the very least, a company should incorporate anticorruption guidelines into its employee handbook or code of conduct. These guidelines should address specific risks such as government interactions, corporate gifts, and the use of third-party business partners.[24] To augment the handbook, startups should also consider offering anti-corruption training to employees, especially those in roles that are likely to come across the risks and can work as a first line of defense.[25] Lastly, due to the risks from third-party business partners, it is equally important to include anti-corruption representations in any third-party contracts.

 

Final Thoughts

 

Ultimately, there is no one-size-fits-all compliance program. Smaller startups may need fewer precautions and a smaller budget while larger ones may require more. What is key is understanding that as the startup grows, so should compliance measures. Assessing risk early on, reassessing risk at different time intervals, and updating trainings and internal compliance programs are essential for startups if they want to avoid FCPA violations.

[1] “How Company Size Influences FCPA Enforcement”, Dietra Crawley, March 22, 2016, https://www.taylorenglish.com/newsroom-publications-How-Company-Size-Influences-FCPA-Enforcement-InsideCounsel.html.

[2] “How Company Size Influences FCPA Enforcement”, Dietra Crawley, March 22, 2016, https://www.taylorenglish.com/newsroom-publications-How-Company-Size-Influences-FCPA-Enforcement-InsideCounsel.html.

[3] “How Company Size Influences FCPA Enforcement”, Dietra Crawley, March 22, 2016, https://www.taylorenglish.com/newsroom-publications-How-Company-Size-Influences-FCPA-Enforcement-InsideCounsel.html.

[4] A Resource Guide to the U.S. Foreign Corrupt Practices Act, 2, (2012).

[5] “How Company Size Influences FCPA Enforcement”, Dietra Crawley, March 22, 2016, https://www.taylorenglish.com/newsroom-publications-How-Company-Size-Influences-FCPA-Enforcement-InsideCounsel.html.

[6] Anti-Bribery and Books & Records Provisions of The Foreign Corrupt Practices Act, 15 U.S.C. ch. 2b § 78a.

[7] Anti-Bribery and Books & Records Provisions of The Foreign Corrupt Practices Act, 15 U.S.C. ch. 2b § 78a.

[8] FCPA Anti-Bribery Provisions, Carlton Fields, May 29, 2015, https://www.carltonfields.com/insights/expect-focus/2015/fcpa-anti-bribery-provisions.

[9] “How Company Size Influences FCPA Enforcement”, Dietra Crawley, March 22, 2016, https://www.taylorenglish.com/newsroom-publications-How-Company-Size-Influences-FCPA-Enforcement-InsideCounsel.html.

[10] FCPA Anti-Bribery Provisions, Carlton Fields, May 29, 2015, https://www.carltonfields.com/insights/expect-focus/2015/fcpa-anti-bribery-provisions.

[11] A Resource Guide to the U.S. Foreign Corrupt Practices Act, 68, (2012).

[12] A Resource Guide to the U.S. Foreign Corrupt Practices Act, 69, (2012).

[13] A Resource Guide to the U.S. Foreign Corrupt Practices Act, 71, (2012).

[14] Growing Pains for Expanding Tech Companies: Uber Investigated for FCPA violations, Sheppard Mullins Richter & Hampton LLP, September 15, 2017, https://www.jdsupra.com/legalnews/growing-pains-for-expanding-tech-71365/.

[15] Growing Pains for Expanding Tech Companies: Uber Investigated for FCPA violations, Sheppard Mullins Richter & Hampton LLP, September 15, 2017, https://www.jdsupra.com/legalnews/growing-pains-for-expanding-tech-71365/.

[16] “Uber Faces Investigation of Possible Foreign-Bribery-Law Violations”, Douglas MacMillan and Aruna Viswanatha, The Wall Street Journal, August 29, 2017, https://www.wsj.com/articles/justice-department-investigates-whether-uber-violated-u-s-foreign-bribery-laws-1504040457.

[17] “Uber Faces Investigation of Possible Foreign-Bribery-Law Violations”, Douglas MacMillan and Aruna Viswanatha, The Wall Street Journal, August 29, 2017, https://www.wsj.com/articles/justice-department-investigates-whether-uber-violated-u-s-foreign-bribery-laws-1504040457.

[18] “Uber Faces Investigation of Possible Foreign-Bribery-Law Violations”, Douglas MacMillan and Aruna Viswanatha, The Wall Street Journal, August 29, 2017, https://www.wsj.com/articles/justice-department-investigates-whether-uber-violated-u-s-foreign-bribery-laws-1504040457.

[19] Growing Pains for Expanding Tech Companies: Uber Investigated for FCPA violations, Sheppard Mullins Richter & Hampton LLP, September 15, 2017, https://www.jdsupra.com/legalnews/growing-pains-for-expanding-tech-71365/.

[20] Stacey Sprenkel and Julie Nicholson, Tips for startups to get ahead of corruption risk, Los Angeles & San Francisco Daily Journal, Thursday, Nov. 2, 2017.

[21] Stacey Sprenkel and Julie Nicholson, Tips for startups to get ahead of corruption risk, Los Angeles & San Francisco Daily Journal, Thursday, Nov. 2, 2017.

[22] Stacey Sprenkel and Julie Nicholson, Tips for startups to get ahead of corruption risk, Los Angeles & San Francisco Daily Journal, Thursday, Nov. 2, 2017.

[23] Stacey Sprenkel and Julie Nicholson, Tips for startups to get ahead of corruption risk, Los Angeles & San Francisco Daily Journal, Thursday, Nov. 2, 2017.

[24] Stacey Sprenkel and Julie Nicholson, Tips for startups to get ahead of corruption risk, Los Angeles & San Francisco Daily Journal, Thursday, Nov. 2, 2017.

[25] Stacey Sprenkel and Julie Nicholson, Tips for startups to get ahead of corruption risk, Los Angeles & San Francisco Daily Journal, Thursday, Nov. 2, 2017.