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.
You be the judge.