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FCPA Guidance Rewrites The FCPA

By on July 16, 2013 in FCPA Jurisprudence, Guidance, Legislative History, Obtain or Retain Business, U.S. v. Kay

Readers have likely read the FCPA Guidance by now, if not multiple times.

The Guidance contains an appendix that includes, among other things, the text of the Foreign Corrupt Practices Act.  In the Guidance, the enforcement agencies have rewritten the text of the FCPA and this post highlights a statutory construction error that even a first year law student would be expected to understand and recognize.

Set forth below is the text of the FCPA regarding the “obtain or retain business” element.

   “anything of value to

         any foreign official for purposes of

(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,

         in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;

Set forth below is how the text of the FCPA is portrayed in the FCPA Guidance.

   “anything of value to

         any foreign official for purposes of

(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;

On one hand, the obvious error and rewriting of the FCPA in the Guidance could be attributed to scrivener’s error.  After all, both the DOJ’s FCPA website and the SEC’s FCPA website contain accurate versions of the FCPA.

On the other hand, scrivener’s error seems unlikely given the substance of the Guidance and that it appears the DOJ and SEC have always wanted an FCPA statute that doesn’t exist.

As I highlight in my article “Grading the FCPA Guidance,” the most disturbing portion of the Guidance concerns the ‘‘obtain or retain business’’ element of the FCPA. The Guidance asserts that ‘‘in 1998, the FCPA was amended to conform to the requirements of the [OECD] Anti-Bribery Convention,’’ and ‘‘these amendments expanded the FCPA’s scope to include payments made to secure ‘‘any improper advantage.’’

The notion that the FCPA’s 1998 amendments conformed the FCPA to the OECD Convention and expanded the FCPA’s scope to include payments made to secure ‘‘any improper advantage’’ is demonstratively false.

Indeed, the DOJ’s position on this specific issue was rejected by both the trial court and the appellate court in United States v. Kay, a case involving payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes a company owed the Haitian government.

The trial court decision stated:

“The OECD Convention had asked Congress to criminalize payments made to foreign officials ‘‘ ‘in order to obtain or retain business or other improper advantage in the conduct of international business.’’ . . . Congress again declined to amend the ‘‘obtain or retain business’’ language in the FCPA . . . . Congress did not insert the ‘‘improper advantage’’ language into the ‘‘obtain or retain business’’ provision of the FCPA.”

Although the Fifth Circuit overruled the trial court’s decision granting the defendants’ motion to dismiss, the appellate likewise court stated as follows concerning the FCPA’s 1998 amendments:

“When Congress amended the language of the FCPA, however, rather than inserting ‘any improper advantage’ immediately following ‘obtaining or retaining business’ within the business nexus requirement (as does the Convention), it chose to add the ‘improper advantage’ provision to the original list of abuses of discretion in consideration for bribes that the statute proscribes.’’

Others have pointed out this key statutory difference as well, including Philip Urofsky, a former DOJ Assistant Chief of the Fraud Section.  Writing after the 2010 CustomsGate cases involving use of Panalpina (see here for the prior post), Urofsky stated (here) as follows.

“When criminal liability is at issue … it is important that the borders of the statute be carefully limned. Unfortunately, the government’s pleadings in the Panalpina cases do more to blur than clarify the limits of the law. For example, in some cases, the DOJ did not even plead the language of the FCPA but used instead that of the OECD Convention. For example, in Pride International, the conspiracy count alleged that the payments in question were ‘to make corrupt payments to a Mexico government official in order to obtain or retain business and to obtain other favorable treatment.’  Similarly, in the Noble NPA, the DOJ stated that the FCPA was intended to prohibit bribes ‘for the purpose of obtaining or retaining business or securing any improper advantage.’  In each case, the italicized language is simply not a part of the statutory element.”

The enforcement agencies state that the Guidance sets forth “what the law is” and has claimed that the document took nearly a year to draft.

Thus, the above statutory construction error is troubling, yet telling at the same time.

Deposition Prep That Lead To One Of The Most Notable FCPA Cases

By on February 19, 2013 in Origins of FCPA Actions, U.S. v. Kay

Foreign Corrupt Practices Act enforcement actions have had many origins.

As explored in this prior post, 2012 corporate enforcement actions originated from the following sources:  voluntary disclosures; disclosures following industry sweeps; and foreign law enforcement investigations.  Other origins of FCPA enforcement actions have been whistleblower or competitor complaints, media reporting – all of which may prompt enforcement agency inquiries –  and sting operations, as in the Africa Sting case (although, contrary to popular misperception this was not the first instance of a sting operation being used in an FCPA case – see here for the prior post).

FCPA enforcement actions can also originate in other interesting and unique ways.  The 2001-2002 enforcement action against David Kay and Douglas Murphy is an instructive example.

Kay was a Vice President of American Rice Inc., (“ARI”) and Murphy was the President and a Director of ARI.  The conduct at issue involved payments to Haitian officials in connection with the importation of rice and an effort to lower customs duties on the product.  The conduct lead to a DOJ enforcement action (see here) and an SEC component (see here) against the indivduals.  The DOJ enforcement action is well-known by FCPA followers given the litigation that ensued both at the trial court and appellate court levels.  (See here for previous posts concerning U.S. v. Kay).

Less well-known, but equally interesting, is the origins of the enforcement action.  As explained in the Fifth Circuit’s opinion (513 F.3d 432):

“In 1999 [American Rice, Inc. – Kay and Murphy’s employer] retained a prominent Houston law firm to represent it in a civil suit.  Preparing for this suit, the lawyers asked Kay for background information on ARI’s rice business in Haiti.  Kay volunteered that he had taken the actions [i.e., made or authorized payments to Haitian customs officials], explaining that doing so was part of doing business in Haiti.  Those lawyers informed ARI’s directors.  The directors self-reported these activities to government regulators.  The SEC launched an investigation into ARI, Murphy, and Kay.  Murphy and Kay were eventually indicted  …”

In short, one of the more notable FCPA cases originated from deposition preparation in a civil case.

The Kay and Murphy prosecution is also notable given that ARI, despite the positions of the Kay and Murphy, was never the subject of an FCPA enforcement action – DOJ or SEC.  The Kay and Murphy prosecutions occurred before non-prosecution and deferred prosecution agreements were introduced to the FCPA context in 2004 and if the Kay and Murphy prosecutions occurred today, ARI would almost certainly be part of the overall enforcement action.

Understanding Wal-Mart

By on May 1, 2012 in Facilitating Payments, FCPA Jurisprudence, Legislative History, Obtain or Retain Business, Permits / Licenses / Customs / Tax, SEC v. Mattson, U.S. v. Kay, Wal-Mart

Prior posts here and here discussed and analyzed the New York Times April 21st article regarding Wal-Mart and its potential FCPA exposure.  As noted in the prior posts, the New York Times article was both unremarkable and remarkable at the same time.  Wal-Mart has dominated the news cycle not because it is under FCPA scrutiny (this was known since December 2011 when Wal-Mart disclosed its FCPA scrutiny joining a list of approximately 100 companies known to be under FCPA investigation).  Rather, Wal-Mart has dominated the news cycle because of how the company acted, or failed to act, since learning of potential FCPA issues in approximately 2005.  Thus, Wal-Mart is mostly a corporate governance story.

Even so, there are some core and fundamental FCPA issues worthy of exploration.  This post discusses many of the same issues I’ve discussed with journalists and others over the past week.  Given the space constraints of media outlets, the below was understandably reduced to one or two sentences.  It is in instances like this when I particularly enjoy having my own website and having the ability to go long and deep.

So long and deep we shall go and the issues discussed below are informed by, among other things, my review of the FCPA’s entire legislative history and my years as an FCPA practitioner.  Although focused on the FCPA’s “foreign official” element, a thorough and comprehensive review of the FCPA’s legislative history can be found here (my “foreign official” declaration used in connection with several recent judicial challenges).  My article “The Story of the Foreign Corrupt Practices Act” is forthcoming in the Ohio State Law Journal.

Do the Wal-Mart Mexico payments at issue violate the FCPA’s anti-bribery provisions?  From a practical standpoint, does it even matter?

The FCPA’s Anti-Bribery Provisions

Two distinct and important questions can be asked about many instances of FCPA scrutiny, including Wal-Mart’s, in this new era of FCPA enforcement.

The first question is whether, given the DOJ and SEC’s current enforcement theories, the Mexican payments at issue – allegedly in connection with permitting, licensing and inspection issues – can expose Wal-Mart to an FCPA enforcement action?  The answer is likely yes and in the past several years the enforcement agencies have brought several FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like.  For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010.  See here at pages 972-975  for a listing of such cases 2007-2009.

The second (and from my perspective more important) question is whether Congress, in passing the FCPA, intended the law to capture payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign officials.  The answer from the FCPA’s legislative history is no.

In the mid-1970’s Congress learned of a variety of foreign corporate payments to a variety of recipients and for a variety of reasons.  Congress accepted and acknowledged in passing the FCPA that it was capturing only a narrow range of foreign payments.  For instance the relevant Senate Report in May 1977 specifically notes that “the committee has recognized that the bill would not reach all corrupt overseas payments.”  Likewise, the relevant House Report in September 1977 also states that “the proposed law will not reach all corrupt payments overseas.”

Of note, in November 1977 (a month prior to passage of the FCPA in December 1977), Representative Robert Eckhardt  (D-TX, a Congressional leader on the foreign payments issue) stated on the House floor as follows.  “Payments to a [foreign official with ministerial or clerical duties] for instance, to complete a form that ought, in equity, to be completed, to give everybody equal treatment, to move the goods off a dock which he will not move without a tip, a mordida, I think, as they call it in the Spanish language, a facilitating payment, or a grease payment would not constitute a bribe.”

Thus, when the FCPA was passed in December 1977 it specifically excluded from the definition of “foreign official” “any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.”  This was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”

When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute.  The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”

Even if a payment does not meet the FCPA’s facilitation payments exception, in order for there to be a violation of the FCPA’s anti-bribery provisions, all statutory elements must be met including the “obtain or retain business” element.

To my knowledge, the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny three times.  These three judicial decisions are summarized below.

Kay Trial Court

In 2001, David Kay and Douglas Murphy (“Defendants”), the president and vice president of Houston-based American Rice, Inc. (“ARI”), were criminally indicted.  The indictment charged FCPA anti-bribery violations and alleged that the defendants made improper payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes owed by ARI to the Haitian government.  The indictment, while specific as to other items, merely tracked the FCPA’s “obtain or retain business” language and did not specifically allege how the alleged payments assisted ARI in obtaining or retaining business in Haiti or what business was obtained or retained.  As stated by the court:  “In other words, the indictment recite[d] no facts that could demonstrate an actual or intended cause-and-effect nexus between reduced taxes and obtaining identified business or retaining identified business opportunities.”

In a case of first impression in the federal courts, the court granted Defendants’ motion to dismiss the indictment and held, as a matter of law based on the FCPA’s legislative history, that the alleged payments were not payments made to “obtain or retain business” and thus did not fall within the scope of the FCPA’s anti-bribery provisions.  See 200 F.Supp.2d 681 (S.D. Tex. 2002).

Mattson / Harris

A few months after the trial court decision in Kay, the Southern District of Texas again considered whether payments made outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions.  As noted in this previous post, the Mattson and Harris enforcement action (a civil enforcement action brought by the SEC) involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment.  The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment.  The court noted that U.S. v. Kay  had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation.  However, the SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases.  The court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.”  See this Memorandum and Order (Sept. 9, 2002).  As noted in this release, the SEC dropped its appeal in July 2004.

Of interest is that Mattson’s lawyers, Martin Weinstein and Robert Meyer of Willkie Farr & Gallagher, were the lawyers identified in the New York Times articles who advised Wal-Mart in 2005 on an investigative work plan that was apparently rejected by Wal-Mart.

Kay Fifth Circuit Ruling

The DOJ appealed the 2002 decision of the Southern District of Texas dismissing the indictment and one issue on appeal was whether payments to “foreign officials” to obtain favorable tax and customs treatment can come within the scope of the FCPA’s anti-bribery provisions.

The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” element was ambiguous and it thus analyzed the FCPA’s legislative history.  See 359 F.3d 738 (5th Cir. 2004).  The Fifth Circuit focused specifically on the U.S. Senate’s 1977 sponsored bill and the SEC report on which the Senate’s proposal was based.  According to the court, the SEC report “exhibited concern about a wide range of questionable payments [including those at issue in Kay] that were resulting in millions of dollars being recorded falsely in corporate books and records.”  Although the Fifth Circuit recognized that the Senate’s proposal did not expressly cover payments that seek to influence the administration of tax laws or seek a favorable tax treatment, the Senate, in the words of the court, “was mindful of bribes that influence legislative or regulatory actions, and those that maintain established business opportunities.”

In short, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than those that only directly influence the acquisition or retention of government contracts or similar arrangements.  The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business.  The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.

However, the Kay court empathically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA.  According to the court, the key question of whether Defendants’ alleged payments constituted an FCPA violation depended on whether the payments were intended to lower ARI’s costs of doing business in Haiti enough to assist ARI in obtaining or retaining business in Haiti. The court then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country.  On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

The court specifically stated: “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

In short, the enforcement theory that payments outside the context of foreign government procurement satisfy the FCPA’s “obtain or retain business” has been subjected to judicial scrutiny three times.

The scorecard:  US – 1; Defendants – 2; or if you prefer US – .5; Defendants – 2.5 (recognizing that the 5th Circuit decision is equivocal).

Contrary to popular misperception, Kay thus does not hold that all payments to a “foreign official” outside the context of foreign government procurement fall within the FCPA’s scope.  Rather, the decision merely holds that Congress intended for the FCPA to apply broadly to payments intended to assist the payer, directly or indirectly, in obtaining or retaining business and that payments to a “foreign official”  outside the context of foreign government procurement can, under appropriate circumstances, fall within the statute. Given the facts and circumstances the Kay court found relevant, it is highly fact-dependant analysis whether a payment to a “foreign official” satisfies the “obtain or retain business” element outside of the context of foreign government procurement.

A key portion from the Kay ruling likely relevant in Wal-Mart is the following:  “there are bound to be circumstances” in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

Despite the equivocal nature of the Kay holding, (and the enforcement agencies overall losing record on the issue) the decision clearly energized the enforcement agencies and post-Kay there has been a significant increase in FCPA enforcement actions where the alleged improper payments involve customs duties and tax payments or are otherwise alleged to have assisted the payer in securing foreign government licenses, permits, and certifications which assisted the payer in generally doing business in a foreign country.  For a listing of many such cases, see my scholarship, “The Facade of FCPA Enforcement” – here.  None of the enforcement actions profiled therein were challenged or subjected to judicial scrutiny.

It thus remains an open question whether payments outside the context of foreign government procurement, in any particular case if subjected to judicial scrutiny, (i) would satisfy the FCPA’s “obtain or retain business” element; or (ii) are too attenuated to obtaining or retaining business (such as merely increasing the profitability of an existing profitable business) and thus, per the Kay holding, not a violation of this key FCPA anti-bribery element.

Does It Even Matter?

A logical and practical question then becomes, does it even matter?  As in most FCPA enforcement actions, the answer in any future Wal-Mart FCPA enforcement action is likely no.  At the end of the day it will not matter if Wal-Mart’s payments, if subjected to judicial scrutiny, would result in FCPA violations.

The short reason is that while Wal-Mart’s counsel can make valid and legitimate legal and factual arguments around conference room tables behind closed doors in Washington D.C., to truly challenge the DOJ in an instance of FCPA scrutiny, and to put the DOJ to its high burden of proof at trial, first requires that the company be criminally indicted, something few corporate leaders are willing to let happen.  It is simply easier, more cost-efficient, and more certain to resolve FCPA scrutiny notwithstanding aggressive (and dubious) enforcement theories or the existence of valid and legitimate defenses.  Also relevant to this issue is the existence of the “carrots” and “sticks” relevant to resolving FCPA enforcement actions.  To learn more about these “carrots” and “sticks” please read my article “The Facade of FCPA Enforcement” – here.

To my knowledge, in the FCPA’s 35 year history, only two corporate defendants have put the DOJ to its high burden of proof in trial.  Wal-Mart will not become the third.  Even so, it is instructive to learn about the two instances in which corporate defendants have put the DOJ to its high burden of proof at trial.

The DOJ’s ultimate record?  0-2.

As noted in this prior post, in 1990, Harris Corporation (“Harris” – a publicly traded telecom provider), along with certain of its executives, were charged in a criminal indictment concerning conduct in Colombia.  In 1991, the court, after hearing the prosecution’s case, granted a defense motion for a verdict of acquittal.  The San Francisco Chronicle stated as follows. “Shortly after the government rested its case, U.S. District Judge Charles Legge of San Francisco ruled from the bench that ‘no reasonable jury’ could convict the company nor its executives on any of the five bribery-related counts for which they were indicted. Citing insufficient evidence, Legge said the government had failed to show any intent by the defendants to enter into a criminal conspiracy. Legge also said it was the first time in his six years on the federal bench that he had dismissed a criminal case at mid-trial for lack of evidence.”

As noted in this prior post, in December 2011 (after the DOJ had secured trial court jury verdicts convicting privately held Lindsey Manufacturing Company and its CEO and CFO of FCPA offenses), Judge Howard Matz (C.D. Cal). vacated the convictions and dismissed the indictment based on numerous prosecutorial misconduct issues that together added “up to an unusual and extreme picture of a prosecution gone badly awry.”  In addition to prosecutorial misconduct, Judge Matz noted the “weakness of the Government’s case” and that the “case against the Lindsey Defendants was far from compelling.”

Wal-Mart’s FCPA Scrutiny Grows

By on April 21, 2012 in Facilitating Payments, Internal Investigation Issues, Legislative History, Mexico, Obtain or Retain Business, Permits / Licenses / Customs / Tax, U.S. v. Kay, Wal-Mart

In December 2011, Wal-Mart made the following generic disclosure in a 10-K filing.

“During fiscal 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anti-corruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.”

Today, the New York Times ran a major story (here) titled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle” that relates to Wal-Mart’s prior disclosure.  Was Wal-Mart’s disclosure to the DOJ, as stated in its December 10-K filing “voluntary”?  According to the Times article, “in December, after learning of The Times’s reporting in Mexico, Wal-Mart informed the Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act.”  (emphasis added).

The conduct at issue in the Times article relates to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggests that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico.

According to the article, in 2005, “Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark.”  According to the Times, Wal-Mart’s lead investigator, a former FBI agent, “recommended that Wal-Mart expand the investigation” but its own examination found that “Wal-Mart’s leaders shut it down.”  The article states that “in one meeting where the bribery case was discussed, H. Lee Scott Jr., then Wal-Mart’s chief executive, rebuked internal investigators for being overly aggressive.”

The Times examination included more than 15 hours of interviews with Sergio Cicero Zapata a former executive who resigned from Wal-Mart Mexico in 2004 after nearly a decade in the company’s real estate department.  The article states as follows.  “In the interviews, Mr. Cicero recounted how he had helped organize years of payoffs. He described personally dispatching two trusted outside lawyers to deliver envelopes of cash to government officials. They targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits — anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.”

Elsewhere, the Times article states as follows.  “The idea, [Cicero] said, was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days. ‘What we were buying was time,’ he said. ”  The article states that Cicero’s “allegations were all the more startling because he implicated himself” and “helped funnel bribes through trusted fixers, known as ‘gestores.'”

The times article contains several internal documents including Willkie Farr & Gallagher’s 2005 “investigative work plan” that called for tracing all payments to anyone who helped Wal-Mart Mexico obtain permits for the previous five years.  The Times article states as follows.  “In short, Willkie Farr recommended the kind of independent, spare-no-expense investigation major corporations routinely undertake when confronted with allegations of serious wrongdoing by top executives. Wal-Mart’s leaders rejected this approach. Instead, records show, they decided Wal-Mart’s lawyers would supervise a far more limited ‘preliminary inquiry’ by in-house investigators.”

According to the Times article, in 2006, Wal-Mart again considered a full investigation of the conduct in Mexico, but that in the end, the company largely delegated responsibility for the investigation to Wal-Mart Mexico.  The Times article quotes a person with knowledge of the thinking of Wal-Mart executives as follows.  “It’s a Mexican issue; it’s better to let it be a Mexican response.”

The Times article contains a detailed statement by Wal-Mart.  Among other things, the Wal-Mart statement notes that “many of the alleged activities in the New York Times article are more than six years old” and that “in a large global enterprise such as Walmart, sometimes issues arise despite our best efforts and intentions.”  The statement continues as follows. “When they do, we take them seriously and act quickly to understand what happened.  We take action and work to implement changes so the issue doesn’t happen again.  That’s what we’re doing today.”

See here for Wal-Mart’s video response to the New York Times article.

*****

The New York Times article paints a troubling picture for Wal-Mart that will likely occupy the company for years to come.  In addition to the Mexico conduct, the DOJ and SEC will surely be interested in the response (or lack thereof) by company executives in Arkansas as well as the results of Wal-Mart’s worldwide review of its operations.

The DOJ and SEC frequently bring FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like.  For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010.  See here at pages 972-975  for a listing of such cases 2007-2009.

This despite the following relevant history.

The FCPA’s original definition of “foreign official” was as follows. “… any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or any person acting in an official capacity for or on behalf of such government or department, agency or instrumentality. Such terms do not include any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.”

This last sentence was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”

When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute.

The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”

Also relevant is the holding of U.S. v. Kay, the only appellate court decision to directly address payments outside the context of directly securing a foreign government contract.  In Kay, the 5th Circuit said that such payments “could” violate the FCPA, but that “there are bound to be circumstances” in which such payments merely increase the profitability of an existing profitable company and thus, presumably does not assist the payer in obtaining or retaining business.  The court specifically stated as follows.  “If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

Wall Street Journal Goes On Offense

By on July 19, 2011 in Facilitating Payments, Media Industry, News Corporation, Obtain or Retain Business, Permits / Licenses / Customs / Tax, Schering-Plough, U.S. v. Kay

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.

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