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A Question Of Knowledge

The mailbag this week brought the following question from KER:

The FCPA prohibits payments to a third party while "knowing" that all or a portion of the payment will go directly or indirectly to a foreign official. The FCPA defines "knowing" as "highly probably" when it it forms an element of the offense and only "substantially certain to occur" with respect to conduct, a circumstance, or a result.

Is it correct that the highly probable standard applies to the books and records provision (triggering criminal as opposed to civil sanctions) and that the "substantially certain to occur standard applies to third party payments"?

At the start, we need to know the statutory basis for criminal violations of the books and records provisions. Section 78m sets out the accounting standards and says in part:
(4) No criminal liability shall be imposed for failing to comply with the requirements of paragraph (2) of this subsection except as provided in paragraph (5) of this subsection.

(5) No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).

And § 78ff of the FCPA says:
(a) Willful violations; false and misleading statements

Any person . . . who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 78o of this title, or by any self-regulatory organization in connection with an application for membership or participation therein or to become associated with a member thereof, which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both, except that when such person is a person other than a natural person, a fine not exceeding $25,000,000 may be imposed; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.

The anti-bribery provisions contain the following definitions of "knowing" and "knowledge:"
(2) (A) A person’s state of mind is “knowing” with respect to conduct, a circumstance, or a result if--

(i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or

(ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur.

(B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.

The problem, however, is that the above definitions of "knowing" and "knowledge" apply to the anti-bribery provisions but not to the accounting standards. And as we've discussed before, a criminal books and records offense can occur with or without an anti-bribery offense. Said another way, the FCPA's anti-bribery provisions and its accounting standards can work together or separately. So an intentional ("knowing") violation of the accounting standards can be a criminal offense “whether or not such falsification is related to a foreign corrupt practice proscribed by the FCPA.” See the United States Attorneys' Criminal Resource Manual (Title 9, Section 1017, FCPA Corporate Recordkeeping).

So the question, as KER makes clear, is what is "willful and knowing" under the accounting standards?

Because there is no definition of "knowing" in the accounting standards, we need to look to case law in the respective federal circuits (and up to the Supreme Court). We can also rely on criminal jury instructions, which are usually based on the relevant case law.

For example, the First Circuit's pattern (standard) criminal jury instructions explain "knowingly" this way:

The word “knowingly,” as that term has been used from time to time in these instructions, means that the act was done voluntarily and intentionally and not because of mistake or accident.
The First Circuit's comment to this instruction also explains how other circuits define "knowingly":
In United States v. Tracy, 36 F.3d 187, 194-95 (1st Cir. 1994), cert. denied, 115 S. Ct. 1717 (1995), the First Circuit acknowledged a split of authority over how to define the term “knowingly.” The Fifth and Eleventh circuits use the instruction stated above, emphasizing the voluntary and intentional nature of the act. Id. at 195. The Sixth, Seventh and Ninth circuits, on the other hand, embrace an instruction to the effect that “‘knowingly’ . . . means that the defendant realized what he was doing and was aware of the nature of his conduct, and did not act through ignorance, mistake or accident.” Id. (quoting Seventh Circuit Instruction 6.04); see also Model Penal Code § 2.02(2)(b)(i).

Although the First Circuit in Tracy approved of the trial court’s “voluntary and intentional” instruction under the circumstances of the case, it did not expressly adopt or reject either definition of “knowingly.” Id. There may be cases when, given the evidence, the alternative instruction will be more helpful to the jury. But the term “nature” in the alternative instruction might incorrectly suggest to the jury that the actor must realize that the act was wrongful.

The Seventh Circuit's equivalent pattern criminal jury instruction on "knowingly" says this:
When the word “knowingly” [the phrase “the defendant knew”] is used in these instructions, it means that the defendant realized what he was doing and was aware of the nature of his conduct, and did not act through ignorance, mistake or accident. [Knowledge may be proved by the defendant's conduct, and by all the facts and circumstances surrounding the case.]

[You may infer knowledge from a combination of suspicion and indifference to the truth. If you find that a person had a strong suspicion that things were not what they seemed or that someone had withheld some important facts, yet shut his eyes for fear of what he would learn, you may conclude that he acted knowingly, as I have used that word. {You may not conclude that the defendant had knowledge if he was merely negligent in not discovering the truth.}]The second paragraph quoted above describes a defendant's willful blindness.

The second paragraph above mentions the Seventh Circuit's view of "willful blindness," an important concept in FCPA enforcement.

The First Circuit also talks about "willful blindness" as a way of satisfying "knowingly" and recommends the following pattern jury instruction:

In deciding whether [defendant] acted knowingly, you may infer that [defendant] had knowledge of a fact if you find that he/she deliberately closed his/her eyes to a fact that otherwise would have been obvious to him/her. In order to infer knowledge, you must find that two things have been established.

First, that [defendant] was aware of a high probability of [the fact in question].

Second, that [defendant] consciously and deliberately avoided learning of that fact. That is to say, [defendant] willfully made himself/herself blind to that fact.

It is entirely up to you to determine whether he/she deliberately closed his/her eyes to the fact and, if so, what inference, if any, should be drawn. However, it is important to bear in mind that mere negligence or mistake in failing to learn the fact is not sufficient. There must be a deliberate effort to remain ignorant of the fact.

So KER is mostly correct -- but for reasons not cited in the original question. The "highly probable standard" comes from the courts' discussion of "willful blindness" and can apply to the books and records provisions (triggering criminal prosecution as opposed to civil sanctions). Similarly, the "substantially certain to occur standard" might also be used by courts to explain "willful blindness." The courts, however, would be relying not on the anti-bribery provisions of the FCPA but on case law and trial practice within their circuit.

Our thanks to KER for the excellent question. And if any readers can add their experience and insights about criminal enforcement of the accounting standards, please drop us a line.


Reader Comments (1)

As always, thank you for your helpful answer. And can I impose with a follow-up?

Do the two standards contained in the FCPA (substantially certain to occur and high probability) simply reflect whether a civil or criminal case is brought?

As I understand, DOJ has responsibility for all criminal enforcement, and for civil enforcement of the anti-bribery provisions for domestics and foreign persons operating
in the US. SEC has responsibility for civil enforcement of the books and records provisions and anti-bribery provisions with respect to issuers.

So, if SEC brings a civil case against an issuer based on the anti-bribery provisions, it only has to show that, for example, the issuer “knew” that it was “substantially certain to occur” that a third party was going to pass value to a foreign official. But if DOJ brings a criminal case against an issuer based on the anti-bribery provisions, it must show that
the issuer “knew” that there was a “high probability” that the third party was going to pass value to the foreign official?


November 10, 2008 | Unregistered CommenterAnonymous

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