Microfinance Meets The FCPA

Photo courtesy of World Vision CanadaThe Justice Department has published its second FCPA Opinion Procedure Release of 2010.

The Requestor in Release 10-02 is a U.S. non-governmental organization and a “domestic concern” under the FCPA. It's a non-profit microfinance institution operating globally, providing loans and other basic financial services to the world’s lowest-income entrepreneurs. Funding comes from grants and donations by governments, NGOs, public and private organizations, and individuals.

The Requestor has a wholly-owned, self-sufficient subsidiary organized as a limited liability company in "a Eurasian country." The so-called Eurasian Subsidiary wanted to contribute $1.42 million to a local microfinance institution through a grant.

The Requestor has been converting all of its local operations, including the Eurasian Subsidiary, to commercial entities licensed as financial institutions. The conversion will help the local entities attract capital and offer new services such as savings accounts, microinsurance, and remittances. The Eurasian Subsidiary's $1.42 million grant to the local microfinance organization is required for the subsidiary's license conversion.

During due diligence, the Requestor discovered that one of the board members of the local microfinance institution and its parent "is a sitting government official in the Eurasian country and that other board members are former government officials."

Despite the presence of at least one foreign official on the target's board, the DOJ gave the Requestor a green light for its subsidiary's investment. The sitting foreign official has and will have no government role in the Requestor's activities. And, under the law of the Eurasian country, sitting government officials can't be paid for this type of board service.

Additional controls in the grant included staggered payments, ongoing monitoring and auditing, earmarking of funds to be spent, further prohibitions on compensating board members, and anti-corruption compliance provisions in the grant documents.

The Release said the purpose of the proposed grant is to obtain or retain business. The DOJ reasoned that the Eurasian Subsidiary's nonprofit business is to be followed by for-profit business activity in the Eurasian country, and the proposed grant would be made as a condition precedent to obtaining a license to operate as a profit-making financial institution.

So, the DOJ said, the issue is whether the proposed grant would amount to the corrupt giving of anything of value to any officials of the Eurasian country in return for obtaining or retaining business. "Based on the due diligence that has been done and with the benefit of the controls that will be put into place, it appears unlikely that the payment will result in the corrupt giving of anything of value to such officials."

Release 10-02 also includes a helpful discussion about charitable giving and the FCPA.

Download a copy of the DOJ's FCPA Opinion Procedure Release No. 10-02 dated July 16, 2010 here.

All DOJ Opinion Procedure Releases can be found here.

Charity Without Fear

The question most asked by our readers during the past year was this: What does the Foreign Corrupt Practices Act say about charitable contributions? It comes up so often because all American and U.S. public companies are subject to the FCPA's antibribery provisions, and most have citizenship programs overseas that involve supporting public and private charitable causes. So they need to be sure their donations are FCPA compliant. That's not always easy to figure out. The FCPA itself doesn't mention charitable giving, and the DOJ and SEC have never issued any formal guidelines about it.

When the question first came up around here, we turned to Pete from D.C. (above), a compliance professional who's logged a lot of miles. He helped us with a post that first appeared nearly two years ago. With a few updates we've included, here's what it said:
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No good deed goes unpunished, or so the saying goes. That sure came true for Schering-Plough. From February 1999 to March 2002, the New Jersey-based maker of Afrin, Claritin, Coricidin and Cipro, among other leading drugs, violated the Foreign Corrupt Practices Act through overseas charitable giving.

According to the Securities and Exchange Commission's June 2004 complaint, the company's subsidiary in Poland made improper payments to a charitable organization called the Chudow Castle Foundation. The Foundation was headed by an individual who was the director of the Silesian Health Fund during the relevant time. The health fund was a Polish governmental body that, among other things, provided money for the purchase of pharmaceutical products and influenced the purchase of those products by other entities, such as hospitals, through the allocation of health fund resources.

The SEC said Schering-Plough Poland paid 315,800 zlotys (approximately $76,000 at the time of the payments) to the Chudow Castle Foundation to induce its director to influence the health fund's purchase of Schering-Plough's pharmaceutical products. The SEC also said that none of the payments to the Foundation were accurately reflected on the subsidiary's books and records and that Schering-Plough's system of internal accounting controls was inadequate to prevent or detect the improper payments.

As a result, Schering-Plough paid a $500,000 civil penalty and consented to an SEC order requiring it to avoid violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. It also had to retain an independent consultant to review its policies and procedures regarding compliance with the Foreign Corrupt Practices Act and implement any changes recommended by the consultant.

Schering-Plough's case, as far as we know, remains the only FCPA enforcement action based entirely on charitable giving. We're talking about it now because it raised important compliance concerns that still linger. For example, how much due diligence is expected of companies with respect to their overseas charitable donations?

At an FCPA conference a couple of years ago, an audience member posed that question to Mark Mendelsohn, the head of the Department of Justice's group that prosecutes FCPA cases. He said each donation has to be considered on its merits, but there are always common-sense guidelines that help determine if donations could violate the FCPA. Is there a nexus between the charity and any government entity from which the company is seeking a decision? If the governmental decision-maker holds a position at the charity, that's a red flag. Is the donation consistent with the company's overall pattern of charitable contributions? For Schering-Plough, the SEC said that "[d]uring 2000 and 2001, the payments constituted approximately 40% and 20%, respectively, of S-P Poland's total promotional donations budget. Moreover, the Foundation was the only recipient of such donations that received multiple payments, making the four payments in 2000 and seven payments in 2001 highly unusual." If one donation or a series of them is more than the company has made to any other charity in the past five years, that's a red flag too.

Beyond the points made by Mark Mendelsohn, there are other smell tests for charitable donations. Who initiated the request for payment to the charity? The key to most bribery charges appears to be the personal benefit to the government official, or the quid pro quo expected of him or her. If a government official hinted at or begged for a payment to the charity, that's another red flag. Will there be a tax deduction for the donation? In most countries, one important result of any gift to charity is tax relief. Therefore, not seeking the tax benefit can become yet another red flag.

And one final point. All due diligence concerning charitable payments -- the asking and answering of the questions posed above -- should be well documented. Nothing will aid in defending against a potential FCPA charge more than a stack of contemporaneously-generated papers backing the story that the payment really was meant to be a charitable contribution and not a bribe. Don't be shy about it. Create real-time documents that demonstrate awareness of potential FCPA issues and measures taken to manage and mitigate the risk. That, after all, is what compliance is really about.
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Schering-Plough Corporation trades on the New York Stock Exchange under the symbol SGP.

View the SEC's Litigation Release No. 18740 (June 9, 2004) here.

Download the SEC's civil complaint in Securities and Exchange Commission v. Schering-Plough Corporation (D.D.C. 2004) here.
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Sir Allen And The FCPA

Since hearing about Allen Stanford's cozy relationships with certain Caribbean leaders, we've wondered if he'll eventually face criminal charges under the Foreign Corrupt Practices Act. Neither bribery nor the FCPA have been mentioned yet in connection with Stanford. But here's what's been reported, so far, in the New York Times and elsewhere.

Because of the SEC's suspicions, the FBI helped gather evidence about Stanford's business practices. The investigation led to the SEC's February 16 civil complaint. It alleged that Stanford's representations about his bank's certificates of deposit were false and misleading. It wasn't true, the SEC charged, that the funds were managed by at least 20 professionals and invested in safe, liquid assets. The truth, instead, was that the money went wherever Stanford himself and a couple of close associates directed, including into risky real estate and private equity deals. And at least $8 billion can't be accounted for.

Stanford, 58, is a U.S. citizen (from Texas) and therefore an FCPA "domestic concern." He has to comply with the antibribery provisions. (Before the recent headlines, we always thought he was British or maybe South African; he calls himself "Sir Allen," sports a small mustache, wears crested blazers, and is crazy about international cricket.)

About Stanford's cozy relationships with foreign leaders -- the tightest, it appears, was with the rulers of Antigua, population 85,000. He resettled his offshore bank there after it was booted off neighboring Montserrat in 1996 for unspecified reasons. His closeness to Antigua's former prime minister, Lester Bird, led to him being "knighted" by the tiny country's government a few years ago. On the Stanford website, he signs the chairman's letter as "Sir Allen Stanford." A note on the homepage says, "Stanford Financial Group and other Stanford entities are currently controlled and managed by a receiver."

In the late 1990s, the New York Times said, Prime Minister Bird appointed Stanford to Antigua's banking advisory board. The appointment created a blatant conflict of interest. The advisory board regulated the banks on Antigua, including those owned by Stanford. What's more, the Times said, "The [advisory board] project was paid for by the Antiguan government by money either lent or granted by Mr. Stanford."

Could those loans or grants have violated the FCPA? Not likely. A payment to a foreign government -- even a payment intended to influence decisions in favor of the donor -- cannot violate the FCPA. An FCPA antibribery offense requires a corrupt payment to a foreign official -- that is, to a human being. See §§ 78dd-1(a), 78dd-2(a). See also the DOJ's FCPA Opinion Procedure Release No. 97-02 (November 5, 1997) discussed in our post here. The DOJ said, because the "requestor's donation would go directly to a government entity -- and not to any foreign government official -- the provisions of the FCPA do not appear to apply to this prospective transaction."

In its civil complaint, the SEC alleged no facts about overseas corruption; the complaint focused on misrepresentations related to the certificates of deposit and unregistered investment-adviser activity by Stanford's companies. And we've seen no reports of credible evidence about illegal payments to foreign officials by Stanford or on his behalf. That doesn't mean evidence won't surface, however. In a couple of other recent cases, when the FBI was called in to investigate foreign business practices unrelated to FCPA concerns, it also discovered evidence of antibribery violations.

That's apparently what happened, for example, to Shu Quan-Sheng, the Virginia-based rocket scientist. The naturalized U.S. citizen sold defense-related goods and services to China without first obtaining U.S. export licenses or State Department approvals. During its export-related investigation, the FBI learned Shu was bribing Chinese government officials to buy his products. Shu pleaded guilty in November 2008 to violating the Arms Export Control Act and the FCPA. And in September last year, four U.S. citizens and their Philadelphia-based company, Nexus Technologies, were charged under the Foreign Corrupt Practices Act with bribing government officials in Vietnam. The FBI may have been investigating the defendants' alleged sales of sensitive equipment to Vietnamese government agencies when it discovered the potential FCPA offenses.

Stanford hasn't been charged by U.S. authorities with any criminal acts. The SEC's complaint is a civil enforcement action and, as mentioned, is limited to securities law issues. The New York Times pointed out, though, that he and his organization were big donors to U.S. politicians and courted them with favors and perks. "Mr. Stanford," the Times said, "also wooed lawmakers and their staff with plane rides and 'fact-finding' trips to vacation destinations. Many were paid for by the Inter-American Economic Council, a nonprofit organization that he supported."

Similar donations, gifts and favors to foreign officials might violate the Foreign Corrupt Practices Act. The law prohibits giving or promising to give, directly or indirectly, anything of value -- including cash, gifts and perks -- to a foreign official for the purpose of obtaining or retaining business. There are three narrow exceptions in the FCPA -- for facilitating payments, promotional expenses, and payments legal under the written laws of the host country. The Justice Department and the courts, however, view the FCPA's "obtaining or retaining business" prohibitions expansively, and take a narrow view of the limited exceptions.

So is this an FCPA story? Not yet. But it's one to watch.

The SEC's Feb. 17, 2009 press release is here. With the press release are links to the SEC's Litigation Release No. 20901 (February 17, 2009) in Securities and Exchange Commission v. Stanford International Bank, et al., Case No. 3-09CV0298-L (N.D.TX.) (here), the SEC's civil complaint (here), the SEC's memorandum of law (here), and information for Stanford customers concerning the federal court's order freezing assets and appointing a receiver over property of Stanford and his companies (here).
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Why We Keep Plugging

It's a familiar and unwelcome moment. Those on the other side of the table spot the FCPA compliance language for the first time:

The joint venture and all its personnel shall comply in all respects with the requirements of the United States Foreign Corrupt Practices Act.

Faces darken. The mood in the room goes sour.

"What's this?" they ask. "U.S. law doesn't have anything to do with our joint venture."

You start explaining: "The FCPA outlaws public bribery by Americans outside the United States. American companies are obligated to comply wherever they do business. Part of that is making sure their overseas partners don't pay bribes . . . "

"Excuse us," they say. "Our new joint venture isn't an American company and we're not Americans. Forget it. Anyway," they add, "our country has its own anti-corruption laws. And we always obey THEM."

It's going to be a long day. Lots of long days.

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Reactions overseas to the FCPA range from mild irritation to vein-popping outrage. It's understandable. The law is sometimes seen as another example of America's arrogance and overreaching, a violation of sovereignty -- legal imperialism at its worst, and high-handed global moralizing. But that's a bum rap. Really.

The FCPA's aim isn't to change the world. It's to stop U.S. companies and their people from bribing foreign officials to obtain or retain business. That's clear from the early debates. Congress didn't want Americans bribing foreign government officials. Doing that, lawmakers and regulators said, distorts competition, ruins reputations, harms local populations and interferes with the foreign policy of the U.S. government.

But people always look for loopholes and shortcuts, so the FCPA takes that into account. It outlaws bribes to foreign officials that are paid directly or indirectly. And it's the indirectly part that causes so much upset overseas.

The FCPA says you can't hire an agent to pay bribes for you. You can't use joint venture partners for the dirty work either. You can't use a brother-in-law or charitable foundation or any other circuitous route. Bribes to foreign officials that originate from your hand are always your responsibility, no matter how indirectly you try to pass them on.

So when American companies go abroad, they have to make sure their business partners -- suppliers, subcontractors, professional advisors, agents and, of course, joint venture partners -- don't pay bribes to foreign officials to help the business. Taking steps to prevent that is required by an effective compliance program. Companies that don't try to stop intermediaries from paying bribes have no real defense under the FCPA when problems happen.

Does explaining all this (and a lot more) to overseas business partners help? Does it soothe their bruised pride and wounded nationalism? Yes, it usually helps, but the process isn't easy. Let's face it -- the FCPA makes people mad. Take due diligence: What contacts have you had for the past five years with any government or government-controlled entity? Are you now paying or have you ever paid bribes to anyone in any government? Can we ask your lawyer, banker, accountant and business associates if you're trustworthy? Those sorts of questions never sound friendly.

To get deals done overseas, though, it's necessary to explain what the FCPA is, what it's meant to accomplish, and how it works. That's good compliance and good business -- and worth fighting for.

So what's better? Spending a few extra hours or days at the negotiating table to do the right thing at the start, or spending years or even a lifetime trying to repair the terrible damage that an FCPA offense can cause?

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When Is Charity A Bribe?

No good deed goes unpunished, or so the saying goes. That sure came true for Schering-Plough a few years ago. From February 1999 to March 2002, the New Jersey-based maker of Afrin, Claritin, Coricidin and Cipro, among other leading drugs, violated the Foreign Corrupt Practices Act through overseas charitable giving.

According to the Securities and Exchange Commission's June 2004 complaint, the company's subsidiary in Poland made improper payments to a charitable organization called the Chudow Castle Foundation. The Foundation was headed by an individual who was the director of the Silesian Health Fund during the relevant time. The health fund was a Polish governmental body that, among other things, provided money for the purchase of pharmaceutical products and influenced the purchase of those products by other entities, such as hospitals, through the allocation of health fund resources.

The SEC said Schering-Plough Poland paid 315,800 zlotys (approximately $76,000 at the time of the payments) to the Chudow Castle Foundation to induce its director to influence the health fund's purchase of Schering-Plough's pharmaceutical products. The SEC also said that none of the payments to the Foundation were accurately reflected on the subsidiary's books and records and that Schering-Plough's system of internal accounting controls was inadequate to prevent or detect the improper payments.

As a result, Schering-Plough paid a $500,000 civil penalty and consented to an SEC order requiring it to avoid violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. It also had to retain an independent consultant to review its policies and procedures regarding compliance with the Foreign Corrupt Practices Act and implement any changes recommended by the consultant.

Schering-Plough's case, as far as we know, remains the only FCPA prosecution based entirely on charitable giving. We're talking about it now because it raised important compliance concerns that still linger. For example, how much due diligence is expected of companies with respect to their overseas charitable donations? At an FCPA conference last year, an audience member popped that question to Mark Mendelsohn, the head of the Department of Justice's group that prosecutes FCPA cases. He said each donation has to be considered on its merits, but there are always common-sense guidelines that help determine if donations could violate the FCPA. Is there a nexus between the charity and any government entity from which the company is seeking a decision? If the governmental decision-maker holds a position at the charity, that's a red flag. Is the donation consistent with the company's overall pattern of charitable contributions? For Schering-Plough, the SEC said that "[d]uring 2000 and 2001, the payments constituted approximately 40% and 20%, respectively, of S-P Poland's total promotional donations budget. Moreover, the Foundation was the only recipient of such donations that received multiple payments, making the four payments in 2000 and seven payments in 2001 highly unusual." If one donation or a series of them is more than the company has made to any other charity in the past five years, that's a red flag too.

Beyond the points made by Mr. Mendelsohn, there are other smell tests for charitable donations. Who initiated the request for payment to the charity? The key to most bribery charges appears to be the personal benefit to the government official, or the quid pro quo expected of him or her. If a government official hinted at or begged for a payment to the charity, that's another red flag. Will there be a tax deduction for the donation? In most countries, one important result of any gift to charity is tax relief. Therefore, not seeking the tax benefit can become yet another red flag.

And one final point. All due diligence concerning charitable payments -- the asking and answering of the questions posed above -- should be well documented. Nothing will aid in defending against a potential FCPA charge more than a stack of contemporaneously-generated papers backing the story that the payment really was meant to be a charitable contribution and not a bribe. Don't be shy about it. Create real-time documents that demonstrate awareness of potential FCPA issues and measures taken to manage and mitigate the risk. That, after all, is what compliance is really about.

Schering-Plough Corporation trades on the New York Stock Exchange under the symbol SGP.

View the SEC's Litigation Release No. 18740 / June 9, 2004 Here.

View the SEC's June 9, 2004 complaint against Schering-Plough Here.

As a postscript, we need to say how much we like what's written above. That sounds like outrageous braggadocio, but it's not. Our friend, Pete from D.C., is the inspiration and chief draftsman of this post. Despite his encyclopedic knowledge of the FCPA and vast experience in its application, he chooses to remain an anonymous contributor to these pages. We can only thank him yet again for his interest and great help in our work here -- and encourage him once more to reveal to the world his almost handsome face.