Clinton Blasts Facilitating Payments

Secretary Clinton in Lusaka, Zambia on June 10, 2011All bribes -- even grease payments to customs officials -- hurt economic growth, Secretary of State Hillary Clinton told her audience at last week's African Growth and Opportunity Forum in Zambia.

Inviting African leaders into "a very frank conversation about corruption," she said even common payments take a real toll.

"Every bribe paid to a customs official represents a hidden tax on the cost of doing business and a drag on economic growth," she said.

The FCPA contains an exception that allows 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].

But claiming a bribe is really a facilitating payment has always been risky. Prosecutors say that anyone relying on the exception should be prepared to defend it -- that is, the burden of proof is always on the one asserting the exception as a defense to an FCPA violation.

Last year, global logistics firm Panalpina and six of its oil-and-gas services customers paid $236.5 million to resolve FCPA-related charges based in part on payments to customs officials in Africa.

The new U.K. Bribery Act starts on July 1 and doesn't allow facilitating payments.

Clinton said corruption costs Africa about $150 billion a year. "It scares away investment, stifles innovation, and slows trade," she told the Africa forum last year.

"Every time an entrepreneur is forced to pay a bribe to start a business or ship goods across a border or open a new facility," she said, "economic progress shudders. As President Obama has said, Africa does not need strong men; it needs strong institutions. We have seen all over the world how vital the rule of law is to maintaining a successful market, attracting investment, and promoting sustainable development."

The FCPA allows grease payments for: obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or related to transit of goods across country; providing phone service, power and water supply; loading and unloading cargo, or protecting perishable products or commodities from deterioration; or the catch-all "actions of a similar nature." See § 78dd-2 (H)(4) et seq.

SEC Charges Second Pride Exec

The former country manager in Venezuela for Pride International, Inc. last week settled civil FCPA charges with the SEC.

Joe Summers, a U.S. citizen who lives in John Day, Oregon, agreed to pay a civil penalty of $25,000.

From 2003 to 2005, Summers arranged payments of about $384,000 to third-party companies, "believing that all or a portion of the funds would be given to an official of Venezuela's state-owned oil company in order to secure extensions of three drilling contracts." Summers also approved a $30,000 payment through an intermediary to an employee of Venezuela's state-owned oil company to obtain the payment of receivables.

Summers' former employer, Pride International, said in February this year it has set aside $56.2 million for an expected settlement with the DOJ and SEC of FCPA offenses. The Houston-based oil-rig operator first disclosed potential compliance problems in 2006.

In December last year, the SEC accused a former Pride vice president, Bobby Benton, of violating the FCPA. The civil complaint against Benton alleged among other things that he deleted references in Pride's audits to about $384,000 in payments made by “the manager of the Venezuelan branch of a French subsidiary of Pride” to third-party companies. Pride self-disclosed the payments and cover-up after it learned about them through its internal investigation. The SEC's complaint against Summers included details about the Venezuelan bribes.

Pride has also disclosed that it found evidence of illegal payments from 2001 through 2006 directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, India, Nigeria, Libya, Angola, and the Republic of the Congo. The payments related to clearing rigs and equipment through customs, resolving customs disputes, immigration, tax, licensing, and merchant marine issues.

The SEC's complaint against Summers charged him with violating Sections 13(b)(5) and 30A of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(5) and 78dd-1] and Rule 13b2-1 [17 C.F.R. § 240.13b2-1], and aiding and abetting Pride's violations of Sections 13(b)(2)(A), 13(b)(2)(B), and 30A of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(B), and 78dd-1].

Pride International, Inc. trades on the NYSE under the symbol PDE.

View the SEC's Litigation Release No. 21617 and Accounting and Auditing Enforcement Release No. 3169 (both dated August 5, 2010) in SEC v. Joe Summers, Civil Action No. 4:10-cv-02786 (S.D. Texas, August 5, 2010) here.

Download the SEC's civil complaint against Summers here.

Pride Discloses Possible Settlement

Pride International, Inc. said this week it has set aside $56.2 million for an expected settlement with the Justice Department and the Securities and Exchange Commission of Foreign Corrupt Practices Act offenses. The Houston-based oil-rig operator first disclosed potential FCPA compliance issues in 2006.

In December last year, the SEC accused a former Pride vice president, Bobby Benton, of violating the FCPA. He allegedly bribed Mexican officials in 2004 and altered the company's accounts to hide the payments. The SEC's December 10 civil complaint, filed in federal court in Houston, seeks a civil penalty and disgorgement from Benton, as well as an injunction against future violations.

Pride earlier disclosed that its internal investigation found evidence of illegal payments from 2001 through 2006 directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, India, Nigeria, Libya, Angola and the Republic of the Congo. The payments related to clearing rigs and equipment through customs, resolving customs disputes, immigration, tax, licensing and merchant marine issues.

Pride's February 16, 2010 release said:

Pride International, Inc. (NYSE: PDE) today announced that it has accrued $56.2 million in the fourth quarter of 2009 in anticipation of a possible resolution with the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) of potential liability under the U.S. Foreign Corrupt Practices Act. As described in Pride's quarterly and annual reports, the company voluntarily disclosed in 2006 to the DOJ and the SEC information relating to initial allegations of potential improper payments to foreign government officials and has continued to cooperate with the agencies' investigations. The accrual in the fourth quarter 2009 represents the company's best estimate of potential fines, penalties and disgorgement related to settlement of the matter with the DOJ and SEC. The monetary sanctions ultimately paid by the company to resolve these issues, whether imposed on the company or agreed to by settlement, may exceed the amount of the accrual.

We talked about Pride's February 2008 disclosure of its internal investigation here.

I'd Want My Conscience

It may seem to Liberians as though everyone in their civil service is corrupt, but it's not true. There's at least one honest man. He's Richard Karyea, a former customs officer at the Roberts International Airport. Two years ago he refused a bribe from a drug smuggler worth more than 1,300 times his $15 monthly salary.

He was offered a $20,000 bribe by the owner of a DVD after finding cocaine hidden inside. Instead of looking the other way, he turned the man over to the police. For his trouble, Karyea was fired by the customs department; the drug smuggler was allowed to board another plane that day for Nigeria.

But there's a happy ending. In January, Liberia's president, Ellen Johnson Sirleaf, who has vowed to fight public corruption, pinned a medal on Karyea. At a ceremony in Monrovia (pictured above), she named him the Civil Servant of the Year. He won a $1,000 cash award and landed a new job -- Deputy Chief Examiner at the Ministry of Finance. And he's become a national hero. Comments to the Liberia Post said some people might consider him stupid for turning down the huge bribe, but he actually deserves to be a minister in the government. "You are a mentor for all [civil servants] to learn from. Bravo."

Liberians needed some good news. Last year, their country ranked 138th on Transparency International's Corruption Perception Index, tied with Paraguay and Tonga. That sounds awful, but its better than 2007, when the country ranked 150th on the CPI, tied with Azerbaijan, Belarus, the Congo, Cote d'Ivoire, Kazakhstan, Kenya, Kyrgyzstan, Sierra Leone, Tajikistan and Zimbabwe. That's a tough neighborhood no one would be sorry to leave behind.

At Karyea's award ceremony, President Sirleaf said he demonstrated "honesty and integrity in support of the Government’s determination to fight corruption in all sectors." For his part, the new hero told the BBC, "It wasn't difficult to turn down the money. If it took me 50 years to earn that money, I'd want my conscience. I will always want my conscience."

Listen to the podcast here.
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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.

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