14 July 2003
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With the Iraq war over, the role of foreign companies in the country's rebuilding is once again whetting the appetite of international construction players. Such companies and their lawyers will have the usual problems. These include: the choice of law; the type, method and forum of dispute resolution; the clash between Western and local cultures; and the all-too-common requirement in overseas contracting for gifts, facilitation payments or outright bribes. For companies involved in overseas contracting, the price and risk is rising rapidly.
Following the Anti-Terrorism, Crime and Security Act 2001, the UK is virtually in line with the US Foreign Corrupt Practices Act 1977 (FCPA). That means UK and US construction companies operating abroad must now behave in a socially responsible manner in relation to their local partners. If they fail to do so they will face criminal prosecutions, which can result in unlimited fines for the company and imprisonment of up to seven years in the UK, five years in the US and 10 years in France for directors and others.
The 2001 act represents the UK's adoption of the Organisation for Economic Cooperation and Development's (OECD) Convention on Combating Bribery of Public Officials in International Business Transactions. By November 2002, the convention had been incorporated into the domestic law of 34 countries. It updates existing legislation on bribery and corruption that dates back to the nineteenth century, and under Sections 108 and 109 it is an offence to bribe a foreign public official, whether the offence is committed in the UK or elsewhere. The offence applies to UK companies and UK nationals whether here or overseas.
To date, no prosecutions have been brought in the UK under the anti-terrorism act - but for how long?
The US is at the forefront of international bribery legislation. The FCPA followed the Watergate scandal in 1977 and it was pressure from the US that led the OECD to draft the convention. The FCPA was amended in 1998 to incorporate the parts of the convention not previously covered. Its provisions are divided into accounting offences and bribery, and prosecutions are enforced by the Securities and Exchange Commission (SEC) or the Department of Justice (DoJ).
Under Section 78dd-1 of the FCPA, it is unlawful for any US company, officer, director, agent or shareholder to corruptly offer "anything of value" to a foreign official in order to obtain or retain business. The penalties are severe, with corporate fines of up to $2m (£1.2m) per violation. However, these fines can pale into insignificance if the company is additionally prevented from continuing with US government contracts for a period of time. For individuals, the penalty includes fines of up to $250,000
(£150,000), or twice the amount of the gross gain derived from the bribe. Imprisonment for up to five years is also a possibility.
While there have been few prosecutions under the FCPA, the SEC and DoJ have shown a clear commitment to its vigorous enforcement. In United States v Lockheed, the aircraft manufacturer pleaded guilty to conspiracy to violate the FCPA anti-bribery provisions. The company's vice-presidents had paid $1m (£60,000) to an Egyptian politician to induce her to influence an order for military cargo planes. Lockheed admitted the payment and was fined $21.8m (£13.1m) and ordered to make a $3m (£1.8m) civil settlement. Lockheed's vice-president pleaded guilty and was fined $125,000 (£76,600) and imprisoned for 18 months. By far the most financially damaging penalty was the resultant decision to suspend Lockheed's export licences for these aircraft.
The large fine and exclusion from the contract is seen as an active deterrent to other US companies with foreign projects,
which routinely instruct their lawyers in the preparation, implementation and monitoring of FCPA compliance programmes.
All EU member states have adopted the convention and have enacted the necessary domestic legislation. The convention came into force in France in September 2000, where it is now an offence to propose "offers, promises, gifts, presents or advantages of any kind whatsoever at any time, either directly or indirectly" to a foreign public official, or to consent to a solicitation from a foreign public official. The offence is punishable by imprisonment of up to 10 years and a maximum fine of E150m (£103.3m). The provisions apply to offences committed in France and abroad. One of the first high-profile cases to come before the French courts is the alleged payment of bribes by the French oil company Elf.
Corporate social responsibility does not end with the criminal legislation, however. Civil proceedings brought as a consequence of the overseas activities of UK and US companies are also increasing. In the UK, the House of Lords held in Lubbe & Ors v Cape plc that the South African claimants could bring an action in the UK against Cape's foreign subsidiary. Although the class action settled almost immediately after the decision, the prospect is for more attempts to run mass tort actions in the UK, despite the courts' traditional dislike of such US practices.
In the US, the long-dormant Alien Torts Claims Act of 1789 has recently been used as the vehicle for claims by foreign nationals against US companies for their actions in foreign jurisdictions. In John Doe et al v Unocal Corp et al, construction and energy company Unocal is defending a claim by 15 Burmese villagers for the actions of its local partners while Unocal was building a gas pipeline from the Andaman Islands to Thailand. While clearing a path through villages for the pipeline, Unocal is alleged to have cooperated and colluded with its joint venture partners, including the Burmese military, to allegedly torture and kill those who would not work on the pipeline or move from its path. The US courts have accepted jurisdiction in the case and an award of significant damages is a distinct possibility.
US corporations have lobbied for years to get a level playing field in international project work given the obligations the FCPA imposed on them when compared with non-US construction companies, which appeared able to make payments to local officials to win contracts. The convention and its subsequent adoption by most Western countries is beginning to level the playing field, and a high-profile European prosecution in the Lockheed mould would do much to accelerate the process. Construction companies and others will need to review their style of play in this game if they are not to risk substantial fines and have their key players sin-binned for many years to come.
Charles Brown is a partner and head of Dechert's construction practice in London and Donald Zarin is a partner at Dechert in Washington DC and head of the international trade practice group; they were assisted with the article by Andrew Davies, an assistant solicitor in the construction practice in London and Sarah Delon-Bouquet, an associate in Dechert's Paris office