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Thinking About The FCPA’s Facilitating Payment Exception?

The Foreign Corrupt Practices Act specifically states that its anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official […] the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official …”.

The term “routine governmental action” means an action “which is ordinarily and commonly performed by a foreign official in,” among other things, “obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country.”

The 1988 Conference Report (here), which ironed out the differences between House and Senate bills creating the exception, states:

“The Conferees wish to make clear that ‘ordinarily and commonly performed’ actions with respect to permits or licenses would not include those governmental approvals involving an exercise of discretion by a government official where the actions are the functional equivalent of obtaining or retaining business for or with, or directing business to, any person.”

This is what the FCPA says and the DOJ acknowledges, at least on paper (see here), that “there is an exception to the anti-bribery prohibition for payments to facilitate or expedite performance of a ‘routine governmental action.'”

However, corporations tend to be risk averse.

Thus, against the backdrop of enforcement agencies seemingly incapable of recognizing that the FCPA does indeed contain a “facilitating payment” exception, a risk averse corporation may just say the heck with it, why risk making a payment exempted from the FCPA’s anti-bribery provisions if enforcement agencies are likely to nevertheless conclude that the payment violates the FCPA.

It is against this backdrop that the recent SEC filing (see here) of Transocean, the world’s largest offshore drilling contractor, caught my eye.

It states, in relevant part, as follows:

“We are currently involved in several investigations by the DOJ and the SEC involving our operations and whether or not we or any of our
employees have violated the FCPA.”

“Our current investigations include a review of amounts paid to and by customs brokers in connection with the obtaining of permits for the temporary importation of vessels and the clearance of goods and materials. These permits and clearances are necessary in order for us to operate our vessels in certain jurisdictions. There is a risk that we may not be able to obtain import permits or renew temporary importation permits in West African countries, including Nigeria, in a manner that complies with the FCPA. As a result, we may not have the means to renew temporary importation permits for rigs located in the relevant jurisdictions as they expire or to send goods and equipment into those jurisdictions, in which event we may be forced to terminate the pending drilling contracts and relocate the rigs or leave the rigs in these countries and risk permanent importation issues, either of which could have an adverse effect on our financial results. In addition, termination of drilling contracts could result in damage claims by customers.”

Based on the above disclosure, it is difficult to analyze whether Transocean is legitimately entitled to the permits and clearances it is seeking.

Let’s assume this is the case, but that a low-level government bureaucrat with a hand out is demanding a payment to do what he otherwise has a legal obligation to do – and that is grant licenses and permits pursuant to the applicable governing rules and regulations.

If this is the case, it is unfortunate that a company feels no other option than to breach contracts and materially restructure its operations because the enforcement agencies are seemingly incapable of recognizing that Congress specifically authorized companies subject to the FCPA to make facilitating payments such as those that perhaps Transocean would have to make in order to secure the permits and clearances at issue.

While some find facilitating payments to be a corrupt payment under a different name (see here) and while the soon-to-be implemented U.K. Bribery Act contains no such exemption, the fact remains that the FCPA contains an express exception for facilitating payments and it is this statute that the enforcement agencies are obligated to enforce.

My Two Cents On The FCPA’s Affirmative Defenses

Students looking for scholarship ideas, should consider the Foreign Corrupt Practices Act.

Why?

There is a good chance that publication of an article will generate coverage and discussion on the blogosphere and elsewhere.

Case in point is Kyle Sheahen’s “I’m Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act.” (see here).

For prior coverage of Sheahen’s article see here, here and here.

Sheahen’s article is about the FCPA’s two affirmative defenses – the so-called local law and promotional expense defenses.

Big picture, Sheahen terms these defenses as being “hollow,” “illusory,” and “useless in practice.”

For starters, I respectfully disagree with Sheahen’s statement that “business and businessmen accused of giving bribes to foreign officials have fared poorly in federal courts” as well as the implication that this somehow supports his thesis.

The three FCPA trials cited from 2009 – Frederick Bourke, William Jefferson, and Gerald and Patricia Greene were a mixed bag for the DOJ, not slam-dunk successes.

For starters, the jury found Jefferson not guilty of substantive FCPA anti-bribery violations (see here).

Sure, Bourke was found guilty by a jury of conspiracy to violate the FCPA and the Travel Act (as well as making false statements to the FBI) (see here), yet when the DOJ alleges that one is a key participant of a “massive bribery scheme” yet secures only a 366 day sentence (see here) from a judge who remarks that “after years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both” – I struggle to put such a case in the decisive “win” category for the DOJ. Plus, Bourke’s case is currently on appeal (see here).

The Green case (see here) would seem to represent the cleanest win for the DOJ even though the sentencing judge expressed concerns whether the Green’s conduct caused any harm in sentencing the couple to six months in prison thereby rejecting the DOJ’s recommended ten year sentence. (See here).

Sheahen’s article was published before the Giffen Gaffe (see here). Giffen aggressively mounted a legal defense and, whether for legal, political or other reasons, the case that began with charges that Giffen made “more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan” ended with a one-paragraph superseding information charging a misdemeanor tax violation. Further, back in 2004, Giffen was successful in having FCPA-related criminal charges dismissed when the trial court judge (see here) concluded that the DOJ offered “the slenderest of reeds” to support the collateral criminal charge.

Going back in time …

George McLean won his FCPA case when the Fifth Circuit concluded, see 738 F.2d 655 (5th Cir. 1984) that the FCPA, as it then existed because of the subsequently repealed Eckhardt Amendment, barred prosecution.

Donald Castle and Darrell Lowry (two Canadian “foreign officials”) won their FCPA-related cases, see 741 F.Supp. 116 (N.D. Tex. 1990), when the court dismissed their criminal indictments. The DOJ asserted that even though the officials could not be prosecuted under the FCPA, they could be prosecuted under the general conspiracy statute (18 USC 371) for conspiring to violate the FCPA. However, the court declined DOJ’s invitation to extend the reach of the FCPA through the application of the conspiracy statute to Castle and Lowry.

Richard Liebo was acquitted, following a three week jury trial, of several counts including nine counts of violating the FCPA’s anti-bribery provisions and one count of violating the FCPA’s accounting and record keeping provisions. See 923 F.2d 1308 (8th Cir. 1991). He was found guilty of one FCPA count concerning his company’s purchase of honeymoon airline tickets for the cousin and close friend of Captain Ali Tiemogo, the chief of maintenance for the Niger Air Force. In connection with this conviction, the Eighth Circuit found that the district court “clearly abused its discretion in denying Liebo’s motion for a new trial” and remanded for a new trial.

Hans Bodmer didn’t fare too badly either in 2004 when Judge Shira Scheindlin (the same judge in the Bourke case) held that the portion of the criminal indictment “charging Bodmer with conspiracy to violate the FCPA contravenes the constitutional fair notice requirement, and the rule of lenity demands its dismissal.”

Of course, the DOJ has had its fair share of FCPA successes, but it remains a misperception that FCPA defendants have “fare[d] so badly” in FCPA trials as Sheahen, and others, have asserted.

Returning to the substance of Sheahen’s article, he discusses the October 2008 Bourke decision by Judge Scheindlin (see 582 F.Supp.2d 535) – a case of first impression on the FCPA’s local law defense.

Bourke argued that the FCPA’s local law affirmative defense was applicable because, under Azeri law even though the payments were illegal, he was relieved from criminal responsibility when he reported the payments at issue to the President of Azerbaijan.

Judge Scheindlin disagreed, drawing a hard line between payments – the focus of the FCPA’s local law affirmative defense in her mind – and the related issue of whether a person could not be prosecuted in the foreign country because a provision may relieve that person from criminal responsibility.

Judge Scheindlin concluded that “an individual may be prosecuted under the FCPA for a payment that violates foreign law even if the individual is relieved of criminal responsibility for his actions by a provision of the foreign law.”

I agree with Sheahen’s statement that Judge Scheindlin’s decision of first impression narrowed the FCPA’s local law defense “to the point of extinction.”

I would go a step further and argue that Judge Scheindlin’s decision would seem to violate the basic axiom that a statute should be construed so that effect is given to all of its provisions, so that no part will be inoperative or superfluous, void or insignificant.

In other words, courts should not suppose that Congress intended to enact unnecessary statutes and there is a presumption against interpreting a statute in a way that renders it ineffective.

The local law affirmative defense was added to the FCPA in 1988 and we must presume that Congress intended to enact the affirmative defense for some reason.

It was widely assumed by Congress in 1977 (when the FCPA was enacted), and by the Congress that amended the FCPA in 1988 to include the local law defense as well, that no nation’s written law permitted bribery of its officials.

Yet, given Judge Scheindlin’s narrow construction of the local law defense, the decision would appear to render the local-law defense (a statutory term that must have some meaning) inoperative, superfluous and insignificant.

As to the promotional expense defense, I would respectfully disagree with Sheahen’s apparent conclusion that the defense is meaningless just because it has never been successfully invoked by an FCPA defendant at trial.

Because of the “carrots” and “sticks” the DOJ and SEC possess in an FCPA enforcement action, and because of the resolution vehicles typically offered to FCPA defendants to resolve an FCPA enforcement action (such as non and deferred prosecution agreements) there is much about the FCPA that has never been subjected to judicial scrutiny.

That does not mean however that an element or defense not successfully invoked at trial renders that element or defense meaningless or hallow.

Indeed, Sheahen discusses the FCPA Opinion Procedure Release process. Through this mechanism, those subject to the FCPA have gained degrees of comfort from DOJ “no enforcement” opinions that are based on the promotional expense defense.

Although the Opinion Procedure Releases are not precedent, countless others in the legal, business, and compliance communities find comfort in these releases, as well as the statute itself, when analyzing real-world conduct for potential FCPA exposure.

FCPA enforcement is in need of many fixes and indeed the Opinion Procedure Release process is likely not the best way for the DOJ to make its enforcement positions known.

However, these structural flaws in FCPA enforcement, coupled with the typical ways in which FCPA enforcement actions are resolved, necessarily leads to the conclusion that the FCPA’s affirmative defenses are “hollow,” “illusory,” and “useless in practice.”

*****

I provided Sheahen with my draft post so that he could respond and here is what he said.

“Professor Koehler,

Thank you for your thorough analysis. Although DOJ’s trial record in FCPA prosecutions is not a clean sheet, the government has still been substantively successful in almost every FCPA case that has gone to trial. Further, the fact remains that no FCPA defendant has successfully invoked either the local law or the promotional expenses defense in an FCPA enforcement action.

Also, while I agree that the promotional expenses defense provides some guidelines for compliance with the FCPA, neither it nor the local law defense provide a meaningful defense to an enforcement action. Accordingly, Congress must take action to ensure that individual and corporate defendants have the actual ability to raise the affirmative defenses contemplated by the statutory scheme.

Thanks again and all the best,

Kyle Sheahen
sheahen2010@lawnet.ucla.edu

Financial Reform Bill Contains Major Compliance Headache

News coverage today will be extensive as to the Dodd-Frank Wall Street Reform and Consumer Protection Act – the financial reform bill – that is expected to be signed by President Obama next week.

But you probably will not see much coverage as to a key “miscellaneous provision” tacked onto the end of the massive bill.

However, to many readers of this blog, this key “miscellaneous provision” is sure to cause much angst – as well it should. And no, I am not talking about the whistleblower provisions included in the financial reform bill that can reward a whistleblower who reports securities laws violations, a provision some are calling the FCPA Whistleblower Bounty Program (see here), even though the provisions are not specific to the FCPA. I will cover these provisions in a future post.

The “miscellaneous provision” is Section 1504.

It is titled “Disclosure of Payments by Resource Extraction Issuers” and it is substantively similar to S.1700, a bad bill that was introduced in the Senate in September 2009. I covered this bill, and its many problems, in this prior post.

As I noted in the prior post, bribery and corruption are bad, but that does not mean that every attempt to curtail bribery and corruption is good.

Case in point is Section 1504 of the financial reform bill.

In short, Section 1504 will substantially increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments. Section 1504 is akin to “swatting a fly with a bazooka” and it attempts to legislate an issue that was sensibly put to rest in the mid-1970’s when Congress held extensive hearings on what would become the FCPA.

Section 1504 amends Section 13 of the Securities Exchange Act of 1934 (15 USC 78m) (“Periodical and Other Reports”) by adding a new section “Disclosure of Payments by Resource Extraction Issuers.”

Under this section, “no later than 270 days after enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the [SEC] shall issue final rules that would require:

• a “Resource Extraction Issuer” (a defined term which means an issuer that:(i) is required to file an annual report with the Commission; and (ii) engages in the commercial development of oil, natural gas, or minerals”)

• to include in its annual report

• “information relating to any payment”

• made by the issuer, “a subsidiary” of the issuer, “or any entity under the control of the issuer”

• to a “foreign government” (a defined term which means a “foreign government, a department, agency, or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission”) or the “Federal Government”

• for “the purpose of the commercial development of oil, natural gas, or minerals.”

Although it is possible that the final SEC rules may shed more light on the above provisions, at this point not much about Section 1504 is clear.

Therein lies the problem.

Not sure, if your company is a “Resource Extraction Issuer” because you are unclear what “commercial development of oil, natural gas, or minerals” means?

No problem, Section 1504 provides this crystal clear definition – “the term ‘commercial development of oil, natural gas, or minerals’ includes exploration, extraction, processing, export and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity, as determined by the [SEC]. “

In other words, if you are an issuer, and you engage in “significant actions relating to oil, natural gas, or minerals” you just may have some huge, new reporting / disclosure requirements imposed on you!

Still confused? Join the club.

Is selling equipment to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?” Is selling exploration software to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?”

What is a payment?

That’s an easy one and Section 1504 provides this crystal clear definition – the term payment means:

(i) a payment that is (I) made to further commercial development of oil, natural gas, or minerals; and (II) not de minimis; and

(ii) includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the Commission […] determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.”

Ignoring for the moment the imperfect and imprecise definition of “Resource Extraction Issuer,” it is one thing to require such issuers to disclose royalties paid to a foreign government, and if that is viewed as providing transparency and eliminating bribery and corruption (however dubious that view may be), well then perhaps Section 1504 is a good piece of legislation.

But Section 1504 seeks disclosure and reporting of much, much more and could conceivably require disclosure of every single dollar a “Resource Extraction Issuer” makes to a “foreign government, a department, agency, or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission” for the “purpose of the commercial development of oil, natural gas, or minerals.”

Here is the real kicker though.

Section 1504 requires all payments (meeting the above definitions – if indeed you can figure out what those definitions are) to be disclosed, including perfectly legitimate and legal payments.

To those who supported Section 1504, I’ve got this to say – “we’ve been down this road before.”

It is called the FCPA (and the various versions of the statute before it was enacted). Years of congressional hearings were had as to this very same disclosure issue and we don’t need to repeat this exercise.

Here is some background.

The FCPA as enacted in 1977 contained (and still contains) an outright prohibition on improper payments to “foreign officials” to obtain or retain business (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.

The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.

As to these disclosure provisions, many people, including, most notably Senator Proxmire (D-WI – a Congressional leader on what would become the FCPA), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate.

Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”

The final House Report (see here) on what would become the FCPA is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected):

“Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements.”

The words of the late Senator Proxmire and the sensible conclusion reflected in the House Report are equally applicable to Section 1504.

Section 1504 (while however noble its intended purpose) is akin to “swatting a fly with a bazooka.”

The FCPA already criminalizes improper payments made to the “foreign government” recipients targeted in Section 1504 to the extent those payments are made to “obtain or retain business.”

Do we really now need a law that requires “Resource Extraction Issuers” to disclose all such payments, even perfectly legitimate and legal payments?

In passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress apparently said yes to this question. However, with any bill of this magnitude, it is likely that certain members of Congress did not even know what they were voting for or, if they did, were willing to accept undesirable “miscellaneous provisions” to ensure overall passage. In fact, what is now Section 1504 never made it “out of committee” since being introduced in September 2009. A similar bill was also introduced in 2008, but likewise went nowhere.

That is all water under the bridge as they say, because Section 1504 is likely soon to become law.

DOJ Guidance and the FCPA

That is the issue addressed by James Parkinson (Mayer Brown – see here) in the below guest post.

*****

As followers of this blog know well, the UK’s newly-enacted Bribery Act (here) calls for the UK government to “publish guidance about procedures that relevant commercial organisations can put into place to prevent persons associated with them from bribing…” Seeing this provision in the Bribery Act suggests the question whether similar guidance issued by the US government would be helpful.

As it turns out, the US government considered this very question over 20 years ago but declined to offer guidance to companies affected by the FCPA. In the 1988 amendments to the FCPA, Congress added provisions entitled “Guidelines by Attorney General,” which required the following:

“Not later than one year after August 23, 1988, the Attorney General, after consultation with the Commission, the Secretary of Commerce, the United States Trade Representative, the Secretary of State, and the Secretary of the Treasury, and after obtaining the views of all interested persons through public notice and comment procedures, shall determine to what extent compliance with this section would be enhanced and the business community would be assisted by further clarification of the preceding provisions of this section and may, based on such determination and to the extent necessary and appropriate, issue–

(1) guidelines describing specific types of conduct, associated with common types of export sales arrangements and business contracts, which for purposes of the Department of Justice’s present enforcement policy, the Attorney General determines would be in conformance with the preceding provisions of this section; and

(2) general precautionary procedures which issuers may use on a voluntary basis to conform their conduct to the Department of Justice’s present enforcement policy regarding the preceding provisions of this section.

The Attorney General shall issue the guidelines and procedures referred to in the preceding sentence in accordance with the provisions of subchapter II of chapter 5 of Title 5 and those guidelines and procedures shall be subject to the provisions of chapter 7 of that title.”

15 U.S.C. §§ 78dd-1(d), 78dd-2(e).

Following the 1988 mandate, the DOJ issued a formal notice inviting all interested persons “to submit their views concerning the extent to which compliance with 15 U.S.C. 78dd-1 and 78dd-2 would be enhanced and the business community assisted by further clarification of the provisions of the anti-bribery provisions through the issuance of guidelines.” Department of Justice, Anti-Bribery Provisions of the Foreign Corrupt Practices Act, 54 Fed. Reg. 40,918 (Oct. 4, 1989).

What happened?

On July 12, 1990, the DOJ declined to issue guidelines on the anti-corruption provisions of the FCPA, stating:

“After consideration of the comments received, and after consultation with the appropriate agencies, the Attorney General has determined that no guidelines are necessary…. [C]ompliance with the [anti-bribery provisions] would not be enhanced nor would the business community be assisted by further clarification of these provisions through the issuance of guidelines.”

Department of Justice, Anti-Bribery Provisions, 55 Fed. Reg. 28,694 (July 12, 1990).

How many responses did the DOJ receive?

According to the OECD’s Phase I Report on the US implementation of the Convention (at 15), “[o]nly 5 responses were received, and 3 of the responses were to the effect that guidelines were unnecessary.”

This suggests another question: what would the commentary landscape look like today if the DOJ published a new Federal Register notice soliciting “views concerning the extent to which compliance with 15 U.S.C. 78dd-1 and 78dd-2 would be enhanced and the business community assisted by further clarification of the provisions of the anti-bribery provisions through the issuance of guidelines”?

Given the rise in enforcement activity and the focus companies now bring to compliance, it seems very likely that far more than five people would submit comments.

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).

*****

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).

*****

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.”

*****

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.”

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