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Entries in Facilitating Payments (66)

Sunday
Feb222009

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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Sunday
Nov092008

Fearing Third Parties

U.S. executives know that most Foreign Corrupt Practices Act compliance risks come from third parties -- overseas acquisition targets, joint venture partners, agents and others. Despite that knowledge, about three quarters of them think their company's due diligence of intermediaries isn't working. That's according to KPMG's 2008 Anti-Bribery and Anti-Corruption Survey.

Here are some findings from the survey based on responses from 103 executives at U.S. multinational companies:

  • 82 percent of the respondents said they face difficulties performing effective due diligence on foreign agents and other third parties.
  • 76 percent said they cannot adequately audit third parties for compliance.
  • 73 percent said their mergers and acquisition due diligence is sub par.
  • 27 percent said their level of M&A due diligence is minimal.
Eighty-five percent of the respondents said their company has a formal FCPA or anti-corruption compliance program. That's good. What's not good is that the programs aren't dealing effectively with the greatest compliance risk of all -- third parties. No wonder Justice Department and SEC enforcement actions under the FCPA are still rising -- they more than doubled last year -- and why most U.S. company executives are still worried about violating the FCPA.

Recent cases involving individuals illustrate how FCPA offenses can harm anyone caught in the mess. That's why, even in tough times, U.S. executives should demand the protection of an effective compliance program. They shouldn't accept compliance risks from third parties that can damage or destroy their companies, their careers, and their families.

View the 2008 KPMG Anti-Bribery and Anti-Corruption Survey here (courtesy of the White Collar Crime Prof Blog).

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Thursday
Oct162008

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.

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Tuesday
Oct142008

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.

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Thursday
Oct092008

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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Thursday
Aug282008

Con-way Settles FCPA Enforcement Action

Internal controls and books and records violations; impermissible "facilitating payments" to customs officials and bribes to airline employees

California-based Con-way, Inc., a global freight forwarder, has paid a $300,000 penalty and accepted a cease and desist order to settle a Foreign Corrupt Practices Act enforcement action with the Securities and Exchange Commission. Con-way's FCPA violations were caused by a Philippines-based subsidiary, Emery Transnational. It made about $244,000 in improper payments between 2000 and 2003 to officials at the Philippines Bureau of Customs and the Philippine Economic Zone Area, and $173,000 in improper payments to officials at fourteen state-owned airlines.

The bribes to customs officials consisted of hundreds of small payments. They were intended to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations. To fund the payments, Emery's employees obtained cash advances to complete customs processing. The SEC said that "unlike legitimate customs payments, the payments at issue were not supported by receipts from the Philippines Bureau of Customs and the Philippine Economic Zone Area. Emery Transnational did not identify the true nature of these payments in its books and records."

Emery's employees also made corrupt payments between 2000 and 2003 to employees at fourteen state-owned airlines that did business in the Philippines. According to the SEC, the "payments were made with the intent of improperly influencing the acts and decisions of these foreign officials and to secure a business advantage or economic benefit." There were “weight shipped” payments intended to induce airline officials to improperly reserve space for Emery on the airplanes, and “gain shares” payments to induce airline officials to falsely under-weigh shipments and to consolidate multiple shipments into a single shipment, resulting in lower shipping charges. Emery paid the airline employees 90% of the reduced shipping costs.

Government-owned or controlled airlines receiving payments were Air France, Alitalia (Italy), China Airlines, EgyptAir, Emirates (Dubai), Gulf Air (Bahrain, Abu Dhabi, Oman), Kuwait Airways, Malaysian Airlines, Pakistan International Airlines, Royal Brunei Airlines, Saudi Arabian Airlines, SilkAir (Singapore), Singapore Airlines, and Thai Airways International.

According to the SEC's complaint, none of Emery's improper payments were accurately reflected in Con-way’s books and records. Also, Con-way knowingly failed to implement a system of internal accounting controls concerning Emery that would both ensure that Emery complied with the FCPA and require that the payments it made to foreign officials were accurately reflected on its books and records. As a result, Con-way violated Sections 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)).

Con-way discovered the illegal conduct at Emery in early 2003. After a preliminary internal investigation, Con-way self-disclosed the potential FCPA violations to the SEC. Following a more thorough internal investigation, Con-way imposed strict financial reporting and compliance requirements on Emery, fired a number of Emery employees involved in the misconduct, provided FCPA training and education to Con-way's own employees and strengthened its compliance program. In December 2004, Con-way sold Emery to UPS.

In the Philippines, payments to customs officials by local employees are a common compliance problem. Such payments are locally referred to as "facilitating payments" but shouldn't be confused with payments of the same name that are permitted under the FCPA. There's an exception in the FCPA for facilitating payments -- but only as defined by the FCPA itself. Among other things, the payments must be 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].

The exception will not apply, however, if there was no legitimate routine governmental action pending and for which the payment was made. A governmental 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” and therefore is outside the scope of the exception. For example, paying a customs clerk to schedule an inspection of goods already in the customs queue may be permissible. But paying a customs clerk to jump the queue, or paying for positive inspection results, may be outside the exception.

Emery's payments to customs officials were intended to induce them to (i) violate customs regulations by allowing Emery to store shipments longer than otherwise permitted, thus saving the company transportation costs related to its inbound shipments; and (ii) improperly settle Emery's disputes with the Philippines Bureau of Customs, or to reduce or not enforce otherwise legitimate fines for administrative violations. Those clearly weren't actions “ordinarily and commonly performed by a foreign official.” That's why the payments fell outside the scope of the FCPA's facilitating payments exception. And whether or not the payments were permissible, Con-way was required to accurately account for them in its books and records, which it didn't do.

The case is also a reminder that employees of government- owned or controlled airlines are "foreign officials" for purposes of the FCPA. Contact with them, either directly or through travel agents or others, should be covered by compliance programs.

Con-way Inc. trades on the NYSE under the symbol CNW.

View SEC Litigation Release No. 20690 and Accounting and Auditing Enforcement Release No. 2866 (August 27, 2008) here.

View the Complaint in Securities and Exchange Commission v. Con-way Inc., Civil Action No. 1:08-CV-01478 (D.D.C.) (EGS) here.

View the SEC's Administrative Enforcement Action / Cease and Desist Order here.

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Monday
Jul142008

Unpeeling Opinion Procedure Releases

Our post about DOJ Release 08-03 -- which deals with the payment of promotional expenses to journalists who work for state-owned media in China -- drew this comment from Frequent Reader . . .

Interesting, but the value of the release is uncertain to commercial companies that cannot meet the stipulation that they "have no business pending with any PRC government agency." Unlike TRACE, many US companies are in China to conduct commercial business which inevitably means business will likely be pending with a PRC agency or state-owned entity.
We responded this way . . .
Careful. TRACE's "representations" are not necessarily "conditions" applicable to all companies in a similar situation. For example, in at least one other recent Release related to the PRC involving promotional expenses, Release 07-02 (September 11, 2007), the Requestor represented that it had no non-routine business pending before the agency that employed the specific "foreign officials" receiving payments. That's a much narrower representation and could apply to many or even most companies.
Since we're the blogger here, we're going to say a bit more . . .

When it comes to DOJ Opinion Procedure Releases, user beware. A too-literal reading can distort the analysis. Before we get into that, though, let's say a few words in praise of Releases.

FCPA practitioners don't have a body of appellate opinions to help unlock the law's mysteries. Instead we have Releases. Although not binding on anyone except the requesting parties, and creating no legal precedent in the strict sense for anyone else, Releases still carry weight in the compliance community. With so little FCPA litigation, Releases become a de facto substitute for judicial interpretation. They don't have the force of law behind them (except as to requestors), but they're cited by practitioners and compliance professionals as "official" guidance from the government. We're no exception; we rely on Releases all the time.

So what's the problem? It's this: Releases often contain too much information. Why? Because the Opinion Procedure Regulations in 28 CFR Part 80 say, among other things, that a request to the DOJ must contain all details of the transaction. So requestors throw in the kitchen sink.

And what happens? The kitchen sink that's in the request frequently shows up in the final Release, too, where "facts" are often called "representations." But representations (aka facts) aren't equivalent to "conditions," and not all representations are equal. The facts of one case may never be duplicated in another case, and facts that are important here may not even be relevant there. Again, however, because requestors are required by law to disclose all of their relevant facts, and because those facts are likely to be repeated in the final Release, the so-called representations simply accrete. They grow like barnacles from one Release to the next. That's happened most obviously with Releases dealing with promotional expenses, a phenomenon we've commented on before.

This accretion doesn't mean the DOJ is requiring each and every representation (aka fact) in the Release. All it means is that the latest requestor had his or her own specific facts that had to be included in the request. That's the case with Release 08-03. TRACE, a non-profit organization, happens to have no pending business with the PRC government. That's a fact, not a requirement, and it could have been different. And then there are other requestors -- driven by caution or advocacy or both -- who load up their requests with lots of representations (aka facts) they've seen in earlier Releases. And so the barnacles grow.

Wherever they come from, the so-called representations in Releases shouldn't be mistaken for requirements. There are some of those, of course, but they're less common. But does all this matter? Yes it does, because viewing every representation in a Release as a requirement can only produce a view of the FCPA's affirmative defenses and exception that are too narrow to be of much use.


Thursday
Jul102008

Heading For The Hammock

It's the weekend again. Good thing. We need (and deserve) some rest. What serious mind, after all, wouldn't be exhausted pondering how Tampa Bay can be one and a half games clear of the Red Sox? Strangely, our spouse seems to hold no opinion on the subject. So in our household the burden of the American League East falls entirely on our shoulders.

Still, we managed to cover some new ground this week. Iraq's civil suit against those implicated in the oil-for-food scandal caught our eye. And we noted the appeal to the House of Lords by Britain's Serious Fraud Office. We're not sure if the bigger scandal there involves BAE and Prince Bandar or the SFO itself.

What else? Oh yes -- we were wowed by the D&O Diary's trend-spotting. Looks like FCPA-inspired civil litigation is the next big hazard in the lives of our already-pummeled corporate leaders.

Meanwhile, we're waiting for the DOJ to deal with Panalpina. The global logistics firm may have stretched "facilitating payments" well beyond the current legal definition -- and in the process caused compliance headaches for practically everyone in the oil-and-gas services sector.

Siemens' hopes for a quick resolution in the U.S. of its massive corruption problems have now evaporated. Our first post about that company was back in September 2007, an eon ago in the life of a blog.

Speaking of eons . . .

Aon Corporation -- the giant insurance broker -- disclosed back in November 2007 an internal investigation into possible violations of the FCPA. When it self-reported to the DOJ it also agreed to toll the statute of limitations. So we guess no one's in a big hurry to wrap up that one.

The orthopedic device makers are waiting to learn their fate with the FCPA. We first wrote about the investigation by the DOJ and SEC into the group's overseas sales practices in October 2007. That post was also our first mention of John Ashcroft's appointment as a compliance monitor in a domestic bribery case for Zimmer Holdings.

The revelation that Mr. Ashcroft might take home $52 million from the appointment prompted our favorite blog editor emeritus, Prof Peter Henning, to note in his '07 Thanksgiving Day message: That's not a bad payday, and Zimmer -- like every other company that enters into a deferred or non-prosecution agreement -- can hardly object to the fees lest it look uncooperative and bring down the wrath of the U.S. Attorney's Office. So much to give thanks for this Thanksgiving.

Well, with the FCPA backlog still growing, we could keep at this for a long time. But our thoughts must now return to more weighty matters. That's right -- the mystery of the American League East.

Enjoy the weekend.

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Sunday
Jun152008

Sweating The Small  Stuff

Public corruption isn't a victimless crime, and whatever helps dispel the false notion that it is, is welcome in this space. Which brings us to . . . the United Nations. We haven't spent much time praising that institution. In fact, we've never done it. But here goes.

The U.N.'s just-published Asia Pacific Human Development Report, Tackling Corruption, Transforming Lives, tells the story of public corruption in Asia. So what's new? This time the story is told not from the perspective of bribe payers or bribe takers, but from the victims themselves. The report isn't easy to read, not because of dry "technical" language or fuzzy jargon. There's none of that. In fact, the language is surprisingly simple. No, it's hard to read because the truth about public corruption isn't fun to look at.

For example, the 248-page report describes a survey from Bangladesh, India, Nepal, Pakistan and Sri Lanka. It found that health workers often demanded bribes for admission to the hospital, to provide a bed, or to give subsidized medications. According to the report,

Among people using hospitals in small cities the proportion paying bribes rose to almost 90 per cent. In maternity hospitals mothers even had to bribe the nurses in order to see their babies.
"Invisible taxes" are everywhere in the poorest countries. In Bangladesh, a study of 3,000 households showed that 97% that bought land had to pay bribes for registration, 88% of the households who changed their land ownership within the family had to pay bribes, and 83% of landowning households had to pay bribes for land surveys.

The most common victims? Poor people. Police corruption, for example, hits those on the bottom rung hardest because they lack the influence needed to defend themselves. Amounts extorted by police can be relatively small but may be a big part of the victims' income. Police sometimes harass whole neighborhoods, the report says, creating "an atmosphere of fear and apprehension." In a riverside slum settlement in Northern India poor families described how police were fleecing them:

They have made our lives miserable. We do not know when we will be thrown out of our homes. They land up any time and demand money. They threaten us that if we do not pay, they would throw us out of our homes. . . . Last week my clothes were torn apart after my husband could not pay the money demanded. We were allowed to go free only after we sold our rickshaw and paid the money.
The U.N. reporters note that most studies about petty corruption don't include any analysis of the impact on ordinary citizens. Why not? Probably because the amounts involved are relatively small, it's hard to measure what's happening, and also because the victims have little chance to complain. But the U.N., to its credit, went out and found people willing to talk.

In Indonesia, for example, one study involved ride-alongs with truckers on long-distance journeys that passed through some of the country's infamous police "checkpoints." Bribe expenses at the checkpoints constituted around 13% of the transportation cost which, though less than the fuel cost, amounted to more than wages. A report from Bangladesh found that a cattle trader had to pay extortion money at eight different places along the way to the market, both to the police and organized criminals - which added as much as 20% to the selling price.

Who would knowingly support that sort of exploitation? It's unthinkable, of course. But here's the problem. When well-known and respected multinational companies come to town and start greasing the palms of the local cops, health workers, land office-officials and postal workers, what's the message? That the rich and powerful think petty bribery is OK? That it's some kind of global best practice? And if brand-name companies are willing to make the small payments, how can local citizens, especially the poor and powerless, ever hope to change things?

Fortunately, a lot of compliance-minded companies now ban all bribes, including facilitating payments. That's great news. They've decided that facilitating payments are too hard to control and account for; that the payments might violate local laws and have to be publicly disclosed back home; and that small bribes overseas might promote a culture of corruption and spoil the company's effective compliance program. So there's too much risk with facilitating payments, even if the Foreign Corrupt Practices Act allows them.

Other companies, though, are sticking with the dangerous idea that small-time bribery is just "cultural," that it's business-as-usual in various countries and doesn't do any real harm. That sort of talk comes from business people and professionals who wouldn't dream of breaking a law back home. But on the road they turn into serial bribers -- under the banner of facilitating payments. It's true, after all, that the Foreign Corrupt Practices Act allows bribes for routine governmental action -- permits and licenses, visas and work orders, police protection, mail pick-up and inspections, phone service, power and water supply, cargo loading and unloading, protecting goods from spoilage, or any "actions of a similar nature." Bribes for those purposes, the FCPA says, are OK. But should any corporate citizen endorse bribery anywhere, whether or not the FCPA allows it?

That question goes beyond legal compliance. It's part of the "soft" subject of ethics, which is never easy to talk about in the business world. Ethics can't be measured, and measuring things -- costs, profits, losses -- is what business is mostly about. That's why it's important sometimes to hear what those outside the business world are saying. The U.N.'s Asia Pacific Human Development Report is full of those voices, and they're worth listening to.
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Tuesday
Jun102008

A Hundred Tiny Bribes

More than a month ago -- practically forever in the time-warped blogosphere -- we mentioned that a reader had shared with us a soon-to-be published paper about facilitating payments. Well, the paper is now available.

It's written by Hogan & Hartson partner T. Clark Weymouth and associate Jeremy B. Zucker. The link is here. They prepared it for pro bono client Global Financial Integrity, a non-profit organization that targets the illegal cross-border flow of funds around the world by working with governments, think tanks and NGOs.

In the paper, Messrs. Weymouth and Zucker trace the history, use and abuse of facilitating payments under the Foreign Corrupt Practices Act. They compare how facilitating payments are treated under the FCPA, the OECD Anti-Bribery Convention, the U.N. Convention Against Corruption and the Inter-American Convention Against Corruption. And they analyze compliance risks associated with grease payments -- with enough examples to cool anyone's ardor for this lone exception written into the FCPA.

As we mentioned back in May, seeing our favorite FCPA topic treated with such thorough scholarship and wrapped in a great presentation is genuinely exciting. We don't want to spoil the fun, though, so we'll stop here -- after we acknowledge the generosity and public spirit of the authors, their law firm and its pro bono client.

View prior posts about facilitating payments here.

Sunday
May042008

Great Words From The Hill, Circa 1977

Aside from the villa on Lake Como and the Aston Martin in the garage, the greatest perk that comes from tending this garden is hearing from so many talented experts in the field of the Foreign Corrupt Practices Act. Last week, for example, a generous reader shared with us a soon-to-be published paper about Facilitating Payments. Seeing our favorite FCPA topic treated with such thorough scholarship, and wrapped in a truly eloquent presentation, was genuinely exciting. It made our day.

We mention the incident, first, to express our gratitude to that particular reader and to all who contribute to the FCPA Blog in so many ways. We also mention it because the paper in question made copious use of the FCPA's rich legislative history -- stimulating us to revisit some of Washington's original debate about the law. Indeed, the Congressional record is still a deep well of meaning and inspiration for FCPA practitioners, judges and scholars.

Among the goodies in the legislative history are the reasons given in 1977 for why the country needed the FCPA. Thirty years on, we think those reasons still ring true.

Here's what the House Committee on Interstate and Foreign Commerce said:

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More than 400 corporations have admitted making questionable or illegal payments. The companies, most of them voluntarily, have reported paying out well in excess of $300 million in corporate funds to foreign government officials, politicians, and political parties. These corporations have included some of the largest and most widely held public companies in the United States; over 117 of them rank in the top Fortune 500 industries.

The abuses disclosed run the gamut from bribery of high foreign officials in order to secure some type of favorable action by a foreign government to so-called facilitating payments that allegedly were made to ensure that government functionaries discharge certain ministrial [sic] or clerical duties. Sectors of industry typically involved are: drugs and health care; oil and gas production and services; food products; aerospace, airlines and air services; and chemicals.

The payment of bribes to influence the acts or decisions of foreign officials, foreign political parties or candidates for foreign political office is unethical. It is counter to the moral expectations and values of the American public. But not only is it unethical, it is bad business as well. It erodes public confidence in the integrity of the free market system. It short-circuits the marketplace by directing business to those companies too inefficient to compete in terms of price, quality or service, or too lazy to engage in honest salesmanship, or too intent upon unloading marginal products. In short, it rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business.

Bribery of foreign officials by some American companies casts a shadow on all U.S. companies. The exposure of such activity can damage a company's image, lead to costly lawsuits, cause the cancellation of contracts, and result in the appropriation of valuable assets overseas.

Corporate bribery is also unnecessary. The Secretary of Treasury testified before the Subcommittee on Consumer Protection and Finance: Paying bribes. . . is simply not necessary to the successful conduct of business in the United States or overseas. My own experience as Chairman of the Bendix Corp. was that it was not necessary to pay bribes to have a successful export sales program.

Nor is Secretary Blumenthal's experience unique. Former SEC Chairman Hills testified: Indeed, we find in every industry where bribes have been revealed that companies of equal size are proclaiming that they see no need to engage in such practices.

Despite the fact that the payments which this bill would prohibit are made to foreign officials, in many cases the resulting adverse competitive affects are entirely domestic. Former Secretary of Commerce Richardson pointed out that in a number of instances, "payments have been made not to "outcompete" foreign competitors, but rather to gain an edge over other U.S. manufacturers."

Corporate bribery also creates severe foreign policy problems for the United States. The revelation of improper payments invariably tends to embarrass friendly governments, lower the esteem for the United States among the citizens of foreign nations, and lend credence to the suspicions sown by foreign opponents of the United States that American enterprises exert a corrupting influence on the political processes of their nations. For example, in 1976, the Lockheed scandal shook the Government of Japan to its political foundation and gave opponents of close ties between the United States and Japan an effective weapon with which to drive a wedge between the two nations. In another instance, Prince Bernhardt of the Netherlands was forced to resign from his official position as a result of an inquiry into allegations that he received $1 million in pay-offs from Lockheed. In Italy, alleged payments by Lockheed, Exxon, Mobil Oil, and other corporations to officials of the Italian Government eroded public support for that Government and jeopardized U.S. foreign policy, not only with respect to Italy and the Mediterranean area, but with respect to the entire NATO alliance as well.

Finally, a strong antibribery statute would actually help U.S. corporations resist corrupt demands. According to former Gulf Oil Co., Chairman Bob Dorsey: If we could cite our law which says we just may not do it, we would be in a better position to resist these pressures and refuse those requests.

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On the Senate side of the Hill in 1977, the problem of improper payments to foreign officials by American corporations was on the agenda of the Committee on Banking, Housing and Urban Affairs. Its final report contained a more concise although no less articulate (and even passionate) description of the need for the legislation. By the way, the working title of the bill, before it became the FCPA, was the "Unlawful Corporate Payments Act of 1977."

Here are the Senate's words:

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Recent investigations by the SEC have revealed corrupt foreign payments by over 300 U.S. companies involving hundreds of millions of dollars. These revelations have had severe adverse effects. Foreign governments friendly to the United States in Japan, Italy, and the Netherlands have come under intense pressure from their own people. The image of American democracy abroad has been tarnished. Confidence in the financial integrity of our corporations has been impaired. The efficient functioning of our capital markets has been hampered.

Corporate bribery is bad business. In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet. Corporate bribery of foreign officials takes place primarily to assist corporations in gaining business. Thus foreign corporate bribery affects the very stability of overseas business. Foreign corporate bribes also affect our domestic competitive climate when domestic firms engage in such practices as a substitute for healthy competition for foreign business.

Managements which resort to corporate bribery and the falsification of records to enhance their business reveal a lack of confidence about themselves. Secretary of the Treasury Blumenthal, in appearing before the committee in support of the criminalization of foreign corporate bribery testified that: "Paying bribes - apart from being morally repugnant and illegal in most countries - is simply not necessary for the successful conduct of business here or overseas.''

The committee concurs in Secretary Blumenthal's judgment. Many U.S. firms have taken a strong stand against paying foreign bribes and are still able to compete in international trade. Unfortunately, the reputation and image of all U.S. businessmen has been tarnished by the activities of a sizable number, but by no means a majority of American firms. A strong antibribery law is urgently needed to bring these corrupt practices to a halt and to restore public confidence in the integrity of the American business system.

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View House Report No. 95-640 (September 28, 1977 - Ordered to be printed) here.

View Senate Report No. 95-114 (May 2 (legislative day, March 28), 1977 - Ordered to be printed) here.

Wednesday
Oct172007

One Law,Two Parts

The question comes from Pune, India: Can a payment that is not a bribe – such as a facilitating payment – be the basis for a criminal violation of the U.S. Foreign Corrupt Practices Act if the accounting for the payment is intentionally misleading?

The answer is yes, and here's how. The FCPA has two parts – the anti-bribery provisions and the accounting standards. They're supposed to work together and often do, but they can also work separately. The anti-bribery provisions are a stand-alone federal criminal statute enforced by the Department of Justice. They reach all U.S. companies and their personnel. In contrast, the accounting standards do not stand alone. They're part of the Securities Exchange Act of 1934. The accounting standards do not apply to everyone, just SEC-reporting companies, called "issuers," and their employees.

While the anti-bribery provisions are a pure criminal statute, the accounting standards – as part of the SEC’s regulatory scheme for public companies – are both administrative rules and a criminal statute. As administrative rules, the accounting standards can be violated by accident. When a “technical violation” happens, the SEC can sanction the violator, but only with civil or administrative penalties and not with criminal fines or jail time. The accounting standards become a criminal matter, however, when a violation happens “knowingly.” In that case, the offense is punishable by up to 20 years in prison and fines. By the way, the possible jail time for violating the anti-bribery provisions is "only" five years, not 20, and proving an accounting offense is simpler than an anti-bribery charge. That's why the Department of Justice favors FCPA accounting prosecutions when there's a choice.

But we're getting ahead of ourselves. Because the anti-bribery provisions and the accounting standards can work separately, an intentional 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). To paraphrase Uncle Sam, then, you can take the fcp out of the FCPA and still commit a criminal offense under the accounting standards. All that's required is for an issuer to cook the books. Therefore, a lawful facilitating payment that is knowingly accounted for in a misleading way can be the basis for a criminal violation of the FCPA.

View the United States Attorneys' Criminal Resource Manual, Title 9, Section 1017 Here.