Examining the root causes of certain Foreign Corrupt Practices Act enforcement actions is not meant to rationalize or condone the conduct at issue, but just to better understand the circumstances given rise to the enforcement action in the first place.
For instance, like several other FCPA enforcement actions highlighted in this post, a root cause for a portion of the conduct alleged in the recent PDVSA related individual enforcement action is that Venezuela was unable to pay its bills and that alleged “foreign officials” offered to pay the outstanding bills (among a stack of many no doubt) in exchange for things of value.
It is difficult to square the enforcement theory that seeking what one is legally entitled to receive equates to a violation of the FCPA’s anti-bribery provisions with several actual legal elements.
Corrupt intent? Congress tells us in the FCPA’s legislative history that “the word ‘corruptly’ connotes and evil motive or purpose.” How can seeking what one is legally entitled to receive evil?
Obtain or retain business? In U.S. v. Kay, the 5th Circuit did conclude that payments outside the context of foreign government procurement “could” violate the FCPA, but only if payments were intended to lower a company’s cost of doing business enough to assist the company in “obtaining or retaining” business. Specifically, the court stated:
“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 in obtaining business would be unnecessary, and thus surplusage – a conclusion we are forbidden to reach.”
How can seeking what one is legally entitled to receive satisfy the “obtain or retain business” element?
Facilitating payments? The FCPA expressly excludes from the anti-bribery provisions payments made “to expedite or to secure the performance of a routine government action by a foreign official.” How can seeking what one is legally entitled to receive not fit within the exception for “secur[ing] the performance of a routine government action”?
Back to the recent PDVSA individual enforcement action in which the DOJ alleged in the indictment:
“Beginning in at least 2010, Venezuela began to experience a liquidity crisis as the profits earned through PDVSA, which historically had been a significant source of revenue to the Venezuelan government as a result of its oil reserves, were insufficient to meet the government’s expenses. Numerous analysts began to speculate that PDVSA could default on its debt, and the government made public commitments for PDVSA to increase oil production.
Given these liquidity problems, PDVSA was unable to pay all of its vendors in a timely manner, but remained under pressure to continue to escalate oil production.
In or about 2011, Rincon and Shiera [individuals previously charged with violating the FCPA’s anti-bribery provisions in connection with the same core conduct] were approached by a group of individuals who consisted of then-current PDVSA officials and individuals outside PDVSA with influence at PDVSA, including De Leon, Villalobos, and Istruriz, referred to as the ‘management team.’ The management team offered to give Rincon’s and Shiera’s companies payment priority over other PDVSA vendors, ensuring that Rincon’s and Shiera’s companies would get a least partial payment on outstanding PDVSA invoices, and to provide Rincon’s and Shiera’s companies with assistance in winning future PDVSA business, in exchange for providing a bribe to the management team in the amount of 10% of all payments Rincon and Shiera received from PDVSA. The management team made offers to other vendors known and unknown to the Grand Jury. In addition, individual members of the management team solicited additional bribe payments from Rincon and Shiera. (emphasis added).
De Leon and Villalobos explained that the bribe proceeds would be split and would be shared among De Leon, Villalobos, Rincon, Istruriz, Reiter [and other officials].
Rincon and Shiera agreed to make the payments to the management team in exchange for payment priority and assistance in winning future PDVSA contracts.”
The recent PDVSA individual enforcement action is not the first time the dubious enforcement theory that seeking what one is legally entitled to receive equates to a violation of the FCPA’s anti-bribery provisions has been used.
In 2013, the DOJ and SEC extracted $54 million from Archer Daniels Midland Co. and related entities. As explained in the article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action,” the principal feature of the enforcement action was that ADM and its shareholders were victims of a corrupt Ukraine government which refused to release value-added tax refunds legitimately owed to the company. In the words of the DOJ, “the Ukrainian government did not have the money to pay VAT refunds that it owed to companies that sold Ukrainian goods outside of Ukraine.” Likewise, the SEC acknowledged that the “Ukrainian government determined to delay paying the VAT refunds owed or did not make any refunds payments at all.”
Prior to the ADM action, there was a 2010 SEC action against Joe Summers concerning conduct in – you guessed it – Venezuela. The title of this previous post was “Paying to Secure Receivables Is Now Bribery?” and it began as follows.
“Attention to companies (and employees) operating around the world. If you are party to a contract, and a mid-level employee at the entity receiving services under the contract holds up payment of money the company is legitimately entitled to receive, but the mid-level employee requests payment in order to release the funds, and you make the requested payment, you are violating the Foreign Corrupt Practices Act.”
As highlighted in the previous post, part of the SEC’s allegations included the following.
“Following widespread strikes and civil unrest in Venezuela in late 2002, Pride […] and other companies performing work for PDVSA (PDVSA is the Venezuela state-owned oil company) had difficulty collecting outstanding receivables from PDVSA. By early 2003, Pride […] had significant unpaid receivables for services that it had provided to PDVSA. In or around March or April 2003, Pride […] received information that a mid-level PDVSA accounts payable employee was holding up the payment of funds owed to Pride […] and wanted a payment of approximately $30,000 in order to release the funds due. In or around March or April 2003, Summers authorized a payment of approximately $30,000 to a third party, believing that all or a portion of the funds would be offered or given by the third party to an employee of PDVSA for purposes of securing an improper advantage in receiving payment from PDVSA. Shortly thereafter, in or around April 2003, Pride […] received overdue payments from PDVSA for work that Pride […] had performed.”
A third example of an FCPA enforcement action being based on a dysfunctional government not paying a company money it was legitimately owed was highlighted in this previous titled “One of the More Dubious FCPA Enforcement Actions of All-Time” concerning a 1994 DOJ enforcement action against Vitusa Corporation and its President Denny Herzberg.
As highlighted in the previous post, the DOJ alleged that Vitusa (a New Jersey corporation engaged in the business of selling commodities and other goods) “entered into a lawful contract to sell milk powder to the Government of the Dominican Republic.”
The DOJ then alleged as follows.
“Although Vitusa delivered the milk powder to the Government of the Dominican Republic, the Dominican government did not pay Vitusa promptly for the milk powder received and, in fact, maintained an outstanding balance due for an extended period of time. Vitusa, therefore, made various efforts to collect the outstanding balance due, including contacting officials of the United States and Dominican Governments to obtain their assistance in securing payment in full.”
According to the DOJ, “during the pendency of the contract, Servio Tulio Mancebo (a citizen of the Dominican Republic) communicated to Herzberg a demand made by a foreign official [a senior official of the Government of the Dominican Republic] which called for the payment of a ‘service fee’ to that official in return for the official using that official’s influence to obtain the balance due to Vitusa for the milk powder contract from the Dominican Government.” According to the DOJ, “Herzberg agreed to Mancebo’s proposal that Vitusa would pay a ‘service fee’ indirectly to the foreign official.” Thereafter, the DOJ alleged that the Government of the Dominican Republic made payment of $63,905.12 to Vitusa on the contract, but that following Herzberg’s instruction, “Mancebo retained $20,000 from that payment.” According to the DOJ, Vitusa and Herberg knew “that all or a portion of the money would be given to the foreign official for the purpose of inducing the official to use that official’s position and influence with the Government of the Dominican Republic in order to obtain and retain business, that is, full payment of the balance due for Vitusa’s prior sale of milk powder to the Government of the Dominican Republic.” Based on the above allegations, the DOJ charged Vitusa with violating the FCPA’s anti-bribery provisions.
In recent years, it has become popular to talk about the “victims” of FCPA enforcement actions and feel good proposals have even been made suggesting that “victims” (you know, the citizens of country x which served as the locus of an FCPA enforcement action) are deserving of compensation from the FCPA settlement amount.
As the above examples highlight however, sometimes the “victims” of FCPA enforcement actions may be the companies or related individuals resolving the actions because they were legitimately owed money by a dysfunctional government that refused to pay.
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