“Foreign Official” Brain Teasers
Two “foreign official” brain teasers are highlighted below.
One touches upon sovereign wealth funds, the other a Chinese state-owned enterprise (as well as sovereign wealth funds). Both are based on recent events.
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A prior post discussed sovereign wealth funds and the FCPA (see here).
I noted that while no FCPA enforcement action has yet involved a sovereign wealth fund, such funds and the investments these funds make in private companies, are clearly on the radar screen of the enforcement agencies as both DOJ and SEC officials have in the past publicly stated that sovereign wealth funds pose FCPA risks because the funds are government owned (see here and here).
The next frontier of the enforcement agencies often times aggressive and dubious “foreign official” interpretation may thus be application to the investments made by sovereign wealth funds.
According to a recent Wall Street Journal article, Chesapeake Energy Corp. (here) recently sold $900 million in preferred stock to a group of investors. Among others, Chesapeake sold shares to China Investment Corp. (a Chinese government sovereign wealth fund – here), Korea Investment Corp. (a South Korea government sovereign wealth fund – here) and Temasek Holdings (Singapore’s sovereign wealth fund – here). For good measure, Abu Dhabi Investment Council (Abu Dhabi’s sovereign wealth fund – here) also invested in Chesapeake.
What would it take for Chesapeake employees to become Chinese “foreign officials”? A majority investment by China Investment Corp.? What if the investment was not a majority investment, but China Investment Corp. exercised veto rights over certain business decisions?
If not Chinese “foreign officials,” what would it take for Chesapeake employees to become Korean “foreign officials.” What if Korea Investment Corp. had the opportunity to appoint Chesapeake board members?
If not Korean “foreign officials,” what fact or factors would it take for Chesapeake employees to become Singapore or Abu Dhabi “foreign officials”?
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Numerous prior posts have discussed Chinese state-owned enterprises (“SOEs”) and the enforcement agencies interpretation (one that has never been accepted by a court) that employees of alleged Chinese SOEs are Chinese “foreign officials” because the SOE is an alleged “instrumentality” of the Chinese government – notwithstanding the fact that it has publicly traded shares and other attributes of private ownership.
One of the largest ever IPO’s is expected to soon price.
It involves Agricultural Bank of China Ltd. (a Chinese government owned bank – here) and its attempts to raise US$20 billion – $30 billion by listing shares on the Hong Kong and Shanghai stock exchanges.
According to a recent article in the Wall Street Journal, Qatar Investment Authority (Qatar’s sovereign wealth fund – here) is expected to invest US$2.8 billion in the offering. Kuwait Investment Authority (Kuwait’s sovereign wealth fund – here) is expected to invest $800 million. Other investors expected to participate in the deal include Temasek Holdings (Singapore’s sovereign wealth fund).
Can an entity such as Agricultural Bank of China Ltd. truly be considered a Chinese government instrumentality when it has publicly traded shares and multi-billion and million dollar investments from other nation’s sovereign wealth funds? At what point could Agricultural Bank of China employees cease being Chinese “foreign officials” and become Qatar or Kuwait “foreign officials”?
It is not just sovereign wealth funds that are planning to make massive investments in Agricultural Bank of China. According to a recent Wall Street Journal article, Archer Daniels Midland Co. (here) is also expected to invest $100 million to $200 million in the IPO.
Can Agricultural Bank of China Ltd. truly be considered a Chinese government instrumentality while at the same time securing a multi-million dollar investment from a US food giant?
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A recent article by Samuel Rubenfeld (Dow Jones News Service) titled “To Comply with Bribery Laws, Companies Must Decide Who’s ‘Official'” explores the meaning of the FCPA’s “foreign official” element. In the article, a DOJ spokeswoman merely referred to the statutory definition of “foreign official” in the FCPA as her agency’s comment for the article.
The FCPA defines “foreign official” as follows:
“Foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.”
So these aren’t brain teasers after all, the DOJ apparently feels that the answer is found in the statute itself.
When the Dust Settles
Documents used to resolve a typical FCPA enforcement action (whether a non-prosecution or deferred prosecution agreement, plea, or settled civil complaint) are often peppered with vague generalities.
This is not surprising given that there is little serious threat of defense challenges and/or judicial scrutiny.
One element that is often vaguely described is the “foreign official” recipient of the alleged bribe. (This is in contrast to what the U.K. SFO has been doing in some of its recent enforcement actions when it “names names” – see here and here).
For instance, in the recent Daimler action (see here), certain of the “foreign officials” are described simply as follows:
“Nigerian government officials,” “high-level members of the executive branch of the Nigerian government,” “high-level executive branch official of Nigeria,” and “a member of the Nigerian police force” and
“senior official of a [Egypt] government owned factory.”
Given the ease in which information now flows and the world-wide interest in corruption and bribery, FCPA enforcement actions are read around the world.
Not only by foreign government officials and law enforcement agencies, but also by foreign media, foreign-based non-governmental organizations, and just plain old people.
It is thus not surprising that when the dust settles on the U.S. FCPA enforcement action, many are left wondering … who are those “foreign officials”?
For the foreign government involved, it is potentially embarrassing to have “one of your own” (assuming that all “foreign officials” in FCPA enforcement actions are properly deemed as such) become the focus of a bribery investigation in the U.S. without doing something about it “at home.”
Thus, with increasing frequency, one sees stories such as this recent Reuters report which details how the Nigeria Economic and Financial Crimes Commission has begun to probe the alleged bribe payments to the Nigerian “foreign officials” mentioned above.
What about that “senior official of a [Egypt] government owned factory”?
I’ve been told that this issue has become sort of a guessing game in Egypt and that Egyptian authorities have launched an investigation (see here)
Whether such foreign government investigations are bona fide or merely politically expediate cover is a valid question.
However, the take-away point is that just because the U.S. Foreign Corrupt Practices Act enforcement action is over, does not necessarily mean that all the dust has settled. Often, other persons, for entirely different reasons, remain interested.
What is Alba?
It’s the commercial enterprise at the center of two FCPA enforcement inquiries.
Commercial enterprise?
In the words of the late Gary Coleman – “whatcha talkin bout” (see here) – the Foreign Corrupt Practices Act concerns payments to “foreign officials.”
However, that is not how the enforcement agencies see it.
Well, actually it is, but under the enforcement agencies’ interpretation of the key “foreign official” element (an interpretation that has never received judicial approval), if a commercial enterprise seemingly has any hint of state involvement, it is an “instrumentality” of the foreign government and all employees of the commercial enterprise are deemed “foreign officials.”
Over 50% of recent FCPA enforcement actions center, in whole or in part, on this controversial interpretation of the “foreign official” element.
The commercial enterprise at the center of two FCPA enforcement inquiries is Aluminium Bahrain BSC (“Alba”).
First, a bit of background.
As evident from the DOJ’s recent stay motion in Alba v. Sojitz Corporation – embedded in this story by Lisa Brennan at Main Justice, the DOJ is currently investigating whether Sojitz Corporation, a Japanese company with its principal place of business in Tokyo, and Sojitz Corporation of America, a wholly owned subsidiary and agent/or alter ego of Sojitz Corporation, made corrupt payments to Alba officials in violation of the FCPA. It appears that DOJ will assert jurisdiction over the Japanese entity based on this statement: “Sojitz Corporation, and its controlled subsidiaries, make use of United States banks to distribute aluminum, and other products, and is a member of the Chicago Board of Trade.”
The DOJ filing also notes that since 2008 the DOJ has also been investigating a separate matter involving Alba, specifically, whether Aloca Inc. made corrupt payments to “public officials in Bahrain in connection with Alcoa’s sale of alumina to Alba.” (see page 3). (See page 11 of Alcoa’s recent 10-Q filing – here – for more).
So what is Alba, the entity at the middle of two separate DOJ FCPA enforcement inquiries?
According to its website (here), Alba is one of the largest aluminium smelters in the world. The company has three shareholders: the government of Bahrain, the Saudi Public Investment Fund, and Breton Investments.
The company exports to more than 25 countries. Approximately 50% of its output is for Bahrain’s downstream industries, about 20% for the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE) and Middle East market, approximately 13% for the Far East market, with the rest for North Africa, South East Asia, India, Europe and the U.S.
The company has over 3,000 employees.
Alba’s CEO is Laurent Schmitt and its CFO is Tim Murray (see here). Prior to being appointed Alba’s CEO, Mr. Schmitt was previously President of Rhodia Polyamide a world wide global business of Rhodia Group based in France. (see here). On Alba’s board is David Meen (see here).
When Congress enacted the FCPA, did it envision that a company like Alba (a company with thousands of employees, a company conducting significant business outside of Bahrain, and company with non-“native” executive officers and board members) would be deemed a “instrumentality” of the Bahrain government by the enforcement agencies?
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).
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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).
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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.”
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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.]