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A Results Based Opinion Procedure Release?

The Department of Justice recently issued (see here) an FCPA opinion procedure release – a meaningful event in the FCPA arena given the general lack of substantive FCPA case law. [To read more about the detailed requirements of the Foreign Corrupt Practices Act Opinion Procedure process (see here and here)]

Reading Opinion Procedure Release 10-02, in which a “non-profit, U.S. based microfinance institution” was the Requestor, I found myself returning to the same question – is this a results-based DOJ opinion?

The big-picture facts are as follows: to get a government-issued license, an entity subject to the FCPA is directed by a government agency to provide something of value to an institution whose board members include a sitting government official and a former government official.

According to the DOJ’s analysis, an analysis that mentions the word “humanitarian” more than once, the contemplated conduct would not cause the DOJ to take any enforcement action.

As explained below, a relevant factor in the DOJ’s opinion is the due diligence the Requestor undertook. Yet, if … say an oil and gas company … undertook similar due diligence steps would such due diligence be viewed as perfuctory or superficial?

Was the humanitarian, non-profit microfinance institution viewed a bit differently than a similarily situated for-profit company?

Was the DOJ’s mindset as to the red flags involving the non-profit along the following lines – this must be legitimate until it is proven that it isn’t?

Conversely, is the DOJ’s mindset as to red flags involving for profit companies, particularly those in high-risk industries, along the following lines – this must be illegal until it is proven that it is legal?

I don’t know the answers to these questions and by posing them I am not drawing any conclusions myself.

Merely interesting questions to ponder while reviewing the facts of Opinion Procedure Release 10-02.

The facts are as follows.

The Requestor is “in the process of converting all of its local operations to commercial entities that are licensed as financial institutions, in order to permit them to attract capital and expand their services to include offerings such as savings accounts, microinsurance and remittances.”

“One of those operations is a wholly-owned subsidiary in a country in Eurasia” which is “currently organized as a limited liability company under the laws of the Eurasian country and operates under a special non-banking financial institution license from the Central Bank of that country” and whose activities are “currently overseen by an agency of the Eurasian country (the ‘Regulating Agency’).”

“As part of its oversight of the Eurasian Subsidiary and [its] proposed transition to commercial status, the Regulating Agency has pressed the Eurasian Subsidiary to take steps to ‘localize’ its grant capital to ensure that it remains in the Eurasian country.”

“Among other things, the Regulating Agency has insisted that the European Subsidiary make a grant to a local microfinance institution [Local MFI] in an amount equal to approximately 33 percent of the Eurasian Subsidiary’s original grant capital.”

“The Regulating Agency has provided a list of Local MFI’s in the Eurasian country and has stated that the Eurasian Subsidiary could not fulfill its localization obligation unless it provided grant funding to one or more of them.”

According to the release, the Requestor “is concerned that compelled grants to an institution on a short list of institutions – without appropriate safeguards – raise red flags under the FCPA.” (emphasis added).

According to the relase, the Regulating Agency rejected the Requestor’s alternative proposals and insisted on the above described arrangement.

The thing of value demanded by the Regulating Agency is not exactly spare change.

According to the release:

“To meet the Regulating Agency’s requirements, the Eurasian Subsidiary proposes to contribute a total of $1.42 million to expand the loan and technical capacity of a Local MFI which previously has received grant funding from the foreign aid community. Of the $1.42 million, $1.07 million would be used to increase the Local MFI’s loan capital – to more than triple its current loan capital. The remaining $350,000 would be used in support of the grant: (a) $50,000 to pay for loan tracking and reporting management system software; (b) $120,000 for capacity-building services and support, including hiring six additional staff members and retaining vendors to provide training and other technical assistance; and (c) $180,000 for the engagement of two independent organizations to monitor and audit the use of the proposed grant (the “Proposed Grant”).”

As referenced above, the Requestor conducted certain due diligence in connection with the “compelled grant.”

According to the release:

“The Eurasian Subsidiary undertook a three-stage due diligence process to vet the potential grant recipients and select the proposed grantee. First, it conducted an initial screening of six potential grant recipients by obtaining publicly available information and information from third-party sources. Based on this review, it ruled out three of the six MFI candidates as generally unqualified to receive the grant funds and put them to effective use. Second, the Eurasian Subsidiary undertook further due diligence on the remaining three potential grant recipients. This due diligence was designed to learn about each organization’s ownership, management structure and operations; it involved requesting and reviewing key operating and assessment documents for each organization, as well as conducting interviews with representatives of each MFI to ask questions about each organization’s relationships with the government and to elicit information about potential corruption risk. Based on the information obtained during this second-stage review, the Eurasian Subsidiary ruled out two of the three remaining potential grant recipients: one for conflict of interest concerns, the other after the discovery of a previously undisclosed ownership change in the entity. As a third round of due diligence, the Eurasian Subsidiary undertook targeted due diligence on the remaining potential grant recipient, the Local MFI. This diligence was designed to identify any ties to specific government officials, determine whether the organization had faced any criminal prosecutions or investigations, and assess the organization’s reputation for integrity.”

The release notes that this “final round of due diligence did not identify information of potential corruption in connection with the Proposed Grant.”

However, it did “uncover that one of the board members of both the Local MFI and the Local MFI’s Parent Organization is a sitting government official in the Eurasian country and that other board members are former government officials.”

According to the release:

“The sitting government official, however, serves in a capacity that is completely unrelated to the microfinancing industry. In addition, under the law of the Eurasian country, sitting government officials may not be compensated for this type of board service, and the Local MFI confirmed that neither its own board members nor the board members of the Local MFI’s Parent Organization receive compensation for their board service. The proposed grant agreement would expressly prohibit the Local MFI from transferring any of the grant funds to the Local MFI’s Parent Organization or otherwise using the grant funds to compensate board members of either the Local MFI or the Local MFI’s Parent Organization.”

The release then mentions several “significant controls” proposed by the Requestor as to the Proposed Grant, including “the grant agreement would expressly prohibit the Local MFI from transferring any of the grant funds to the Local MFI’s Parent Organization or otherwise using the grant funds to compensate board members of either the Local MFI or the Local MFI’s Parent Organization.”

Based on these core facts, the DOJ’s analysis is:

“the Department does not intend to take any enforcement action with regard to the proposed transaction…”

The DOJ first stated that the Requestor was subject to the FCPA’s anti-bribery provisions and that the Proposed Grant to the Local MFI was indeed “for the purpose of obtaining or retaining business.”

The DOJ framed the question as follows:

“The issue presented is whether the Proposed Grant would amount to the corrupt giving of anything of value to any officials of that country in return for obtaining or retaining business. Based on the due diligence that has been done and with the benefit of the controls that will be put into place, it appears unlikely that the payment will result in the corrupt giving of anything of value to such officials.”

The DOJ stated:

“As an initial matter, it is important to note that the expressed motivation of the Regulating Agency here is to ensure that grant money given to the Eurasian Subsidiary for humanitarian purposes in the Eurasian country continues to be used for humanitarian purposes in that country. The Requestor was concerned, nevertheless, that without due diligence and appropriate controls, such a grant could carry a significant risk that the result might be the transfer of things of value to officials of the Eurasian country.”

The DOJ continued:

“The Department is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations. As noted above, the Requestor conducted three rounds of due diligence. The controls that the Requestor proposes would ensure with reasonable certainty that the grant money from the Eurasian Subsidiary would not be transferred to officials of the Eurasian country. As noted, these controls include the following: the staggered payment of grant funds; ongoing monitoring and auditing; the earmarking of funds for capacity-building; a prohibition on the compensation of board members; and the institution of an anti-corruption compliance program.”

The DOJ then lists three other opinion releases that deal with charitable-type grants or donations and ultimately states that the Proposed Grant “is consistent with the Department’s past approach to grant-related requests.”

This is the curious aspect of the DOJ’s analysis because the Requestor’s Proposed Grant was not charity or a donation, rather it was a “compelled grant” (a term DOJ used earlier in the release) specifically requested by the Regulating Agency as a condition to the Requestor obtaining the desired license.

Results-based opinion?

You be the judge.

For other coverage of Opinion Procedure Release 10-2, see here, here and here.

Schumer Calls For BP Investigation

Senator Charles Schumer (D-NY) has requested a Department of Justice investigation of BP.

It has nothing to do with the Gulf of Mexico, but rather the Foreign Corrupt Practices Act.

BP is British company, but its ADR shares trade on the New York Stock Exchange and BP is thus subject to the FCPA.

In a letter to Attorney General Eric Holder (see here) Schumer requests that the DOJ investigate whether BP violated any of the provisions of the Foreign Corrupt Practices Act (“FCPA”) in connection with the August 2009 release of Abdel Baset al-Megrahi, the Libyan terrorist convicted of the 1988 bombing of Pan-Am flight 103 that killed 270 people, including 189 Americans. [This post is limited to a discussion of the FCPA, and not the above referenced release.]

Why does Schumer think BP may have violated the FCPA?

Because, according to Schumer’s letter – “BP has admitted that it lobbied United Kingdom government officials to wrap up a proposed prisoner transfer agreement (PTA) with the Libyan government amid concerns that a delay in reaching this agreement would harm a deal BP had signed with Libya’s National Oil Company to explore for oil and gas in the Gulf of Sidra and in parts of Libya’s western desert—an agreement which BP estimated could lead to eventual earnings of up to $20 billion.”

Hold the phone and stop the presses … a large corporation has admitted that it lobbied its own government in connection with a business purpose.

This would seem to be yet another example of the FCPA’s double standard in that what is routinely done at home suddenly becomes a potential criminal matter when done in connection with international business. For other examples of the double standard see here and here.

Unless there is a finding that something of value went to a foreign official, the FCPA is not implicated because the law does not apply to giving things of value to a foreign government itself. Strange you say, but that is how the FCPA is written – a fact even the DOJ recognizes. See here for DOJ Opinion Procedure Release 09-01 in which the DOJ states that the proposed course of conduct “fall[s] outside the scope of the FCPA in that the [thing of value] will be provided to the foreign government, as opposed to individual government officials …”

Schumer’s letter also states:

“If BP, or its officials, promised the Libyan Government that it would secure al-Megrahi’s release from detention in exchange for oil exploration rights—or even that it would provide lobbying services for such a release on the Libyan Government’s behalf—BP may have been unlawfully authorizing performance of valuable services to the Libyan Government in exchange for profitable oil exploration rights in express violation of the FCPA. Similarly, if BP promised anything of value to United Kingdom government officials to secure al-Megrahi’s release, this would also violate the FCPA.”

According to Schumer’s press release, he and “Senators Gillibrand, Menendez, and Lautenberg last week requested the British government investigate the circumstances surrounding al-Megrahi’s release and requested that BP and the British government turn over all documents related to the oil companies’ efforts lobbying for a prison-release agreement with Libya. They also called for the US State Department to press the British to investigate BP’s involvement in the incident.”

It is unusual for a U.S. politician to call upon DOJ to investigate a foreign-based company (or any company for that matter) for FCPA violations – particularly when the conduct at issue largely centers on conduct between the company and its own government officials.

Although the U.K. Bribery Act is not yet law (see yesterday’s post here), when enacted, it is expected to have a broad jurisdictional scope and apply to certain U.S. companies, just as the FCPA applies to certain U.K. companies.

Following Schumer’s lead will a British politician request that the U.K. Serious Fraud Office investigate a U.S. company because it lobbied its own government officials in connection with a business purpose? As John Gapper, the associate editor and chief business commentator of the U.K. based Financial Times, stated in an editorial on the subject, “the US has been no stranger to dubious deals with foreign governments that benefit both its strategic interests and US companies.”

For more, see here for Christopher Matthew’s Main Justice story on the topic.

A Look Back in Time

Literally, Time Magazine that is.

In connection with my work in progress on the FCPA’s legislative / early history, the below articles from Time’s searchable archives caught my eye. (See here).

*****

In November 1979, Time carried a piece (here) about the DOJ’s new program to offer advice on the FCPA – what has come to be called the FCPA Opinion Procedure Release. The article contains this quote from Stanley Sporkin, the SEC’s then Enforcement Chief: “We do not have guidelines for rapists, muggers and embezzlers, and I do not think we need guidelines for corporations who want to bribe foreign officials.” Fast forward 30-some years and Sporkin is still on the FCPA scene. It was recently reported (here) that Sporkin is assisting former FBI Director Louis Freeh as the monitor in the Daimler enforcement action. Among the monitor’s duties is “review[ing] and evaluat[ing] the effectiveness of Daimler’s internal controls, record-keeping, and existing or new financial reporting policies and procedures as they relate to Daimler’s compliance with the books and records, interal accounting controls and anti-bribery provisions of the FCPA, and other applicable anti-corrption laws.” (See here Appendix D).

*****

Almost as soon as the FCPA was passed, concerns were raised that the law was harmful to U.S. business. There was much activity on this issue in the early 1980’s as evidenced in this article from October 1980, this article from March 1981, this article from March 1981 as well, and this article from June 1981.

These articles detail, among other things: (i) that the Carter administration (Carter signed the FCPA into law in December 1977) “sent a hefty 250-page report to Congress on the various ways the U.S. discourages exporters” – one example – “the provisions of the 1977 Foreign Corrupt Practices Act, which have never been clearly spelled out by the Justice Department.” (ii) that the GAO released a report in 1981 (see here for a prior post) detailing how the FCPA “is riddled with complicating ambiguities and shortcomings” including the key “foreign official” element; and (iii) that President Reagan’s “transition team on the workings of the Securities and Exchange Commission […] has recommended decriminalization of bribery.”

At to this last point, Time notes:

“Such a stance by the Administration toward foreign bribery would itself cause problems. By failing to enforce the act as written, the Administration not only would leave the legislation’s ambiguities unresolved, but would show a disrespect for the law, which is itself corrupting. Since the U.S. has adopted a moral position with regard to foreign bribery, neither the Administration nor Congress can now afford to let the subject wither away without compromising its principles in the process.”

*****

In response to Forbes recent FCPA article (see here), the Wall Street Journal Law Blog asked (see here) “is the FCPA just a full employment act for the private bar.” Such a question as it relates to the FCPA is not new. This March 1981 Time piece notes that the FCPA was “dubbed by one Wall Street wag” as the “Accountants’ Full Employment Act of 1977.”

The 1981 GAO Report

The year was 1981.

The FCPA was a mere infant – approximately 3.5 years old. Those living with it were concerned with its ambiguities and complying with it.

In March 1981, the “investigative arm” of Congress, the Government Accountability Office (GAO) released a report, “Impact of Foreign Corrupt Practices Act on U.S. Business.” (See here and here).

The report was based, in part, on a GAO questionnaire survey of 250 companies randomly selected from the Fortune 1000 list of the largest industrial firms in the U.S.

The questionnaire addressed the FCPA’s relationship to the following four areas: (1) corporate policies and/or codes of conduct, (2) corporate systems of accountability, (3) cost burdens, if any, incurred by management to comply with the act, and (4) corporate opinions regarding the (i) acts effect on U.S. corporate foreign sales, (ii) the clarity of the act’s provisions, (iii) the potential effectiveness of an international antibribery agreement, and (iv) perceived effectiveness of the act in reducing questionable payments.

The GAO also discussed the FCPA’s impact with leading public accounting firms, professional accounting and auditing organizations, professional legal associations and business and public interest groups. In addition, the GAO discussed enforcement of the FCPA with DOJ and SEC officials and examined documentation relating to enforcement activities. Also interviewed by the GAO were officials from the Overseas Private Investment Corporation, Department of Commerce, Treasury, and State.

The GAO report covers all the topics listed above. However, this post relates to the clarity of the FCPA’s provisions.

Chapter 4 of the Report is titled “Issues Surrounding the Act’s Antibribery Provisions.”

The chapter begins by noting that there is “confusion over what constitutes compliance with the act’s antibribery provisions.”

The report notes that “corporate and governmental officials have criticized the anti-bribery provisions as being ambiguous about what constitutes compliance.”

The ambiguities include confusion or uncertainty about a host of issues, including the “definition of ‘foreign official.””

At the time, the term “foreign official” specifically excluded any employee whose duties are essentially ministerial or clerical.” This exclusion was eliminated in the 1988 amendments to the FCPA. Otherwise the definition of “foreign official” the GAO report found to be ambiguous is same today – “any officer or employee of a foreign government or one of its departments, agencies or instrumentalties.” [Note -the public international organization prong was added in 1998].

The report notes:

“This definition has been criticized as unclear. Lawyers we contacted questioned whether employees of public corporations, such as national airlines or nationalized companies, are considered foreign officials. Similar questions have surfaced in countries – particularly developing countries – where there are small and frequently closely related groups, including both business and government relationships as well as families. Individuals within these groups frequently move between the private and public sectors, often without a clear distinction.”

The report then discusses the DOJ’s guidance program and begins by noting that “President Carter expressed concern over the potential effect of the act’s alleged ambiguities in September 1978 – only 9 months after its passage.” “To reduce this uncertainty, he directed the Department of Justice to give the business community guidance concerning its enforcement intentions under the act.”

The report notes that in March 1980, the DOJ implemented its “long awaited guidance program” but that the “program has yet to effectively address the ambiguities, and it is doubtful it will.”

In concluding Chapter 4 of the Report, the GAO notes:

“the act is an expression of congressional policy, and rigorously defined and completely unambiguous requirements may be impractical and could provide a roadmap for corporate bribery. On other hand, companies, whether registered with SEC or domestic concerns under Department of Justice jurisdiction, should be subject to clear and consistent demands by the Government agencies responsible for enforcing the act.”

An option the GAO recommends is that “the Justice Department, SEC, and other interested agencies […] offer legislative proposals which would amend the act to more explicitly define the antibribery provisions and [such an amendment] could cover concepts such as the definition of “foreign official.”

GAO notes “because of the importance of the act and the questions and concerns about the antibribery provisions, close congressional oversight is needed.”

Not surprsingly, both DOJ and SEC disagreed with the GAO’s findings. In its responses, the agencies attack, not the substance of the findings, but the GAO’s methodology.

The GAO report states:

“Both SEC and Justice disagree with our recommendations that they develop alternative ways to address the antibribery provisions. They contend that our statistics suggest that ambiguities in the act are not a sigifnicaint problem.”

In 1981, the investigative arm of Congress found, based on extensive study, that the FCPA’s “foreign official” element was ambiguous.

Here we are some thirty years later having the same discussion.

[Here is another interesting nugget. In June 1981, John Fedders was named to be the SEC’s Director of Enforcement, replacing Stanley Sporkin who left to become general counsel at the CIA. During a news conference, Fedders “pledged to enforce, with discretion, the Foreign Corrupt Practices Act, which he criticized as being ambiguous.” See Owen Ullmann, “Corporate Lawyer Gets SEC Enforcement Post,” Associated Press, June 29, 1981.]

Hiring a “Foreign Official”

Hiring a “foreign official” can be risky. Particularly when the “foreign official” is recommended by a foreign government. These are certain FCPA “red flags.”

However, “red flags” don’t always turn out red and in this case the “red flags” turn a pleasant shade of pink because the “foreign official” recommended by a foreign government is being hired in connection with a U.S. government contract.

That at least appears to be one take-away from FCPA Opinion Procedure Release No. 10-01 (see here).

According to the Release, a U.S. company (the “Requestor”) “entered into a contract with an agency of the U.S. government to perform work in a foreign country.” “Pursuant to that contract, the Requestor is obligated to hire and compensate individuals in connection with that work” and “at least one individual to be hired, and perhaps more, is a foreign official within the meaning of the FCPA.”

Among other things, the Requestor represented that: (i) the foreign country selected the “foreign official” to be hired based upon the individual’s qualifications for the position; (ii) the U.S. government directed the Requestor to hire the “foreign official”; (iii) the “foreign official” will be compensated $5,000 per month to provide services as directed by the foreign country; (iv) the foreign official currently serves as a paid officer for an agency of the foreign country, but the individual’s position does not relate to the work at issue and the services that the individual will perform are separate and apart from those performed by the individual as a “foreign official”; and (v) the “foreign official” will not perform any services on behalf of, or make any decision affecting the Requestor including any procurement or contracting decisions.

Based on this information, the DOJ stated that it “does not presently intend to take any enforcement action with respect to the proposed service contract described in this request.”

According to the DOJ, “[w]hile the Individual is a “foreign official” within the meaning of the FCPA, and will receive compensation as Facility Director, through a subcontractor, from the Requestor, the Individual is being hired pursuant to an agreement between the U.S. Government Agency and the Foreign Country, and will not be in a position to influence any act or decision affecting the Requestor.”

The DOJ further stated:

“The Requestor is contractually bound to hire and compensate the Individual as directed by the U.S. Government Agency. The Requestor did not play any role in selecting the Individual, who was appointed by the Foreign Country based upon the Individual’s qualifications. Moreover, the Individual’s position is separate and apart from the Individual’s position as a Foreign Officer. In neither position will the Individual perform any services on behalf of, or receive any direction from, the Requestor. Accordingly, the Individual will have no decision-making authority over matters affecting the Requestor, including procurement and contracting decisions.”

To read more about the detailed requirements of the Foreign Corrupt Practices Act Opinion Procedure process (see here and here).

For additional FCPA Opinion Procedure Releases on the topic of hiring a “foreign official” or otherwise doing business with a “foreign official” see 80-4 (here), 82-03 (here), 86-01 (here), 93-01 (here), 93-02 (here), 94-01 (here), 96-02 (here), 00-01 (here), 01-02 (here), 08-01 (here)

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