The Donald Goes Off And Conflates The Issues
Business mogul Donald Trump (who in recent years flirted with a Presidential run) recently went off on the Foreign Corrupt Practices Act on CNBC’s Squawk Box program. (See here for the video – the FCPA portion begins at approximately minute 14). Joining Trump in the discussion was Tom Stemberg of Highland Capital Partners. You will hear during the program views that FCPA enforcement has become “absolutely crazy,” and that the FCPA is a “horrible law.”
As with most post-News Corp. and post-Wal-Mart commentary, Trump conflates two issues: (1) the FCPA as passed by Congress and (2) the FCPA as enforced by the DOJ and SEC. Many of the concerns Trump and Stemberg raise were addressed by Congress when Congress elected not to capture payments to “foreign officials” in connection with ministerial or clerical acts. For more on this issue, see this previous post “Understanding Wal-Mart.”
You will also hear during the Squawk Box program a suggestion that instead of prohibiting improper payments, the FCPA should merely require disclosure of such payments. I do not agree with the suggestion, but it is not an outlandish suggestion. Indeed, as discussed in several prior posts (see here for instance) in the mid-1970’s Congress considered two main competing legislative proposals to deal with the so-called foreign corporate payments problem: prohibition vs. disclosure.
The disclosure regime was favored by the administration of Gerald Ford. President Ford’s point person on the issue was Elliot Richardson (Secretary of Commerce) who, in a letter to Senator William Proxmire (a Congressional leader on the issue), summarized the work of the Ford Task Force as follows. “The Task Force has concluded that the criminalization approach would represent little more than a policy assertion, for the enforcement of such a law would be very difficult if not impossible. […] The criminal approach would represent poor public policy. […] At the same time, the Task Force perceived several very positive attributes of systematic disclosure.” President Ford stated as follows. “The reporting requirement covers a broad range of payments relative to government transactions as well as political contributions and payments made directly to foreign public officials. By requiring reporting of all significant payments, whether proper or improper, made in connection with business with foreign government, the legislation will avoid the difficult problems of definition and proof that arise in the context of enforcement of legislation that seeks to deal specifically with bribery and extortion abroad.”
The disclosure regime was rejected by Congressional leaders. A Senate Report stated as follows. “The Committee concluded that an outright prohibition would be at least as feasible to enforce as any meaningful disclosure requirement. […] Clearly, in order to enforce such a disclosure requirement and apply sanctions for failure to file reports, it would be necessary to prove that the undisclosed payment was actually made, and that it was made with an improper purpose. Thus, the same evidence necessary to prove a violation of a direct prohibition would have to be marshalled in order to enforce a disclosure statute. Accordingly, the Committee concluded that a disclosure approach has at least the same enforcement problems inherent in the direct prohibition approach and none of its advantages.”
Jimmy Carter (who favored a prohibition regime over a disclosure regime) defeated Ford in the 1976 election and the rest is history.
Wal-Mart And FCPA Reform
A hot topic of late is what impact Wal-Mart’s FCPA scrutiny will have on FCPA reform efforts.
Last week, in an editorial (here) USA TODAY stated as follows. “Supporters of weakening the act argue that the Justice Department has become too powerful and arbitrary. Some Chamber proposals, such as clearer enforcement guidelines, are relatively non-controversial. But others would seriously undermine the law. The most troublesome would give companies an automatic defense merely for implementing internal compliance programs to prevent and police bribery. The proposal would amount to giving companies a get-out-of-jail-free card. It’s not hard to imagine corporations drawing up a set of cookie-cutter guidelines designed to meet the letter of the law, which might or might not reflect their commitment to thwarting corruption.”
[Dear USA TODAY Editorial Board, as noted in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) an FCPA compliance defense would not eliminate corporate criminal liability under the FCPA or reward “fig leaf” or “purely paper” compliance programs. A compliance defense would not apply to corrupt business organizations, activity engaged in or condoned by executive officers, or activity by any employee if it occurred in the absence of preexisting compliance policies and procedures. A growing chorus of former Department of Justice officials, including those who used to enforce the FCPA, support an FCPA compliance defense and a compliance defense will better incentivize more robust corporate compliance, reduce improper conduct, and thus best advance the FCPA’s objective of reducing bribery. As noted in this prior post, that’s not weakening the FCPA, that is strengthening the FCPA and best advancing its objective of reducing bribery.]
In an opposing view (here) also published by USA TODAY, former U.S. Attorney General Michael Mukasey (who represents the U.S. Chamber Institute for Legal Reform with regard to the Foreign Corrupt Practices Act) stated as follows. “Some suggest that increased FCPA enforcement has proved the law’s utility without the need for changes. But the opposite is true: Aggressive enforcement has alerted business and the courts alike to its flaws. That is why clarifying the FCPA has drawn bipartisan support.”
[I agree that high-profile instances of FCPA scrutiny such as News Corp.’s and Wal-Mart’s has shined a much needed light on FCPA enforcement and caused those who do not ponder FCPA issues every day to take notice. See here and here for prior posts. And indeed, Mukasey is right, as noted in this previous post, certain aspects of FCPA reform share bipartisan support.]
This Wall Street Journal Corruption Currents post by Samuel Rubenfeld titled “Wal-Mart Bribery Allegations Stir Up FCPA Debate Anew” contains the views of many including a statement I liked from Ian Koski, a spokesman for Sen. Chris Coons (D., Del. who has been open to amending the FCPA) that the Wal-Mart investigation is ongoing and that the senator wouldn’t decide legislative policy based on a news story.
In this post Tom Fox (FCPA Compliance and Ethics Blog) said that Wal-Mart’s FCPA scrutiny “will sound the death knell for any efforts to amend” the FCPA. Fox also penned a guest post on the FCPA Blog (here) titled “How Wal-Mart Killed The Compliance Defense.” Also on the FCPA Blog, (here) Professor Andy Spalding penned a post titled “The Good Faith Compliance Defense, Unscathed.” Professor Peter Henning, writing on the New York Times DealBook page (here), stated as follows. “The investigation of Wal-Mart has brought the Foreign Corrupt Practices Act to the attention of the public in a way not seen since the 1970s scandals that led to its adoption. Congress may find it politically impossible to adopt changes to the statute that would arguably make it more difficult to pursue cases as long as the allegations of foreign bribery by a leading American company remain in the headlines.” Likewise, Michael Volkov (Corruption, Crime and Compliance Blog) stated (here) that “Congress is not going to amend the FCPA anytime soon, and especially not in an election year” and yesterday he stated (here) that “FCPA reform is dead — not just for this year but for years to come.”
What to make of all this?
For starters, let’s observe what I submit are facts. The reason Wal-Mart has dominated the news cycle the past few weeks is not because the company is under FCPA scrutiny, this was known in December 2011 when Wal-Mart disclosed its FCPA scrutiny, becoming one of approximately 100 companies known to be under FCPA investigation. Rather, the reason Wal-Mart has dominated the news is because of how the company acted, or failed to act, since learning of potential FCPA issues in approximately 2005. This is a corporate governance issue, not an FCPA issue, and thus should not impact limited and sensible FCPA reform.
However, many people, including politicians who are ultimately responsible for reform, are unlikely to make this critical distinction and thus the recent news regarding Wal-Mart could impact FCPA reform.
Exhibit A and B in the politicization of FCPA reform are nearly identical letters here and here from Elijah Cummings (Ranking Member of the House Committee on Oversight and Government Reform) and Henry Waxman (Ranking Member of the House Committee on Energy and Commerce) to the Chairman of the Board of Directors of the Retail Industry Leaders Association and the President of the U.S. Chamber of Commerce. The letters state as follows. “We are concerned about the role that Wal-Mart officials may have played in the Chamber’s Institute for Legal Reform. It would appear to be a conflict of interest for Wal-Mart officials to advise on ways to weaken the Foreign Corrupt Practices Act at a time when the leadership of the company was apparently aware of corporate conduct that may have violated the law.”
Regardless of any impact Wal-Mart’s FCPA scrutiny may have on FCPA reform, FCPA reform was unlikely to happen this year even before the recent coverage of Wal-Mart. When the DOJ in November 2011 promised FCPA guidance in 2012 (see here for the prior post), this forestalled introduction of an actual FCPA reform bill. Guidance has still not been released and when it is, there is likely to be an absorption period that flows into the election season.
Honestly debating and considering changes to a statute titled the “Foreign Corrupt Practices Act’ is a political hot potato. It always has been and will always be. For instance, several reform bills in the 1980’s sought to change the name of the law to the “Business Accounting and Foreign Trade Simplification Act” so that an honest and considered debate could occur.
Certain FCPA amendments occurred in 1998, but the last period of major substantive FCPA reform occurred in the 1980’s. Those reform efforts took approximately eight years.
FCPA reform is not dead, nor should it be. But it is likely going on a summer vacation. For more on my views on FCPA reform see this recent video (with many thanks to Levick Strategic Communications for the opportunity).
I conclude this post with guiding words from key players during the FCPA reform debates in the 1980’s.
In 1981, Senator Alfonse D’Amato opened Senate hearings on a bill to amend the FCPA. He stated that the bill “provides us with a good opportunity to assess the effect of recently enacted legislation and its implementation.” Senator D’Amato noted as follows. “The discussion which takes place during these hearings is not a debate between those who oppose bribery and those who support it. I see the major issue before us to be whether the law, including both its antibribery and accounting provisions, is the best approach, or whether it has created unnecessary costs and burdens out of proportion to the purposes for which it was enacted, and whether it serves our national interests.”
In an opening statement during Senate hearings, Senator John Chafee, a leader in the FCPA reform movement stated: “We’ve learned a great deal about the Foreign Corrupt Practices Act in the last three years. We’ve learned that the best of intentions can go awry and create confusion and great cost to our economy.” During the hearing, Senator Chafee further stated as follows: “Critics have attempted to characterize my bill as a signal to U.S. companies that they can return to the ‘bad old days’ of foreign bribery. That is not my intent, nor should it be the signal. I abhor bribery, whether domestic or foreign, but I also dislike confusion. Thus, my bill will eliminate uncertainty while maintaining strong prohibitions against bribery. The ambiguities and murkiness of the bill’s language have caused U.S. companies to withdraw from legitimate markets and contributed to the decline in the U.S. share of world exports. We need to end this confusion.”
During Senate hearings, Senator D’Amato also noted as follows: “The thing that bothers me about this kind of a debate is that we tend to posture this thing as if somebody were for or against bribery. I think it is important to state for the record that bribery of any foreign official by any U.S. concern is bad for our national health, and it is something that we have got to stop, we have got to deal with, and we have, I think, gone a long way with the FCPA. What we proposed to do is to simplify that law and to make it workable so that we can set that standard in concrete from now on and not have the abuses that occurred prior to 1977, but not by stopping exports, but by stopping bribery. That is the objective.” Senator D’Amato further stated as follows. “I think it is very important that in the committee’s work that we not create the attitude that this committee is making it easier for businesses to engage in illegal activity. That has, in fact, been suggested, not only by our distinguished colleague from Wisconsin [Senator Proxmire, a Senate leader in enactment of the FCPA who generally opposed the reform efforts], but also by certain journalists, who are questioning the need for proposed changes. I think that rather than hampering prosecution of illegal acts, [the reform bill at issue] would clarify and make possible just prosecution of those who engage in bribery. It would eliminate any ‘gray area’ by clearly spelling out the limits of the law.”
During Senate hearings, Senator John Heinz stated as follows. “… There are many people that are extremist, and there are others who get carried away by their enthusiasm who are going to argue that even if we change the provisions in the present act, that are unnecessary or ambiguous or uncertain, that even though we are not doing so, we are legalizing bribery. That strikes me as the worst kind of demagoguery, because it implies that everything that Congress has done in the past is perfect. And does anybody believe that?”
During the Senate hearing, William Satterwhite (Senior VP, General Counsel and Chief Legal Officer of Enserch Corp.) testified. He began his testimony as follows: “Before I begin my comments, I would like to state for the record, Enserch Corp. is not in favor of bribery. It is a sad commentary on the political atmosphere surrounding this legislation that those who support the bill feel compelled to make clear that they do not condone corruption.”
My favorite quote from the FCPA reform debates of the 1980’s and one that rings true today is from William Brock (U.S. Trade Representative) who observed, during a 1982 FCPA reform hearing, as follows. “Just because the Foreign Corrupt Practices Act spotlights a sensitive subject, some people wish to turn a ‘blind eye’ to its shortcomings rather than risk being accused of being ‘soft on bribery.’ That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. [… ] Is there any U.S. law that ought to be above such review and clarification – especially one as complex as the FCPA.”
Understanding Wal-Mart
Prior posts here and here discussed and analyzed the New York Times April 21st article regarding Wal-Mart and its potential FCPA exposure. As noted in the prior posts, the New York Times article was both unremarkable and remarkable at the same time. Wal-Mart has dominated the news cycle not because it is under FCPA scrutiny (this was known since December 2011 when Wal-Mart disclosed its FCPA scrutiny joining a list of approximately 100 companies known to be under FCPA investigation). Rather, Wal-Mart has dominated the news cycle because of how the company acted, or failed to act, since learning of potential FCPA issues in approximately 2005. Thus, Wal-Mart is mostly a corporate governance story.
Even so, there are some core and fundamental FCPA issues worthy of exploration. This post discusses many of the same issues I’ve discussed with journalists and others over the past week. Given the space constraints of media outlets, the below was understandably reduced to one or two sentences. It is in instances like this when I particularly enjoy having my own website and having the ability to go long and deep.
So long and deep we shall go and the issues discussed below are informed by, among other things, my review of the FCPA’s entire legislative history and my years as an FCPA practitioner. Although focused on the FCPA’s “foreign official” element, a thorough and comprehensive review of the FCPA’s legislative history can be found here (my “foreign official” declaration used in connection with several recent judicial challenges). My article “The Story of the Foreign Corrupt Practices Act” is forthcoming in the Ohio State Law Journal.
Do the Wal-Mart Mexico payments at issue violate the FCPA’s anti-bribery provisions? From a practical standpoint, does it even matter?
The FCPA’s Anti-Bribery Provisions
Two distinct and important questions can be asked about many instances of FCPA scrutiny, including Wal-Mart’s, in this new era of FCPA enforcement.
The first question is whether, given the DOJ and SEC’s current enforcement theories, the Mexican payments at issue – allegedly in connection with permitting, licensing and inspection issues – can expose Wal-Mart to an FCPA enforcement action? The answer is likely yes and in the past several years the enforcement agencies have brought several FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like. For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010. See here at pages 972-975 for a listing of such cases 2007-2009.
The second (and from my perspective more important) question is whether Congress, in passing the FCPA, intended the law to capture payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign officials. The answer from the FCPA’s legislative history is no.
In the mid-1970’s Congress learned of a variety of foreign corporate payments to a variety of recipients and for a variety of reasons. Congress accepted and acknowledged in passing the FCPA that it was capturing only a narrow range of foreign payments. For instance the relevant Senate Report in May 1977 specifically notes that “the committee has recognized that the bill would not reach all corrupt overseas payments.” Likewise, the relevant House Report in September 1977 also states that “the proposed law will not reach all corrupt payments overseas.”
Of note, in November 1977 (a month prior to passage of the FCPA in December 1977), Representative Robert Eckhardt (D-TX, a Congressional leader on the foreign payments issue) stated on the House floor as follows. “Payments to a [foreign official with ministerial or clerical duties] for instance, to complete a form that ought, in equity, to be completed, to give everybody equal treatment, to move the goods off a dock which he will not move without a tip, a mordida, I think, as they call it in the Spanish language, a facilitating payment, or a grease payment would not constitute a bribe.”
Thus, when the FCPA was passed in December 1977 it specifically excluded from the definition of “foreign official” “any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.” This was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”
When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute. The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”
Even if a payment does not meet the FCPA’s facilitation payments exception, in order for there to be a violation of the FCPA’s anti-bribery provisions, all statutory elements must be met including the “obtain or retain business” element.
To my knowledge, the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny three times. These three judicial decisions are summarized below.
Kay Trial Court
In 2001, David Kay and Douglas Murphy (“Defendants”), the president and vice president of Houston-based American Rice, Inc. (“ARI”), were criminally indicted. The indictment charged FCPA anti-bribery violations and alleged that the defendants made improper payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes owed by ARI to the Haitian government. The indictment, while specific as to other items, merely tracked the FCPA’s “obtain or retain business” language and did not specifically allege how the alleged payments assisted ARI in obtaining or retaining business in Haiti or what business was obtained or retained. As stated by the court: “In other words, the indictment recite[d] no facts that could demonstrate an actual or intended cause-and-effect nexus between reduced taxes and obtaining identified business or retaining identified business opportunities.”
In a case of first impression in the federal courts, the court granted Defendants’ motion to dismiss the indictment and held, as a matter of law based on the FCPA’s legislative history, that the alleged payments were not payments made to “obtain or retain business” and thus did not fall within the scope of the FCPA’s anti-bribery provisions. See 200 F.Supp.2d 681 (S.D. Tex. 2002).
Mattson / Harris
A few months after the trial court decision in Kay, the Southern District of Texas again considered whether payments made outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions. As noted in this previous post, the Mattson and Harris enforcement action (a civil enforcement action brought by the SEC) involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment. The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment. The court noted that U.S. v. Kay had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation. However, the SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases. The court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.” See this Memorandum and Order (Sept. 9, 2002). As noted in this release, the SEC dropped its appeal in July 2004.
Of interest is that Mattson’s lawyers, Martin Weinstein and Robert Meyer of Willkie Farr & Gallagher, were the lawyers identified in the New York Times articles who advised Wal-Mart in 2005 on an investigative work plan that was apparently rejected by Wal-Mart.
Kay Fifth Circuit Ruling
The DOJ appealed the 2002 decision of the Southern District of Texas dismissing the indictment and one issue on appeal was whether payments to “foreign officials” to obtain favorable tax and customs treatment can come within the scope of the FCPA’s anti-bribery provisions.
The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” element was ambiguous and it thus analyzed the FCPA’s legislative history. See 359 F.3d 738 (5th Cir. 2004). The Fifth Circuit focused specifically on the U.S. Senate’s 1977 sponsored bill and the SEC report on which the Senate’s proposal was based. According to the court, the SEC report “exhibited concern about a wide range of questionable payments [including those at issue in Kay] that were resulting in millions of dollars being recorded falsely in corporate books and records.” Although the Fifth Circuit recognized that the Senate’s proposal did not expressly cover payments that seek to influence the administration of tax laws or seek a favorable tax treatment, the Senate, in the words of the court, “was mindful of bribes that influence legislative or regulatory actions, and those that maintain established business opportunities.”
In short, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than those that only directly influence the acquisition or retention of government contracts or similar arrangements. The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.
However, the Kay court empathically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. According to the court, the key question of whether Defendants’ alleged payments constituted an FCPA violation depended on whether the payments were intended to lower ARI’s costs of doing business in Haiti enough to assist ARI in obtaining or retaining business in Haiti. The court then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.
The court specifically stated: “[I]f 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 or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”
In short, the enforcement theory that payments outside the context of foreign government procurement satisfy the FCPA’s “obtain or retain business” has been subjected to judicial scrutiny three times.
The scorecard: US – 1; Defendants – 2; or if you prefer US – .5; Defendants – 2.5 (recognizing that the 5th Circuit decision is equivocal).
Contrary to popular misperception, Kay thus does not hold that all payments to a “foreign official” outside the context of foreign government procurement fall within the FCPA’s scope. Rather, the decision merely holds that Congress intended for the FCPA to apply broadly to payments intended to assist the payer, directly or indirectly, in obtaining or retaining business and that payments to a “foreign official” outside the context of foreign government procurement can, under appropriate circumstances, fall within the statute. Given the facts and circumstances the Kay court found relevant, it is highly fact-dependant analysis whether a payment to a “foreign official” satisfies the “obtain or retain business” element outside of the context of foreign government procurement.
A key portion from the Kay ruling likely relevant in Wal-Mart is the following: “there are bound to be circumstances” in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.
Despite the equivocal nature of the Kay holding, (and the enforcement agencies overall losing record on the issue) the decision clearly energized the enforcement agencies and post-Kay there has been a significant increase in FCPA enforcement actions where the alleged improper payments involve customs duties and tax payments or are otherwise alleged to have assisted the payer in securing foreign government licenses, permits, and certifications which assisted the payer in generally doing business in a foreign country. For a listing of many such cases, see my scholarship, “The Facade of FCPA Enforcement” – here. None of the enforcement actions profiled therein were challenged or subjected to judicial scrutiny.
It thus remains an open question whether payments outside the context of foreign government procurement, in any particular case if subjected to judicial scrutiny, (i) would satisfy the FCPA’s “obtain or retain business” element; or (ii) are too attenuated to obtaining or retaining business (such as merely increasing the profitability of an existing profitable business) and thus, per the Kay holding, not a violation of this key FCPA anti-bribery element.
Does It Even Matter?
A logical and practical question then becomes, does it even matter? As in most FCPA enforcement actions, the answer in any future Wal-Mart FCPA enforcement action is likely no. At the end of the day it will not matter if Wal-Mart’s payments, if subjected to judicial scrutiny, would result in FCPA violations.
The short reason is that while Wal-Mart’s counsel can make valid and legitimate legal and factual arguments around conference room tables behind closed doors in Washington D.C., to truly challenge the DOJ in an instance of FCPA scrutiny, and to put the DOJ to its high burden of proof at trial, first requires that the company be criminally indicted, something few corporate leaders are willing to let happen. It is simply easier, more cost-efficient, and more certain to resolve FCPA scrutiny notwithstanding aggressive (and dubious) enforcement theories or the existence of valid and legitimate defenses. Also relevant to this issue is the existence of the “carrots” and “sticks” relevant to resolving FCPA enforcement actions. To learn more about these “carrots” and “sticks” please read my article “The Facade of FCPA Enforcement” – here.
To my knowledge, in the FCPA’s 35 year history, only two corporate defendants have put the DOJ to its high burden of proof in trial. Wal-Mart will not become the third. Even so, it is instructive to learn about the two instances in which corporate defendants have put the DOJ to its high burden of proof at trial.
The DOJ’s ultimate record? 0-2.
As noted in this prior post, in 1990, Harris Corporation (“Harris” – a publicly traded telecom provider), along with certain of its executives, were charged in a criminal indictment concerning conduct in Colombia. In 1991, the court, after hearing the prosecution’s case, granted a defense motion for a verdict of acquittal. The San Francisco Chronicle stated as follows. “Shortly after the government rested its case, U.S. District Judge Charles Legge of San Francisco ruled from the bench that ‘no reasonable jury’ could convict the company nor its executives on any of the five bribery-related counts for which they were indicted. Citing insufficient evidence, Legge said the government had failed to show any intent by the defendants to enter into a criminal conspiracy. Legge also said it was the first time in his six years on the federal bench that he had dismissed a criminal case at mid-trial for lack of evidence.”
As noted in this prior post, in December 2011 (after the DOJ had secured trial court jury verdicts convicting privately held Lindsey Manufacturing Company and its CEO and CFO of FCPA offenses), Judge Howard Matz (C.D. Cal). vacated the convictions and dismissed the indictment based on numerous prosecutorial misconduct issues that together added “up to an unusual and extreme picture of a prosecution gone badly awry.” In addition to prosecutorial misconduct, Judge Matz noted the “weakness of the Government’s case” and that the “case against the Lindsey Defendants was far from compelling.”
Wal-Mart’s FCPA Scrutiny Grows
In December 2011, Wal-Mart made the following generic disclosure in a 10-K filing.
“During fiscal 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anti-corruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.”
Today, the New York Times ran a major story (here) titled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle” that relates to Wal-Mart’s prior disclosure. Was Wal-Mart’s disclosure to the DOJ, as stated in its December 10-K filing “voluntary”? According to the Times article, “in December, after learning of The Times’s reporting in Mexico, Wal-Mart informed the Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act.” (emphasis added).
The conduct at issue in the Times article relates to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggests that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico.
According to the article, in 2005, “Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark.” According to the Times, Wal-Mart’s lead investigator, a former FBI agent, “recommended that Wal-Mart expand the investigation” but its own examination found that “Wal-Mart’s leaders shut it down.” The article states that “in one meeting where the bribery case was discussed, H. Lee Scott Jr., then Wal-Mart’s chief executive, rebuked internal investigators for being overly aggressive.”
The Times examination included more than 15 hours of interviews with Sergio Cicero Zapata a former executive who resigned from Wal-Mart Mexico in 2004 after nearly a decade in the company’s real estate department. The article states as follows. “In the interviews, Mr. Cicero recounted how he had helped organize years of payoffs. He described personally dispatching two trusted outside lawyers to deliver envelopes of cash to government officials. They targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits — anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.”
Elsewhere, the Times article states as follows. “The idea, [Cicero] said, was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days. ‘What we were buying was time,’ he said. ” The article states that Cicero’s “allegations were all the more startling because he implicated himself” and “helped funnel bribes through trusted fixers, known as ‘gestores.'”
The times article contains several internal documents including Willkie Farr & Gallagher’s 2005 “investigative work plan” that called for tracing all payments to anyone who helped Wal-Mart Mexico obtain permits for the previous five years. The Times article states as follows. “In short, Willkie Farr recommended the kind of independent, spare-no-expense investigation major corporations routinely undertake when confronted with allegations of serious wrongdoing by top executives. Wal-Mart’s leaders rejected this approach. Instead, records show, they decided Wal-Mart’s lawyers would supervise a far more limited ‘preliminary inquiry’ by in-house investigators.”
According to the Times article, in 2006, Wal-Mart again considered a full investigation of the conduct in Mexico, but that in the end, the company largely delegated responsibility for the investigation to Wal-Mart Mexico. The Times article quotes a person with knowledge of the thinking of Wal-Mart executives as follows. “It’s a Mexican issue; it’s better to let it be a Mexican response.”
The Times article contains a detailed statement by Wal-Mart. Among other things, the Wal-Mart statement notes that “many of the alleged activities in the New York Times article are more than six years old” and that “in a large global enterprise such as Walmart, sometimes issues arise despite our best efforts and intentions.” The statement continues as follows. “When they do, we take them seriously and act quickly to understand what happened. We take action and work to implement changes so the issue doesn’t happen again. That’s what we’re doing today.”
See here for Wal-Mart’s video response to the New York Times article.
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The New York Times article paints a troubling picture for Wal-Mart that will likely occupy the company for years to come. In addition to the Mexico conduct, the DOJ and SEC will surely be interested in the response (or lack thereof) by company executives in Arkansas as well as the results of Wal-Mart’s worldwide review of its operations.
The DOJ and SEC frequently bring FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like. For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010. See here at pages 972-975 for a listing of such cases 2007-2009.
This despite the following relevant history.
The FCPA’s original definition of “foreign official” was as follows. “… any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or any person acting in an official capacity for or on behalf of such government or department, agency or instrumentality. Such terms do not include any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.”
This last sentence was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”
When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute.
The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”
Also relevant is the holding of U.S. v. Kay, the only appellate court decision to directly address payments outside the context of directly securing a foreign government contract. In Kay, the 5th Circuit said that such payments “could” violate the FCPA, but that “there are bound to be circumstances” in which such payments merely increase the profitability of an existing profitable company and thus, presumably does not assist the payer in obtaining or retaining business. The court specifically stated as follows. “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 or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”
A Focus On Facilitation Payments
This post is all about facilitation payments.
Congress was clear when it passed the FCPA that the statute was not intended to address such payments. For instance, the relevant House Report (H.R. Rep. No. 95-640 (1977)) stated as follows. “The language of the bill is deliberately cast in terms which differentiate between [corrupt] payments and facilitating payments, sometimes called ‘grease payments,’ … For example, a gratuity paid to a customs official to speed the processing of a customs document would not be reached by the bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity be performed in any event. While such payments made to assure or to speed the proper performance of a foreign official’s duties may be reprehensible in the United States, the committee recognizes that they are no necessarily so viewed elsewhere in the world and that it is not feasible for the United States to attempt unilaterally to eradicate all such payments. As a result, the committee has not attempted to reach such payments.”
Originally, the FCPA contained an indirect facilitation payments exception through the definition of “foreign official” which excluded from that definition any employee of a foreign government “whose duties are essentially ministerial or clerical.” Among the FCPA’s 1988 amendments was taking this indirect facilitation payments exception from the definition of “foreign official” and establishing a direct, stand-alone facilitation payment exception currently found in the statute.
With that backdrop, two items to highlight. First, recent scholarship from an SEC enforcement attorney on facilitation payments. Second, a Q&A with a member of the Global Steering Team for the recently formed facilitation payment focused anti-corruption industry initiative, Committee to Address Facilitation Payments (C.A.F.P.)
Facilitation Payments Scholarship
Jon Jordan (Senior Investigations Counsel with the FCPA Unit of the SEC) recently published “The OECD’s Call For An End To “Corrosive’ Facilitation Payments And The International Focus On The Facilitation Payments Exception Under The Foreign Corrupt Practices Act” in the University of Pennsylvania Journal of Business Law (see here).
The article gives a basic outline of the FCPA and the facilitation payments exception and explores the history behind the exception. The article then discusses the U.S. pursuit of an international agreement prohibiting foreign bribery and the resulting OECD Anti-Bribery Convention. Next, the article focuses on international and domestic disdain over the issue of facilitation payments during the first decade of the Convention. Then, the article considers the recent OECD Recommendation calling on the prohibition of facilitation payments and the OECD’s recent criticisms of the U.S. with respect to its policies on facilitation payments. Jordan then gives his prediction that the facilitation payments exception will be eliminated and provides his recommendation that domestic companies prohibit the use of facilitation payments in the current global anti-bribery environment.
Jordan’s article is an informative read and this sentence from the article stood out to me. “[W]hile the FCPA contains several core provisions that will always withstand the test of time, the facilitation payments exception is out of date in this modern-day era of commerce and sensibility.”
Q&A With Mike Munro
The Committee to Address Facilitation Payments (C.A.F.P.) is a collection of global companies working together to address the potential future demand/risk of facilitation type payments in a thoughtful, proactive and appropriate manner. It recently released this document and below Mike Munro (Vice President, Associate General Counsel and Chief Compliance Officer, Transocean, and a member of the Global Steering Team for C.A.F.P.) responds to some questions.
Q: Congress chose to exempt facilitating payments from the reach of the FCPA’s anti-bribery provisions. Why then is there a need for CAFP to address facilitating payments?
A: Regardless of whether facilitation payments are allowed by anyone, I am not aware of any company that believes facilitation type payments are positive to business or economic development. All companies want to reduce the risk of potential facilitation payments and clearly the best way to do that is through collective action.
Q: Does CAFP support amending the FCPA to remove the facilitating payments exception?
A: C.A.F.P. is not an organization that would take that type of position. The types of legal changes we are interested in relate to how government processes can be clarified or improved (such as computer automation) to reduce risk or situations that potentially could involve facilitation payments.
Q: To best eliminate facilitating payments in many countries, cultural changes are necessary. Can a committee of multinational companies effectuate cultural change?
A: Cultural change could be helpful in some countries and situations to reduce the potential risk of facilitation type payments and therefore a significant focus of C.A.F.P. is to engage local people and companies in this effort.
Q: It would seem that the best forward-looking solution to reducing the demand for facilitating payments is to increase civil servant salaries in many foreign countries. Do you agree?
A: Increasing civil servants pay could potentially have a positive impact but how positive of an impact would be difficult to determine. Clearly if an individual’s pay is not sufficient to meet daily living requirements, most would agree that there is likely a higher probability of requests or demands, but as indicated above, other factors such as culture, individual integrity norms, etc. do have an impact.
Q: If increasing foreign civil service salaries is a good idea, how can it be accomplished?
A: If a decision was made that increasing civil servant salaries would be helpful, one of the ways to approach that would be to have key companies and industry groups in a particular country approach high level government officials to determine how best to effectuate such a change. The companies and industry groups could then help coordinate that effort with others in that country who have similar interests and views.