Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor

FCPA Blog Daily News


Overseas Bribery Allegations Against Florida Pol

A federal lawsuit filed in Miami this week alleges that Republican fundraiser Harry Sargeant III and his company made illegal payments to Jordanian officials in exchange for an exclusive license to move military fuel through Jordan and into Iraq, according to NBC News. If the allegations are true, the payments may have violated the Foreign Corrupt Practices Act.

Harry Sargeant is the Finance Chairman of the Republican Party of Florida. He and his firm, Boca Raton-based International Oil Trading Company (IOTC), deny wrongdoing and say no bribes were paid. A spokesman for them said the allegations in the lawsuit are a "sour-grapes effort by a losing bidder, an attempt to shake down IOTC for a job well done," according to NBC News' Aram Roston.

NBC News says the Miami lawsuit was filed by a competitor of IOTC, Supreme Fuels, based in Dubai. The central allegation is a "conspiracy since 2004 to bribe key Jordanian government officials to ensure that defendants would be the sole recipients of more than one billion dollars worth of U.S. government contracts for the supply of fuels to the U.S. military in Iraq."

The suit against Sargeant and his company reportedly asks for damages under the federal RICO statute -- the Racketeer Influenced and Corrupt Organizations Act. Victims of overseas public corruption cannot bring private lawsuits under the Foreign Corrupt Practices Act. Only the Justice Department and, for public companies and their personnel, the Securities and Exchange Commission, can prosecute FCPA offenses. IOTC is privately-held. (Earlier this year, unrelated private RICO suits alleging foreign bribery were brought against BP and Alcoa.)

Sargeant was the subject last week of a letter written by U.S. Rep. Henry Waxman (D-Ca), the Chairman of the Committee on Oversight and Government Reform. The letter asked Defense Secretary Gates to investigate Sargeant and IOTC in connection with overcharges for fuel deliveries to the U.S. military in Iraq. Concerning IOTC's arrangements with Jordan, Rep. Waxman's letter said,

When the Defense Department awarded IOTC the June 2004 contract, IOTC was the highest bidder of six offers, with an initial bid over twice as high as the lowest offer. None of the five lower bidders were awarded the contract, however, because they were unable to obtain a "letter of authorization" to transport fuel from the Jordanian government. As a March 2004 "Preaward Survey" reported, IOTC's "major strength is the backing of the Royal Family." In effect, this backing gave IOTC a monopoly on the delivery of fuel through Jordan. Mr. Sargeant and IOTC appear to have taken full advantage of their ties to the Jordanian royal family. Under federal procurement law, it is illegal to award a contract to a company whose prices are not "fair and reasonable."
The 16-page letter also said,
The contract awarded to IOTC in June 2004 was rebid in March 2005 and December 2006. In neither instance was IOTC the low bidder, but the contracts were awarded to IOTC because it remained the only bidder with a letter of authorization from the Jordanian government. In April 2005, Mr. Sargeant advised a contracting official that the letter of authorization awarded to IOTC "is a sensitive issue in Jordan and they would prefer to keep it as low profile as possible."
NBC News says it received an email from a spokesman for Sargeant saying that only a legitimate fee was paid to the government of Jordan. "What Supreme [Fuels] calls a 'bribe' was a required fee for importing and transporting military fuel through Jordan," a spokesman for Sargeant and IOTC said. "The fee was paid to an official agency of the Jordanian state and thoroughly documented. This and any other related charge have been shared with the Department of Defense (and to Congress) as part of our transparent disclosure of any and all costs related to the fuel delivery process."

Payments to government agencies do not violate the Foreign Corrupt Practices Act. But payments to government officials to obtain or retain business that are made directly, or indirectly through a government agency, can violate the FCPA.

As reported by the New York Times last week, Sargeant is listed on Senator McCain’s website as having raised $500,000 or more for his presidential campaign. The campaign had to return some of Sargeant's contributions because they were improperly "bundled"to avoid contribution limits. The donations in question were solicited by Sargeant's Jordanian business partner, Mustafa Abu Naba’a, and were all returned.

Another partner, Mohammad al-Saleh, a brother-in-law of Jordan's King Abdullah II, sued Sargeant in Florida state court last year. According to the New York Times, he alleged that he "obtained special governmental authorizations [for IOTC] to transport the fuel through Jordan and was then unlawfully forced out by Mr. Sargeant, who strongly disputed those allegations."

Rep. Waxman’s letter to Secretary Gates said Sargeant’s profit from the fuel delivery contracts may have been $70 million or more.

The New York Times pointed out that there is no evidence Senator McCain or anyone connected to his campaign tried to influence the granting of the contracts to IOTC.



Business Down, Compliance Risks Up

When times are tough and markets shrink, new international joint ventures sprout up everywhere. They're a fast and inexpensive way to expand commercial reach. JVs formed out of economic necessity often bring together companies that in good times are competitors. So their concerns about the arrangements usually focus on competitive risks, such as exposing their proprietary plans, customers lists, intellectual property and key personnel to potential poachers.

But another joint venture-related risk is compliance with the Foreign Corrupt Practices Act. Companies new to joint venturing may not understand how easily their overseas partners' illegal practices can be imputed to them. More ominously, companies facing financial flak might take intentional risks for the sake of survival. The law, they convince themselves, doesn't really mean what it says. Joint venture partners, after all, are beyond their control and therefore beyond their legal responsibility. That's not true, of course. But when backed into a financial corner, priorities can shift -- with tragic results.

Compliance is never easy, and in bad times it's harder than ever. Potential partners, for example, may be evaluated only for their effectiveness, without regard to their reliability. So what's needed to police joint ventures? The steps below are minimum requirements for an effective compliance program -- in good times and bad:

Due Diligence. Take all necessary and prudent precautions through well-documented due diligence to ensure that business relationships are formed only with reputable and qualified joint venture partners.

Board or Management Reviews. Examine the suitability of all prospective joint venture partners for purposes of compliance with the Foreign Corrupt Practices Act. Review the adequacy of due diligence performed in connection with the selection of overseas partners, as well as the joint venture's selection of agents, subcontractors and consultants for business development outside the United States. Reviewers should not be subordinate to the most senior officer of the Company's department or unit responsible for the relevant transaction.

Compliance Obligations in the Joint Venture Documents. Include in all joint venture agreements representations and undertakings by the joint venture partners, with periodic re-certifications, that no payments of money or anything of value have been or will be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, or candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government or an instrumentality thereof to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the Company is a participant

Audits and Approvals. Retain audit rights over the joint venture. Agree with all partners that the joint venture will not hire an ­agent, subcontractor or consultant without the Company's prior written consent (to be based on adequate due diligence).

Right to Terminate. Make sure all joint venture documents allow for immediate and unfettered termination for any breach of compliance-related obligations.

View other posts about joint ventures here.



Ding Dong, FCPA Investigation Calling

Beauty-products giant Avon said Monday it has launched an internal investigation into possible Foreign Corrupt Practices Act violations in China. The investigation may be linked to the payment of improper promotional expenses. Avon -- with five and a half million independent sales representatives in more than 100 countries -- is the world's largest direct seller. The company's FY2007 revenues were $9.9 billion.

China imposed restrictions on direct selling in the late 1990s that forced Avon to market its products through shops and boutiques. Two years ago, the company convinced China's regulators to allow its traditional door-to-door sales model. Avon's FCPA disclosure refers to "certain travel, entertainment and other expenses" but doesn't say if the investigation involves promotional expenses for Chinese regulators involved in that decision.

Foreign companies often feel pressure to sponsor trips by Chinese regulators, who aren't shy to ask for such perquisites. Last week we discussed the FCPA's affirmative defense for payments to officials related directly to “the promotion, demonstration, or explanation of products or services" that are "reasonable and bona fide.” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). That defense, as we said, is loaded with uncertainty and very difficult for companies to safely use.

Here's the portion of the company's release that deals with the FCPA investigation:

Avon Products, Inc. (NYSE: AVP) announced today, October 20, 2008, that it is voluntarily conducting an internal investigation of its China operations, focusing on compliance with the Foreign Corrupt Practices Act ("FCPA"). The Company, under the oversight of the Audit Committee, commenced in June 2008 an internal investigation after it received an allegation that certain travel, entertainment and other expenses may have been improperly incurred in connection with the Company's China operations. The company has voluntarily contacted the Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. The internal investigation is in its early stage and no conclusion can be drawn at this time as to its outcome.
View Avon's full "Statement on Voluntary Disclosure" (October 20, 2008) here.



Amid OECD Criticism, A Breakthrough In Britain

The U.K.'s failure to prosecute its multinationals for overseas bribery, while other European countries and the U.S. are stepping up enforcement, threatens the integrity of the international anti-bribery effort. That's what a fed-up OECD Working Group on Bribery says in its just-released report.

The 37-member OECD anti-bribery group launched an investigation into Britain's enforcement practices after the U.K.'s Serious Fraud Office quashed a corruption investigation into BAE Systems in December 2006. The military equipment supplier had been accused of funneling £1 billion in secret payments to the former Saudi ambassador to the United States, Prince Bandar bin-Sultan, in exchange for help selling jet fighters to the Saudi government. Both BAE and the Prince have denied breaking any laws.

The OECD was blunt. It said in its report:

The Working Group is disappointed and seriously concerned with the unsatisfactory implementation of the [OECD Anti-bribery] Convention by the UK. The continued failure of the UK to address deficiencies in its laws on bribery of foreign public officials and on corporate liability for foreign bribery has hindered investigations. . . . The Working Group also strongly regrets the uncertainty about the UK's commitment to establish an effective corporate liability regime in accordance with the Convention, as recommended in 2005, and urges the UK to adopt appropriate legislation as a matter of high priority.
Meanwhile, the U.K. government is celebrating two well-timed maiden anti-corruption victories. The breakthrough prosecutions are reported in a briefing from a Fulbright & Jaworski team led by Washington partner William B. Jacobson. Billy -- who joined Fulbright last month after serving with distinction as the Assistant Chief for FCPA Enforcement at the Justice Department's Fraud Section, Criminal Division -- graciously consented to our liberal use of the material. We're happy about that. For the past few days we haven't had a spare minute due to the ALCS -- i.e., planning to watch the games, watching the games, then talking about what happened in the games.

Here, then, is an abridged version of Fulbright's report:

In the course of just a few weeks, the UK has brought two separate foreign bribery cases to conclusion - the first such cases brought by UK authorities.

First, in late September, the Overseas Anti-Corruption Unit ("OACU") of the City of London Police announced that both an employee of CBRN Team Ltd ("CBRN"), a UK security consulting firm, and an official of Uganda pled guilty to bribery charges stemming from a scheme in which CBRN paid the Ugandan official in order to receive a contract to advise the Ugandan Presidential Guard. While the CBRN employee received a suspended sentence, the Ugandan official was sentenced to twelve months' incarceration.

Second, on October 6, 2008, the UK's Serious Fraud Office ("SFO"), in a case the SFO was investigating for evidence of foreign bribery, announced that it had reached a £2.25m (US$3.9m) settlement with major construction firm Balfour Beatty plc for alleged unlawful accounting in connection with certain 'payment irregularities' which it self-reported. While the SFO acknowledged that there were no grounds for criminal prosecution of either the company or any individual, this marks the first time a company has reached this type of civil settlement as part of a foreign bribery investigation. This is a significant event in the UK's enforcement of anti-corruption laws and comes only 6 months after the SFO was given the powers to make a civil recovery of the proceeds of crime.

The SFO's Powers

The SFO is a UK investigation and enforcement authority established to deal with serious financial crime and has the power to investigate any suspected offence appearing on reasonable grounds to involve serious or complex fraud. In the course of an investigation, the SFO may give notice to the subjects of the investigation, or to anyone else that the SFO thinks may have relevant information, to answer questions or to provide information or specified documentation, and in appropriate circumstances may issue warrants to compel production. The SFO may also commence and conduct criminal proceedings relating to that fraud. The SFO's powers to obtain civil recoveries in relation to the proceeds of crime are relatively new. In April 2008, the Serious Crime Act 2007 transferred the civil recovery powers formerly vested in the Assets Recovery Agency to a number of agencies including the SFO.

The CBRN Team Case

The prosecution of the managing director of CBRN and the Ugandan official who received the bribe is noteworthy in many respects. First and foremost, it represents the first convictions for foreign bribery in UK history. Second, having been investigated by the City of London Police's OACU, it also marks the first successful foreign bribery investigation by that recently-formed unit. Third, the prosecution was handled by the Crown Prosecution Service and not the SFO, which usually investigates foreign bribery with the OACU.

Additionally, the UK's ability to prosecute the foreign official who took the bribe sets the UK's legislation apart from the United States' foreign bribery law, the Foreign Corrupt Practice Act ("FCPA"). Under the FCPA, only the giver of a bribe, and not the foreign official who received the bribe' may be prosecuted. For all the criticism that the UK's foreign bribery legislation has received in recent years, those laws are, in this respect, stronger than the FCPA.

View Fulbright's full briefing on the cases here.



Looking Through The FCPA

Legal loopholes, the conventional wisdom goes, expand over time, until there's more hole than donut. But is that true of the Foreign Corrupt Practices Act? Have its three Congressionally created loopholes -- two affirmative defenses and one exception -- gotten bigger over time?

The answer is no. In fact, there's never been much wiggle room in the FCPA, and what's there hasn't grown (it might have shrunk a bit, though). Here's why.

The facilitating payments exception sounds more important than it is. Yes, it allows bribes-- grease payments -- for “routine governmental action . . . which is ordinarily and commonly performed by a foreign official." 15 U.S.C. §§78dd-1 (b) and (f) (3). The examples in the law include obtaining permits and licenses, processing visas, getting police protection, mail and phone service, scheduling inspections, connecting power and water, loading and unloading cargo, and protecting perishable goods. There's even a catch-all for "actions of a similar nature."

But here's the problem. Most so-called grease payments don't fall within the exception after all. The only protected payments are those intended to facilitate legitimate routine governmental action. So bribing an official to do anything outside his or her assigned duties isn't legal. For example, paying a customs clerk to schedule an inspection of goods already in the customs queue is OK, but paying to leapfrog the queue or pass an inspection isn't. Grease payments only work when you pay for something you're already entitled to, and that's not a common need.

The government has always taken a narrow view of facilitating payments, so there's no reason for optimism when approaching the subject. But still, the idea persists that this exception is broader than it really is. Our guess is that at least a third of all internal investigations today are triggered when companies discover illegal bribes that someone first mischaracterized as facilitating payments. No wonder 80% of U.S. companies now ban grease payments entirely.

How about payments related to product promotions? Has this loophole grown over the years? Do companies use it to pass buckets of money to foreign officials? Not a chance.

The FCPA says payments to foreign officials are permitted for expenses related directly to “the promotion, demonstration, or explanation of products or services" that are "reasonable and bona fide.” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). If a payment to a foreign official is reasonable and bona fide, however, it can't be corrupt. And if it's not corrupt, it's not prohibited by the FCPA. If it's not prohibited by the FCPA, what's the point of the affirmative defense? Well, no one knows.

Congress created loads of uncertainty about this exception through its inartful language (thanks, William Safire). So compliance-minded companies have to approach it with extreme caution. They adopt elaborate guidelines to prove their payments are reasonable and bona fide. No new business can be brought before the officials being comped. No advance funds or reimbursements in cash. No expenses for spouses, family, or other guests. No entertainment or leisure activities. No side trips. No golf (yikes!). No walking-around money. No give-away hats or tee shirts that don't sport the host’s name or logo. Everything has to be reasonable and bona fide. Which means this exception isn't threatening the structural integrity of the FCPA. But it is making U.S. companies look cheap, stingy and inhospitable.

Finally, there's the local law defense. The FCPA allows otherwise prohibited payments that are "lawful under the written laws and regulations of the foreign official’s" country. 15 U.S.C. §§ 78dd-1(c)(1), 78dd-2(c)(1) and 78dd-3(c)(1). This affirmative defense was added to the FCPA in 1988. It sounded promising then because most people misunderstood what Congress intended. They thought that if a payment wasn't criminalized by local law, it was permitted under the FCPA. But that idea was seriously wrong.

Unlike its snafu with promotional payments, Congress was clear on this. It said that only payments permitted by the written laws of the official's country are immunized under the FCPA. Which means the defense only works if the local law says the payment is permitted. But do governments enact laws to declare things legal? No, they enact laws to declare things illegal. Laws usually tell people what they can't do, not what they can do. With very few countries rushing to pass laws that permit their officials to accept bribes, it's safe to say this exception won't be expanding much any time soon.

So there they are -- the FCPA's three little loopholes. They really are tiny. Nothing Joe the Plumber could drive his truck through, that's for sure.



Surveying FCPA Compliance

Eighty percent of U.S. companies have now banned facilitating payments entirely, and nearly four in ten small U.S. companies have walked away from business in countries where the perceived risk of non-compliance was too high.

Those are among the findings of Fulbright & Jaworski's 2008 Litigation Trends Survey. The fifth annual report is based on input from 358 U.S. and U.K. in-house counsel, including 251 U.S. respondents.

Here are some facts from the "Bribery and Foreign Corruption" section of the survey, which is available here:

  • Twenty percent of companies with $1 billion or more in revenues undertook a bribery or corruption investigation during the survey period. For companies with less than $1 billion in revenues, the number was 2%, and for companies under $100 million, it was just 1%.
  • Manufacturers led all other industry segments in corruption investigations at 14%, followed by energy firms at 12%.
  • Seven percent of U.S. companies engaged outside counsel because of possible corruption or bribery charges, including violations of the Foreign Corrupt Practices Act.
  • Eleven percent of the responding companies with international operations hired outside counsel during the survey year to investigate bribery claims, and 20% dealt with potential bribery concerns as part of due diligence in a corporate acquisition.
  • Only 20% of U.S. companies still allow facilitating payments in some countries as a means of expediting business and government functions.
  • In the U.K, 39% of companies still permit facilitating payments.
  • Thirteen percent of the responding companies admit they still allow small direct payments to foreign governments in certain specific situations.
  • One-quarter of energy companies and one-fifth of financial services firms admitted making direct payments to foreign hosts in some cases.
  • Twenty three percent of all U.S. companies said they have made the decision to walk away from doing business in a country based on the perceived degree of local corruption. For companies with under $100 million in revenues, the walk-away rate was 39%, and for billion-dollar companies it was 31%.
A release says the survey was conducted earlier this year (and in the prior four years) by Greenwood Associates, a Houston-based research firm. It canvassed 358 in-house counsel in the U.S. and U.K., more than two-thirds of whom identified themselves as either general counsel or deputy general counsel, with 7% holding the title of senior counsel, 10% associate general counsel, and 15% staff counsel.

The industry groups covered by the survey included financial services, energy, manufacturing, health care, retail, real estate, insurance, education, and technology and telecommunications. By size, 22% of the responding companies report revenues under $100 million, 39% report revenues between $100 million and $999 million, and 39% at $1 billion and above. Just under half the companies are publicly held (a quarter are listed on the NYSE) and 57% maintain at least one foreign office, with 19% having locations in more than 20 countries.



Comments To What's The Count

Nine out of 10 visitors to this blog (according to view our posts through a reader such as Google Feedfetcher or an aggregator. That means most visitors normally don't see comments (or the buttons and other information to the right).

In response to our prior post about how the DOJ and SEC count their FCPA actions, we've received some helpful comments that we want to share with everyone. Here's what we've heard so far:

Anonymous said...

Still doesn't really answer varying scenarios:

(1) If the DOJ indicts someone who six months later enters a plea agreement, is that two enforcement actions?

(2) What if the DOJ indicts someone one year and that person enters a plea agreement a year later? Does that count as an enforcement action each year?

(3) What if the DOJ charges a subsidiary and enters a DPA or NPA with the parent (ala Baker Hughes last year), does that count as two enforcement actions?

October 13, 2008 10:01 PM

The FCPA Blog said...
Yup, there are some unanswered questions. We'll post any further responses to clear up the mysteries.
October 13, 2008 2:15 AM
bc said...
The SEC counts enforcement actions on a fiscal year ending Sept. 30.

October 13, 2008 8:17 AM

Miguel V said...
Not sure how they count it internally, but thus far I've got about 6 different incidents from Jan 1, 2008 from the SEC's lit releases. This is not counting the IXTC case that wrapped up this year after it had dragged on seemingly forever.

October 14, 2008 3:38 PM

Miguel V said...
Should also add I'm counting 4-5 for the DOJ since Jan 1 depending how you want to count it.

October 14, 2008 4:15 PM

Marc said...
Not sure how you figure Miguel. If you include settlements, pleas and unresolved indictments, on the DOJ side you appear to have 15 enforcement actions so far this year. If you don't include indictments, you have 8.

6 Corporate Settlements
• Willbros Group (May)
• AGA Medical Corp.(May)
• AB Volvo (Mar.)
• Flowserve Corp. (Feb.)
• Faro Technologies (Jun.)
• WABTEC (Feb.)

2 Individual Pleas
• Jack Stanley (Sep.)
• Martin Self (May

7 Indictments
• Gerald Green (Superceding) (Oct.); (Initial) (Jan.)
• Patricia Green (Superceding) (Oct.); (Initial) (Jan.)
• Shu Quan Sheng (Physicist) (Sep.)
• Nam Nguyen (Nexus Tech) (Sep.)
• Kim Nguyen (Nexus Tech) (Sep.)
• An Nguyen (Nexus Tech) (Sep.)
• Joseph Lukas (Nexus Tech) (Sep.)

On the SEC side, you appear to have 13 enforcement actions.

6 Corporate Settlements/Orders
• Con-Way Inc.(August)
• Faro Technologies (Jun.)
• Willbros Group (May)
• AB Volvo (Mar.)
• Flowserve Corp. (Feb.)
• WABTEC (Feb.)

7 Individual Settlements/Orders
• Jack Stanley (Sep.)
• Jason Steph (May)
• Gerald Jansen (May)
• Lloyd Biggers (May)
• Steven J. Ott (April)
• Roger M. Young (April)
• Yaw Osei Amoako (April)

October 14, 2008 7:12 PM



What's The Count?

Some weekend. We should've expected it since the calendar says mid-October. That always means one thing, or maybe two. The sky is falling on Wall Street . . . and the American League Championship Series is in full swing, literally. In Game 2, seven home runs in five innings. Five hours and 27 minutes of pure tension. Great baseball, even if outside the park the Anglo-American capitalist model was taking strike three (at least according to some voices from the Eurozone).

But coming back to our subject of the Foreign Corrupt Practices Act, a reader last week with an eye for detail asked the following:

I have a question about how DOJ and SEC provide numbers of prosecutions /enforcement actions for a particular year. First, when they say 2008, is it fiscal year (e.g., Oct. 2007-Oct. 2008) or calendar year? Second, do you know what they count as an action? I assume it is any indictment, plea agreement, DPA/NPA/or (in the case of the SEC) settlement or enforcement action filed, but not sentencing?

We can't answer for the SEC, but the Justice Department counts actions on a calendar-year basis. The description in the question of what's included is correct. Any indictment, plea agreement, deferred prosecution agreement or non-prosecution agreement gets a number. To avoid double counting, sentencings do not get numbers because the actions are included from the time of charging or entry of the guilty plea.

If anyone would like to add more to this answer or speak for the SEC, please drop us a line.



After Kay, Another Warning About Grease Payments

Responding to our post, Case Closed For Kay And Murphy, reader Jon May has asked a great question: Isn't there a danger that the grease exception will lull businesses into the very conduct that is proscribed by Kay?

Yes, there's a danger of that happening, but it's not new.

Before Kay, the DOJ already had an expansive view of FCPA enforcement. Prosecutors were looking beyond bribes intended to help land business directly from overseas government customers. Enforcement scrutiny extended to any overseas public bribery that might create a commercial advantage, and Kay didn't change that.

So what bribes have been fair game for prosecution? The list in our prior post about Kay mentioned payments to reduce taxes or speed up tax refunds, jump customs queues, obtain favorable product inspections, manipulate business registrations, alter rates or delivery times of national carriers, reduce utility costs, and enhance property usage, among others.

And here's Jon's point: Those examples sound a lot like facilitating payments. And doesn't the FCPA allow facilitating payments? Then what's going on?

The facilitating payments exception permits bribes for “routine governmental action . . . which is ordinarily and commonly performed by a foreign official." See 15 U.S.C. §§78dd-1 (b) and (f) (3) [Section 30A of the Securities & Exchange Act of 1934]. That seems clear enough. But according to the statute, facilitating payments can relate only to an action which is ordinarily and commonly performed by a foreign official.

The clear implication of the language -- and the view adopted by the Justice Department years ago -- is that the exception will not apply if there was no legitimate routine governmental action pending and for which the payment was made. Anything obtained or sought to be obtained by subornation of the official’s duty is not an action “ordinarily and commonly performed by a foreign official.” So it's outside the scope of the exception.

For example, paying a customs clerk to inspect goods already in the customs queue and awaiting inspection may be permissible. But paying a customs clerk to jump the queue, or paying for positive inspection results, may be outside the exception. Think of it this way: Any time an official is asked to do something more -- something beyond the scope of his or her normal duty, the facilitating payments exception is unlikely to apply.

The FCPA itself lists these examples of facilitating payments: (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.

But here's the catch. No matter how hard you try to make a bribe fit into one of those examples, the facilitating payments exception won't apply if there was no legitimate routine governmental action pending and for which the bribe was paid. Again, action obtained or sought to be obtained by subornation of the official’s duty is not an action ordinarily and commonly performed by a foreign official. Therefore, it's outside the scope of the exception.

If this sounds like a difference without a distinction, like another piece of linguistic linguine -- well, that's right. It's confusing. Which is why the facilitating payments exception, to use Jon's word, is filled with danger.

As he says, companies can be lulled by the exception into illegal behavior. More often than not, bribes first identified as permitted grease payments do not fall within the exception after all. Sometimes it's the purpose of the payments that makes them unsuitable -- there's no underlying legitimate routine governmental action. Sometimes the recipient's identity or role spoils the exception. The so-called clerk who's collecting the bribe turns out to be a real decision maker. And sometimes the timing or size of a payment isn't consistent with a payment for mere routine governmental action. Why pay big money for something you're already entitled to receive?

Prosecutors say that anyone relying on the exception should be prepared to defend it. They warn that dollar thresholds alone aren't reliable, which means bribes aren't facilitating payments just because they're small. And, say the feds, an issuer’s books and records must accurately reflect facilitating payments, making clear to an outside observer the actual purpose for the bribe. That sort of disclosure -- which amounts to a signed confession in the public domain -- is terrible publicity. It also creates a further risk of prosecution in host countries where the grease payments were made.

In other words, a lot can go wrong with facilitating payments, and when it does the downside can be . . . a long way down.

That's why plenty of compliance-minded companies now ban all bribes. Grease payments, companies have decided, are just too hard to control and account for. They might have to be publicly disclosed, they might violate local laws, and they might promote a culture of corruption that will spoil the company's effective compliance program. And what about the ethics and morality of grease payments? After all, they harm local economies and honest citizens and perpetuate corrupt regimes. Should any corporate citizen promote that outcome? So even though the FCPA permits them, grease payments are getting a well-deserved boot.

Thanks, Jon, for the great question. And for giving us another chance to sound the alarm about facilitating payments.



Charting The FCPA

"Cash crunch could result in more corruption cases," says a headline in the current Financial Week (available here.) In the article, Steven Tyrrell, the head of the Justice Department's fraud section, says the credit crisis may produce a crop of additional Foreign Corrupt Practices Act cases. The targets this time would be banks and others that went looking for cash from sovereign wealth funds in exchange for favors rendered to the host-country's rulers.

"Mr. Tyrrell," the article says, "noted the recent boom of sovereign wealth funds is an area at the top of the Justice Department’s hit list, though it has not yet garnered any definitive cases."

We've never seen empirical studies on the subject, but we've noticed that FCPA cases generally spring from industries that deal in scarce commodities -- whatever those happen to be at any moment in history. It could be energy, telecommunications licenses, access to hospital patients, metals, food, cash and so on.

Wherever buyers are scrambling for supply, sellers have opportunities to squeeze them. Rising energy prices over the past decade, for example, increased the leverage corrupt oil-producing countries could exert over foreign buyers. In her excellent book, Bribery and Extortion, Alexandra Wrage talks about corruption in Nigeria's ruling family during the energy and metals boom. The story is grotesque, and the scenario was repeated in resource-rich, governance-poor countries around the globe. The pressures in energy-related markets eventually resulted in many FCPA enforcement actions, culminating in Jack Stanley's shocking guilty plea last month.

These days, a commodity in short supply is cash. Sovereign wealth funds have it and banks need it. Will the financial institutions succumb to market pressures? Will they abandon FCPA compliance to save their balance sheets? Some might, as the DOJ's Steven Tyrrell predicts. And if that happens, pin-striped tragedies are sure to follow.

We don't have empirical evidence for this one either. But we're fairly certain that anyone who has ever occupied a jail cell because of an FCPA offense wishes they'd complied instead.



Case Closed For Kay And Murphy

The U.S. Supreme Court will not review the Fifth Circuit's decisions in U.S. v. Kay, the Justices said yesterday. The Foreign Corrupt Practices Act convictions of David Kay and Douglas Murphy cannot be further appealed and the two must now serve their prison sentences -- 37 months for Kay and 63 months for Murphy.

The former executives of American Rice, Inc. were found guilty in 2005 of bribing Haitian officials in order to reduce their company's taxes. They argued all along that the FCPA didn't apply to bribes to reduce taxes, or that if it applied, the "obtaining or retaining" language in the law (the business nexus element) is so ambiguous that enforcement in their case would be unfair. The Justice's denied the petition for certiorari after a review at their Sept. 29, 2008 docket conference.

The lower court's view of the FCPA, left undisturbed by the Supreme Court, is important for at least a few reasons:

First, the Fifth Circuit said any payments to foreign officials that might assist in obtaining or retaining business by lowering the costs of operations can fall within the FCPA.

Second, the Fifth Circuit emphatically did not think enforcing the statute against Kay and Murphy would be unfair, even if the business nexus element is a bit ambiguous. "A man of common intelligence," it ruled, "would have understood that . . . in bribing foreign officials, [Kay and Murphy were] treading close to a reasonably-defined line of illegality. . . . Defendants took this risk, and splitting hairs . . . does not allow them to argue successfully that the FCPA’s standards were vague."

And third, the court said the government can satisfy the "knowing" element of an FCPA offense by showing merely that the defendants understood that their actions were illegal. No specific knowledge about the FCPA and its prohibitions is required.

Denial of cert is terrible news for Kay and Murphy and a personal tragedy for them. For the rest of us, it means the Justice Department's so-called "expansive enforcement" of the FCPA will continue. Compliance programs need to be expansive as well, aimed not just at bribes intended to help land business directly from foreign governments but extending also to any overseas public bribery that might create a commercial advantage. That includes payments to reduce taxes or speed up refunds, jump customs queues, obtain favorable product inspections, manipulate business registrations, alter rates or delivery times of national carriers, reduce utility costs, and enhance property usage -- to name just a few.

View the U.S. Supreme Court's Oct. 6, 2008 Orders List here.

View our prior posts about U.S. v. Kay here.



Tax Charges Added In Hollywood FCPA Case

Last week's superseding indictment of movie producers Gerald and Patricia Green includes new allegations that Mrs. Green filed two false tax returns. The government says she signed returns in 2005 and 2006 that included deductions for "commissions" which she knew were "bribes to a foreign official for obtaining and retaining business."

FCPA trouble can lead to tax problems, says Selva Ozelli, a New York City lawyer and CPA. In an earlier post (The FCPA Can Be A Very Taxing Matter), we talked about her excellent article, "Is This Bribe Deductible? Tax Implications Of the U.S. Foreign Corrupt Practices Act." It appears in Tax Notes International (December 17, 2007, p. 1171).

She says that knowingly filing tax returns that characterize illegal payments abroad as deductible expenses can lead to criminal charges for fraud. The IRS has the burden of proving fraud -- that is, that the filer knew its return was false and intended to evade paying taxes by making a false return. But, she says, the standard of proof is not "beyond a reasonable doubt" but by "clear and convincing evidence," a lower burden for the government. She also says a taxpayer can be acquitted in a criminal bribery case and still lose a fraudulent-filing case.

The U.S. government is alleging that Patricia Green filed two tax returns she knew were false. Paragraph 29 of the superseding indictment contains one of the tax-related charges. It says:

On or about June 15, 2005, in Los Angeles County, within the Central District of California, and elsewhere, defendant PATRICIA GREEN did willfully make and subscribe a U.S. Income Tax Return, Form 1120, for SASO Entertainment ("SASO"), for the tax year 2004, which was verified by a written declaration that it was made under the penalties of perjury and that was filed with the Internal Revenue Service on or about June 20, 2005, which return defendant PATRICIA GREEN did not believe to be true and correct as to every material matter, in that said return claimed SASO paid $303,074 in "commissions" deductible from SASO's gross income as costs of goods sold, whereas, as defendant PATRICIA GREEN then well knew, that figure was a false and overstated amount including bribes to a foreign official for obtaining and retaining business with SASO that were not commissions or costs of goods sold.
Each tax charge is punishable by up to 10 years in prison. The new indictment also contains one count of conspiracy to violate the FCPA and engage in money laundering, 10 counts of violating the FCPA, seven counts of transportation promotion money laundering, one count of a transaction in criminally derived property, and one count of forfeiture. The conspiracy and FCPA charges each carry a maximum penalty of five years in prison and each money laundering count carries a maximum penalty of up to 20 years in prison.

The Greens pleaded not guilty to the original charges. They're scheduled to be arraigned on the superseding indictment on October 14.

As the DOJ says, an indictment is merely an accusation and a defendant is presumed innocent until proven guilty beyond a reasonable doubt.

Ms. Ozelli's article is available exclusively from Tax Notes International (which is by subscription only) here.

View our prior posts about the Greens here.