Foreign Corrupt Practices Act enforcement actions are often simplistic regarding the reasons why a company obtained or retained the business at issue in the enforcement action.
The DOJ and/or SEC allege of course that it was because of the alleged improper payments and often ignore other valid and legitimate reasons why the company at issue obtained or retained business.
Indeed, the vast majority of FCPA enforcement actions are against business organizations that are otherwise viewed as industry leaders who sell the best products or offer the best services for the best prices.
With such companies can it truly be said that but for the alleged improper payments the company would not have obtained or retained the business?
This general topic has been explored numerous times on these pages (see here, here, here, and here). Call it the causation gap in most FCPA enforcement actions.
As previously highlighted, the lack of causation between an alleged improper payment and any alleged business obtained or retained is not a legal defense because the FCPA’s anti-bribery provisions prohibit the offer, payment, promise to pay or authorization of the payment of any money or thing of value. Indeed, several FCPA enforcement actions have alleged unsuccessful bribery attempts in which no business was actually obtained or retained.
Nevertheless, causation should be relevant when calculating FCPA settlement amounts, specifically disgorgement which is often the most prominent component of an SEC FCPA settlement. However, the prevailing FCPA enforcement theory often seems to be that because Company A made improper payments to allegedly obtain or retain X, then all of Company A’s net profits associated with X are subject to disgorgement.
Consider the December 2014 FCPA enforcement action against Avon. At $135 million, it was the third-largest FCPA enforcement action of all-time against a U.S. company.
At its core, the enforcement action alleged that various things of value were provided to Chinese officials to induce the officials to award Avon a national direct selling license. The enforcement action alleged that Avon received the license because Chinese officials were provided things of value such as wallets, designer bags, watches, meals, and travel benefits.
In other words, the allegations are simplistic – but for Chinese officials receiving the above things of value, Avon would not have received the license.
However, this ignores other valid and legitimate reasons why Avon got the license. Indeed, as highlighted in this post for years the U.S. government was encouraging the Chinese government to award direct selling licenses to U.S. companies pursuant to China’s commitment to do so by virtue of its World Trade Organization membership.
Set forth below are relevant excerpts from United States Trade Representative documents during the same time period at issue in the Avon enforcement action.
2004 REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE
“China is scheduled to implement its distribution services commitments by December 11 of this year and thereby allow foreign enterprises to freely distribute goods within China. While China has issued regulations that call for timely implementation of these commitments, China has not made clear the precise means by which foreign enterprises will actually be able to apply for approval to provide any of the various types of distribution services. In addition, China has not yet fulfilled its commitment to open its market for sales away from a fixed location, or direct selling, by December 11, 2004, as none of the measures necessary to allow foreign participants have been issued. The Administration will pay particular attention to these areas over the coming months to ensure that China fully meets these important WTO commitments.
[…]
In its accession agreement, China committed to eliminate national treatment and market access restrictions on foreign enterprises providing these services through a local presence within three years of China’s accession (or by December 11, 2004), subject to limited product exceptions.
[…]
China committed to lift market access and national treatment restrictions in the area of sales away from a fixed location, or direct selling, by December 11, 2004. China did not agree to any liberalization before that date. China first permitted direct selling in 1990, and numerous domestic and foreign enterprises soon began to engage in this business. In the ensuing years, however, serious economic and social problems arose, as so-called “pyramid schemes” and other fraudulent or harmful practices proliferated. China outlawed direct selling in 1998, although some large U.S. and other foreign direct selling companies continued to operate in China after altering their business models. Throughout 2004, MOFCOM has been drafting three measures to implement China’s direct selling commitment, the Measures for the Administration of Direct Marketing, the Measures for the Administration of Sales Personnel Training and the Regulations on the Prevention of Anti-Pyramid Sales Scams. Despite U.S. requests and the December 11 deadline for China to implement its direct selling commitment, MOFCOM has not made drafts of these measures available for public comment. To date, it has only discussed them in a November 2004 meeting with selected enterprises.
Based on the November 2004 meeting and subsequent bilateral engagement by the United States, it appears that the draft direct selling measures may contain several problematic provisions. For example, one provision raises serious national treatment concerns, as it apparently allows direct selling of domestically produced goods, but requires imported goods to be sold at a fixed location. Other provisions, meanwhile, impose operating requirements that seem designed to make direct selling commercially unviable. The United States has urged MOFCOM to reconsider these provisions. Through the end of 2004 and into 2005, as necessary, the United States will work closely with U.S. companies in an effort to ensure that China develops and implements direct selling measures that facilitate legitimate commerce and are WTO-consistent.”
2005 REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE
“China only issued the regulations implementing its commitment to open its market for sales away from a fixed location, also known as “direct selling”, in September 2005, and these regulations contain several problematic provisions that the United States has urged China to reconsider. The Administration will continue to pursue these important issues in 2006 to ensure that China fully meets its commitments.
[…]
Meanwhile, MOFCOM’s ninemonth delay in issuing regulations on sales away from a fixed location, or direct selling, postponed the start-up of direct selling activities by foreign enterprises. A similar delay affected the wholesaling and retailing of pharmaceuticals. These delays have been disappointing, given the fundamentally important nature of China’s distribution services commitments and the repeated assurances by senior-level Chinese government officials that China would implement these commitments on time. In 2006, the United States will closely monitor how MOFCOM and relevant provincial and local authorities exercise their approval authority. In particular, the United States will work to ensure that the approval systems operate expeditiously, in a non-discriminatory manner and without creating any new trade barriers.
[…]
Sales away from a fixed location China first permitted direct selling in 1990, and numerous domestic and foreign enterprises soon began to engage in this business. In the ensuing years, however, serious economic and social problems arose, as so-called “pyramid schemes” and other fraudulent or harmful practices proliferated. China outlawed direct selling in 1998, although some direct selling companies were permitted to continue operating in China after altering their business models. In its WTO accession agreement, China committed to lift market access and national treatment restrictions in the area of sales away from a fixed location, or direct selling, by December 11, 2004. China did not agree to any liberalization before that date. As early as 2002, MOFCOM and SAIC began drafting measures to implement China’s direct selling commitment. Despite U.S. requests and the December 11, 2004 deadline for China to implement its direct selling commitment, the Chinese authorities did not make any drafts of these measures publicly available, instead only providing unofficial drafts to select direct selling enterprises. The Chinese authorities subsequently issued final versions of these measures – the Measures for the Administration of Direct Selling and the Regulations on the Administration of AntiPyramid Sales Scams – in September 2005, nine months late. The final versions of the direct selling measures made some improvements to provisions apparently included in the earlier drafts. Nevertheless, these measures still contain several problematic provisions. For example, one provision would outlaw practices allowed in every country in which the U.S. industry operates – reportedly 170 countries in all – by refusing to allow direct selling enterprises to pay compensation based on team sales, where upstream personnel are compensated based on downstream sales. The United States has pointed out that China could revise this provision to permit team-based compensation while still addressing its legitimate concerns about pyramid schemes. Other problematic provisions include a three-year experience requirement that only applies to foreign enterprises, not domestic ones, restrictions on the cross-border supply of direct selling services and high capital requirements that may limit smaller direct sellers’ access to the market. The United States has urged the Chinese authorities to reconsider the problematic provisions in the direct selling measures, both bilaterally and during the transitional review before the Council for Trade in Services, held in September 2005. MOFCOM has since offered to meet with U.S. and other foreign industry representatives to hear their concerns. This meeting is expected to take place in January 2006. The United States will work closely with U.S. companies in urging China to revise its direct selling measures to facilitate legitimate commerce and to comply with its WTO commitments.”
2006 REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE
“Another key area involves China’s commitment to open its market for sales away from a fixed location, also known as “direct selling.” Initially delayed, China’s implementation of this commitment has since proceeded slowly and has subjected foreign direct sellers to unwarranted restrictions on their business operations. The United States will continue to pursue these important issues in 2007 to ensure that China fully meets its commitments and will take further appropriate actions seeking the revision or elimination of problematic policies, including through WTO dispute settlement, where appropriate.”
[…]
China first permitted direct selling in 1990, and numerous domestic and foreign enterprises soon began to engage in this business. In the ensuing years, however, serious economic and social problems arose, as so-called “pyramid schemes” and other fraudulent or harmful practices proliferated. China outlawed direct selling in 1998, although some direct selling companies were permitted to continue operating in China after altering their business models.
In its WTO accession agreement, China committed to lift market access and national treatment restrictions in the area of sales away from a fixed location, or direct selling, by December 11, 2004. China did not agree to any liberalization before that date.
As early as 2002, MOFCOM and SAIC began drafting regulations to implement China’s direct selling commitment. Despite U.S. requests and the December 11, 2004 deadline for China to implement its direct selling commitment, the Chinese authorities did not make any drafts of these measures publicly available, instead only providing unofficial drafts to select direct selling enterprises. The Chinese authorities subsequently issued final versions of these measures – the Measures for the Administration of Direct Selling and the Regulations on the Administration of Anti-Pyramid Sales Scams – in August 2005, nine months late. In September 2006, after releasing a draft for public comment, MOFCOM issued the Administrative Measures on the Establishment of Service Network Points for the Direct Sales Industry, which clarified some aspects of the earlier measures.
The final versions of the August 2005 direct selling measures made some improvements to provisions apparently included in the earlier drafts, but they also contained several problematic provisions. For example, one provision essentially outlaws multi-level marketing practices allowed in every country in which the U.S. industry operates – reportedly 170 countries in all – by refusing to allow direct selling enterprises to pay compensation based on team sales, where upstream personnel are compensated based on downstream sales. The United States has pointed out that China could revise this provision to permit team-based compensation while still addressing its legitimate concerns about pyramid schemes. Other problematic provisions include a three-year experience requirement that only applies to foreign enterprises, not domestic ones, a cap on single-level compensation, restrictions on the cross-border supply of direct selling services and high capital requirements that may limit smaller direct sellers’ access to the market. The new service center regulations also include vague requirements that could prove excessively burdensome for small and medium-sized direct sellers.
Working closely with U.S. industry, the United States immediately began urging the Chinese authorities to reconsider the problematic provisions in the direct selling measures, both bilaterally and during the transitional review before the Council for Trade in Services, held in September 2005. After the direct selling measures went into effect in December 2005, moreover, many companies began to apply for direct selling licenses but were confused by the opaque license review process. Despite MOFCOM’s regulatory requirement that direct selling licenses be reviewed within ninety days, many foreign and domestic companies have waited for many months for MOFCOM and SAIC to review their license applications. Accordingly, the United States urged China to address the slow pace and lack of transparency in the licensing process, along with the problematic restrictions in the direct selling measures, during the run-up to the April 2006 JCCT meeting. In response, MOFCOM agreed to hold an informal dialogue with U.S. and other foreign industry representatives in the following months to better understand their concerns about the direct selling measures and to facilitate their efforts to navigate the application and approval process for obtaining licenses. Since then, five U.S. companies had obtained licenses (as of early December 2006), and MOFCOM generally remained slow in processing a growing number of license applications from foreign and domestic companies. The United States, meanwhile, has continued to urge China to revise its direct selling measures and to process direct selling applications in a timely and transparent manner in order to facilitate legitimate commerce and to comply with its WTO commitments, both in bilateral meetings and at the November 2006 transitional review before the Council for Trade in Services. The United States will continue these efforts in 2007.”
