Many people, not surprisingly, view current events through the lens of their profession. Indeed, there have been some thoughtful pieces written about the Foreign Corrupt Practices Act as the COVID-19 crisis unfolds. (See here, here, here and here).
Some of these articles have focused on the FCPA risks of moving product across borders, interacting with customs and border officials, and/or interactions with “foreign officials” in connection with licensing, permitting, and other regulatory issues.
My own two cents on FCPA issues in the midst of COVID-19 is that it once again demonstrates the difference between the FCPA (the statute as written by Congress and interpreted by courts) and the FCPA as enforced by the DOJ and/or SEC. (See here, here, and here for prior similar posts).
To highlight this difference, set forth below is information about the FCPA’s corrupt intent and obtain and retain business elements as well as the FCPA’s facilitating payment exception.
Corrupt Intent
For there to be a violation of the anti-bribery provisions, the thing of value to a “foreign official” to assist in “obtaining or retaining business” must be offered or provided with a corrupt intent.
Although the FCPA does not specifically define the term “corrupt,” legislative history is instructive. As stated in a House Report, “the word ‘corruptly’ connotes an evil motive or purpose.”
Notwithstanding the above, in numerous FCPA enforcement actions it would seem to be an open question whether the thing of value to a foreign official was offered or provided with an evil motive or purpose.
Obtain or Retain Business
For there to be a violation of the FCPA’s anti-bribery provisions the thing of value must be offered or provided with a corrupt intent to a “foreign official,” not just for any reason but to influence or induce the recipient to assist in “obtaining or retaining” business.
The FCPA’s legislative history evidences that despite learning of a wide range of foreign corporate payments, Congress chose to limit the anti-bribery provisions to a narrow range of circumstances involving foreign government procurement or influencing foreign government legislation or regulations. For instance, the Conference Report drafted immediately prior to the FCPA’s passage stated:
“The scope of the prohibition [in the Senate bill] was limited by the requirement that the offer, promise, authorization, payment, or gift must have as a purpose inducing the recipient to use his influence with the foreign government or instrumentality, influencing the enactment or promulgation of legislation or regulations of that government or instrumentality or refraining from performing any official responsibilities, so as to direct business to any person, maintain an established business opportunity with any person or divert a business opportunity from any person.”
The House amendment was similar to the Senate bill; however, the scope of the House amendment was not limited by the “business purpose” test […] The conferees clarified the scope of the prohibition by requiring that the purpose of the payment must be to influence any act or decision of a foreign official (including a decision not to act) or to induce such official to use his influence to affect a government act or decision so as to assist an issuer in obtaining, retaining or directing business to any person.”
For most of the FCPA’s history, the “obtain or retain business” element presented little dispute or controversy as enforcement largely focused on payments in connection with foreign government procurement. However, in the modern era of enforcement the “obtain or retain” business element has led to dispute and controversy in certain cases as many enforcement actions have nothing to do with foreign government procurement. As the enforcement agencies brought more individual enforcement actions concerning conduct outside the context of foreign government procurement, individuals began to challenge this interpretation theory resulting in judicial decisions.
The enforcement theory that payments outside the context of foreign government procurement violate the anti-bribery provisions has been subjected to judiciary scrutiny four times.
The first instance involved criminal charges against Alfred Duran and other various individuals associated with AEA Aircraft Recovery (a company in the business of recovery of seized aircraft). According to the government, the defendants conspired to make payments to officials of the Dominican Republic in order to obtain the release of two aircraft seized by the government. All of the defendants pleaded guilty except for Duran who put the DOJ to its burden of proof at trial. After the DOJ presented its evidence at trial, Duran filed a motion for judgment of acquittal and argued that “no reasonable jury could find that the purpose of any of the alleged intended payments was to assist […] in obtaining or retaining business” and that the government “has failed to adduce sufficient evidence to prove any intended payments were not facilitating or expediting payments for the purpose of expediting or securing routine governmental action (i.e. grease payments).” The trial court judge granted the motion ending the case and according to media reports the judge said that “the government failed to prove the charges against [Duran] were a crime under the FCPA.”
The second instance was in U.S. v. Kay in which David Kay and Douglas Murphy (the president and vice president of American Rice Inc. (ARI) were criminally charged with anti-bribery violations based on allegations that they 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. The trial court found the FCPA’s “obtain or retain business” element ambiguous and thus consulted the legislative history and stated:
“A review of the legislative history confirms that in 1977, Congress chose to limit the scope of the prohibited activities under the FCPA and did not intend to cover payments made to influence any and all governmental decisions. This legislative history weighs against the Government’s argument that the FCPA should be construed so broadly so as to encompass payments made to reduce customs duties or tax obligations. The Court thus determines that Congress has considered and rejected statutory language that would broaden the scope of the FCPA to cover the conduct in question here.”
Accordingly, the court granted the defendants’ motion to dismiss the indictment and held, as a matter of law, that the alleged payments were not payments made to ‘‘obtain or retain business’’ and thus did not fall within the scope of the anti-bribery provisions.
Shortly after the trial court decision in Kay in the Southern District of Texas, a case in the same jurisdiction again considered whether payments made to foreign officials outside the context of foreign government procurement fell under the anti-bribery provisions. The case was SEC v. Mattson, a civil enforcement action against Baker Hughes Inc. employees Eric Mattson and James Harris in which the government alleged that the FCPA captured goodwill payments to an Indonesian tax official for a reduction in a tax assessment. The issue before the court in a pre-trial motion to dismiss was whether the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment. The court noted that the Kay court already found that the FCPA did not prohibit goodwill payments to foreign officials to reduce a tax obligation. However, the SEC attempted to distinguish the Kay ruling by arguing that in the civil enforcement context the FCPA’s language should be construed more liberally than in criminal cases. The court rejected the SEC’s argument, followed the trial court’s analysis in Kay, and held 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 ‘‘obtain or retain business.’’
The DOJ appealed the trial court dismissal in Kay and the appeal thus represented the fourth, and most recent, instance in which payments to foreign officials outside the context of foreign government procurement were subjected to judiciary scrutiny. Specifically, 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. Like the trial court, the appellate court also found in its 2014 decision the “obtain or retain business” element ambiguous and stated:
“Perhaps our most significant statutory construction problem results from the failure of the language of the FCPA to give a clear indication of the exact scope of the business nexus element; that is, the proximity of the required nexus between, on the one hand, the anticipated results of the foreign official’s bargained-for action or inaction, and, on the other hand, the assistance provided by or expected from those results in helping the briber to obtain or retain business. Stated differently, how attenuated can the linkage be between the effects of that which is sought from the foreign official in consideration of a bribe (here, tax minimization) and the briber’s goal of finding assistance or obtaining or retaining foreign business with or for some person, and still satisfy the business nexus element of the FCPA?”
Like the trial court, the appellate court consulted the legislative history but came to a different conclusion than the trial court. The appellate court stated:
“We surmise that, in using the word ‘business’ … Congress intended for the statute to apply to bribes beyond the narrow band of payments sufficient only to ‘obtain or retain government contracts.’ […] In short, the 1977 legislative history … convinces us that Congress meant to prohibit a range of payments wider than only those that directly influence the acquisition or retention of government contracts or similar commercial or industrial arrangements. […] We cannot hold as a matter of law that Congress meant to limit the FCPA’s applicability to cover only bribes that lead directly to the award or renewal of contracts. Instead, we hold that Congress intended for the FCPA to apply broadly to payments intended to assist the payer, either directly or indirectly, in obtaining or retaining business for some person, and that bribes paid to foreign tax officials to secure illegally reduced customs and tax liability constitute a type of payment that can fall within this broad coverage.”
[…]
“Thus, in diametric opposition to the district court, we conclude that bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA’s proscription. We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It still must be shown that the bribery was intended to produce an effect—here, through tax savings—that would ‘assist in obtaining or retaining business.’”
Indeed, the appellate court emphatically stated that not all such payments to a foreign official outside the context of foreign government procurement violate the FCPA; it merely held that such payments ‘‘could’’ violate the FCPA. According to the court, the key question of whether the 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:
“There are bound to be circumstances in which such a cost reduction does nothing other than increase the profitability of an already-profitable venture or ensure profitability of some start-up venture. Indeed, 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 is obtaining or retaining business would be unnecessary, and thus surplusage—a conclusion that we are forbidden to reach.”
In short, there have been four instances of judicial scrutiny of the enforcement theory that things of value offered or provided to a foreign official outside the context of foreign government procurement fall under the anti-bribery provisions. The enforcement agencies lost three of those cases and the fourth case—the appellate court decision in Kay—is equivocal. The decision merely holds 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 a highly fact-dependent question whether a payment to a foreign official outside the context of foreign government procurement is within the scope of the anti-bribery provisions. The key portion from the Kay ruling would seem to be the following: ‘‘there are bound to be circumstances” in which payments outside the context of foreign government procurement do “nothing other than increase the profitability of an-already profitable venture or ensure profitability of some start-up venture” and thus presumably does not assist the payer in obtaining or retaining business.
Notwithstanding the above, in the FCPA’s modern era here have been numerous corporate enforcement actions concerning alleged payments or things of value to foreign officials in connection with import/export, licensing, permitting, and other points of contact with regulatory officials.
Facilitating Payments
While some view facilitating or “grease” payments to be corrupt payments under a different name, the fact remains that the FCPA contains an express facilitating payments exception and it is this statute that the enforcement agencies are obligated to enforce.
The FCPA states that the anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official … the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official …”.
The FCPA defines “routine governmental action” as follows:
“The term “routine governmental action” means only an action which is ordinarily and commonly performed by a foreign official in:
(i) obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country; (ii) processing governmental papers, such as visas and work orders; (iii) providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country; (iv) providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or (v) actions of a similar nature.
The term “routine governmental action” does not include any decision by a foreign official whether, or on what terms, to award new business to or to continue business with a particular party, or any action taken by a foreign official involved in the decision-making process to encourage a decision to award new business to or continue business with a particular party.”
The legislative history is clear that in passing the FCPA Congress intended to capture only a narrow category of payments and chose not to capture so-called facilitating payments given the difficult and complex business conditions encountered in many foreign countries. Congressional leaders spearheading enactiment of the FCPA were clear as to the scope of the law they envisioned. For instance, Senator Proxmire stated:
“I recognize it is hard [to define a bribe], but we are not concerned so much about the low level grease payments. What we are talking about is the payment, as I say, to make a sale. …. What we are concerned about, as I say, and trying to get at . . . is bribery for the purpose of making sales abroad.”
“[W]e define [a bribe] as a payment to an official of a foreign government for the purpose of inducing him to use his influence to secure business for the issuer or influence legislation or regulations of his government.”
Representatives Murphy and Eckhardt likewise stated during a House hearing:
“This bill is not concerned with so-called grease or facilitating payments, such as may be necessary to some petty clerk to speed documents through a bureaucracy. The bill does not address itself to ‘grease’ or ‘facilitating’ payments made to low-level clerical or ministerial government officials.”
Senate and House Reports evidence the limited scope of the FCPA and how it would not capture all foreign corporate payments Congress learned of during its multi-year investigation. A Senate Report stated:
“In drafting the bill . . . the Committee deliberately cast the language narrowly, in order to differentiate between such payments [to a foreign official corruptly intended to induce the recipient to use his influence to secure business, influence legislation or regulations] and low-level facilitating payments sometimes called ‘grease payments.’ Thus, [the bill] would not reach a small gratuity paid to expedite shipment through Customs or the placement of a trans-Atlantic telephone call, to secure required permits, or to ensure that a corporation’s warehouses were not put to the torch. In other words, payments made to expedite the proper performance of duties may be reprehensible, but it does not appear feasible for the United States to attempt unilaterally to eradicate all such payments. However, where the payment is made to influence the placement of government contracts or to influence the formulation of legislation or regulations, such payment is prohibited. …. The Committee fully recognizes that the proposed law will not reach all corrupt payments overseas.”
A House Report likewise stated:
“The scope . . . is limited by the requirement that the offer, promise, authorization, payment, or gift must have as a purpose inducing the recipient to use influence with the foreign government or instrumentality, or to refrain from performing any official responsibilities, so as to direct business to any person, maintain an established business opportunity with any person, divert any business opportunity from any person or influence the enactment or promulgation of legislation or regulations of that government or instrumentality. . . . The bill’s coverage does not extend to so-called grease or facilitating payments. . . . The language of the bill is deliberately cast in terms which differentiate between such payments and facilitating payments, sometimes called ‘grease payments’. In using the word ‘corruptly’, the committee intends to distinguish between payments which cause an official to exercise other than his free will in acting or deciding or influencing an act or decision and those payments which merely move a particular matter toward an eventual act or decision or which do not involve any discretionary action. In defining ‘foreign official’, the committee emphasizes this crucial distinction by excluding from the definition of ‘foreign official’ government employees whose duties are essentially ministerial or clerical. For example, a gratuity paid to a customs official to speed the processing of a customs document would not be reached by the bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity by 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. As a result, the committee has not attempted to reach such payments. However, where the payment is made to influence the passage of law, regulations, the placement of government contracts, the formulation of policy or other discretionary governmental functions, such payments would be prohibited. The committee fully recognizes that the proposed law will not reach all corrupt payments overseas.”
There is little case law construing the FCPA’s facilitation payments exception, but an SEC enforcement action against Mark Jackson and James Ruehlen (individuals associated with Noble Corporation) is notable in that a federal trial court judge interpreted various aspects of the facilitating payment exception during pre-trial proceedings. In terms of background, the DOJ and SEC brought parallel enforcement actions against several oil and gas companies doing business in Nigeria and a portion of the conduct focused on payments allegedly made to the notoriously corrupt Nigerian Customs Service (“NCS”) in connection with securing or renewing temporary import permits so that oil rigs could remain in Nigerian waters. Other allegations in the so-called Customs Gate actions included payments made to NCS officials “to expedite the delivery of goods and equipment into Nigeria.” Perhaps in a sign of how obvious the facilitating payments exception was to the conduct at issue, the DOJ twice stated in the Noble Corp. resolution documents that “the payments [at issue] … would not constitute facilitation payments for routine governmental actions within the meaning of the FCPA.” None of the Customs Gate corporate enforcement actions were subjected to any meaningful scrutiny, but were resolved through non-prosecution or deferred prosecution agreements in which the companies collectively paid approximately $236 million in combined settlement amounts.
Perhaps signaling the weakness of the underlying enforcement theories, the only individuals charged in connection with Customs Gate were Jackson and Ruehlen and the individuals put the SEC to its burden of proof in the civil action. As relevant to facilitating payments, the defendants argued that the SEC had the burden of pleading the inapplicability of the facilitating payments exception, whereas the SEC argued that the defendants had the burden of pleading the inapplicability of the exception. In an issue of first impression, the judge held that the SEC “must bear the burden of negating the facilitating payments exception” and that the “exception is best understood as a threshold requirement to pleading that a defendant acted ‘corruptly.’” Later in the pre-trial proceedings, even the SEC acknowledged that the facilitating payments exception is “a difficult area to understand, largely because of the wording of the exception and the statute overall.” In denying competing motions for summary judgement, the judge stated:
“I have such trouble understanding the facilitating payment exception. […] I mean, it almost swallows the rest of the statute. And I know it’s in the legislative history that these, I think reference is made to grease payments, somehow to grease the skids. How do I separate those payments, which do seem to be contemplated, from the payments that [the SEC] alleges were made in this case, which you think are squarely within the FCPA’s prohibition? […] And I don’t understand it. Whether we make the distinction based on size of payments, regularity of payments, purpose of payments, nature of the — of the favorable conduct elicited. I just really struggle with it.”
On the eve of trial and facing the prospect of having to negate the facilitating payments exception and otherwise prove its case, the SEC agreed to settle the matter on very favorable terms for the defendants and defense counsel subsequently stated:
“Due to the settlement [in the case], the court never had the opportunity to rule on the fate of the FCPA’s facilitating-payments exception under the SEC’s newfound interpretation. But the SEC’s position on this issue signals a shift in policy toward the practical elimination of the exception. If the SEC continues down the road established in this case, it will be interesting to examine whether courts accept the SEC’s position eliminating the exception. However, since most FCPA cases are not litigated, the SEC may seek to push its novel interpretation into law, without approval by the courts, by including it in settlement agreements going forward.”
Notwithstanding the above, many corporate FCPA enforcement actions in the modern era concern payments made in connection with securing foreign permits, licenses or other official documents needed in connection with foreign country business activity.
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