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Regarding Princelings And Family Members

As a result of JPMorgan’s scrutiny over its alleged hiring of family members of alleged Chinese “foreign officials,” (see here for the prior post), FCPA Inc.’s vocabulary has been expanded to include the word “princelings.”  But then again “princelings” in China are nothing new – see this excellent May 2012 article in the New York Times – as well as here.

The prior JPMorgan post highlighted at least five FCPA enforcement actions based, in part, on allegations that a company hired family members of alleged “foreign officials” for alleged improper purposes.  As typical with FCPA corporate enforcement actions, none of those enforcement actions were subjected to any meaningful judicial scrutiny.

This Wall Street Journal article earlier this week cites a “U.S. official” who said that “the government wouldn’t even have to show a benefit was actually derived from a hire.  ‘Corrupt intent is the beginning and the end of the analysis,’ the official said. ‘It’s what your intent was, not if you were successful.’  Not so fast, said this FCPA attorney in the WSJ article – that scenario presents “epic proof problems for the government” and “even if the hiring may be motivated by a desire to curry favor with the foreign official, that doesn’t mean the hiring is corrupt if everything else about the hiring is appropriate.”

Indeed, as I noted in the prior post and in the New York Times article, there is nothing inherently illegal about hiring family members of alleged “foreign officials.”

The issue of hiring a family member of an alleged “foreign official” as an agent or representative (not in-house so to speak) has been directly raised in three DOJ FCPA opinion procedure releases.

Release 82-04 (1982) states:

“The Department of Justice has received a review request from Thompson & Green Machinery Company, Inc. (“T & G”) pursuant to the Review Procedure Releases Procedure.

T & G intends to compensate a foreign businessman (“Mr. X”) whom it hired and used as its agent in connection with a generator sale in a foreign country. The written consultant agreement, which obligates T & G to pay “Mr. X” a commission for his efforts in promoting the sale, notes that no part of Mr. X’s commission will be used by Mr. X, either directly or indirectly, to pay any commission or finder’s fee to a third party. Furthermore, the consultant agreement references the FCPA’s prohibition of the payment or giving anything of value to an employee or official of a foreign government. After having been advised that Mr. X’s brother (“Mr. Y”) is an employee of the very foreign government with whom T & G concluded the generator sale, T & G obtained separate affidavits from both Mr. X and Mr. Y in which they pledge adherence to the antibribery provisions of the FCPA. T & G has represented that it will pay Mr. X his commission by check or bank transfer in the country where the services were rendered, and the company will require Mr. X to declare and exchange his commission in accordance with all applicable currency control laws in that foreign country.

Based on all the facts and circumstances as represented by the requestor, the Department does not presently intend to take an enforcement action with respect to the compensation of Mr. X by T & G.”

Release 84-01 (1984) states:

“The Department has reviewed a review request from an American firm which seeks to engage a foreign firm (“Marketing Representative”) as its marketing representative in a foreign country. The Marketing Representative’s principals are related to the head of state of the foreign country. Moreover, one of the Marketing Representative’s principals personally manages certain of the head of state’s private business affairs and investments.

This proposed contractual relationship has raised concerns about the application of the FCPA, and the American firm has requested a determination of the Department’s present enforcement intention under the Act.

The requester has made the following representations, among others, with respect to its proposed contractual relationship with the Marketing Representative:

1. The Marketing Representative will represent that it will not pay or agree to pay, directly or indirectly, any funds or anything of value, on behalf of the American firm, to any public official in the foreign country for the purpose of influencing the official’s official acts, or to induce the official to use his influence to the Marketing Representative’s benefit. The Marketing Representative will also represent that no owner, partner, officer, director, or employee is or will become an official of the foreign government during the term of the agreement.

2. The proposed agency agreement provides that if the Marketing Representative directly or indirectly offers, pays, promises, gives or authorizes payment of any money or anything of value to any government or public official for the purpose of influencing any act or decision of such official in his official capacity, or inducing him to use his influence with the foreign government to influence the government’s decision concerning retention of the American firm, the agreement will automatically be rendered void ab initio and the Marketing Representative will automatically surrender any claim for any payment under the agreement even for sales previously concluded or sales previously rendered. Either party may terminate the agreement without cause upon 30 days’ notice. The agreement is governed by the law of the state in which the American firm has its principal place of business.

3. The Marketing Representative will be solely responsible for all of its costs and expenses incurred in connection with its representation of the American firm, unless the latter expressly assumes responsibility in writing in advance for specified expenses. Any claim for reimbursement of expenses specifically assumed in advance by the American firm must be accompanied by a detailed itemization of expenses claimed and a copy of the American firm’s written authorization of the expenditure. All purchase orders must be in writing. The American firm will pay commissions only in U.S. dollars and only in the foreign country in which the Marketing Representative has its principal place of business.

4. The Marketing Representative will have no right to assign any portion of its rights under the agreement to any third party without the prior written consent of the American firm. Likewise, the Marketing Representative will not obligate the American firm to third parties without the latter’s prior written consent.

5. The Marketing Representative will make, when required, full disclosure to the United States government and the foreign government of its identity and the amount of commission applicable to a specific contract. It has also been represented that the American firm considered several factors in selecting the Marketing Representative. Among these were considered: (1) the number of years the Marketing Representative has been in operation; (2) the Marketing Representative’s successful representation of several large U.S. and foreign corporations; (3) the qualifications of the Marketing Representative’s principals; and (4) the Marketing Representative’s reputation among businessmen and bankers both in the U.S. and abroad.

Based upon all of the facts and circumstances, as presented by the requester, the Department does not presently intend to take any enforcement action premised upon its proposed contractual relationship with Marketing Representative.”

Release 95-03 (1995) states:

 “The Department has received an FCPA opinion request from an American company and several foreign entities and individuals with which the American company proposes to enter into a joint venture. The proposed Joint Venture would engage in cooperative ventures in the investment banking field in a foreign country. The Joint Venture would also apply for a license to do business in the foreign country. Formation of the Joint Venture was conditioned upon, in part, a favorable FCPA opinion from the Department.

One of the proposed Joint Venture partners of the American firm is an entity which is the family investment company of, among others, a relative of the leader of the country in which the Joint Venture will conduct business. The relative is represented to be a prominent businessperson with significant managerial experience and responsibilities and who holds public and political party offices. Without question, the relative is a “foreign government official” as that term is used in the FCPA, and it is this circumstance which has prompted the request under the FCPA Opinion Procedure.

The American company, which will provide 50 percent of the start-up capital for the Joint Venture, would have effectively irrevocable power to appoint the most senior official of the Joint Venture — and any successors — who would have extensive powers in the management of the business of the Joint Venture, including the power to appoint outside auditors. The Joint Venture official would also have the power to take such steps as he or she deemed necessary to ensure compliance with the FCPA, including the power to order an audit.

The role of the foreign government official and member of that official’s immediate family in the Joint Venture would include assisting the Joint Venture in making important contacts in the country, providing investment advice and management consulting services, and development of new business for the Joint Venture.

Each of the parties to the FCPA request would receive a percentage of the gross or net profits received as a result of the government projects awarded to the Joint Venture. The foreign government official and the official’s relative would also receive annual payments in the range of $100,000 to $250,000 for services rendered as officers of the Joint Venture.

The foreign government official and the official’s relative have signed the FCPA Opinion Request, and have thus represented directly to the Department of Justice that they will comply with the FCPA as if they were subject to the Act. All the requestors, including the foreign official, further represent, among other things, the following:

1. Each requestor is familiar with the FCPA and its prohibitions; is in compliance with the laws of the foreign country and the FCPA as if they were subject to it and will remain in compliance for the duration of the Joint Venture.

2. No part of the payments received directly or indirectly by the requestors from the American company will be used for any purpose, nor will any action be taken by any requestor in connection with the business of the Joint Venture, which would constitute a violation of the laws of the foreign country or the FCPA.

3. The foreign official’s government and political party duties do not involve any decisions to award business in connection with the government projects sought by the Joint Venture or in the appointment, promotion, or compensation of the government officials who will decide which companies will receive such business, nor are those duties related to any of the official’s other duties on behalf of the Joint Venture or the interests of the American company.

4. Should the nature of the foreign government official’s public offices or responsibilities change so that the official’s representations in the FCPA Opinion Procedure request would no longer apply, the official will so notify the other requestors so that appropriate actions may be taken.

5. No meetings with government officials on behalf of the Joint Venture will be initiated by the foreign government official and all such meetings will be attended by no fewer than two Joint Venture representatives.

6. In connection with each meeting the official attends with a government official on behalf of the Joint Venture, the official will provide a letter to the Minister and most senior civil servant of the relevant government department, stating that the official is acting solely in the official’s capacity as a participant in the Joint Venture.

7. No member of the Joint Venture will assign its rights under the Joint Venture to a third party without the prior approval in writing of the other Joint Venture members. The requestors acknowledge that such a transfer, if approved, may require consultation with the Department of Justice should the identity of the transferee implicate the FCPA.

8. Specific procedures will be in effect with respect to the operation of the Joint Venture, including requirements concerning the keeping of accurate expense, correspondence, and other records of the business of the Joint Venture, including a requirement that all payments by the Joint Venture will be by check or bank transfer and no payments will be made in cash or by bearer instruments. All payments owed to a requestor or Joint Venture party will be made directly to that party and all payments to foreign parties will be made in the foreign country in question.

Based upon all the facts and circumstances, as represented by the requestors, the Department does not presently intend to take any enforcement action with respect to the prospective Joint Venture described in the request.”

The above releases contain, as do all such releases, the following qualification.

“this Release have no binding application to any party which did not join in the request and can be relied upon by the requesting party only to the extent that the disclosure of facts and circumstances in the request is accurate and complete and continues to accurately and completely reflect such facts and circumstances”

And of course these 1980’s releases were authored by individuals who have long left the DOJ’s FCPA enforcement program.

The above releases are in addition to numerous DOJ FCPA releases that address the issue of hiring an alleged “foreign official” directly or otherwise doing business with an alleged “foreign official” – see  80-04, 82-03, 85-03, 86-01, 93-01, 93-02, 94-01, 96-02, 00-01, 01-02, 08-01, 10-01, 10-03, 12-01.  See here and here for links to the releases.

For addition reading, see “Corrupt Intent, Relationship Building, and Quid Pro Quo Bribery:  Recent Domestic Bribery Cases” in the September 2011 FCPA Update from Debevoise & Plimpton.

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