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In A Way, It Is Like Gambling

Last week Penn National Gaming Inc. Chairman Peter Carlino spoke at the Baron Investment Conference in New York.  This article by CNBC’s Lawrence Delevingne states:

“The U.S. government is too restrictive in trying to prevent its companies from corruption abroad and it’s hurting business expansion in Asia and elsewhere, according to Carlino. ‘There’s a little bit of overzealousness in this,’ Carlino said during a speech at the Baron Conference. ‘Those are limitations that American companies face that others don’t.’  Carlino said he wants to get into the lucrative Asian casino market—Las Vegas Sands already has a large presence in Macau, for example—but hasn’t been able to out of fear of violating U.S. rules.  […] ‘There’s a problem for U.S. businesses, frankly. We had an interesting opportunity in a country that I won’t name; we were hampered in a major way by the American Foreign Corrupt Practices Act,’ he said.  […]  Carlino said Penn looked at expanding into the Asian country via an existing company but one of the line items of the business was to pay off the border guards.  ‘It seems OK to me, frankly. If that’s the game, we’ll play it,’ Carlino said to chuckles from the mostly retiree Baron fund-shareholder audience. ‘There are problems for American companies trying to do business.’  ‘If it’s there, we’re looking at it. Problem is, the pickings are slim,’ he said of countries like Burma, India and Sri Lanka. ‘So finding the right opportunity, although we look and I trust we will, is tough,’ Carlino added.”

There are two ways to view Carlino’s comments.

The first is that Carlino meant that the FCPA – the law passed by Congress – is hurting U.S. business abroad.  If so, well that is a correct policy decision that Congress knew and accepted when it passed the FCPA in 1977.  For instance, as highlighted in “The Story of the Foreign Corrupt Practices Act,” during a Congressional hearing Representative John Moss stated:

“To think that no loss of business would occur in every instance would be unrealistic. Can we allow this to occur? Yes, if that is the small price we must pay to return morality to corporate practice. Yes, if that is the small price we pay to show that U.S. firms compete in terms of price, quality, and service and not in terms of the size of a bribe. Real competition works. The vast majority of American companies have operated successfully in foreign countries without the need to resort to bribery.”

Likewise, Treasury Secretary Michael Blumenthal stated:

 “To the very, very small extent a particular company may lose a particular contract because it refuses to engage in this practice, I would be willing to say, all right, we will be at a slight competitive disadvantage and we will all sleep the better for it.”

The second way to view Carlino’s comments is that he conflated FCPA enforcement with the actual FCPA – as Donald Trump also did as highlighted in this prior post.  In other words, Carlino confused FCPA enforcement with the FCPA.

Simply put, there is often a difference between FCPA enforcement and the FCPA.

For instance, Congress specifically exempted facilitation payments from the FCPA’s anti-bribery provisions.  However, it is an open question whether the facilitating payments exception has any real meaning or whether the enforcement agencies have essentially repealed this exception through its enforcement theories.  For instance, the SEC’s former Assistant Director of Enforcement has called the FCPA’s facilitating payment exception “illusory” and stated:

“The drafters of the FCPA recognized that such demands for ‘grease payments’ are a reality in many countries, and accordingly made clear that certain payments made to expedite the approval of permits or licenses, or to prompt the expeditious performance of similar low-level ministerial duties, fell outside the ambit of the statute’s anti-bribery provisions. Yet that exception for ‘facilitating payments’ […] is becoming harder and harder to rely on. […]  The DOJ and SEC have pressed a narrow view of the exception in recent years … […] Of course, the fact that the FCPA’s twin enforcement agencies have treated certain payments as prohibited despite their possible categorization as facilitating payments does not mean a federal court would agree. But because the vast majority of enforcement actions are resolved through DPAs and NPAs, and other settlement devices, these cases never make it to trial. As a result, the DOJ and the SEC’s narrow interpretation of the facilitating payments exception is making that exception ever more illusory, regardless of whether the federal courts – or Congress – would agree.”

Similarly, the FCPA’s books and records and internal controls provisions are qualified by the term “reasonable” and the only substantive judicial decision on these provisions (see here for the prior post) stated:

“The definition of accounting controls does comprehend reasonable, but not absolute, assurances that the objectives expressed in it will be accomplished by the system. The concept of ‘reasonable assurances’ contained in [internal control provisions] recognizes that the costs of internal controls should not exceed the benefits expected to be derived. It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs. It appears that Congress was fully cognizant of the cost-effective considerations which confront companies as they consider the institution of accounting controls and of the subjective elements which may lead reasonable individuals to arrive at different conclusions. Congress has demanded only that judgment be exercised in applying the standard of reasonableness. […] It is also true that the internal accounting controls provisions contemplate the financial principle of proportionality—what is material to a small company is not necessarily material to a large company.”

SEC guidance on the FCPA’s books and records and internal controls provisions stand for the following propositions:

  • not all books and records are within the purview of the provisions;
  • issuers should not face liability when its management was not aware and reasonably should not have known of the conduct at issue;
  • the principal objective of the provisions is to reach knowing or reckless conduct;
  • thousands of dollars ordinarily should not be spent conserving hundreds;
  • the provisions are not an independent unrestrained mandate to establish novel or unprecedented corporate recordkeeping standards;
  • if conduct was engaged in by a low-level employee, without the knowledge of top management, and with appropriate corrective action taken, an enforcement action against the issuer is not warranted; and
  • the provisions do not require a company or its senior officials to be guarantors of all conduct of company employees.

Nevertheless, the enforcement agencies frequently bring FCPA enforcement actions against issuers without any allegation or suggestion that the conduct at issue was known or approved by top management (see here for example).  In this new era of FCPA enforcement, the position of the enforcement agencies appear to be that indeed corporate officers are guarantors of all conduct of company employees and that fail-safe accounting and internal controls measures are indeed the standard (see here for example).

Against this backdrop, seeking to do business in challenging foreign markets through employees or agents may indeed be- based on the current enforcement theories – in a way like gambling.

If this is what Carlino meant, perhaps he has a point.  The Congress that enacted the FCPA in 1977 and the Congress that amended the FCPA in 1988 certainly appeared to empathize.

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