All In The Family

In a post here we described our edits to Wikipedia's article on the Foreign Corrupt Practices Act (here). Wiki's old article said a bank owner (pictured far left) whose brother was the minister of finance (far right) would be a foreign official for the FCPA. That's wrong, we said, because although consanguinity might be important, it has never been a definitive test of foreign-officialdome under the FCPA.

One of our readers had this to say about our edits: The omission of prohibitions on payments to family members creates a significant loophole. Are there any cases where business dealings with family members have been examined? My reading of the SEC statement on Statoil is that the Iranian official may not have had the formal authority to guarantee the contract but that it was his family connections which were being purchased.

We replied this way: Good point. But as far as we know, neither the FCPA itself nor any Opinion Releases or cases say that commercial dealings with family members of government officials are per se violations of the FCPA. If a family member is being used to make an illegal payment "indirectly" to a foreign official, then a violation would probably result, in the same way that indirect payments through other agents are illegal. But the mere fact of the consanguinity is not determinative, and that was the problem with Wiki's original article. No question, however, that dealing with family members of foreign officials always raises compliance red flags. It should probably be avoided in most cases because of the risks. But under some circumstances commercial relationships with family members of foreign officials may be permissible under an effective compliance program.

Exhibit A for our answer is FCPA Review Procedure Release No. 82-04 (November 11, 1982) [mislabeled as 82-02 on the DOJ site]. It's available here. In it, the Department of Justice received a review request from Thompson & Green Machinery Company, Inc. ("T & G"). It hired a foreign businessman ("Mr. X") as its agent in connection with a generator sale in a foreign country. However, Mr. X's brother was an employee of the same foreign government to whom T & G was trying to sell its generator. The DOJ gave its blessing, however, after receiving assurances from T & G that (i) the written consultant agreement with Mr. X prohibited him from using any part of his commission to pay a finder’s fee to a third party, and also expressly referred to the FCPA; and (ii) both Mr. X and his brother signed separate affidavits in which they pledged to adhere to the FCPA’s antibribery provisions.

So it's not illegal per se under the FCPA to have commercial dealings with family members of foreign officials. No question, however, that doing so is full of risk. For example, Paradigm's hiring of the brother of an official from Pemex, from which Paradigm was then awarded a contract, was cited as an offense. See our post here. Family members were also involved in FCPA convictions or allegations in U.S. v. Kozeny (see our posts here), U.S. v. Sapsizian & Acosta [see also Alcatel] (S.D. Fla. 2006), SEC v. Bellsouth Corporation (N.D. Ga. 2002), U.S. v. Metcalf & Eddy (D. Ma. 1999), and others.

But the FCPA itself doesn't mention family members, and as of today, Exhibit A above -- FCPA Review Procedure Release No. 82-04 -- remains "good law," if we can refer to a DOJ opinion that way. It means the fact that someone is related by blood or marriage to a foreign official doesn't make the person a foreign official for the FCPA. It does, however, mean dealing with them is always a high-risk proposition. That's why lots of compliance-minded companies ban the practice entirely.

Many thanks to our reader who contributed the thoughtful comment about family relationships and the FCPA.

Comments

[Howard]

On the issue of payments to a family member, keep in mind the Schering Plough example where a Polish government official set up a legitimate charitable foundation to restore old castles, and Schering made donations to the foundation between 1999 and 2002.

In that case there was FCPA books and records liability even though the payments did not go to the official since the purpose of the payments was to influence the offical but were recorded as a charitable donation. Presumably a similar books and records violation could be found for payments made to a family member if they are designed to influence the government official but not properly recorded as such.

[The FCPA Blog]

Great comment. The books and records aspect adds another significant risk to "commercial" arrangements with family members of foreign officials.