There is no legal obligation to voluntarily disclose actual violations of the Foreign Corrupt Practices Act, something even the DOJ has acknowledged various times. 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 International is involved in the heating, air conditioning, and refrigeration markets.
This October 2016 post asked what made Lennox so hot that it disclosed to the DOJ and SEC an investigation into a $475 payment in Russia to release a shipment of goods being held by customs officials.
Specifically, the 2016 disclosure stated:
“In October 2016, the Company self-reported to the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) an alleged payment in the amount of 30,000 rubles (approximately US $475) to a Russian customs broker or official. The Company, under the oversight of its Audit Committee, has initiated an investigation into this matter with the assistance of external legal counsel and external forensic accountants. The alleged payment was purportedly made to release a shipment of goods being held by Russian customs officials due to inaccurate paperwork. The value of the shipment was approximately €62,000 (approximately US $68,500). The allegations are related to the Company’s subsidiary in Russia, which had 2015 annual sales of approximately US $5 million and approximately US $3 million in sales for the nine months ended September 30, 2016. To date, the investigation has not resulted in any evidence of other potentially improper payments; however, the investigation has raised questions regarding possible irregularities with respect to other Russian customs documents. The investigation is ongoing. The Company intends to fully cooperate with the SEC and the DOJ regarding this matter. The Company does not anticipate any material adverse effect on its business or financial condition as a result of this matter.”
The disclosure was arguably one of the most absurd FCPA disclosures ever.
Given the amount of the payment at issue and its apparent limited nature, few FCPA practitioners would likely have counseled Lennox to voluntarily disclose. That alone should be questioned.
The disclosure also should be questioned, more fundamentally, because of the FCPA itself.
The FCPA’s anti-bribery provisions specifically exempt “facilitating or expediting payments 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 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 FCPA’s legislative history clearly reflects Congress’s intent regarding facilitating payments.
In pertinent part, the relevant Senate Report specifically states: “[The FCPA] would not reach a small gratuity paid to expedite shipment through customs …”. Likewise, the relevant House Report specifically states: “a gratuity paid to a customs official to speed the processing of a customs document would not be reached by the [FCPA].”
Even if the payment Lennox disclosed would not fall under the FCPA’s facilitating payment exemption, there is of course the FCPA’s obtain or retain business element. At least three courts have concluded that payments outside the context of foreign government procurement – as the payment at issue in the Lennox disclosure surely would seem to be – do not even violate the FCPA.
The only court to have concluded that such payments could violate the FCPA was the 5th Circuit in U.S. v. Kay, a case concerning payments to Haitian customs officials for the purpose of reducing customs duties and sales taxes owed to the Haitian government. According to the court, the key question of whether the payments constituted an FCPA violation depended on whether the payments were intended to lower the company’s costs of doing business in Haiti enough to assist the company in obtaining or retaining business in Haiti.
Yet even in that case, the court cautioned:
“There are bound to be circumstances in which such a cost reduction does nothing other than increase the profitability of an already-profitable venture or ensure profitability of some start-up venture. Indeed, if the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting is obtaining or retaining business would be unnecessary, and thus surplusage—a conclusion that we are forbidden to reach.”
For the reasons highlighted above, it is difficult to see how the payment disclosed by Lennox is even in violation of the FCPA as written, the FCPA as interpreted by the courts, and the FCPA as intended by Congress.
In short, some serious questions should be asked about why Lennox made that 2016 disclosure.
Among the questions that should be asked concern the role of FCPA counsel who, if this instance of FCPA scrutiny follows the typical path and results in typical in pre-enforcement action professional fees and expenses, stand to pull in millions.
Fast forward three years and Lennox is still under FCPA scrutiny and disclosed in its most recent annual report:
“In October 2016, we self-reported to the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) an alleged payment in the amount of 30,000 rubles (approximately US $475) to a Russian customs broker or official. Under the oversight of our Audit Committee, we initiated an investigation into this matter with the assistance of external legal counsel and external forensic accountants.The scope of the investigation was later expanded to include our operations in Poland and Ukraine. The investigation raised questions regarding possible irregularities with respect to noncompliance with customs documents and procedures related to these operations. We concluded our investigation and communicated our findings to the SEC and the DOJ. The DOJ has declined to prosecute this matter and we continue to fully cooperate with the SEC regarding this matter.”
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