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The FCPA’s Murky “Knowledge” Element

Knowledge is one of the more difficult concepts to distill in criminal law.

The FCPA is no exception, particularly when it comes to the FCPA’s “while knowing” standard set forth in the FCPA’s third party payment provisions which generally prohibit otherwise improper payments to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly” to a foreign official. (see 78dd-1(a)(3)).

The third party payment provisions have not always included this “while knowing” standard. When first enacted in 1977 and up until 1988 (when the FCPA was amended), the third party payment provisions had a broader standard and applied if a defendant engaged in the prohibited conduct “while knowing or having reason to know” that all or a portion of such money or thing of value would be offered, given, or promised, directly or indirectly to a foreign official.

In a superb new piece titled, “The ‘Knowledge’ Requirement of the FCPA Anti-Bribery Provisions: Effectuating Or Frustrating Congressional Intent?,” – Kenneth Winer and Gregory Husisian of Foley & Lardner (the “Authors”) conclude that “[t]he DOJ and SEC … now interpret the knowledge requirement so broadly that they have effectively eviscerated the 1988 statutory changes thereby raising an important question: Are the DOJ and SEC frustrating the intent of Congress by ignoring the reason that Congress amended the FCPA?” (see here).

These are the type of questions we like to posed here at the FCPA Professor blog and, for the record, I am glad to see that I am not alone in questioning whether certain aspects of current FCPA enforcement frustrate or contradict Congressional intent in enacting or amending the FCPA.

The authors do a fine job of walking the reader through a concise overview of the “knowledge” element’s legislative history, particularly the 1988 House and Senate bills which sought to amend the “knowledge” element. Reviewing case law cited in the compromise conference report, the Authors conclude that the “intent of the 1988 amendments” was to “address concerns that FCPA intermediary violations could be found where there was no actual knowledge” and that even though “Congress adopted language to cover situations beyond actual knowledge, it did so in a very circumscribed fashion.”

That fashion, according to the Authors, – “[o]nly in the limited circumstances where the party had something very close to actual knowledge – that is, both awareness of a ‘high probability’ that a corrupt payment would be made and a ‘deliberate’ decision to avoid gaining information in a conscious effort to avoid learning the truth – is the knowledge requirement satisfied.”

According to the Authors, the DOJ and SEC, and most FCPA commentators, talk about “willful blindness” or “head in the sand” language, provide a list of red flags, and then state that “failure to follow up on red flags will be treated as knowledge, regardless of the reason why the person did not inquire.”

Suppose a company is aware of a “high probability” that a corrupt payment is being made on its behalf, but that the company, perhaps because of “cost, delay, disruption or likely futility involved” in attempting to conduct an investigation, does not further. Under the “common view,” such a failure to investigate is a form of culpable knowledge.

Nonsense says Winer and Husisian. They note that “[o]f course, failing to conduct sufficient due diligence or ignoring red flags can, in many circumstances, be foolish in the extreme,” but that, as noted in the FCPA’s legislative history and cases cited therein, such “foolishness, in and of itself, cannot constitute a finding that knowledge is present.”

According to the Authors, the “net effect of this attitude is to bring the FCPA back to its original ‘reason to know’ standard” and the current enforcement approach utilizing this standard is nothing more than “implementing an approach that Congress specifically rejected.”

Winer and Husisian close by saying:

“The SEC, DOJ, and many commentators might think it would be best if the knowledge requirement was satisfied by failure to conduct adequate due diligence or the failure to follow up on red flags (even if the defendant was not motivated by a purpose of avoiding knowledge of the corrupt payment). But that is not the policy balance that Congress struck in the 1988 amendments. The agencies should rethink their interpretation of the FCPA and enforce the knowledge requirement as Congress intended.”

***

Curious as to the Author’s take on the knowledge jury instructions from the Bourke and Green trials this summer? The Bourke jury instructions – thumbs up; the Green jury instructions – thumbs down.

Your Comments (Even if Anonymous) Are Welcome

It is always gratifying to know that people out there are reading and finding your content worthwhile.

Recently, a reader e-mailed with an informative comment, but indicated that she was hesitant to post it on the blog because she works for a company and didn’t want her comment associated with the company. I told her that I allow anonymous comments and she suggested that I announce this fact.

So here is the announcement – the FCPA Professor blog allows anonymous comments. To do so, at the end of a post, click on “comment,” you will then see a “comment as” drop-down box where “anonymous” is one of the options.

Why do I allow anonymous comments?

Obviously, I would prefer signed comments, however, I understand the concerns of FCPA practitioners, in-house counsel, business leaders and others when posting to a blog. After all, our topic is the FCPA – some rather serious stuff.

As a practicing lawyer, I frequented certain blogs, often felt inclined to comment on issues, but never did for fear of my comments being attributed to my firm and the clients it represents. The FCPA bar is a small bar and relationships with enforcement officials often matter just as much (at least it seemed to me) as facts and the law. For in-house counsel, their client is the company that employs them, and, in this Internet age, it is not too difficult to match people’s names to their employer.

Thus, to most effectively carry out the mission statement of this blog – “to foster a forum for critical analysis and discussion of the FCPA (and related topics) among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons” – I allow anonymous comments.

There are certainly enough FCPA related topics these days to get people talking, so please feel free to start talking (even if anonymously) on this blog.

Halliburton / KBR … The Sequel

In February 2009, Halliburton Co., KBR Inc., and Kellogg Brown & Root LLC agreed to resolve parallel DOJ and SEC FCPA enforcement actions concerning improper payments to Nigerian officials in connection with the Bonny Island liquefied natural gas project. (see here, here, and here).

The combined $579 million in fines and penalties remains the most ever against a U.S. company for FCPA violations.

Included in the web of companies involved in the Nigeria conduct was M.W. Kellogg Company (“MWKL”), a United Kingdom joint venture 55% owned by KBR. MWKL is mentioned in the linked DOJ and SEC materials above.

It looks like Halliburton’s exposure via M.W. Kellogg is not over.

Today, in a 10-Q filing (see here – p. 10), Halliburton stated as follows:

“In the United Kingdom, the Serious Fraud Office (SFO) is considering civil claims or criminal prosecution under various United Kingdom laws and appears to be focused on the actions of MWKL, among others. Violations of these laws could result in fines, restitution and confiscation of revenues, among other penalties, some of which could be subject to our indemnification obligations under the master separation agreement. Our indemnity for penalties under the master separation agreement with respect to MWKL is limited to 55% of such penalties, which is KBR’s beneficial ownership interest in MWKL. Whether the SFO pursues civil or criminal claims, and the amount of any fines, restitution, confiscation of revenues or other penalties that could be assessed would depend on, among other factors, the SFO’s findings regarding the amount, timing, nature and scope of any improper payments or other activities, whether any such payments or other activities were authorized by or made with knowledge of MWKL, the amount of revenue involved, and the level of cooperation provided to the SFO during the investigations.”

It used to be that companies with FCPA exposure could get a good night’s sleep after resolving DOJ and (if an issuer) SEC enforcement actions.

As this action (and others in recent years) demonstrate, the landscape has changed and “tag-a-long” FCPA-like enforcement actions or inquiries in other countries I think will become the new norm.

Iraq … And What Constitutes An FCPA Violation?

A couple of Iraq articles of interest to pass along.

As noted (here), yesterday in Washington D.C. the “Iraqi government, backed by the Obama administration, kick[ed] off its biggest post-Saddam investment roadshow […] to convince American businesses to join the country’s reconstruction efforts.”

According to the article, “[d]ozens of Iraqi government officials, provincial governors, state investment commission authorities and others will give presentations” and “present overviews of sectors such as oil, agriculture and construction” and “investment opportunities in about 750 projects.”

Bringing the topic home, there are lots of Iraqi “foreign officials” in Washington this week.

The article points out the obvious security and legal risks awaiting U.S. investors and businesses seeking to do business in Iraq.

The articles also concludes by saying that “[t]he biggest potential roadblock for most U.S. companies in Iraq is corruption” and that “American companies are generally under much closer scrutiny by U.S. regulators when it comes to overseas operations.”

Although the article does not mention the FCPA specifically, readers of this blog obviously know that the comment invokes and relates to the FCPA.

So here is the question.

Corruption is high in Iraq. But what constitutes “corruption” or more to the point, what constitutes an FCPA violation when doing business or seeking business in Iraq?

Last month, when commenting on the Green’s FCPA trial verdict, our friends over at the FCPA Blog (see here) said that the trial judge’s jury instructions “show just how simple the FCPA’s antibribery provisions really are” and noted that the only ones who seem to think that the FCPA is “complicated, technically challenging and obscure, poorly drafted and badly organized” are the lawyers who are trained to “quibble.”

I agree (and to use my favorite cliche) when offering a suitcase full of cash to a government official to secure a government contract, the FCPA is straightforward and provides little room for lawyers to “quibble.”

However, most FCPA issues are not as straightforward.

Given a number of reasons (the general lack of substantive FCPA case law, untested and unchallenged legal theories, etc.), there remains much about the FCPA that justifiably causes lawyers to … well … quibble.

So here is an exam question.

Let’s say you are interested in doing business in Iraq – specifically its oil and gas sector. You learn that, per the applicable production sharing agreement or joint venture agreement being proposed, x% of employees will need to be Iraqi. Problem is, these prospective employees are not technically competent to perform the job. You are then told that it will be up to you to establish special colleges to train them.

Scratching your head?

Well, this is no academic hypothetical, this is very real world.

Iraqi’s oil minister was recently quoted as saying (see here) that “Iraqis would have to make up 85 percent of the work force for the international oil companies doing business here.” The minister acknowledged the fact that Iraq currently lacked the “hundreds of thousands of Iraqi engineers and technicians” needed and that “it would be up to the foreign oil companies to establish special colleges to train them.”

So let’s run this fact pattern through the FCPA elements assuming that the foreign oil company is an issuer or domestic concern under the FCPA.

“foreign officials” check – at least under the DOJ/SEC’s untested and unchallenged assertion that employees of state-owned companies (regardless of title or rank) are foreign officials.

“thing of value” check – surely an education and obtaining technical skills is valuable.

“to obtain or retain business” check – it is a contractual term which you must agree to in order to get the business.

Sure the FCPA does have a “corrupt intent” element, but that element is often read out of the statute. For instance, many enforcement action merely set forth in conclusory fashion the corrupt intent element without providing any factual support.

The above Iraq example is not unique as most production sharing agreements or joint venture agreements in the foreign extraction industry contain similar terms or conditions requiring the U.S. company to buy “local content,” fund certain community causes, and the like.

What’s there to quibble about in such crystal clear examples as these?

Plenty.

FCPA Collateral Effects and Those “Pesky” Shareholders

I previously posted (see here) that while there is little in terms of substantive FCPA case law – this much is clear – there is no private right of action under the FCPA – enforcement of the law is in the hands of the DOJ and the SEC.

That does not mean that aggrieved third parties, including a company’s own shareholders, are without legal recourse should a company become subject to an FCPA enforcement action or merely disclose a potential FCPA issue.

Indeed, shareholder derivative litigation is often a collateral effect of FCPA disclosures or enforcement actions.

Case in point, the shareholder derivative complaint filed last week on behalf of Pride International, Inc. in Texas state court against certain members of its board of directors and certain of its executives officers seeking to remedy defendants’ breach of fiduciary duties. (see here).

The breach?

According to the complaint, “[f]rom 2001 to 2006, Pride repeatedly violated the [FCPA] through its business operations in numerous countries.” (see para. 1). “Certain current and former officers and directors of the company were aware of the violations and that the violations could, and eventually did, cause substantial harm to Pride and its shareholders, yet they knowingly failed to make a good faith effort to correct or prevent the misconduct.” (see para. 1).

The complaint alleges at para 23 that “[t]he individual defendants were aware of the violations well before the company announced the FCPA Investigation to the company’s shareholders and the public at large.” “Nevertheless,” according to the complaint, “the Individual Defendants took no action until an undisclosed employee of the company complained about the violations.”

The complaint then details Pride’s numerous public statements – beginning in March 2006 – regarding its potential FCPA issues and exposure. Certain of these disclosures and statements have been covered elsewhere (see here and here).

Beyond re-stating Pride’s numerous public statements, the complaint is sparse on detail, including little specific factual evidence to support the allegation that the Director Defendants “knew or were reckless in not knowing of the Company’s violations of the FCPA.” (see para. 50).

Regardless of the complaint’s ultimate fate, the Pride derivative suit is but the latest example of the collateral effects / sanctions a company will likely face when its business conduct is subject to FCPA scrutiny.

For those keeping track at home, such collateral effects / sanctions are yet another reason for companies to have effective, robust and well-communicated FCPA compliance policies and procedures which are periodically monitored and strengthened.

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