Wall Street Journal Goes On Offense
It is not everyday FCPA details are dissected on the editorial page of a major newspaper. But then again, it is not everyday that the parent company of a major newspaper is embroiled in a major scandal that has an FCPA element to it.
Yesterday, in a lengthy and wide-ranging editorial (here), the Wall Street Journal had this to say about the FCPA implications of the News Corp. scandal.
“The political mob has been quick to call for a criminal probe into whether News Corp. executives violated the U.S. Foreign Corrupt Practices Act with payments to British security or government officials in return for information used in news stories. Attorney General Eric Holder quickly obliged last week, without so much as a fare-thee-well to the First Amendment.”
“The foreign-bribery law has historically been enforced against companies attempting to obtain or retain government business. But U.S. officials have been attempting to extend their enforcement to include any payments that have nothing to do with foreign government procurement. This includes a case against a company that paid Haitian customs officials to let its goods pass through its notoriously inefficient docks, and the drug company Schering-Plough for contributions to a charitable foundation in Poland.”
“Applying this standard to British tabloids could turn payments made as part of traditional news-gathering into criminal acts. The Wall Street Journal doesn’t pay sources for information, but the practice is common elsewhere in the press, including in the U.S.”
With the WSJ now suggesting that payments to police officers are “part of traditional news-gathering” – at least in certain countries – and it suggesting that paying sources for information is “common,” it may be possible that the next FCPA industry sweep will be of the media industry. Previous industry sweeps have included the oil and gas industry, a current sweep of the pharmaceutical / medical device industry that has been active for some time, and a recently initiated sweep of the financial services industry.
The remainder of this post details the two FCPA enforcement actions referenced in the WSJ’s editorial.
For starters, the WSJ is correct when its stated as follows. “The foreign-bribery law has historically been enforced against companies attempting to obtain or retain government business. But U.S. officials have been attempting to extend their enforcement to include any payments that have nothing to do with foreign government procurement.”
During the FCPA’s first 20 years, every FCPA enforcement action concerned allegations that payments to a “foreign official” assisted the payor in “obtaining or retaining business” with a foreign government or alleged foreign government “department, agency, or instrumentality.”
FCPA enforcement then changed – most notably with the U.S. v. Kay prosecution.
U.S. v. Kay
In 2001, David Kay and Douglas Murphy (the “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. “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.”
The trial 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. The DOJ appealed the decision 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. 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 emphatically 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.”
Despite the equivocal nature of the Kay holding, the decision clearly energized the enforcement agencies and post-Kay there has been an explosion in FCPA enforcement actions where the alleged improper payments have nothing to do with obtaining or retaining foreign government business. Many of these enforcement actions are profiled in my article “The Façade of FCPA Enforcement” (here at pages 971-976). None of these enforcement actions were challenged or subjected to meaningful judicial scrutiny and the Kay decision remains the only caselaw on the FCPA’s key “obtain or retain business” element.
For original source documents related to the Kay enforcement action see here.
Schering-Plough
The other FCPA enforcement action referenced by the WSJ is the 2004 enforcement action against Schering-Plough. Notably this was only an SEC civil enforcement action and only charged FCPA books and records and internal control violations.
The SEC civil complaint (here) alleged that Schering-Plough violated the FCPA when its wholly-owned Polish subsidiary (“S-P Poland”) improperly recorded a bona fide charitable donation to a Polish foundation where the founder/president of the foundation was also the director of a government health fund (the “Director”) that provided money to hospitals throughout Poland for the purchase of pharmaceutical products. According to the SEC, “during thc period in which the payments were being made to the foundation, S-P Poland’s sales two of its oncology products, increased disproportionately compared with sales of those products in other regions of Poland.” As is typical in SEC FCPA enforcement actions, there was no meaningful judicial scrutiny of this action and the company settled the charges without admitting or denying the SEC’s allegations.
News Corp And The FCPA
On July 7th the U.K. Guardian reported (here) that “up to five [U.K. police] officers were paid between them a total of at least £100,000 in cash from the News of the World.” The next day, Dominic Rushe and Jill Treanor of the U.K. Guardian made the link (see here) between these payments and the Foreign Corrupt Practices Act.
What followed over the next 10 days was the most intense worldwide media coverage of the FCPA in its nearly 35 year history.
Last Wednesday, in a development seldom – if ever – seen in the FCPA context, Senator Barbara Boxer (D-CA) and John Rockefeller (D-WV) wrote Attorney General Eric Holder and SEC Chairman Mary Schapiro (see here) requesting “that the U.S. Department of Justice and the Securities and Exchange Commission investigate whether News Corporation, a U.S.-based corporation, has violated United States law – specifically the Foreign Corrupt Practices Act of 1977.” Separately, Senator Frank Lautenberg (D-NJ) wrote Holder and Schapiro (see here). Senator Lautenberg stated as follows. “The limited information already reported in this case raises serious questions about the legality of the conduct of News Corporation and its subsidiaries under the FCPA. Further investigation may reveal that current reports only scratch the surface of the problem at News Corporation. Accordingly, I am requesting that DOJ and the SEC examine these circumstances and determine whether U.S. laws have been violated.”
Public interest groups (see here for one example) also began demanding an FCPA inquiry into the News of the World scandal.
Soon thereafter, it was reported that the FBI (an agency that investigates allegations of criminal violations of the FCPA under the supervision of the Fraud Section of the DOJ Criminal Division) opened an investigation of News Corp. Among others, Congressmen John Conyers “applaud[ed] Attorney General Eric Holder’s announcement that the Justice Department has opened a formal investigation into allegations that News Corp. may have violated both federal wiretapping statutes and the Foreign Corrupt Practices Act.” (See here).
The News Corp. scandal is wide in scope potentially implicating several laws both here in the U.S. and the U.K. This post focuses on News Corp.’s potential FCPA exposure.
Can the FCPA apply to News Corp. even if the improper conduct took place outside of the U.S.?
Yes. News Corp. is a U.S. company and as such the FCPA has extraterritorial application meaning it can face FCPA liability even if the conduct at issue takes places entirely outside of the U.S. Indeed, in most FCPA enforcement actions the conduct at issue takes place outside of the U.S. Further, it is very common in FCPA enforcement actions for parent companies to be held legally responsible for the acts of subsidiary employees on the theory that such employees acted as “agents” of the parent company and that the parent company ultimately derived the financial benefit from the improper conduct at issue.
Indeed, even News Corp.’s FCPA policies and procedures (here) states as follows. “The Foreign Corrupt Practices Act (FCPA) is a U.S. law that forbids bribery of foreign (meaning non-U.S.) government officials, whether elected or appointed, even if the bribe takes place outside the United States. Because News Corporation is a U.S. corporation, the FCPA may apply to all Company employees everywhere in the world, regardless of their nationality or where they reside or do business.”
Why do the London police payments implicate the FCPA’s anti-bribery provisions?
As a general matter, the FCPA’s anti-bribery provisions prohibit the payment of money or anything of value to a “foreign official” to “obtain or retain business.” London police officers are “foreign officials” under the FCPA. For instance, in this 2006 FCPA enforcement action the DOJ asserted that an Iraqi police officer was a “foreign official” under the FCPA.
As to “obtain or retain business,” for most of its history FCPA enforcement actions focused on payments to “foreign officials” to “obtain or retain business” with a foreign government. However, during the past decade, the DOJ has brought numerous FCPA enforcement actions premised on payments to customs officials, tax officials, immigration officials and the like where the payments have nothing to do with “obtaining or retaining business” with a foreign government. Rather, the payments were alleged to have assisted the payor in “obtaining or retaining” business in the general sense.
The leading court decision on this issue is U.S. v. Kay. 359 F.3d 738, 740 (5th Cir. 2004). As further explained in this piece (pages 917-921), in Kay, a U.S. circuit court (one step below the U.S. Supreme Court) concluded that 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. Even so, the court 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. The court 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.
Despite Kay’s equivocal holding, there has been a significant increase in FCPA enforcement actions since the decision concerning payments to “foreign officials” that better position the payor to “obtain or retain business” in the general sense. (See for instance the “CustomsGate” category under the Search page of this site).
Thus, payments to London police officers that allowed News of the World to obtain non-public information to write sensational news stories – and thus sell more newspapers – would seem to fit the type of FCPA enforcement common post-Kay. Given that News Corp. is a media company and its product is information, such payments are similar to an oil and gas company making payments to a “foreign official” to obtain non-public information concerning the location of oil and gas deposits.
What about the FCPA’s books and records and internal control provisions?
In addition to its anti-bribery provisions, the FCPA also contains books and records and internal control provisions applicable to U.S. listed companies such as News Corp. The books and records provision requires that “issuers” (the statutory term for U.S. listed companies) “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” The internal controls provision require that “issuers” “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:” among other things, “transactions are executed in accordance with management’s general or specific authorization;” “access to assets is permitted only in accordance with management’s general or specific authorization;” and “transactions are recorded as necessary to permit a preparation of financial statements in conformity with generally accepted accounting principles … and to maintain accountability for assets.”
These provisions, despite being part of the FCPA, are generic in scope. Thus, if other payments part of News Corp.’s wide-ranging scandal – such as “hush” settlement payments to phone hacking victims are misrecorded on the company’s books and records, such entries would provide the basis for independent FCPA books and records violations – even if such conduct does not directly implicate the FCPA’s anti-bribery provisions. As to the London police payments, such payments, if not recorded accurately on the company’s books and records, would of course also give rise to an independent FCPA books and records violation. Both the DOJ and the SEC (which also has FCPA jurisdiction over U.S. listed companies) frequently hold parent companies liable for the books and records violations of subsidiaries on the theory that subsidiary books and records are consolidated with the parent company’s books and records for purposes of financial reporting.
As to the FCPA’s internal control provisions, the enforcement agencies often take the rather simplistic position that because the payments were made or because corporate expenses were not accurately recorded, the company did not have effective internal controls.
If News Corp. faces FCPA liability does that mean that executive officers will as well?
Not necessarily. Under U.S. legal principles, a corporate entity such as News Corp. can face legal liability based on the conduct of any employee or agent to the extent the employee or agent was acting within the scope of their authority and the conduct was intended to benefit, at least in part, the organization. Many FCPA enforcement actions against corporate entities result from the improper conduct of low to mid-ranking employees in the absence of any allegation that executive officers or board members knew about the conduct at issue or participated in the conduct at issue. Thus, just because News Corp. may face FCPA liability under these principles does not necessarily mean that executive officers will as well.
As to individuals (whether high-ranking executives or otherwise) there needs to be some evidence of culpable conduct – which in the FCPA criminal context – often means participating in the improper conduct, authorizing the improper conduct, or knowing of the improper conduct but failing to put a stop to it.
Will U.S. authorities defer to British authorities in investigating the London police payments?
Some have suggested that U.S. authorities are unlikely to bring an enforcement action because the U.K. has strong anti-corruption laws and is capable of handling this matter domestically. I disagree. The U.K. Bribery Act went live on July 1st, but it only covers conduct that occurs after that date. Prior to the Bribery Act, the U.K. had a hodgepodge of antiquated bribery and corruption statutes. However, the problem with those statutes is they required a “controlling mind” of the corporate to be involved in the conduct at issue in order to prosecute the entity. The weakness of these pre-Bribery Act laws was clearly evident in the U.K. BAE enforcement action from 2010. As the Serious Fraud Office stated in court papers “a serious evidential difficulty had been identified in respect of potential corruption charges, namely the difficulty of proving the involvement of a ‘controlling mind’ in the offending.” Thus, if there is no evidence of “controlling minds” being involved in the London police payments, pre-Bribery Act laws will be insufficient to bring bribery charges as occurred in the BAE matter. This evidentiary difficulty is one of the reasons the U.K. passed the Bribery Act.
U.S. enforcement agencies have a good relationship with their U.K. counterparts and cooperation between the agencies is likely to occur, but there is little reason to believe that the U.S. will stand down and not bring an enforcement action if that is what the evidence warrants. In fact, there have been several FCPA enforcement actions concerning U.K. business entities, based on conduct occurring in the U.K.,and/or involving U.K. citizens. See here for the 2010 FCPA enforcement action relating to Innospec, here for the FCPA enforcement action concerning employees of Pacific Consolidated Industries and here for the FCPA enforcement action against U.K. citizen Jeffrey Tesler.
What is likely to happen next?
There are multiple reasons why News Corp. will cooperate, if it is not already, in the DOJ’s FCPA investigation. The DOJ has substantial discretion (some would argue too much) in resolving corporate criminal matters. Under the DOJ’s Principles of Prosecution of Business Organizations (see here), one of the factors DOJ will consider in deciding how to resolve any potential action is the company’s cooperation. Cooperation in the FCPA context often means conducting an internal, independent review of the conduct at issue and sharing the results, witness statements, key documents, etc. with the enforcement agencies on a near real-time basis. Cooperation is also a mitigating factor under the advisory U.S. Sentencing Guidelines which provide a monetary penalty range for all FCPA criminal actions.
How long is this FCPA gray cloud likely to hang over News Corp?
Likely for a few years. It is typical for an FCPA enforcement inquiry to begin based on a certain set of limited and discrete facts – here the London police payments. However, before the enforcement agencies (DOJ or SEC) will agree to resolve an FCPA matter, it is typical for the agencies to ask the “where else” question. In other words, the question will be – if News Corp. employees (broadly speaking) made the London police payments, did other News Corp. employees around the world make similar payments to “foreign officials” to “obtain or retain business.” To answer this question, and because News Corp. is likely in cooperation mode and because the company has an incentive to learn this information itself, News Corp. will likely conduct a targeted world-wide review of its operations. Such a review takes time and often costs tens of millions of dollars in professional fees and expenses. Because of these dynamics, it is typical for FCPA scrutiny – from the point of investigation to the point of enforcement action – to last between 2-4 years.
Summer Reading For Representative Conyers
During last week’s FCPA hearing in the House, Representative John Conyers (D-MI) had a contentious Q&A exchange with Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers). See here for the previous post regarding the hearing.
Conyers asked – “give me some examples of overcriminalization of the FCPA.” He repeatedly interrupted Regon and asked “just give me some examples” “give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization.” Conyers stated, “only 140 cases have been brought in 10 years -that averages 14 cases a year – is that overcriminalization to you?” Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occurred.
There should be plenty of concern regarding prosecutions that have already occurred, but given the glare of the cameras, the stress of testifying, and the disruption of being interrupted, it would have been difficult for any witness to retrieve from their memory bank specific FCPA enforcement actions.
This post provides a summer reading list of FCPA enforcement actions, commentary and analysis, and legal scholarship for Representative Conyers so that he can best seek answers to the question he posed to Regon.
For starters, what does overcriminalization mean?
To be sure, it can mean different things to different people in different circumstances. In “The Overcriminalization Phenomenon(here) Eric Luna provides this definition – “the overcriminalization phenomenon consists of: (1) untenable offenses; (2) superfluous statutes; (3) doctrines that
overextend culpability; (4) crimes without jurisdictional authority; (5) grossly disproportionate punishments; and (6) excessive or pretextual enforcement of petty violations. In this piece, Jeffrey Parker (while observing that “definitions of “overcriminalization” are a bit fuzzy and debatable”) identifies the following as among the factors that may contribute to overcriminalization: “the vague, arcane, or trivial nature of such prohibitions, as undermining citizens ability to conform, and debasing the moral moment of the criminal sanction” and “the lack of adequate mens rea standards in criminal prohibitions.”
Not all overcriminalization factors are relevant to this “new era of FCPA enforcement” (see here), but in the minds of many, several factors are.
Enforcement Actions
In the 2011 Comverse Technologies enforcement action (see here), the company paid $2.8 million in combined fines and penalties (and no doubt millions more in connection with the investigative and resolution process) to resolve a matter in which the DOJ did not allege that the company even knew about the improper payments at issue. The action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ’s enforcement theory.
In the 2010 Alliance One International enforcement action (see here), the company paid approximately $20 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter in which it did absolutely nothing wrong. Rather, the entire DOJ enforcement action was based on a successor liability theory. Again, the action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ’s enforcement theory.
In the 2010 Noble Corporation enforcement action (see here), the company paid approximately $8 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter involving the import and export of goods into Nigeria. When Congress passed the FCPA, its intent as to so-called facilitating or grease payments was clear. Senate Report No. 95-114 (May 2, 1977) states, in pertinent part, as follows. “The statute does not […] cover so-called ‘grease’ payments such as payments for expediting shipments through customs …”. The relevant House Report (No. 95-640, September 28, 1977) similarly states 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 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 of necessity be performed in any event. While 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 not 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.” The Noble enforcement action was resolved via a non-prosecution agreement meaning, again, there was no judicial scrutiny of the DOJ’s enforcement theory.
And then of course there is the issue of “foreign official” and the fact that most FCPA enforcement actions in this new era are based on alleged improper payments to employees of alleged state-owned or state-controlled enterprises (“SOEs”) on the theory that such business entities are “instrumentalities” of a foreign government and thus all employees, regardless of rank or position, are “foreign officials” under the FCPA. Yet, (1) During its multi-year investigation of foreign corporate payments, Congress was aware of the existence of SOEs and that some of the questionable payments uncovered or disclosed may have involved such entities. (2) In certain of the bills introduced in Congress to address foreign corporate payments, the definition of “foreign government” expressly included SOE entities. These bills were introduced in both the Senate and the House during both the 94th and 95th Congress. (3) Despite being aware of SOEs and despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, Congress chose not to include such definitions or concepts in what ultimately become the FCPA in 1977. See here for extensive reading on this issue.
Commentary and Analysis
In 2010, Forbes ran a feature article (here) titled “The Bribery Racket” – “How Federal Crackdown on Bribery Hurts Business And Enriches Insiders.” Lucinda Low, a respected FCPA practitioner, notes in the article that “the scope of things companies have to worry about is enlarging all the time as the government asserts violations in circumstances where it’s unclear if they would prevail in court” and that “you don’t have the checks and balances you would normally have if you had more litigation.” Commenting on the current era of FCPA enforcement, Joseph Covington (who headed the DOJ’s FCPA efforts in the 1980’s) said that the current era “is good business for law firms […] good business for accounting firms, it’s good business for consulting firms, the media–and Justice Department lawyers who create the marketplace and then get yourself a job.”
Here, Michael Levy (a former Assistant United States Attorney in the District of Columbia and law clerk to U.S. Supreme Court Justice Lewis F. Powell Jr.) talks about what he calls prosecutorial common law. Levy states that “prosecutors don’t set out deliberately to interpret criminal statutes in ways that convict hundreds of people on the basis of a standard that not a single Supreme Court Justice finds supportable …”. Levy notes that “we have seen this before in connection with the interpretation of the honest services fraud and obstruction of justice statutes, and it is certainly happening today with the FCPA.”
In this publication, an author group including Philip Urofsky (former Assistant Chief of the DOJ Fraud Section responsible for FCPA enforcement) and Danforth Newcomb (a dean of the FCPA bar) noted that in several recent FCPA enforcement actions “the theories used to hold parents accountable for the acts of subsidiaries and vice versa appear to be unclear.” In other cases, the author group states that in many cases critical elements of the statute were not pleaded or were pled in a way “that is not consistent with established precedent and the language of the statute.”
In a September 10, 2010 interview with the Corporate Crime Reporter, Mark Mendelsohn (the former head of DOJ FCPA enforcement during this era of resurgence who departed the DOJ for private practice in 2010) stated that “some of the factors” the DOJ uses to resolve FCPA cases are transparent, but “there are other factors less easy to see from the outside.” Mendelsohn also noted, in connection with non-prosecution and deferred prosecution agreements (the common way FCPA enforcement actions are resolved) that the “danger” “is that it is tempting for the Department, or the SEC [to use these vehicles] to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.”
In this Q&A exchange, Martin Weinstein (a former DOJ FCPA attorney who prosecuted the Lockheed case in the mid-1990’s and is now a prominent FCPA practitioner) stated as follows. “The last decade of FCPA enforcement has seen extraordinary evolution, and I think you have to say that when Congress passed the law in 1977, they did not envision the wide reach of enforcement today and the types of things that the government gets involved in, such as transactions, joint ventures, and successor liability.”
Legal Scholarship
In “Enthusiastic Enforcement, Informal Legislation: The Unruly Expansion of the Foreign Corrupt Practices Act” (here), Amy Westbrook (Washburn University School of Law) argues that the recent “transformation of the FCPA has been brought about by ad hoc enforcement actions, rather than legislation, judicial decision, or regulation” and that “in the absence of formal process or reasoned articulation, the actual scope of the law is unclear.”
In “The Facade of FCPA Enforcement” (here), I argue that “the FCPA often means what the enforcement agencies say it means” and that “even though the resolution vehicles typically used to resolve an FCPA enforcement action are not subject to judicial scrutiny and [thus] the vehicles do not necessarily reflect the triumph of the enforcement agencies’ theories, in the absence of substantive FCPA case law, these privately negotiated resolution vehicles have come to represent de facto FCPA case law” which breed “inefficient overcompliance by risk averse business actors fearful of enterprise – threatening liability because of the enforcement agencies’ untested and dubious theories.”
How Do Your Goods Get Out Of China?
A few years ago, I would have read this recent New York Times article “Weak Link in an Export Chain” and not thought much of it.
But then in November 2010 there was a $236 million joint DOJ/SEC enforcement action involving numerous companies (one I have called CustomsGate). See here for a prior post of all the enforcement actions. The enforcement actions were mostly about use of freight forwarding and logistics services, expediting delivery of goods and equipment into a country, local processing fees, express courier services, and the like.
The New York Times article is about the trucking industry in China that takes goods from the factory floor to China’s seaports. The article depicts a highly disorganized, inefficient … and yes corrupt … industry. According to the article, logistics firms usually hire small Chinese trucking companies and these companies routinely “pay bribes to ward off highway inspectors” and to “avoid heavy fines and transportation restrictions.”
The article states as follows. “Corruption is also a major problem. Chinese truck drivers say highway and port inspectors routinely demand payoffs or bribes.”
What does this have to do with “obtain or retain business?”
Point taken, yet this is the same question raised in connection with the CustomsGate enforcement actions as well. See here.
So the question remains – how do your goods get out China?
Food For Thought
Given the enforcement agencies’ interpretations of the FCPA, a wide variety of seemingly routine interactions with “foreign officials” are subject to FCPA scrutiny.
For instance, in February, Tyson Foods, one of the world’s largest processors of chicken and other food items, agreed to resolve an FCPA enforcement action focused on payments to Mexican veterinarians responsible for certifying product for export. As noted in this prior post, the enforcement action involved both a DOJ and SEC component and the total settlement amount was approximately $5.2 million – a figure in addition to the pre-enforcement action and post-enforcement action fees and expenses.
The Tyson Foods enforcement action was an example of yet another recent Foreign Corrupt Practices Act enforcement action dealing with licenses, permits, certifications, and the like.
On January 4, 2011, President Obama signed the Food Safety Modernization Act (“FSMA”) (here for more information).
In a recent piece published by Law360 (“Growing Risk: FCPA Exposure For Foreign Food Food Cos. – March 16, 2011), Foley & Lardner attorneys Lisa Noller (here) and Carmen Couden (here) state that new provisions in the FSMA “unintentionally create foreign bribery risks for foreign importers of food.”
The FCPA risk, the authors note, is all about foreign certifications. The FSMA will require importers of food to have a certification issued by “an agency or a representative of the government of the country from which the article of food at issue originated” that the “article of food complies with applicable requirements” under the FSMA.
As further noted by the authors, “food is often a commodity that cannot wait for clearances – if it does not ship immediately, it spoils and the value is destroyed.”
This dynamic would seem to increase the motivation a low-ranking, poorly paid “foreign official” has to make an improper, extortionate payment related to food certification.
A facilitating payment exempted from the FCPA (at least per the FCPA’s terms – enforcement is separate question) or prosecutable bribe payment?
What type of journey did your banana, scallop – create your own dish – take on its way to the U.S.?
Interesting food for thought.