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Facilitation Payments Declared Illegal Under Canadian International Corruption Law

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Today’s post is from Toronto-based Bennett Jones attorneys Milos Barutciski, Matthew Kronby and Jessica Horwitz.

The government of Canada announced on October 30 that the exception allowing for facilitation payments under the Corruption of Foreign Public Officials Act (CFPOA) will be eliminated effective October 31, 2017.

The CFPOA was amended in 2013 to strengthen Canada’s international corruption law. Among other things, the 2013 amendments introduced nationality jurisdiction, thus making Canadian companies and citizens liable for corruption anywhere in the world, increased penalties for bribery from a maximum of 5 years imprisonment to 14 years and created a new books and records offence. These and other amendments came into force on June 19, 2013.

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Customs Issues In Argentina Result In FCPA Enforcement Action Against BJ Services

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[This post is part of a periodic series regarding “old” FCPA enforcement actions]

In 2004, the SEC brought this administrative cease and desist order against BJ Services (a Houston-based oil field services, products, and equipment company). The conduct at issue focused on the company’s Argentina subsidiary and its relationships with customs officials. As stated in the SEC’s order, there was no indication that anyone employed by BJ Services approved many of the alleged improper payments and the SEC further acknowledged that the improper payments were made in violation of BJ Services’ existing policies prohibiting payments of the kind made to the customs official.

Other interesting aspects of the enforcement include the following: (i) certain of the improper payments were facilitated by the Argentina subsidiary issuing checks “in the name of a lower’level” employee who then “cashed the checks and provided the proceeds to the customs official”; (ii) the SEC seemed to acknowledge that certain of the payments were facilitation payments under the FCPA, but nevertheless improperly booked, and thus still actionable.

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Lennox International – The Most Absurd FCPA Voluntary Disclosure Ever?

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Lennox International is involved in the heating, air conditioning, and refrigeration markets.

The question needs to be asked: what made the company so hot as to recently disclose to the DOJ and SEC an investigation into a $475 payment in Russia to release a shipment of goods being held by customs officials?

The disclosure is arguably one of the most absurd FCPA disclosures ever.

There is of course no legal obligation to voluntarily disclose, something even the DOJ acknowledges in its April 2016 FCPA Pilot Program. But then again, returning to an issue first highlighted in this 2009, voluntary disclosure is the fuel that feeds FCPA enforcement and is extremely lucrative for FCPA Inc. Indeed, who can forget the words of the former DOJ Fraud Section Chief in this Wall Street Journal article “if you get two of these [FCPA investigations] a year as a partner, you’re pretty much set.”

Lennox’s decision to disclose was presumably a business decision made by the board of directors or audit committee based on the advise of FCPA counsel. If FCPA counsel did indeed advise company leaders to disclose, that advise needs to be seriously questioned.

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Survey Responses Indicate That The More Things Change, The More They Remain The Same

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The “Story of the Foreign Corrupt Practices” highlights how Congress clearly understood and appreciated the many difficult foreign business conditions facing U.S. companies.

For instance, the 1976 SEC Report on Questionable and Illegal Corporate Payments and Practices, on which Congress placed great reliance during its multi-year legislative process leading to the FCPA, documented a wide range of foreign corporate payments to a variety of recipients for a variety of reasons including payments “to persuade low-level governmental officials to perform functions or services which they are obligated to perform as part of their governmental responsibilities, but which they may refuse or delay unless compensated.”

Congress could have legislated as to the wide range of foreign corporate payments brought to its attention and certain bills introduced during the multi-year legislative process leading to the FCPA did indeed capture a wide range of payments. Yet, in passing the FCPA Congress intended to capture only a narrow range of foreign corporate payments.

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Donald Trump: The FCPA Is a “Horrible Law and It Should Be Changed”

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Tonight is the first Republican presidential debate. If history is any guide, the candidates will deliver scripted responses and speak in vague generalities about many issues.

Many polls suggest that Donald Trump is leading the field, but whether Trump will ultimately emerge as the Republican candidate remains to be seen.

Nevertheless, one thing about Trump compared to traditional political candidates is that he is unscripted and blunt.

As highlighted in this 2012 post, Trump was unscripted and blunt when speaking of the Foreign Corrupt Practices Act in relation to Wal-Mart’s FCPA scrutiny focused on alleged payments in Mexico to obtain various licenses and permits.

In this CNBC SquawkBox interview (beginning at the 14-minute mark) Trump said that “this country is absolutely crazy” to prosecute alleged FCPA violations in places like Mexico and China.  Moreover, Trump said that the FCPA is a “horrible law and it should be changed” and that it puts U.S. business at a “huge disadvantage.”

In this criticisms, Trump confuses two issues:  (1) the FCPA as passed by Congress and (2) the FCPA as enforced by the DOJ and SEC.  Many of the concerns Trump raises were addressed by Congress when it elected not to capture payments to “foreign officials” in connection with ministerial or clerical acts or licensing and permitting issues.

The FCPA’s legislative history makes clear that in passing the FCPA Congress intended to capture only a narrow category of payments and chose not to capture so-called facilitating payments given the difficult and complex business conditions encountered in many foreign countries.  Consider the following language from the relevant Senate and House Reports.

The Senate Report stated:

“In drafting the bill . . . the Committee deliberately cast the language narrowly, in order to differentiate between such payments [to a foreign official corruptly intended to induce the recipient to use his influence to secure business, influence legislation or regulations] and low-level facilitating payments sometimes called ‘grease payments.’ Thus, [the bill] would not reach a small gratuity paid to expedite shipment through Customs or the placement of a trans-Atlantic telephone call, to secure required permits, or to ensure that a corporation’s warehouses were not put to the torch. In other words, payments made to expedite the proper performance of duties may be reprehensible, but it does not appear feasible for the United States to attempt unilaterally to eradicate all such payments.  […] The Committee fully recognizes that the proposed law will not reach all corrupt payments overseas.”

The House Report likewise stated:

“The bill’s coverage does not extend to so-called grease or facilitating payments. . . . The language of the bill is deliberately cast in terms which differentiate between such payments and facilitating payments, sometimes called ‘grease payments’. In using the word ‘corruptly’, the committee intends to distinguish between payments which cause an official to exercise other than his free will in acting or deciding or influencing an act or decision and those payments which merely move a particular matter toward an eventual act or decision or which do not involve any discretionary action. […] For example, a gratuity paid to a customs official to speed the processing of a customs document would not be reached by the bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity by performed in any event.  While payments made to assure or to speed the proper performance of a foreign official’s duties may be reprehensible in the United States, the committee recognizes that they are not necessarily so viewed elsewhere in the world and that it is not feasible for the United States to attempt unilaterally to eradicate all such payments. As a result, the committee has not attempted to reach such payments. […] The committee fully recognizes that the proposed law will not reach all corrupt payments overseas.”

The FCPA originally contained an indirect facilitating payment exception embedded in the “foreign official” element by excluding from the definition of “foreign official” “any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.”

In 1988, this indirect exception was removed from the definition of “foreign official” in favor of an express stand-alone exception.  The House Report indicates that Congress did not seek to disturb Congress’s original intent and stated:

“The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”

At present, the FCPA’s anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official … the purpose of which is to expedite or to secure the performance of a routine government action by a foreign official …”.

The FCPA defines “routine government action” as follows:

“The term “routine governmental action” means only an action which is ordinarily and commonly performed by a foreign official in

(i) obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country; (ii) processing governmental papers, such as visas and work orders; (iii) providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country; (iv) providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or (v) actions of a similar nature.

The term “routine governmental action” does not include any decision by a foreign official whether, or on what terms, to award new business to or to continue business with a particular party, or any action taken by a foreign official involved in the decision-making process to encourage a decision to award new business to or continue business with a particular party.”

Notwithstanding the above legal authority, many corporate FCPA enforcement actions in this new era concern payments made in connection with securing foreign permits, licenses or other official documents needed to do business in a foreign country. This raises the question of whether the facilitating payments exception has any real meaning or whether the enforcement agencies have essentially repealed this exception through its enforcement theories.

Indeed, the SEC’s former Assistant Director of Enforcement has called the FCPA’s facilitating payment exception “illusory” and stated:

“The drafters of the FCPA recognized that such demands for ‘grease payments’ are a reality in many countries, and accordingly made clear that certain payments made to expedite the approval of permits or licenses, or to prompt the expeditious performance of similar low-level ministerial duties, fell outside the ambit of the statute’s anti-bribery provisions. Yet that exception for ‘facilitating payments’ […] is becoming harder and harder to rely on. […]  The DOJ and SEC have pressed a narrow view of the exception in recent years … […] Of course, the fact that the FCPA’s twin enforcement agencies have treated certain payments as prohibited despite their possible categorization as facilitating payments does not mean a federal court would agree. But because the vast majority of enforcement actions are resolved through DPAs and NPAs, and other settlement devices, these cases never make it to trial. As a result, the DOJ and the SEC’s narrow interpretation of the facilitating payments exception is making that exception ever more illusory, regardless of whether the federal courts – or Congress – would agree.”

(See Richard Grime and Sara Zdeb, “The Illusory Facilitating Payments Exception: Risks Posed By Ongoing FCPA Enforcement Actions And The U.K. Bribery Act,” (2011).

As relevant to the de facto repealing of this statutory exception, a current Senior Investigations Counsel with the SEC’s FCPA Unit stated, in his personal capacity:

“While the FCPA contains several core provisions that will always withstand the test of time, the facilitation payments exception is out of date in this modern-day era of commerce and sensibility.”

(See Jon Jordan, “The OECD’S Call for an End to ‘Corrosive’ Facilitation Payments and the International Focus on the Facilitation Payments Exception Under the Foreign Corrupt Practices Act,” 13 Univ. of Pennsylvania Journal of Business Law 881 (2011).

In short, Trump likely confused the issues.  If he meant to say that certain aspects of the current FCPA enforcement landscape are absolutely crazy there are many people who would likely agree.

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