TESTIMONY OF PAUL V. GERLACH ASSOCIATE DIRECTOR, DIVISION OF ENFORCEMENT U.S. SECURITIES AND EXCHANGE COMMISSION CONCERNING H.R. 4353, THE INTERNATIONAL ANTI-BRIBERY AND FAIR COMPETITION ACT OF 1998 BEFORE THE SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS COMMITTEE ON COMMERCE UNITED STATES HOUSE OF REPRESENTATIVES SEPTEMBER 10, 1998 Chairman Oxley, Congressman Manton and other Members of the Committee: I appreciate the opportunity to testify on behalf of the U.S. Securities and Exchange Commission ("SEC" or "Commission") concerning H.R. 4353, legislation to implement the Organization for Economic Cooperation and Development ("OECD") Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The Commission would like to congratulate the Committee on holding hearings and considering legislation on this important issue. The United States, as a signatory to the OECD Convention, has agreed to seek approval and enactment of implementing legislation by the end of 1998. The Commission strongly supports the securities laws provisions of H.R. 4353, which it believes are necessary to implement the OECD Convention. Through the OECD Convention, 33 nations have now committed to eradicate bribery of foreign officials in order for companies to transact business in the international marketplace. This Convention, which is largely consistent with existing U.S. law, the Foreign Corrupt Practices Act ("FCPA"), is designed to level the playing field upon which U.S. companies compete in the international business arena and to create transparent business practices around the world. To continue momentum for the OECD Convention, it is important that the United States enact implementing legislation on schedule to ensure FCPA consistency with the Convention. BACKGROUND OF THE FOREIGN CORRUPT PRACTICES ACT The United States has been a world leader in combating corruption in the global marketplace for some time. The Commission has been -- and will continue to be -- at the forefront of that effort. Among the statutory tools that the SEC relies upon is the FCPA.[1] Enacted 20 years ago, the FCPA makes illegal the payment of bribes to foreign officials for the purpose of obtaining or retaining business. The FCPA also created books and records and internal controls provisions of the federal securities laws that have been more generally used by the Commission to combat fraud. The problem of bribery by United States corporations doing business abroad first surfaced during the 1970s when the press reported allegations of questionable payments by United States companies to foreign government officials. In 1973, several corporations and executives were charged with using corporate funds for illegal domestic political contributions by the Office of the Special Prosecutor of the Department of Justice. Since the nondisclosure of these activities might entail violations of the federal securities laws, the Commission published a statement of the view of the Division of Corporation Finance concerning disclosure of these matters in public filings. This release explains that indictments, guilty pleas, and convictions of corporations or their officers or directors for illegal acts are "material to an evaluation of the integrity of the management of the corporation as it relates to the operation of the corporation and use of corporate funds."[2] Commission staff also discovered falsification of corporate financial records to conceal the use of corporate funds as well as the existence of secret "slush funds" disbursed outside the normal financial system. The resulting investigations culminated in settled injunctive actions against 14 companies as of May 10, 1976. As a result of the potential magnitude of the problem, the Commission began a voluntary disclosure program under which the Commission offered not to bring enforcement actions against companies that disclosed past payments and agreed to implement internal procedures to prevent bribery in the future. Under the program, over 400 United States companies, including 117 of the top Fortune 500 companies, admitted making questionable or illegal payments in excess of $300 million to foreign government officials.[3] The Commission submitted a report to Congress together with a legislative proposal.[4] Enactment of the Foreign Corrupt Practices Act of 1977 In response to these events, Congress enacted the Foreign Corrupt Practices Act of 1977, amending the Securities Exchange Act of 1934 (the "Exchange Act"), and making the United States the first government to outlaw bribery of foreign officials. The FCPA attempts to stop corporate bribery through three basic means: * First, by making it illegal to bribe foreign officials to obtain or retain business. The Commission has civil enforcement authority over the violation of the anti-bribery provisions by domestic or foreign public companies whose securities are registered with the SEC, and the Department of Justice has both civil and criminal enforcement authority for violations of the anti-bribery provisions by domestic concerns, as well as for criminal actions involving issuers. The FCPA covers payments to foreign government officials, political parties, party officials, political candidates, and intermediaries (the anti-bribery provision). Section 30A(a) of the Exchange Act (15 U.S.C. § 78dd-1(a)); * Second, by requiring companies subject to SEC reporting requirements to keep detailed books and records that accurately reflect corporate payments and transactions (the books and records provision). Section 13(b)(2)(A) of the Exchange Act (15 U.S.C. § 78m(b)(2)(A)); and * Third, by requiring companies subject to SEC reporting requirements to institute and maintain an internal accounting system to assure management's control over the company's assets (the internal controls provision). Section 13(b)(2)(B) of the Exchange Act (15 U.S.C. § 78m(b)(2)(B)).[5] Subsequent Events Critics have contended that the FCPA places American businesses at a competitive disadvantage in the foreign marketplace because other countries do not have similar prohibitions against foreign bribery. This disadvantage may mean lost opportunities for American companies in the global marketplace, possibly affecting overseas procurements valued in the billions of dollars each year. Indeed, some of our trading partners have explicitly encouraged such bribes by permitting businesses to claim them as tax-deductible business expenses. In 1988, in conjunction with amendments to the FCPA, Congress sought to address the competitiveness issue. It charged the President to negotiate an agreement with the other OECD members requiring them to enact legislation similar to the FCPA to combat the problems created by bribery, and required the President to report to Congress within one year of passage on the progress of these negotiations. Since 1988, the United States has been urging other countries to criminalize bribery of foreign officials by their nationals. The legislation at issue today is the culmination of these efforts. The Commission's Enforcement of the FCPA The Commission has brought four enforcement cases involving the anti-bribery provision of the FCPA.[6] The Commission has also brought numerous cases enforcing the books and records and internal controls provisions of the FCPA. [7] One recent case involving bribery as well as the books and records and internal controls provisions of the FCPA is SEC v. Triton Energy Corp. In this case, the SEC alleged that during the years 1989 and 1990, two former senior officers of Triton Indonesia, a subsidiary of Triton Energy, authorized numerous improper payments to the subsidiary's business agent who acted as an intermediary between Triton Indonesia and Indonesian government agencies, knowing or recklessly disregarding the high probability that the business agent either had or would pass such payments along to Indonesian government employees for the purpose of influencing their decisions affecting the business of Triton Indonesia. The two former senior officers, along with other Triton Indonesia employees, concealed these payments by falsely documenting and recording the transactions as routine business expenditures. Triton Indonesia also recorded other false entries in its books and records. Although Triton Energy did not authorize or direct these improper payments and misbookings, when Triton Energy's internal auditor notified its management of the violations in a memorandum, Triton Energy's former president ordered that all copies of the memorandum be destroyed, and Triton Energy's management failed to put a stop to the illicit activities. Without admitting or denying the allegations, Triton Energy consented to the entry of an injunction that permanently enjoins it from future violations of the books and records and internal controls provisions of the FCPA, and ordered it to pay a $300,000 penalty. The two former senior officers each consented to the entry of an injunction that permanently enjoins them from future violations. One was ordered to pay a $35,000 penalty and the other to pay a $50,000 penalty. The result in Triton makes clear that whenever senior management becomes aware of FCPA violations, even if it did not authorize them in the first instance, it is liable for failure to investigate and put an end to such violations. OECD Convention Since Congress' 1988 directive to the President to engage in international efforts to combat bribery, efforts to combat corruption have gained increasing support in the international community. These efforts finally culminated in the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the "OECD Convention"), a treaty negotiated by the OECD and signed by the United States and 32 other nations on December 17, 1997 in Paris.[8] The Commission has been an active participant in this project and is pleased with the OECD Convention. The OECD Convention calls on all parties to make it a criminal offense "for any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official, for that official or for a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business."[9] It further calls on all parties to assert territorial jurisdiction broadly and, where consistent with national legal and constitutional principles, to assert nationality jurisdiction. All 33 nations pledged to seek approval of the Convention and enactment of implementing legislation by the end of 1998. In addition, if ratified, the OECD Convention would facilitate cooperation among participating countries in investigating instances of alleged bribery. In the U.S., the OECD Convention was forwarded by the President to the Senate in April 1998. The Senate unanimously passed a resolution of advice and consent to ratify the OECD Convention on July 31, 1998.[10] Specific Provisions of H.R. 4353 as they Relate to the Exchange Act Although the OECD Convention is largely consistent with existing U.S. law, the FCPA, as well as Section 30A of the Exchange Act, would need to be amended to implement the Convention. H.R. 4353 is designed to make the necessary implementing changes to existing U.S. law. The conforming changes to the Exchange Act proposed by H.R. 4353, which are largely minor in nature, are as follows:[11] * First, the OECD Convention bans payments made to secure "any improper advantage". The FCPA currently prohibits payments made "in order to obtain or retain business". H.R. 4353 clarifies the scope of FCPA liability to explicitly include the OECD Convention language "securing any improper advantage" from a foreign official. H.R. 4353 effects this change in Section 2(a) by amending Section 30A(a) of the Exchange Act (15 U.S.C. § 78dd-1(a)); * Second, the OECD Convention includes officials of international agencies within the definition of "foreign public official." H.R. 4353 expands the definition of covered "foreign official" to include officials of public international organizations. Section 2(b) of H.R. 4353 amends Paragraph 1 of Section 30A(f) of the Exchange Act (15 U.S.C. § 78dd-1(f)); * Third, the OECD Convention provides for nationality jurisdiction. H.R. 4353 conforms to the OECD Convention by providing an additional basis for jurisdiction over foreign bribery by U.S. issuers and U.S. persons that are officers, directors, employees, or agents, or stockholders of such issuers. Accordingly, the bill will amend the FCPA to provide for jurisdiction over the acts of U.S. businesses and nationals in furtherance of unlawful payments that take place outside the United States, irrespective of whether in doing so they make any use of the mails or means or instrumentalities of U.S. interstate commerce. The Commission has been advised by the Department of Justice that this exercise of jurisdiction over U.S. businesses and nationals for unlawful conduct abroad is consistent with U.S. legal and constitutional principles. It is within the constitutional grant of power to Congress to "regulate Commerce with foreign Nations" and to "define and punish . . . Offenses against the Law of Nations." U.S. Const. art. I, § 8, cl. 3 & 10. Section 2(c) of H.R. 4353 amends Section 30A of the Exchange Act (15 U.S.C. § 78dd-1) to effect this change; and * Fourth, the OECD Convention necessitates conforming penalties for non-U.S. citizen employees and agents of issuers and domestic concerns to penalties for U.S. citizen employees and agents (which are currently more severe). H.R. 4353 amends the penalties applicable to employees and agents of U.S. businesses to eliminate the current disparity between U.S. nationals and non-U.S. nationals employed by or acting as agents of U.S. companies. In the current statute, foreign nationals employed by or acting as agents of U.S. companies (as opposed to officers or directors) are subject only to civil penalties. The bill would eliminate this restriction and, thereby, subject all employees or agents of U.S. businesses to both civil and criminal penalties. Eliminating this preferential treatment implements the OECD Convention's requirement that "[e]ach Party shall take such measures as may be necessary to establish that it is a criminal offence [sic] under its law for any person [to make unlawful payments]."[12] Section 2(d) of H.R. 4353 amends Section 32(c) of the Exchange Act (15 U.S.C. § 78ff(c)) to effect this change.[13] CONCLUSION The increasing globalization of the world's economy, along with the establishment of capital markets in new environments, have contributed to U.S. companies having increased business dealings and interests abroad. As this trend continues, the risk of U.S. companies operating in situations where bribery of foreign officials is a normal part of doing business increases. Accordingly, it is important to enact, and to encourage other countries to enact, legislation that will provide a more level playing field for U.S. companies in the international marketplace. The Commission has aggressively enforced the FCPA and strongly supports the OECD Convention and the implementing legislation as a means to provide a more level playing field for U.S. companies abroad. In sum, the Commission strongly supports the changes to the securities laws contemplated by H.R. 4353. **FOOTNOTES** [1]: Pub. L. No. 95-213, 91 Stat. 1494 (1977), as amended by the Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, tit. V, §§ 5001-03, 102 Stat. 1415 (1988) (codified as amended at 15 U.S.C. §§ 78m, 78dd-1, 78dd-2, 78ff). [2]: Securities Act Release No. 5466 (Mar. 8, 1974). [3]: H.R. Rep. No. 95-640 at 4 (1977). [4]: Securities and Exchange Commission, 94th Cong., Report on Questionable and Illegal Corporate Payments and Practices (Comm. Print 1976). [5]: In addition, as a result of amendments to the FCPA in 1988, it is unlawful for any person to knowingly circumvent or knowingly fail to implement a system of internal accounting controls, or to knowingly falsify any book, record, or account described in Section 13(b)(2). See Section 13(b)(5) of the Exchange Act (15 U.S.C. § 78m(b)(5)). [6]: See SEC v. Triton Energy Corp., Litigation Release No. 15266 (Feb. 27, 1997) and Litigation Release No. 15396 (June 26, 1997); SEC v. Ashland Oil, Inc., Litigation Release No. 11150 (July 8, 1986); SEC v. Sam P. Wallace Co., Litigation Release No. 9414 (Aug. 13, 1981); and SEC v. Katy Industries, Inc., Litigation Release No. 8519 (Aug. 30, 1978). [7]: The Commission has brought more than 300 cases involving the books and records and internal controls provisions of the FCPA. See e.g., SEC v. William Trainor, Vincent D. Celentano, Medical Diagnostic Products, Inc. (f/k/a/ Novatek International, Inc.), et al., Litigation Release No. 15786 (June 18, 1998) and Litigation Release No. 15844 (Aug. 12, 1998); SEC v. Charles T. Young and Selig Adler, Litigation Release No. 15794 (June 29, 1998); SEC v. Joseph C. Allegra, David Hersh, J. Lee Ledbetter and H. Flynn Clyburn, Litigation Release No. 15384 (June 11, 1997); SEC v. Policy Management Systems Corp., et al., Litigation Release No. 15417 (July 23, 1997); SEC v. Structural Dynamics Research Corp., et al., Litigation Release No. 15325 (Apr. 10, 1997); and SEC v. Kendall Square Research Corp., et al., Litigation Release No. 14895 (Apr. 29, 1996) and Litigation Release No. 15155 (Nov. 12, 1996). Notably, these provisions extend to all issuers who register securities with the Commission, even foreign issuers. See e.g., SEC v. Montedison, S.p.A., Litigation Release No. 15164 (Nov. 21, 1996). (The complaint alleged that Montedison, an Italian company, engaged in a scheme designed to conceal hundreds of millions of dollars of payments that, among other things, were used to bribe Italian politicians and other persons. The scheme concealed losses of at least $398 million. The complaint alleged that as a result of the scheme, Montedison's assets were materially overstated on its books and records and in its financial statements for fiscal years 1988 through 1991.) [8]: These 33 countries include most of the significant trading countries in the world and consist of 28 OECD Member States and five non-OECD Members who are participants in the OECD's Working Group on Bribery in International Business Transactions. At this time, Australia is the only OECD Member State that has not signed the OECD Convention. [9]: OECD Convention, art. 1, para. 1. [10]: Notably, on the same day, the Senate passed by voice vote S. 2375, its version of implementing legislation for the Convention. [11]: As is its general practice, the Commission is confining its testimony to the amendments affecting the federal securities laws. [12]: OECD Convention, art. 1, para. 1 (emphasis supplied). [13]: In addition, Section 4 of H.R. 4353 largely parallels the other provisions of the FCPA to create parity between the treatment of U.S. nationals and foreign nationals. This change is to conform with the OECD Convention's call on parties to cover "any person." The current FCPA covers only issuers covered under the Exchange Act and "domestic concerns."