The Stings Before The Sting
A post that will increase your chance of capturing the office FCPA Jeopardy title.
As frequently reported, the Africa Sting case was the first time in the FCPA’s history that undercover investigative techniques were used. As detailed in this prior post, not true, undercover investigative techniques have been used in several other FCPA enforcement actions.
As frequently reported, the Africa Sting case was the first time in the FCPA’s history that a full-blown sting operation was used in connection with an enforcement action. This too is not true as detailed in this post which provides an overview of prior DOJ FCPA sting operations.
Hebert Tannenbaum
In 1996 an FBI spent agent received information from a confidential informant that Tannenbaum (the principal of Long Island based Tanner Management Corporation – a garbage incinerator manufacturer) “had previously made payments to foreign government officials to induce them to purchase garbage incinerators from the defendant.” (See here for the complaint). The informant further advised the FBI that Tannenbaum “had offered to make payments to government officials of various foreign countries in order to sell garbage incinerators in those countries” and during a recorded meeting with the informant Tannenbaum confirmed that he “had previously made a $75,000 cash payment to an official of the Government of Barbados, as an inducement for the purchase by his government of a garbage incinerator.” Thereafter, the informant, acting at the FBI’s direction, recorded a call with Tannenbaum during which Tannenbaum “admitted that he was willing to make payments to sell his garbage incinerators” and the complaint references specific payments in Taiwan and Argentina. During a meeting at the Park Lane Hotel in New York, the informant introduced Tannenbaum to the FBI special agent who was posing “as an Argentine government procurement official who wanted to purchase a garbage incinerator.” During the meeting, Tannenbaum offered to sell the Argentine “procurement official” an incinerator and stated “that he was willing to make a payment to facilitate the deal.” According to the complaint, Tannenbaum, on the way to a bank to open an account to faciliate the deal, told the undercover FBI agent posing as the “procurement official” that “for all he knew [“procurement official”] could have been an FBI agent” and that Tannenbaum was “in his seventies, and did not want to get in trouble.”
Well, Tannebaum did get in trouble.
Based on the above information, Tannenbaum was charged in 1998 via a one count criminal information (here) with conspiracy to violate the FCPA. The information is signed by then U.S. Attorney for the S.D. of New York Mary Jo White currently a partner at Debevoise & Plimpton (here).
Tannenbaum pleaded guilty (see here and here for the DOJ release) and was sentenced to 366 days plus three years of supervised release.
Richard Novak
In 2006, Richard Novak was charged (here) with, among other counts, violating the FCPA. It remains one of the more unusual FCPA enforcement actions ever. Novak and others owned and operated several internet businesses using the names “Saint Regis University,” “Robertstown University” and “James Monroe University.” According to the superseding information “they were diploma mills in that these ‘universities’ had no legitimate faculty members; offered no legitimate academic curriculum or services; required no course work or class work; and were not recognized by the United States Department of Education.” According to the superseding information, Novak made a bribe payment to the “Consult and First Secretary at the Liberian Embassy in Washington D.C. in order to assist Saint Regis University and its owners in fraudulently selling diplomas through their internet businesses.” Elsewhere, the superseding information states that “various foreign government officials who received the bribes held various positions at the Liberian Embassy in Washington, D.C., the Liberian Embassy in Accra, Ghana, and at the Ministry of Education for the Republic of Liberia in Monrovia, Liberia” and that these individuals, among other things, “were in a position to: issue certificates of accreditation and recognition; issue notarial certificates; issue letters claiming that Saint Regis University was fully accredited and recognized by the Ministry of Education in the Republic of Liberia; and cause staff at the Liberian Embassy in Washington D.C. to answer the telephone calls in a positive way when inquiries regarding the legitimacy [of the Universities] were made.”
Although not specifically mentioned in the superseding information, a component of the original indictment (here) against Novak and several others was U.S. Secret Service agents posing as high school dropouts seeking degrees.
Novak pleaded guilty (see here) and was sentenced to three years probation.
A Focus On Sub-Saharan Africa
An article recently caught my eye by Herbert Igbanugo (here) and Raymond Gwenigale (here) of the U.S. based Igbanugo Partners International Law Firm titled “Assessing and Minimizing Customs-Related Corruption Risk in Sub-Saharan Africa’s Ports” (see here).
In this guest post, Igbanugo and Gwenigale provide an overview of their article.
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“In Assessing and Minimizing Customs-Related Corruption Risk in Sub-Saharan Africa’s Ports, we examine the complex maze of Sub-Saharan Africa (“SSA”) ports and maritime commerce, shedding light on the ever present contagion of corruption and bribery in SSA ports and its effect on the region’s economic development. We also touch on methods for reducing corruption and bribery in SSA ports and how companies doing business in the region can protect themselves through the implementation of risk assessment and due diligence programs.”
“The increase in both containerized and general cargo in SSA Ports over the past decade has served to highlight the issues of corruption and bribery in the region and the need for a more efficient, regulated system to combat corruption. An important contributor to the corruption and inefficiency of SSA ports are the improper and antiquated regulation systems in place. Moving toward modern port-management structures such as the landlord port system and independent port regulator structures, as well as improving automation systems in Customs will help combat corruption at SSA ports.”
“A key element in minimizing customs-related corruption risks of companies doing business in SSA is the development of an in-depth understanding of the unique characteristics of the SSA countries in which they operate. Businesses must also understand and abide by the legal and regulatory regime in place in each country’s ports and create customs compliance strategies that reflect an understanding of the Customs clearance processes in specific countries. In discussing customs-related corruption in SSA ports, one must also keep in mind the impact of the African tradition of patronage. Customs reform must address these traditions and work to reduce the negative impacts of patronage if anti-corruption efforts are to be successful.”
“To protect themselves from FCPA prosecution companies need to adopt and enforce clear policies prohibiting all those who act on their behalf from engaging in bribery. Developing a mandatory exhaustive questionnaire for use by all agents is a good starting point for any risk mitigation effort. When retaining foreign customs clearance agents, firms or consultants, companies must minimize risk by meticulously scrutinizing the background of the consultant and securing a written agreement regarding FCPA compliance. The use of reputable culturally competent auditors and close supervisor of local compliance counsel or general counsel are also paramount.”
“The article is one in a series of African Counsel articles dedicated to eradicating corruption and improving corporate social responsibility in SSA. As a culturally competent SSA focused firm with the in depth knowledge of Africa that only those who call Africa home would possess, we are committed to becoming one of the best information sources for US organizations intent on operating in an SSA environment free of corruption. We are proud of our strong African heritage, SSA focus, and we are quite delighted to share our knowledge of Africa with everyone to whom it matters. Links to our African Counsel newsletter and SSA Practice Brochure can be found here and here.”
“Rapid Multinational Expansion Through Mergers and Acquisitions” Leads to FCPA Enforcement Action Against Diageo
The Foreign Corrupt Practices Act is of course no laughing matter. Yet if an FCPA joke book is ever written there is surely to be an entry about the Indian and Korean military officials, a Thai lobbyist, and a Korean Customs official, who while on a purely recreational side-trip to Budapest, stopped in a bar, nibbled on some rice cakes, downed a Guinness and talked about product labeling, excise taxes, and transfer pricing.
Yesterday, the SEC announced (here) an FCPA books and records and internal controls enforcement action against Diageo PLC via an administrative cease and desist order. Diageo, headquartered in London, has American Depository Shares registered with the SEC and traded on the New York Stock Exchange and is thus an “issuer” under the FCPA.
In summary fashion, the Order (here) stated as follows.
“This matter concerns multiple violations of the Foreign Corrupt Practices Act (“FCPA”) by Respondent Diageo, one of the world’s largest producers of premium alcoholic beverages. Over more than six years, Diageo, through its subsidiaries, paid over $2.7 million to various government officials in India, Thailand, and South Korea in separate efforts to obtain lucrative sales and tax benefits.”
“In India, from 2003 through mid-2009 Diageo made over $1.7 million in illicit payments to hundreds of Indian government officials responsible for purchasing or authorizing the sale of its beverages. Increased sales from these payments yielded more than $11 million in ill-gotten gains. In Thailand, from 2004 through mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied extensively on Diageo’s behalf in connection with multi-million dollar pending tax and customs disputes, contributing to Diageo’s receipt of certain favorable dispositions by the Thai government. With respect to South Korea, in 2004, Diageo paid 100 million won (KRW) (over $86,000) to a customs official as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Diageo also paid over $100,000 in travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo made hundreds of gift payments totaling over $230,000 to South Korean military officials in order to obtain and retain liquor business.”
“Diageo and its subsidiaries failed to account accurately for these illicit payments in their books and records. Exercising lax oversight, Diageo also failed to devise and maintain internal accounting controls sufficient to detect and prevent the payments.”
As set forth in the SEC’s order, “Diageo’s history of rapid multinational expansion through mergers and acquisitions contributed to defects in its FCPA compliance programs.” Indeed, the conduct at issue focused on Diageo India Pvt. Ltd. (“DI”) (a wholly-owned indirect subsidiary acquired as a result of a merger); Diageo Moet Hennessy Thailand (“DT”) (a joint venture Diageo acquired an indirect majority interest in as a result of a merger) and Diageo Korea Co. Ltd. (“DK”) (a wholly-owned indirect subsidiary acquired during an acquisition). According to the SEC, “at the times of these acquisitions, Diageo recognized that its new subsidiaries had weak compliance policies, procedures, and controls” but “nevertheless, Diageo failed to make sufficient improvements to these programs until mid-2008 in response to the discovery of illicit payments.”
India
As to India, the SEC stated as follows. “From at least 2003 through June 2009, DI paid an estimated $792,310 in improper cash payments through its third-party distributors to 900 or more employees of government liquor stores in and around New Delhi. DI also paid an estimated $186,299 (representing 23% of the payments) in “cash service fees” to the distributors as compensation for advancing the funds. DI made the payments to increase government sales orders of its products, and to secure favorable product placement and promotion within the stores.”
The SEC further stated as follows. “During the same six-year period (2003 – 2009), Diageo, through DI, also reimbursed an estimated $530,955, and made plans to reimburse an additional $79,364, in improper cash payments made by third-party sales promoters to government employees of the Indian military’s Canteen Stores Department (“CSD”). The payments, made with DI’s knowledge and authorization, were designed to: (i) foster the promotion of Diageo products in the CSD’s canteen stores (analogous to the U.S. military’s post exchanges); (ii) obtain initial listings and annual label registrations for Diageo brands, price revision approvals, and favorable factory inspection reports; (iii) secure the release of seized shipments of Diageo products; and (iv) promote good will through the distribution of Diwali and New Year’s holiday gifts to CSD employees.”
The SEC also stated as to India as follows. “Diageo failed to ensure that DI properly accounted for a number of additional, improper payments to government officials who controlled administrative functions vital to DI’s business. From at least 2003 through 2008, Diageo, through DI, reimbursed an estimated $98,310 in cash payments made by its third-party promoters and distributors to government officials in the North Region of India and in the State of Assam for the purpose of securing label registrations for Diageo products.” In addition, the SEC Order stated as follows. “… [F]rom at least 2003 through June 2009, Diageo, through DI, paid an estimated $78,622 in extra commissions to its distributors in the North Region to reimburse them for payments made to Excise officials to secure import permits and other administrative approvals.”
Thailand
As to Thailand, the SEC Order stated as follows. “From April 2004 through July 2008, Diageo, through DT, retained the services of a Thai government and foreign political party official (the “Thai Official”) to lobby other Thai officials to adopt Diageo’s position in several multi-million dollar tax and customs disputes. For this retainer DT paid approximately $12,000 per month for 49 months, for a total of $599,322. DT compensated the Thai Official through 49 direct payments to a political consulting firm (the “Consulting Firm”) for which the Thai Official acted as a principal. Most, if not all, of the $599,322 paid to the Consulting Firm was for the Thai Official’s services and accrued to his benefit. The Thai Official served as a Thai government and/or political party official throughout the relevant period (April 2004 – July 2008) in which he received compensation from DT. At various times the Thai Official served as Deputy Secretary to the Prime Minister, Advisor to the Deputy Prime Minister, and Advisor to the Ministry of Agriculture and Cooperatives. The Thai Official also served on a committee of the ruling Thai Rak Thai political party, and as a member and/or advisor to several state-owned or state-controlled industrial and utility boards. DT’s senior management knew that the Thai Official was a government officer during its engagement of the Consulting Firm. The Thai Official was the brother of one of DT’s senior officers at that time. Several members of Diageo’s global and regional management attended meetings with the Thai Official and senior members of the Thai government. The Thai Official provided extensive lobbying services on behalf of Diageo and DT in connection with several important tax and customs disputes that were pending between Diageo and the Thai government. For example, with respect to excise taxes, the Thai Official coordinated and attended numerous meetings between senior Thai government officials and senior Diageo and DT management, including two meetings in April and May 2005 with Thailand’s then Prime Minister. In May 2005, shortly following the meetings arranged by the Thai Official, the Prime Minister made a radio address publicly endorsing Diageo’s position in favor of a “specific” approach (based on quantity) rather than an “ad valorem” approach (based on price) to calculating excise taxes. On Diageo’s behalf, the Thai Official also met repeatedly with senior commerce, finance, and customs authorities in charge of the transfer pricing and import tax disputes, as well as with members of the Thai parliament. The Thai Official’s services contributed to Diageo’s successful resolution of several components of these disputes. For example, during 2004 and 2005 Diageo and DT were actively engaged in a dispute with the Thai government over the appropriate transfer pricing formula applied to One Liter bottles of Johnnie Walker Red Label and Black Label Scotch whiskey. Based in part on the Thai Official’s lobbying efforts, the Thai government accepted important aspects of DT’s transfer pricing method and released over $7 million in bank guarantees that DT had been required to post while the tax dispute was pending.”
South Korea
As to Korea, the SEC Order stated as follows. “Diageo had significant tax and customs issues in South Korea. In April 2003, DK, under Diageo’s direction, requested from South Korea a more advantageous formula for calculating the transfer pricing, for tax purposes, of Windsor Scotch whiskey that DK was importing into South Korea. As part of those negotiations, DK also sought tens of millions of dollars in tax rebates based on a claim that DK had overpaid under the then existing transfer pricing formula. In April 2004, following a year of intense negotiations and lobbying by DK, the South Korean government granted DK a rebate of approximately $50 million. In July 2004, three months after DK received the tax rebates, a DK manager (the “Manager”) paid an apparent reward of 100 million KRW ($86,339) to a Korean Customs Service official (the “Customs Official”) who had played a key role in the transfer pricing negotiations. With the approval of DK’s then chief financial officer, the Manager generated 60 million KRW ($51,802) of the payment by means of a surreptitious cash kickback scheme. The Manager solicited an inflated invoice from DK’s third-party customs brokerage firm (the “Customs Broker”), which had provided DK with consulting services during the transfer pricing negotiations. As orchestrated, DK paid an inflated invoice amount to the Customs Broker, which then gave 60 million KRW ($51,802) in cash back to the Manager. The Manager funded the remaining 40 million KRW ($34,537) of the total reward amount from personal sources. The Manager then provided the Customs Official with 100 million KRW ($86,339) in the form of ten bank checks of approximately 10 million KRW ($8,634) each.”
The SEC Order further stated as follows. “During the course of the transfer pricing negotiations in 2003 and 2004, DK also paid $109,253 in travel and entertainment costs for Korean customs and other government officials. Some of these expenses were unapproved and constituted improper inducements of the South Korean officials. For example, in December 2003, the Customs Official and several official colleagues traveled to Scotland with DK employees. The purported reason for the trip was to inspect Diageo’s Windsor Scotch production facilities as part of the transfer pricing negotiations. During the course of this apparently legitimate trip, DK’s chief financial officer and the Manager took the South Korean officials on a purely recreational side-trip to Prague and Budapest.”
In addition, the SEC Order stated as follows regarding gifts to Korean military officers. “From at least 2002 through at least 2006, Diageo, through DK, routinely made hundreds of small payments to South Korean military officers for the purpose of obtaining or maintaining business and securing a competitive business advantage. The payments assumed two forms: (i) holiday and vacation gifts known as “rice cake” payments; and (ii) business development gifts, called “Mokjuksaupbi” payments. Rice cake payments were customary and traditional presents that Diageo, through DK, provided to scores of military officers – many of whom were responsible for procuring liquor – several times each year during holidays and vacations. From 2002 through 2006, DK made approximately 400 rice cake payments, totaling at least $64,184, in the form of cash or gift certificates ranging in value between $100 and $300 per recipient. In October 2004, a senior officer within Diageo’s global compliance department explicitly approved the practice of making rice cake payments after a DK employee explained that the company would face a competitive disadvantage if it refrained. Over the same four-year period, Diageo, through DK, also spent approximately $165,287 on hundreds of non-traditional, non-seasonal gifts and entertainment for the military. Of these so-called “Mokjuksaupbi” payments (a term that was broadly intended by DK to refer to “payments for relationships with customers”), approximately $106,051 were for the purpose of influencing specific purchasing decisions. For example, in 2003, DK personnel requested approval of approximately $2,600 to entertain army personnel “for their cooperation” in connection with the re-selection of Windsor Scotch.”
Based on the above conduct, the SEC found FCPA violations, but only FCPA books and records and internal control violations. The absence of FCPA anti-bribery violations against Diageo and the referenced entities would seem to be the result of a lack of a U.S. nexus as to the payments. Even though the FCPA was amended in 1998 to provide an alternative nationality jurisdiction test as to U.S. issuers and domestic concerns, the FCPA retains a territorial U.S. nexus jurisdictional test as to non-U.S. issuers such as Diageo that are nevertheless subject to the FCPA.
As to the FCPA violations, the SEC order states as follows. “Diageo’s books and records did not accurately reflect illicit payments that it made, through its subsidiaries, to Indian, Thai, and South Korean government and military officials. Instead, Diageo, through DI, DT, and DK, disguised the improper payments as legitimate vendor expenses or recorded them under misleading rubrics such as “factory expenses,” “telephone expenses,” “shareholder stake,” and “sales support.” In several instances, the illicit payments were not recorded at all.” The SEC Order further states as follows. “As evidenced by the extent and duration of the wrongful payments and their improper recordation, Diageo failed to devise and maintain sufficient internal accounting controls.”
The SEC Order mentions Diageo’s cooperation and “certain remedial measures undertaken by Diageo, including employee termination and significant enhancements to its compliance program.”
As is common in all SEC FCPA enforcement actions, Diageo settled the matter without admitting or denying the SEC’s findings. Per the SEC Order, Diageo shall pay disgorgement of $11,306,081, prejudgment interest of $2,067,739, and a civil monetary penalty of $3,000,000.
In a press release (here) Diageo stated as follows. “Diageo takes the SEC’s findings seriously and regrets this matter. Systems and controls have been enhanced in an effort to prevent the future occurrence of such issues and to reinforce, everywhere the Company operates, a culture of compliance and commitment to the principles embodied in Diageo’s Code of Business Conduct.”
Diageo’s most recent Annual Report (Sept. 2010) stated as follows.
“As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators’ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo’s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations.”
Bribery Is Not A First Amendment Issue, But News Corp’s Potential FCPA Liability Does Shine A Needed Light On The FCPA’s Current Era
[On July 20th, the Wall Street Journal published an Op-Ed (here) by David Rifkin and Lee Casey concerning the FCPA implications of the News Corporation scandal titled “Payments and News-Gathering: The New First Amendment Threat.” I drafted and submitted to the WSJ a piece that, in part responded to certain of the FCPA assertions made by Rivkin and Casey, and in other respects sought to further inform the public discussion concerning News Corporation’s potential FCPA exposure and more broadly the current era of FCPA enforcement. The WSJ declined to publish the piece and it thus appears below – modified slightly to conform to the typical postings on this site]
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One aspect of the growing News Corporation scandal concerns the Foreign Corrupt Practices Act (“FCPA”) given the allegations that News Corporation employees and agents may have provided cash or other things of value to London police officers to obtain non-public information that better allowed News Corporation entities to publish stories and thus sell more newspapers.
Based on these allegations and revelations, calls by certain U.S. senators for an FCPA investigation of News Corporation find firm support given how the Department of Justice and the Securities and Exchange Commission have aggressively interpreted the FCPA during the past decade of its resurgence. (See here for a prior post).
Yet, recently in a WSJ Op-Ed, David Rivkin (here) and Lee Casey (here), commenting on the FCPA implications of the News Corporation scandal, made the senseless assertion that the First Amendment makes an FCPA inquiry of News Corporation “inappropriate” because the “the FCPA was certainly not intended to police news-gathering .”.
In passing the FCPA in 1977, Congress clearly demonstrated a capability of creating certain exceptions. For instance, the FCPA has always contained a limited national security exception for conduct engaged in pursuant to a specific, written directive of the head of any Federal department or agency pursuant to Presidential authority to issue such directives. However, having analyzed the FCPA’s entire legislative history (including thousands of pages of Congressional hearing transcripts, Congressional floor statements, texts of competing bills, and Executive agency documents and statements – see here for more) I can say that there is no basis to suggest that Congress sought to exclude the media industry from the FCPA’s prohibitions.
Nor should the media industry be excluded from FCPA scrutiny if its news gathering methods include paying bribes to “foreign officials” to obtain information. Few would suggest that the media industry would be excluded from criminal liability if its news gathering methods include assault and battery of sources to obtain information. The same logic and reasoning applies when news gathering is facilitated through the payment of bribes.
Even though Rivkin and Casey are off-base with their First Amendment assertion, they do correctly state that “since the late 1990’s […] the Securities and Exchange Commission and the U.S. Department of Justice have begun applying the law ever more broadly – to conduct that has little connection to obtaining government contracts or other government benefits, such as product approvals, permits or licenses.” Likewise, a recent WSJ editorial (here) also correctly stated that the FCPA “has historically been enforced against companies attempting to obtain or retain government business” but that “U.S. officials have been attempting to extend their enforcement to include any payments that have nothing to do with foreign government procurement.”
The intense media coverage of New Corporation’s potential FCPA exposure has succeeded in raising two distinct, yet equally important questions, as to the FCPA’s current era of enforcement. The first question is whether – given the DOJ and SEC’s current enforcement theories – the London police officer payments can expose News Corporation to FCPA liability. That answer is yes and the First Amendment, for the reasons stated above, is not relevant to this question. The second question is whether Congress intended the FCPA to apply to the numerous FCPA enforcement actions (actions typically resolved through non-prosecution and deferred prosecution agreements and thus subject to little or no judicial scrutiny) in this new era that have nothing to do with obtaining or retaining foreign government contracts.
This is a valid and legitimate question and the same question could also be asked as to many other current FCPA enforcement theories. For instance, in the FCPA’s decade of resurgence, a significant percentage of FCPA enforcement actions do not involve foreign government officials. Rather, the “foreign officials” at issue are alleged employees of state-owned or state-controlled enterprises (such as procurement managers and project engineers) and thus employees of alleged “instrumentalities” of a foreign government. This common enforcement agency position, even as to commercial enterprises in which a foreign state holds merely a minority interest, is the functional and substantive equivalent of alleging that General Motors and American International Group are “instrumentalities” of the U.S. government and that all GM and AIG employees are therefore U.S. “officials.” The enforcement agencies frequently assert this position even though there is no express statement or information in the FCPA’s extensive legislative history to support the position.
In “The Façade of FCPA Enforcement” recently published by the Georgetown Journal of International Law (see here) and in my other writings I have extensively profiled how the FCPA has frequently come to mean whatever the enforcement agencies say it means and how the FCPA has morphed into an all-purpose corporate ethics statute. The issue is not whether payments to London police officers to obtain information or to employees of commercial enterprises with a dint of foreign government ownership are ethical – few would suggest they are. Rather the issue is whether such payments are what Congress intended to regulate when it passed the FCPA. If Congress desires an all-purpose corporate ethics statute vs. a limited foreign bribery statute that is a decision for Congress to make – not for the enforcement agencies to make via its charging decisions that are largely insulated from judicial scrutiny.
News Corporation’s potential FCPA exposure based on current DOJ and SEC enforcement theories has succeeded in focusing greater attention on this new era of FCPA enforcement and that is a good thing and in the public interest for this dialogue to continue.
The FCPA’s “Illusory” Facilitating Payments Exception
Facilitating payments. The FCPA is clear, as was Congress when it passed the FCPA. Such payments are excepted from the FCPA’s anti-bribery provisions.
Yet why do so many FCPA enforcement actions concern payments to low-level foreign officials to secure permits, licenses and the like?
In the words of former SEC FCPA enforcement attorney Richard Grime (see here) it is because “the DOJ and the SEC’s narrow interpretation of the facilitating payments exception is making that exception ever more illusory, regardless of whether the federal courts – or Congress – would agree.”
In this piece, Grime and co-author Sara Zbed (here) discuss the FCPA’s facilitating payment exception, how “recent enforcement actions have diminished the availability of the exception,” and why the exception has been “further eroded by the recently-enacted U.K. Bribery Act, which lacks any comparable exception and applies broadly to individuals and companies as long as they carry on some business in the United Kingdom.”
Excerpts from the article appear below.
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“The drafters of the Foreign Corrupt Practices Act (“FCPA”) recognized that such demands for “grease payments” are a reality in many countries, and accordingly made clear that certain payments made to expedite the approval of permits or licenses, or to prompt the expeditious performance of similar low-level ministerial duties, fell outside the ambit of the statute’s anti bribery provisions. Yet that exception for “facilitating payments” – enacted during the FCPA’s 1988 amendments – is becoming harder and harder to rely on.”
“By excluding facilitating payments from the FCPA’s ambit, Congress acknowledged that such payments – while considered reprehensible within the United States – are “not necessarily [considered reprehensible] elsewhere in the world” and, for that reason, that “it is not feasible for the United States to attempt unilaterally to eradicate all such payments.””
“The FCPA contains no indication of whether permitted facilitating payments are required to be below a certain dollar amount; nor does the statute provide any additional guidance about where a facilitating payment ends and a corrupt payment begins. Federal courts have not squarely confronted the issue, either. To the contrary, only a small handful of decisions even mention the facilitating payments exception, and those that do provide little clarity about the exception’s outer limits.”
“… [T]he Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) have pressed a narrow view of the exception in recent years, and businesses and other defendants, reluctant to test the law’s boundaries at trial, have settled their cases instead.”
“The DOJ and the SEC have stepped into the void created by this absence of relevant case law, and their recent enforcement actions have diminished the availability of the exception in two principal ways. First, the business purpose requirement of the FCPA is being expanded to cover all manner of circumstances regardless whether there is a clear connection between the payment to the foreign official and obtaining or retaining business. For example, payments to obtain tax refunds, expedite inspections, and procure inspections from government officials are being charged as violations of the anti-bribery provisions without any explanation of why those payments satisfied the business purpose requirement of the law. Second, both the SEC and DOJ have charged violations of the accounting provisions for facilitation payments that are not recorded accurately.”
“Of course, the fact that the FCPA’s twin enforcement agencies have treated certain payments as prohibited despite their possible categorization as facilitating payments does not mean a federal court would agree. But because the vast majority of enforcement actions are resolved through deferred prosecution agreements, non-prosecution agreements, and other settlement devices, these cases never make it to trial. As a result, the DOJ and the SEC’s narrow interpretation of the facilitating payments exception is making that exception ever more illusory, regardless of whether the federal courts – or Congress – would agree.”
Grime and Zbed then shift gears and talk about the FCPA’s facilitating payment exception in light of the U.K. Bribery Act, a law that went live on July 1st.
“Whatever force the facilitating payments exception retains in this environment has been further eroded by the recently-enacted U.K. Bribery Act, which lacks any comparable exception and applies broadly to individuals and companies as long as they carry on some business in the United Kingdom.”
“If the increasing skepticism with which the FCPA’s enforcement agencies view facilitating payments gives pause to companies that permit such payments, so too should the recently enacted Bribery Act – a United Kingdom law that does not permit facilitating payments and whose broad territorial sweep may render the FCPA’s exception even more illusory.”
“The risk associated with permitting facilitating payments are particularly great for companies that do some business in the U.K., because the Bribery Act prohibits such payments and has a broad jurisdictional scope.”
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As to the FCPA’s facilitating payment exception, I previously observed here that some find facilitating payments to be corrupt payments under a different name. However, Congress did not agree, and the fact remains that the FCPA contains an express exception for facilitating payments. The enforcement agencies are obligated to enforce the statute that Congress passed, not a statute they wish they had. If Congress wants to remove the facilitating payment exception from the FCPA, let Congress do that, not the enforcement agencies through its charging decisions.