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As We Say, Not Necessarily As We Do

Yesterday Lanny Breuer (Assistant Attorney General – Criminal Division) spoke before the Council on Foreign Relations. The title of his speech (see here) was “International Criminal Law Enforcement: Rule of Law, Anti-Corruption and Beyond.”

Breuer begins, “I am pleased to be able to share with you today how the Criminal Division seeks to promote the Rule of Law in our increasingly global society.” Breuer notes that “perhaps in no area has the Criminal Division’s” approach “had more dramatic results for the international Rule of Law than in that of corruption.”

Breuer then sketches a brief history of the FCPA and notes that “when the U.S. enacted the [FCPA] in 1977, and as recently as the 1990’s, some developed countries continued to argue that a certain amount of corruption might be desirable in developing nations; and it has been only in the last decade that some developed countries have eliminated tax deductions for foreign corrupt practices.”

On this point, I fully agree that the DOJ is the undeniable leader in prosecuting bribery and corruption, and for this, it deserves credit.

Breuer then “spreads the FCPA gospel” (as Christopher Matthews at Main Justice recently termed it – see here).

Verses included: the “increased emphasis on charging individuals is part of a deliberate enforcement strategy to deter and prevent corrupt practices in the future;” “gone are the days when we relied solely on tips from whistle-blowers to build cases – instead we are now bringing the tools of organized crime investigations to white collar investigations.”

The speech ends – “I would welcome any questions you might have.”

I’ve got some questions.

During Breuer’s tenure, two signature enforcement actions were the BAE and Daimler bribery, yet no bribery enforcement actions (see here and here for prior posts).

In both actions, the DOJ alleged facts sufficient to charge the companies with FCPA anti-bribery violations. Yet in both cases, no anti-bribery violations were charged.

Included in the Rule of Law is the notion that the law is to be applied equally to all subject to the law. Under the Rule of Law, certain companies in certain industries who may sell certain products to certain customers are not immune from the law.

Yet, in the eyes of many, the BAE and Daimler enforcement actions stand for the proposition that certain companies are indeed “above” the FCPA and essentially immune from FCPA anti-bribery charges.

So, my questions are:

How was the Rule of Law advanced in the BAE and Daimler enforcement actions?

How was the Rule of Law advanced when a company (BAE) that “provided support services to [a Saudi official] while in the territory of the U.S.” including “ the purchase of travel and accommodations, security services, real estate, automobiles and personal items” (these are the DOJ’s words) is not charged with FCPA anti-violations? [Particularly when the DOJ alleges that over $5 million in invoices for benefits provided to the Saudi official were submitted by just one BAE employee during a one year period.]

How was the Rule of Law advanced when a company (Daimler) that “engaged in a long-standing practice of paying bribes to ‘foreign officials'” (these are the DOJ’s words) is not required to plead guilty to anything?

As noted above, the DOJ is the undeniable leader in prosecuting bribery and corruption, and for this, it deserves credit. However, with leadership comes responsibility and accountability.

When preaching, the preacher is subject to criticism, particularly when urging his parishioners to do as he says, not necessarily as he does.

The DOJ did some FCPA / Rule of Law preaching yesterday.

For extolling the virtues of the Rule of Law in the face of several recent high-profile examples where Rule of Law principles were seemingly ignored, the DOJ has set itself up for criticism.

Happy Birthday!

I was born in 1977.

Yet for most of my life, I was neglected and nobody cared or talked about me.

However, about ten years ago, my caretakers suggested that I change my look (get a new haircut, change my wardrobe, those sort of things).

Boy did that help.

In some circles at least, I am now the most popular person in the room.

Lawyers travel to the far reaches of the globe just to determine if I am relevant, corporations publicly disclose potential dates with me, there are seminars and training sessions about me, lawyers run to Washington D.C. (my birthplace) to tell my caretakers how relevant I am (when in fact I may not be relevant at all) … and, I even hear there are a few blogs devoted to me.

Who am I?

Why of course I am the FCPA and today is my 32nd birthday!

*****

On December 19, 1977, the FCPA was enacted. On December 20, 1977, President Carter signed the FCPA into law.

Hosting an FCPA birthday party?

Here is the signing statement to read just before the candles are placed on the cake. After cake, instead of a game of “pin the cash-filled suitcase on the foreign official” how about a discussion as to whether the enacting Congress and President Carter would even recognize certain enforcement theories which have become a hallmark of current enforcement of the FCPA.

S. 1700 … A Bad Bill

[Warning – this post may cause your head to spin]

Bribery and corruption are bad.

That does not mean, however, that every attempt to curtail bribery and corruption is good.

Case in point – “The Energy Security Through Transparency Act of 2009” (S. 1700)(the “Act”) introduced in the Senate on September 23, 2009 by Richard Lugar (R-IN) and co-sponsored by several other senators – both Democrats and Republicans. (see here and here).

S-1700 seeks to amend Section 13 of the Securities Exchange Act of 1934 (15 USC 78m) (“Periodical and Other Reports”) by adding a new section (m) “Disclosure of Payment by Resource Extraction Issuers.”

Under this proposed new section, no later than 270 days after enactment of the Act, the SEC shall issue final rules that would require:

• a “Resource Extraction Issuer”( a defined term which means an issuer that:(i) is required to file an annual report with the Commission; and (ii) engages in the commercial development of oil, natural gas, or minerals”)

• to include in its annual report

• “information relating to any payment”

• made by the issuer, “a subsidiary or partner” of the issuer, “or any entity under the control of the issuer”

• to a “foreign government” (a defined term which means a “foreign government, an officer or employee of a foreign government, an agent of a foreign government, a company owned by a foreign government, or a person who will provide a personal benefit to an officer of a government if that person receives a payment, as determined by the [SEC].”

• for “the purpose of the commercial development of oil, natural gas, or minerals.”

The final rules to be issued by the SEC would require that the annual report include: (i) the type and total amount of such payments made for each project” of the issuer “relating to the commercial development of oil, natural gas, or minerals;” and (ii) “the type and total amount of such payments made to each foreign government.”

Thereafter, the Act requires that “to the extent practicable, the [SEC] shall make available online, to the public, a compilation of the information required to be submitted” under the above rules.

Wow, there is a lot here, so let me try to break this down a bit – to the extent I am able.

First, this much is clear. The disclosure/reporting requirement would apply to more than just U.S. “Resource Extraction Issuers” and, in this way, is really no different than the FCPA’s books and records and internal control provisions which apply to all issuers – not just U.S. issuers.

According to one analysis (see here), of the thirty largest internationally operating oil and gas companies, twenty-seven of the companies (including those in Europe, Canada, Russia, China and Brazil) would be covered by the Act based on their issuer status.

Thus, a concern one often hears expressed with the FCPA … that it puts U.S. companies at a disadvantage … would not seem credible if made in connection with this Act. (Of course, because the FCPA – including both its anti-bribery provisions and books and records and internal control provisions – apply to more than just U.S. companies, that argument is not credible in the FCPA context either; but that is an issue for another day).

Beyond the fact that the Act will apply to more than just U.S. “Resource Extraction Issuers,” not much else about the Act is clear.

Therein lies the problem.

Not sure, if your company is a “Resource Extraction Issuer” because you are unclear what “commercial development of oil, natural gas, or minerals” means?

No problem, as the Act provides this crystal clear definition – “the term ‘commercial development of oil, natural gas, or minerals’ includes the acquisition of a license, exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, as determined by the [SEC].

In other words, if you are an issuer, and you engage in “significant actions relating to oil, natural gas, or minerals” you just may have some huge, new reporting / disclosure requirements imposed on you!

Still confused? Join the club.

Is selling equipment to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?” Is selling exploration software to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?”

What is a payment? That’s an easy one and the Act provides this crystal clear definition – the term payment means:

(i) a payment that is (I) made to further commercial development of oil, natural gas, or minerals; and (II) not de minimis; and

(ii) includes taxes, royalties, fees, licenses, production entitlements, bonuses, and other material benefits, as determined by the [SEC].”

Ignoring for the moment the imperfect and imprecise definition of “Resource Extraction Issuer,” it is one thing to perhaps require such issuers to disclose royalties paid to a foreign government, and if that is viewed as providing transparency and eliminating bribery and corruption (however dubious that view may be), well then perhaps the Act is a good piece of legislation.

But the Act seeks disclosure and reporting of much, much more and could conceivably require disclosure of every single dollar a “Resource Extraction Issuer” makes to, well, just about anybody in connection with the “commercial development of oil, natural gas, or minerals” if the money ultimately makes its way to a foreign government, an officer or employee of a foreign government, a company owed by a foreign government, or any person who will provide a personal benefit to an officer of a government.

What’s the knowledge requirement in the Act?

There isn’t one!

So if a “Resource Extraction Issuer” makes a payment to person who then unbeknownst to the “Resource Extraction Issuer” makes a payment to a person “who will provide a personal benefit to an officer of a government” there is a disclosure obligation.

But how the heck is the “Resource Extraction Issuer” supposed to disclose something it doesn’t know about?

Here is the real kicker though. The Act requires all payments (meeting the above definitions – if indeed you can figure out what those definitions are) to be disclosed, including perfectly legitimate and legal payments!

Here is another mind bender. Say you are one of those foreign “Resource Extraction Issuers” such as Petrobras (Brazil) that also doubles as a so-called “company owned by a foreign government.” Under this Act, because the SEC already considers all Petrobras employees to be “foreign officials,” such companies would presumably be required to disclose the salaries and benefits provided to all of its employees.

How silly is that?

To those who support this Act, I’ve got this to say – “we’ve been down this road before.”

It’s called the FCPA (and the various versions of the statute before it was enacted). Years of congressional hearings were had as to this very same disclosure issue and we don’t need to repeat this exercise.

Here is some background.

The FCPA, of course, as enacted, contained (and still contains) an outright prohibition on improper payments (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.

The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) however, started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.

As to these disclosure provisions, many people, including, most notably Senator Proxmire (D-WI – a Congressional leader on the “FCPA” issue), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate.

Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”

The final House Report (see here) on what would become the “FCPA” is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected):

“Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements.”

The words of the late Senator Proxmire and the reasoned conclusion reflected in the House Report are equally applicable here.

The Act (while however noble its intended purpose) is akin to “swatting a fly with a bazooka.”

The FCPA already criminalizes improper payments made to the “foreign government” recipients targeted in the Act to the extent those payments are made to “obtain or retain business.” Do we really now need a law that requires “Resource Extraction Issuers” to disclose ALL such payments, even perfectly legitimate and legal payments?

For the record, S-1700 has been referred to the Senate Banking, Housing, and Urban Affairs Committee.

For the record, similar legislation was introduced in Congress in 2008, but no action was taken on the bills.

For the record, this post has left me dizzy just thinking through the ramifications. I can’t imagine being a corporate counsel actually tasked with ensuring compliance with this Act.

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.

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