Archive for the ‘Facilitating Payments’ Category

Amendments To Simplify The FCPA For U.S. Businesses

Monday, September 24th, 2012

Foreign Corrupt Practices Act reform may be in sleep mode at the moment, but this has not stopped (nor should it) forward-thinking individuals from contemplating FCPA reform.

Case in point, Stephen Clayton, with today’s guest post.  Clayton is currently an attorney in private practice specializing in FCPA services.  Previously, he was an in-house counsel, including for Sun Microsystems.  At Sun, he responsible for all legal work in East and South Asia, Latin America, Australia/New Zealand and Canada, and then became Senior Director, Anti-Corruption Compliance, responsible for Sun’s global FCPA compliance.  Sun was acquired by Oracle in early 2010 at which point Clayton established his private practice.  Clayton also teaches an FCPA-related course for Golden Gate University’s School of Accounting.

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Amendments to Simplify the FCPA for US Businesses

Proposals for and against amending the FCPA have been percolating in Congress for the past 2 years. The U.S. Chamber of Commerce took a lead role, advocating that substantial changes are needed to promote international business by U.S. companies. Other groups, including the Open Society Foundations, have opposed any revisions that they say would weaken the FCPA or impede enforcement.   The amendments that would provide the most help US business people have not been proposed by any of the parties lobbying Congress.

Bribery is still very common in international business and US companies are harmed by it every day. Congress should consider common sense changes to the 35-year-old FCPA that would make the law less confusing and more in tune with anti-corruption compliance practices in 2012.  If changes are to be made to the FCPA, they should enable good companies and ethical business people understand and follow the law. It is easier for business people to comply with a clearly worded, strict law than try to deal with a complicated, confusingly worded law that has to be filtered through layers of lawyers. The proposals by the Chamber and its opponents retained all of the complexity and confusion in the current law, so in the end would not benefit business.

There are six changes would substantially reduce the confusion business people and in house lawyers have about the FCPA and thereby enable them to do international business with a clear understanding of their legal risks and implement effective compliance programs.

1. Eliminate the Exception for Facilitating Payments.

This exception creates the illusion that minor bribery of employees of foreign governments can be “legal.” Å corporate policy allowing employees to pay any bribes is morally indefensible. Even if corporate management believes small bribes are a necessary practice, it is extremely difficult to determine which bribes Congress considers “legal.” The facilitating payments exception is offensive to normal US ethical standards for corporate governance. The majority of companies that examine facilitating payments prohibit their employee and agents from paying them.  Congress should eliminate the exception.

2. Eliminate the affirmative defense for bribes that are “lawful under the written law or regulation of the country.”

Countries do not have written laws that permit conduct that is illegal under the FCPA. But business people and non-specialist lawyers see this language in the statute and think it must have some meaning. Here again they are forced to guess which types of bribes Congress considers to be “legal.” What difference does it make to good corporate governance if a country rigs its laws to allow bribery of members of its royal family or specific government employees? It is still bribery and clean, ethical US companies would lose business to the bribe payers. This affirmative defense is essentially meaningless and confusing and there is no reason for it to remain in the law.

3. Add provisions to the FCPA making commercial (private) corruption a federal crime.

The most glaring flaw of the FCPA is that it makes it a crime to bribe only certain people, i.e. “foreign officials” including employees of “instrumentalities” of foreign governments. By making that distinction, Congress created the impression that US companies can legally pay bribes to all other people. The FCPA as it is now written causes companies and their lawyers to spend an extraordinary amount of time trying to determine if corrupt payments made on their behalf are legal or illegal. This is the most confusing aspect of the FCPA and puts company management in an ethical conundrum. Amending the FCPA to criminalize all bribery of anyone in international business will end the confusion. In international business in the 21st century, it should not matter if the recipient of a bribe is a government official or works for an instrumentality of a government or is an employee or officer of a commercial company.

4. Add a U.K. style strict liability crime of failure to prevent bribery to the FCPA and a corresponding affirmative defense for proving an adequate compliance program.

The U.K. Bribery Act of July 2011 contains a new crime that does not exist in the FCPA: Failure by a Business Organization to Prevent Bribery. It’s a strict liability crime – if bribery of anyone occurred in a company’s business, the company has violated this law. To balance strict liability, the UKBA includes an affirmative defense. If the company whose employees paid bribes can prove it had in place adequate processes to prevent bribery before the bribery occurred, it may avoid liability for this specific crime.

Congress should consider amending the FCPA to incorporate this U.K. legal innovation that makes it easy for company management to understand that all bribery by employees and agents is a crime.

5. Amend the FCPA to clarify that a parent company is responsible for the violations of its subsidiaries.  

Executives of US companies create, manage and are responsible for their company’s foreign subsidiaries. US management hires the subsidiary’s managers and gives them their instructions and goals. Subsidiaries exist to generate profits and provide business advantages to the parent company. U.S. law should be unambiguous on the point that subsidiaries and their employees cannot be a convenient and easily manipulated shield from criminal liability for bribery.

Limiting a company’s liability for the FCPA violations of its subsidiaries adds to the list of gray areas that perpetuate the argument that Congress intended that only certain types bribes of certain people are illegal. Congress can remove uncertainty by amending the FCPA so it is impossible to doubt that a parent company is always responsible for the bribery, corruption and false records of any of its subsidiaries.  This is the kind of clear legal guidance US companies need.

6. Widen the scope of the FCPA’s “reasonable and bona fide expenditures” affirmative defense.

Companies should be able to engage normal sales and marketing operations and be confident this will not violate the law.  Congress needs to promote legitimate, properly documented business practices. The current affirmative defense is poorly worded and unnecessarily restrictive. It limits bona fide business expenditures to those “directly related to the promotion, demonstration or explanation of products or services; or the execution or performance of a contract…” That limitation is not necessary and is confusing to business people.

Conclusion:

These six amendments would make it easier for corporate management and in house lawyers to understand what is prohibited by the FCPA and significantly improve their ability to develop reasonable compliance programs. Many major companies already have policies that prohibit facilitation payments, make commercial (private) bribery by their employees and agents a terminable offense and apply their FCPA compliance program to all their subsidiaries. Congress should follow this leadership by business and bring the FCPA into the 21st century.  Congress should not enact a slate of amendments that only serve to perpetuate the most obvious flaw in the FCPA – that it prohibits only certain (poorly defined) bribery of certain (poorly defined) people and therefore permits all other bribery.  Amendments that merely play with the definitions of who can be bribed in what manner will not help US companies. All bribery in international business harms US companies and must be clearly illegal.

Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure

Tuesday, September 18th, 2012

I am pleased to share my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure” recently published in the Bloomberg BNA White Collar Crime Report.

The abstract is as follows.

High-profile instances of Foreign Corrupt Practices Act scrutiny focus attention on the law and its enforcement across a broad spectrum. In spring 2012, arguably the most high-profile instance of scrutiny in the FCPA’s 35-year history occurred as Wal-Mart’s alleged conduct in Mexico dominated the news cycle. Wal-Mart’s scrutiny has been instructive in many ways at a key point in time for the FCPA. The article uses Wal-Mart’s potential FCPA exposure as a prism to view the current FCPA enforcement environment.

Among the issues discussed in the article are the following: whether Congress intended in passing the FCPA to capture the type of payments at issue in Wal-Mart; what caselaw instructs as to the payments; whether what Congress intended or what courts have concluded even matters; the impact of Wal-Mart’s scrutiny on the company as well as industry peers; and the politicization of Wal-Mart’s scrutiny and its impact on FCPA reform.

The complete article can be downloaded here.

A Wide-Ranging Interview

Wednesday, September 12th, 2012

The FCPA Report is an online publication that contains articles on a variety of FCPA topics to assist lawyers in relevant practice areas, in-house counsel,  and risk and compliance managers stay ahead of the curve.  It launched this June and features thematic sourced and researched by primarily lawyers, as well as contributed articles by experts in the field, interviews with leading figures, and reports on important developments. It is available to subscribers and trial subscribers at www.fcpareport.com.

I was pleased to do a telephone interview with the FCPA Report in mid-August.  Today’s post sends you to the wide-ranging Q&A previously published, in two parts, in the FCPA Report and linked to here with permission.

Topics covered in the Q&A include the following:  statute of limitations, judicial scrutiny, the duration of FCPA scrutiny, voluntary disclosure, Wal-Mart’s FCPA scrutiny, facilitation payments, obtain or retain business, foreign official, corporate fines, victims issues, a private right of action, FCPA Inc. and the revolving door, the three buckets of FCPA financial exposure and Foreign Corrupt Practices Act reform.

Friday Roundup

Friday, September 7th, 2012

A focus on entertainment and calling out FCPA / Bribery Act Inc. and a recent disclosure from a company that is part of FCPA history.  It’s all here in the (slimmer than normal) Friday roundup.

Recent Comments From The Director of the U.K. SFO

The briberyact.com previously mentioned here recent comments made by David Green (Director of the U.K. Serious Fraud Office) in a Daily Mail article (here) that “mainstream corporate entertaining” is of little concern to the SFO.  Green states in the article as follows.  “We are not  interested in that sort of case. We are interested in hearing that a large company has mysteriously come second in bidding for a big contract. The sort of  bribery we would be investigating would not be tickets to Wimbledon or bottles of champagne. We are not the ‘serious champagne office.’”

The same can not always be said of the DOJ or SEC.  Although such seemingly minor corporate entertainment expenditures have never been the sole focus of an enforcement action, several enforcement actions have included such allegations. For instance, the UTStarcom enforcement action (see here for the prior post) contained allegations about a $600 bottle of wine.  The Data Systems and Solutions enforcement action (see here for the prior post) contained allegations regarding a Cartier watch.  The IBM enforcement action (see here for the prior post) contained allegations about a camera.  The RAE Systems enforcement actions (see here for the prior post) contained allegations about kitchen appliances, business suits, and high-priced liquor.  Numerous other examples abound.  One must assume that the enforcement agencies included such allegations in the resolution documents for a reason, not just to fill up paper.

Alexandra Wrage (President of Trace International) noted the U.K. / U.S.  irony in this recent piece for Corporate Counsel.   ”[W]hereas the U.S. law permits these expenditures [facilitation payments and reasonable entertainment expenses], within reason, and then enforces when companies overstep, the U.K. prohibits them, but assures the public that they won’t be prosecuted.”

Green’s comments to the Daily Mail were also notable for his calling out of FCPA (or as the case may be Bribery Act) Inc.  The Daily Mail article notes as follows.  “[Green] criticised American law firms that had taken  advantage of the uncertainty. ‘It is in their interest to focus attention on the  Bribery Act. They put up talking heads and arrange conferences. It is a huge  industry.’”  Green’s comments are similar to those noted in this prior post by Kenneth Clark (the U.K.’s anti-corruption champion) who stated, in the House of Commons, leading up to the Bribery Act as follows.   “I hope to put out very clear guidance [regarding the Bribery Act] to save [businesses] from the fears that are sometimes aroused by the compliance industry, the consultants and lawyers who will, of course, try to persuade companies that millions of pounds must be spent on new systems that, in my opinion, no honest firm will require to comply with the Act.”

Harris Corp.

As previously noted in this Wall Street Journal Corruption Currents post, Harris Corporation disclosed as follows in its recent annual report.

“[I]n April 4, 2011, we completed the acquisition of Carefx and thereby also acquired its subsidiaries, including in China (“Carefx China”). The consolidated revenue of the Carefx China operations for fiscal 2012 was approximately $1.4 million, or less than 0.1% of our consolidated revenue. In connection with our integration activities and the subsequent audit of the financials of the Carefx China operations, we became aware that certain entertainment, travel and other expenses in connection with the Carefx China operations may have been incurred or recorded improperly. In response, with the concurrence of our Audit Committee, we initiated an internal investigation, with the assistance of outside legal counsel, to determine whether violations of the FCPA potentially occurred. In the course of our investigation, we learned that certain employees of the Carefx China operations had provided pre-paid gift cards and other gifts and payments to certain customers and potential customers. Although our investigation is not complete, we have already taken remedial actions related to the Carefx China operations, including changes to internal control procedures, termination of the gift-giving practice, additional compliance training and termination of the employment of certain individuals. The preliminary results of the investigation have been disclosed to our Audit Committee, Board of Directors and auditors, and we have also contacted the U.S. Department of Justice and the SEC to voluntarily disclose that we are conducting the investigation and to advise that it is our intent to fully cooperate with any investigation that they may conduct with respect to this matter. We cannot predict at this time any regulatory action that may be taken with respect to this matter or any other potential consequences that may result. However, based on the information available to date, we do not believe that this matter will have a material adverse effect on our financial condition, results of operations or cash flows.”

As noted in this previous post, Harris Corp. is part of FCPA history.  It is believed to be the first, and to this day only, publicly traded company to have put the DOJ to its burden of proof at trial.  As noted in the post, Harris Corp. prevailed in the enforcement action (1990-1991).  I noted in the previous post as follows.  If non-prosecution and deferred prosecution agreements existed in 1990, would Harris have resolved the enforcement action via such a resolution vehicle? Likely yes. Yet Harris and the individual defendants all prevailed at trial.

If the conduct Harris recently disclosed gives rise to an enforcement action, will Harris likewise this time around put the DOJ to its burden of proof?  Even if it has valid legal and factual defenses, not a chance.  NPAs and DPAs exist today and resolving FCPA inquiries is often more about cost-beneft / risk-reward, than law and facts.

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A good weekend to all.

Briefing Complete In Jackson – Ruehlen Challenge

Monday, July 16th, 2012

This previous post asked whether the SEC would be put to its burden of proof in the Mark Jackson and James Ruehlen FCPA enforcement action.  The answer was yes as the defendants filed a motion to dismiss the SEC’s complaint as highlighted in this previous post.  The SEC filed an opposition brief that is highlighted in this previous post.  Last Friday, Jackson & Ruehlen filed separate reply briefs (see here and here).

In summary, Jackson’s counsel (lead by David Krakoff, BuckleySandler – here) argues as follows (internal citations omitted).

“Plaintiff Securities and Exchange Commission’s [opposition brief] side-steps the issues presented as well as Supreme Court precedent. Rather than address the deficiencies in its Complaint … the SEC ignores them and assumes it is not required to plead actual facts. Rather than properly plead the elements of a Foreign Corrupt Practices Act (“FCPA”) violation, the SEC claims it would simply be too difficult to identify, in any way, the other necessary party in an alleged bribery scheme—the foreign official who received or was to receive alleged bribes, or what acts that specific foreign official took.

But viewed under proper pleading standards, the SEC’s Complaint remains deficient and must be dismissed. The Complaint is nothing more than a series of conclusions about what Jackson “knew” or “believed,” without the necessary foundation of facts suggesting that Jackson did “know” or “believe” what the SEC asserts. Such conclusions are not “well-pleaded” facts which must be accepted by the Court as true for the purpose of a motion to dismiss. The few well-pleaded facts do not rise to the level of a plausible entitlement to relief, and indeed are equally consistent with a legally permissible explanation of Jackson’s conduct, which requires the Complaint to be dismissed. And many of the claims are barred by the statute of limitations.

The SEC has had years to investigate this case, using the full force of its investigatory power. It is not too much to ask, now that it has filed suit, for the SEC to plead actual facts.”

In summary, Ruehlen’s counsel (lead by Joseph Warin, Gibson Dunn – here) argues as follows (internal citations omitted)

“Despite investigating this case for many years, the SEC concedes in its Opposition that the Complaint does not allege the basic facts of an FCPA claim:

• It does not identify any Nigerian official—by name or even by position—to whom bribes were paid, authorized, or intended.

• It does not identify any duty that was breached or any law that was violated by the unknown Nigerian official recipient(s).

• It does not state what the unknown Nigerian officials did in exchange for the bribes or how those actions were intended to assist Noble in   obtaining or retaining business.

These structural flaws cannot be cured through discovery.

First, without alleging the identity of the officials, facts describing their duties and obligations under Nigerian law, and facts showing how Mr. Ruehlen allegedly intended to corrupt them, the SEC’s conclusory claims only raise the “sheer possibility that the defendant has acted unlawfully,” which is insufficient to state a claim.

Second, because the plain language of the FCPA permits payments to foreign officials in order to secure routine governmental actions, the Complaint only alleges conduct that is “not only compatible with, but indeed [is] more likely explained by, lawful . . . behavior.”

Third, the Complaint does not meet the standards of notice pleading under Federal Rule of Civil Procedure 8. Mr. Ruehlen is left to guess who was allegedly bribed, the scope of that person’s authority, and whether that person violated any Nigerian law. He must also guess which Noble record he allegedly falsified and which control he allegedly evaded. Accordingly, the Complaint does not provide Mr. Ruehlen the requisite “fair notice of what the . . . claim is and the grounds upon which it rests,” rendering it impossible for him to answer the Complaint, seek discovery, or prepare his defense.

The briefing is complete and the lines have been drawn.

The Jackson & Ruehlen challenge is a significant event in terms of the SEC’s FCPA enforcement program.  Rarely is the SEC put to its burden of proof in FCPA enforcement actions.  As noted in this prior post, the last time the SEC was put to its burden, in a similar case concerning conduct outside the context of foreign government procurement, the SEC lost.  In addition, as noted in prior posts (here and here) the government (DOJ and SEC) have an overall losing record when put to its burden of proof in cases concerning conduct outside the context of foreign government procurement.