Previous posts here, here and here discussed the early July release by the DOJ and SEC of a Second Edition of the FCPA Guidance.
I took my red pen to the Second Edition and set forth below are numerous examples of false statements, selective information, and half-truths in the FCPA Guidance
The actual words of the FCPA statute matter – yet the Guidance contains several false statements about the law as well as conveniently omits certain statutory language. How courts have interpreted the FCPA matters – yet the Guidance omits several FCPA judicial decisions (including decisions issued since the original Guidance was released in 2012). The Guidance cites certain FCPA legislative history – yet ignores other FCPA legislative on the same topic. The Guidance cites certain FCPA jury instructions – yet ignores other FCPA jury instructions.
In short, the FCPA Guidance (like the original Guidance) is not a fair and balanced portrayal of FCPA legal authority and developments, but rather a one-sided advocacy piece by enforcement agencies who are adversaries to business organizations subject to FCPA scrutiny and enforcement.
Pg 1 of the Guidance states:
“The accounting provisions require issuers to make and keep accurate books and records and to devise and maintain an adequate system of internal accounting controls.”
The last clause is false. The word “adequate” does not appear in the FCPA.
Rather, the FCPA states that issuers shall “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that” certain specific objectives are met and “reasonable assurances” is defined to mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.
Pg. 2 of the Guidance states under the heading “Historical Background”:
“SEC discovered that more than 400 U.S. companies had paid hundreds of millions of dollars in bribes to foreign government officials to secure business overseas.”
This is a misleading statement. The House Report that the Guidance cites actually states:
“More than 400 corporations have admitted making questionable or illegal payments. The companies, most of them voluntarily, have reported paying out well in excess of $300 million in corporate funds to foreign government officials, politicians, and political parties. These corporations have included some of the largest and most widely held public companies in the United States; over 117 of them rank in the top Fortune 500 industries. The abuses disclosed run the gamut from bribery of high foreign officials in order to secure some type of favorable action by a foreign government to so-called facilitating payments that allegedly were made to ensure that government functionaries discharge certain ministrial [sic] or clerical duties.”
Pg. 2 of the Guidance states:
“In 1998, the FCPA was amended to conform to the requirements of the [OECD] Anti-Bribery Convention. These amendments expanded the FCPA’s scope to (1) include payments made to secure ‘any improper advantage'”
The first sentence is false. If one analyzes the OECD Anti-Bribery Convention and the FCPA post-1998 amendments (in other words the current FCPA) one clearly sees that there are key differences between the two.
The second sentence is also false. Although the 1998 amendment did indeed add the words “secure any improper advantage” to the FCPA’s anti-bribery provisions, payments or things of value to foreign officials must still satisfy the FCPA’s obtain or retain business element. As highlighted below, this is clear in looking at the placement of the phrase “secure improper advantage in the FCPA.
“anything of value to
any foreign official for purposes of
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;
In short, payments made to“secure any improper advantage” do not independently satisfy the required obtain or retain business element. As Kay (a decision talked about below in more detail) makes clear, authorizing the payment of money or anything of value, to a foreign official, must still be for the purposes of “obtaining or retaining business.”
Indeed, the precise issue of whether payments to “secure any improper advantage” independently satisfy the FCPA’s anti-bribery provisions was specifically litigated in Kay and both the trial court and appellate court rejected the DOJ’s position.
The trial court stated:
“The OECD Convention had asked Congress to criminalize payments made to foreign officials ‘‘ ‘in order to obtain or retain business or other improper advantage in the conduct of international business.’’ . . . Congress again declined to amend the ‘‘obtain or retain business’’ language in the FCPA . . . . Congress did not insert the ‘‘improper advantage’’ language into the ‘‘obtain or retain business’’ provision of the FCPA.”
Although the Fifth Circuit overruled the trial court’s decision granting the defendants’ motion to dismiss (discussed more below), the appellate likewise court stated as follows concerning the FCPA’s 1998 amendments:
“When Congress amended the language of the FCPA, however, rather than inserting ‘any improper advantage’ immediately following ‘obtaining or retaining business’ within the business nexus requirement (as does the Convention), it chose to add the ‘improper advantage’ provision to the original list of abuses of discretion in consideration for bribes that the statute proscribes.’’
Pgs. 10-11 of the Guidance discusses “what jurisdictional conduct triggers the anti-bribery provisions” including as to foreign nationals. However, the Guidance omits any mention of a high-profile instance in which an FCPA individual defendant put the DOJ to its burden of proof regarding its expansive jurisdictional theory. Omission of this case matters given how rarely the DOJ is put to its burden of proof – including as to jurisdictional issues. There is no mention in the Guidance of the DOJ’s prosecution of Pankesh Patel, a U.K. national who was charged in connection with the otherwise unsuccessful DOJ-manufactured Africa Sting case. Among other charges, prosecutors alleged that Patel violated the FCPA’s anti-bribery provisions by sending a DHL package containing a purchase agreement from the United Kingdom to the United States in furtherance of the alleged bribery scheme. At the close of the government’s case, in what is believed to be the first FCPA judicial ruling regarding jurisdiction over foreign actors, Judge Richard Leon, of the U.S. District Court for the District of Columbia, rejected the DOJ’s ‘‘novel interpretation’’ and granted Patel’s motion for acquittal.
Pg. 11 of the Guidance states that the “‘business purpose test’ … is broadly interpreted” and cites to H.R. No. 95-831 as support. However, there is nothing in H.R. No. 95-831 to support this statement. Rather this Conference Report drafted immediately prior to the FCPA’s passage stated, when comparing a House amendment to the Senate bill, as follows:
“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.”
Pg. 11 of the Guidance states: “The FCPA also prohibits bribes in connection with conducting business or to gain a business advantage. For example, bribe payments made to secure favorable tax treatment, to reduce or eliminate customs duties, to obtain government action to prevent competitors from entering a market, or to circumvent a licensing or permit requirement, can all satisfy the business purpose test.”
For the reasons stated above, the portion “to gain a business advantage” is false. The only citation offered in the Guidance for the second sentence is prosecutorial common law ( that is resolution vehicles not subjected to any judicial scrutiny).
Pg. 12 of the Guidance discusses the Kay case but omits discussion of the key language of the equivocal decision. In the case, the Fifth Circuit noted that the key question of whether the defendants’ alleged payments to foreign officials to lower customs duties and sales taxes on imports constituted an FCPA violation depended on whether the payments were intended to lower the company’s costs of doing business in Haiti enough to assist the company 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.”
Not only is the Guidance’s discussion of Kay incomplete and thus misleading, but the Guidance also omits any reference to the two other instances in which payments outside the context of foreign government procurement have been subjected to judicial scrutiny.
U.S. v. Duran (S.D. Florida – 1990)
The first instance of a Non-Procurement Case being subjected to judicial scrutiny involved criminal charges filed in 1990 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.”
SEC v. Mattson (S.D. Texas 2002)
In this civil enforcement action against Baker Hughes Inc. employees Eric Mattson and James Harris, the SEC 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 trial 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.’’
In short, there have been four instances of judicial scrutiny of Non-Procurement Cases. 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.”
Pg 16 of the Guidance states “companies may also violate the FCPA if they give payments or gifts to third parties, such as an official’s family members, as a indirect way of corruptly influencing a foreign official.” This seemingly contradicts pg. 14 of the Guidance which states that the FCPA prohibits things of value “to” a foreign official. (See this prior post for the importance of the word “to”)..
Pg. 19 of the Guidance states: “The FCPA broadly applies to corrupt payments to “any” officer or employee of a foreign government and to those acting on the foreign government’s behalf.”
This is false. The FCPA’s “foreign official” definition actually states:
“The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.”
In other words, those acting on behalf of a foreign government must still be acting “in an official capacity” not just merely acting on the foreign government’s behalf as the Guidance suggests.
Pgs. 20-21 of the Guidance discusses “instrumentality” of a foreign government and state-owned or state-controlled enterprises (SOEs). Missing from the discussion is any mention of relevant legislative history which clearly establishes that competing versions of the FCPA Congress considered yet rejected specifically included state-owned or state-controlled enterprise (SOE) concepts. (See here to learn more).
Pg. 20 of the Guidance discusses jury instructions relevant to the foreign official issue. However, the Guidance omits any discussion of the “foreign official” jury instruction in U.S. v. Carson. As highlighted in this prior post, the judge issued a pre-trial jury instruction titled “knowledge of statute of foreign official” stating in pertinent part:
[…..]
“(4) The defendant offered, paid, promised to pay, or authorized the payment of money, or offered, gave, promised to give, or authorized the giving of anything of value to a foreign official;
(5) The payment or gift at issue in element 4 was to (a) a person the defendant knew or believed was a foreign official or (b) any person and the defendant knew that all or a portion of such money or thing of value would be offered, given, or promised (directly or indirectly) to a person the defendant knew or believed to be a foreign official. Belief that an individual was a foreign official does not satisfy this element if the individual was not in fact a foreign official.
(6) The payment or gift at issue was intended for at least one of four purposes: a. To influence any act or decision of a foreign official in his or her official capacity; b. To induce a foreign official to do or omit to do any act in violation of that official’s lawful duty; c. To secure any improper advantage; or d. To induce a foreign official to use his or her influence with a foreign government or department, agency, or instrumentality thereof to affect or influence any act or decision of such government, department, agency, or instrumentality;
[…..]
In his order, the judge stated:
“The Government proposes to add the following paragraph to element 5:”
The government need not prove that the defendant knew the legal definition of “foreign official” under the FCPA or knew that the intended recipient of the payment or gift fell within the legal definition. The defendant need not know in what specific official capacity the intended recipient was acting, but the defendant must have known or believed that the intended recipient had authority to act in a certain manner as specified in element 6.”
The Court does not believe that this language is necessary, and it is potentially confusing.”
Pg. 21 of the Guidance states that the “DOJ and SEC continue to regularly bring FCPA cases involving bribes paid to employees of agencies and instrumentalities of foreign government” and then discusses the 2010 enforcement action against ABB. However, the Guidance fails to mention that in connection with the same underlying conduct and pursuant to the same enforcement theory, the DOJ also prosecuted former ABB General Manager John Joseph O’Shea. As noted in this previous post, in 2012 a judge granted O’Shea’s motion for acquittal and found him not guilty of all substantive FCPA charges. The motion was granted at the close of the DOJ’s case and the jury was dismissed. During the hearing on O’Shea’s motion for acquittal, it is clear that the trial court judge was troubled by the DOJ’s “foreign official” position and its lack of preparation as to the unique attributes of the Mexican electricity company that was allegedly an SOE. During the hearing, the judge stated that the DOJ “is supposed to know before it brings the indictment that it can prove that it is a governmental entity … in fact you should have to convince the grand jury of it.” The judge further commented that “it does trouble me, although I don’t think it’s relevant to this motion, that the Government did not present evidence on governmental status on which a reasonable grand jury could have relied.”
Pg. 23 of the Guidance discusses legislative history relevant to the third-party payment provisions but omits the following legislative history, A Senate Report stated:
“[The provisions] are meant to prevent management from adopting ‘head-in-the-sand’ approach to bribery in order to avoid liability by ignoring facts and circumstances underlying the subject transaction which would indicate the payment of a bribe. […] On the other hand, the mere fact of doing business in a country where corrupt payments are common, or the employment of an agent with personal relationships with government officials in the country where the company seeks to do business, would not establish such a course of conduct. Similarly, the payment of a commission that is higher than customary would not by itself violate [the provisions] without other evidence that the increased amount of commission is to permit a corrupt payment to be made.”
A House Report likewise stated:
“The definition of ‘knowing’ is intended to make it clear that a ‘head in the sand’ approach to the payment of bribes through third parties will not be tolerated. Knowing is therefore defined to include conscious disregard of a high probability that a payment to a third payment will be transmitted by that party to a foreign official …”.
The House Report further stated:
“… [M]ere negligence will not give rise to a civil prosecution under the FCPA. There must be a showing of reckless disregard or knowledge. […] [N]either mere negligence nor reckless disregard will give rise to a criminal prosecution under the FCPA. In order to bring a criminal prosecution for violation of the third party payments provisions, a showing of knowledge as defined in the [FCPA] would be required.”
Pg. 25 of the Guidance discusses facilitating payments and states “examples of ‘routine governmental action’ include processing visas, providing police protection or mail service, and supplying utilities like phone service, power, and water.” The FCPA defines routine government as follows:
(A) 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.”
Conveniently, the Guidance omits ANY reference of (i) underlined above (arguably the most important example of routine government action given its placement in the statute).
Pg. 26 of the Guidance states:
“Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action.”
Continuing with the word “telling” – tellingly there is no citation (even though there are 442 footnotes in the Guidance) provided for this assertion and the FCPA’s facilitating payment exception is silent regarding the size of the payment.
Regarding the FCPA’s facilitating payment exception, there is zero mention or reference in the Guidance to SEC v. Mark Jackson and James Ruehlen (individuals associated with Noble Corporation). This enforcement action was a rare instance in which a court (S.D. Texas – 2012) construed the facilitating payments exception. 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. 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 corporate enforcement actions concerning this conduct were subjected to any meaningful scrutiny, but rather 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 the many corporate enforcement actions 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.
There is zero mention of this enforcement action in the Guidance including how, in a case of first impression, a judge ruled that the government must bear the burden of negating the facilitating payments exception.
At pg. 36 of the Guidance, when talking about the DOJ’s defeat in Hoskins the Guidance states “at least in the Second Circuit.” This is interesting because the government does not cabin its discussion of obtain or retain business and the Kay decision to “at least in the Fifth Circuit” or its discussion of “instrumentality” and the Esquenazi decision to “at least in the Eleventh Circuit.” Moreover, there is zero mention in the Guidance that post-trial the judge granted Hoskins’s motion of acquittal regarding the FCPA offenses. (See here for the prior post).
Pg. 38 of the Guidance states: “In addition to the anti-bribery provisions, the FCPA contains accounting provisions applicable to public companies” This is a half-truth given that the accounting provisions can also apply to private companies if such companies have reporting obligations to the SEC – for instance because of the number of shareholders. (See the FCPA enforcement action against PBSJ for example).
Pg. 39 of the Guidance states: “Under the internal controls provisions, issuers must devise and maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the firm’s assets.”
This is a false statement. The statutory standard is to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that certain limited financial objectives are met. There is a big difference between assure and reasonable assurances and the FCPA defines the terms “reasonable assurances” and “reasonable detail” mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.
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