This prior post  detailed the DOJ’s recent criminal indictment against Yanliang Li (a citizen of China and former Managing Director of a Chinese division of Herbalife) and Hongwei Yang (a citizen of China and former head of the External Affairs Department of a Chinese division of Herbalife). Yang was charged with one count of conspiracy to violate the FCPA and Li was charged with one count of conspiracy to violate the FCPA, one count of perjury and one count of destruction of records in a federal investigation. In addition, the SEC charged Li with violating the FCPA’s anti-bribery provisions and aiding and abetting books and records and internal controls violations.
This post highlights additional issues to consider from the enforcement action.
What Does This Mean For Herbalife?
Approximately 80% of corporate FCPA enforcement actions lack related charges against any company employees. In the approximate 20% of corporate FCPA enforcement actions that do result in related charges against company employees, the charges either occur before or after the corporate enforcement action.
In this instance, the individual charges obviously occurred before any action against Herbalife. As highlighted in the prior post, Herbalife’s October 30th quarterly report stated:
“These investigations are proceeding, the government is continuing to request documents and other information relating to these matters, and the Company is continuing to discuss with the government possible resolution of these matters. […] The Company is continuing to cooperate with the SEC and DOJ. Although a likely outcome could include resolutions or government actions, the Company cannot predict the eventual scope, duration, or outcome of the government investigations at this time, including potential monetary payments, injunctions, or other relief, the results of which may be materially adverse to the Company, its financial condition, its results of operations, and its operations.”
If there is an enforcement action against Herbalife based on the conduct of Li and Yang as alleged in the indictment it would be a joke.
Because set forth below are the general allegations, among others, the DOJ/SEC made against Li and/or Yang as it relates to Herbalife.
- Defendants circumvented Herbalife’s internal controls.
- Defendants submitted “fraudulent reimbursement requests.”
- Defendants “obtained reimbursement for the bribes from China Subsidiary through false expense claims designed to conceal the true nature of the expenditures at issue.”
- Defendants “circumvented Herbalife’s internal accounting controls related to EA’s [the China Subsidiary’s External Affairs Department] expenditure on gifts and entertainment for Chinese government officials. These internal accounting controls, among other things, prohibited the payment of bribes; established limits on the value, frequency, and nature of expenditures on government officials; and required EA employees to provide receipts and other specific information, including the names of the government official involved, to obtain approval and reimbursement for their expenditures.”
- Defendants “conceal[ed] their fraud from Herbalife’s Internal Audit department.”
- Defendants instructed “two EA employees to falsely submit reimbursement requests.”
- Defendants “in order to prevent the scheme from being detected by Herbalife’s Internal Audit Department” directed others to “provide certain instructions to another colleague” and not to use company e-mail.
- Defendants expenditures “violated, among other things, Herbalife’s policies and controls prohibiting entertaining relatives of government officials.”
- Li “furthered the scheme and concealed the scheme by, among other things, routinely creating false records and certifications disclaiming any knowledge of fraud or circumvention of internal accounting controls.
- Over a nearly ten year period, Li signed certifications titled “Statement Regarding Facts and Circumstances Relating to Exchange Act Filings” which Li caused to be sent to Herbalife’s U.S. headquarters. “In these certifications, which Herbalife relied upon in the preparation of its public filings with the SEC, Li falsely certified that ‘nothing came to my attention that made me question the effectiveness of [the company’s] disclosure controls and procedures’ and that ‘I am not aware of any fraud, whether or not material, that involves management or other employees who have a significant role in Herbalife’s internal controls.”
- “During the time period relevant” to the indictment, the defendants “each participated in more than ten in-person and online trainings related to Herbalife’s anti-fraud and anti-corruption policies. Furthermore, Li and Yang both certified repeatedly that they understood and would adhere to Herbalife’s Code of Business Conduct and Ethics, which, among other things, required compliance with the FCPA.”
- Defendants instructed others to rewrite expenses reports to conceal the nature of payments
- Defendants coached others to give false stories to internal audit
- Defendants gave false assurances to internal audit
- Li falsely assured internal audit that he was otherwise committed to improving compliance of Herbalife’s internal FCPA and internal accounting controls.”
- Li “fasley assured internal audit that he would discipline and train employees to improve compliance of China subsidiary policies.”
Obtain or Retain Business?
The FCPA anti-bribery charges against Li and Yang focus on, in the words of the indictment: (1) “obtaining and retaining China Subsidiary’s licenses to operate as a direct-selling enterprise in provinces throughout China; (2) corruptly influencing Chinese governmental investigations into China Subsidiary’s compliance with Chinese laws applicable to direct-selling enterprises; and (3) corruptly influencing Chinese state-owned and state-controlled media for the purpose of removing negative media reports about China subsidiary.”
In other words, the Li and Yang enforcement action is yet another example of a non-procurement type of FCPA enforcement (as opposed to an FCPA enforcement action in which the government alleges that the improper conduct actually obtained or retained business).
Pardon me for being that guy or a bit old-fashioned, but it is important to keep in mind the following regarding non-procurement FCPA enforcement actions.
For there to be a violation of the anti-bribery provisions, something 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.”
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.”
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 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 2004 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.
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