It is not everyday FCPA details are dissected on the editorial page of a major newspaper. But then again, it is not everyday that the parent company of a major newspaper is embroiled in a major scandal that has an FCPA element to it.
Yesterday, in a lengthy and wide-ranging editorial (here), the Wall Street Journal had this to say about the FCPA implications of the News Corp. scandal.
“The political mob has been quick to call for a criminal probe into whether News Corp. executives violated the U.S. Foreign Corrupt Practices Act with payments to British security or government officials in return for information used in news stories. Attorney General Eric Holder quickly obliged last week, without so much as a fare-thee-well to the First Amendment.”
“The foreign-bribery law has historically been enforced against companies attempting to obtain or retain government business. But U.S. officials have been attempting to extend their enforcement to include any payments that have nothing to do with foreign government procurement. This includes a case against a company that paid Haitian customs officials to let its goods pass through its notoriously inefficient docks, and the drug company Schering-Plough for contributions to a charitable foundation in Poland.”
“Applying this standard to British tabloids could turn payments made as part of traditional news-gathering into criminal acts. The Wall Street Journal doesn’t pay sources for information, but the practice is common elsewhere in the press, including in the U.S.”
With the WSJ now suggesting that payments to police officers are “part of traditional news-gathering” – at least in certain countries – and it suggesting that paying sources for information is “common,” it may be possible that the next FCPA industry sweep will be of the media industry. Previous industry sweeps have included the oil and gas industry, a current sweep of the pharmaceutical / medical device industry that has been active for some time, and a recently initiated sweep of the financial services industry.
The remainder of this post details the two FCPA enforcement actions referenced in the WSJ’s editorial.
For starters, the WSJ is correct when its stated as follows. “The foreign-bribery law has historically been enforced against companies attempting to obtain or retain government business. But U.S. officials have been attempting to extend their enforcement to include any payments that have nothing to do with foreign government procurement.”
During the FCPA’s first 20 years, every FCPA enforcement action concerned allegations that payments to a “foreign official” assisted the payor in “obtaining or retaining business” with a foreign government or alleged foreign government “department, agency, or instrumentality.”
FCPA enforcement then changed – most notably with the U.S. v. Kay prosecution.
U.S. v. Kay
In 2001, David Kay and Douglas Murphy (the “Defendants”), the president and vice president of Houston-based American Rice, Inc. (“ARI”), were criminally indicted. The indictment charged FCPA anti-bribery violations and alleged that the defendants made improper payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes owed by ARI to the Haitian government.
The indictment, while specific as to other items, merely tracked the FCPA’s “obtain or retain business” language and did not specifically allege how the alleged payments assisted ARI in obtaining or retaining business in Haiti or what business was obtained or retained. “In other words, the indictment recite[d] no facts that could demonstrate an actual or intended cause-and-effect nexus between reduced taxes and obtaining identified business or retaining identified business opportunities.”
The trial court granted Defendants’ motion to dismiss the indictment and held, as a matter of law based on the FCPA’s legislative history, that the alleged payments were not payments made to “obtain or retain business” and thus did not fall within the scope of the FCPA’s anti-bribery provisions. The DOJ appealed the decision and one issue on appeal was whether payments to “foreign officials” to obtain favorable tax and customs treatment can come within the scope of the FCPA’s anti-bribery provisions.
The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” element was ambiguous and it thus analyzed the FCPA’s legislative history. The Fifth Circuit focused specifically on the U.S. Senate’s 1977 sponsored bill and the SEC report on which the Senate’s proposal was based. According to the court, the SEC report “exhibited concern about a wide range of questionable payments [including those at issue in Kay] that were resulting in millions of dollars being recorded falsely in corporate books and records.” Although the Fifth Circuit recognized that the Senate’s proposal did not expressly cover payments that seek to influence the administration of tax laws or seek a favorable tax treatment, the Senate, in the words of the court, “was mindful of bribes that influence legislative or regulatory actions, and those that maintain established business opportunities.” In short, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than those that only directly influence the acquisition or retention of government contracts or similar arrangements. The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.
However, the Kay court emphatically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. According to the court, the key question of whether Defendants’ alleged payments constituted an FCPA violation depended on whether the payments were intended to lower ARI’s costs of doing business in Haiti enough to assist ARI in obtaining or retaining business in Haiti. The court then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.
The court specifically stated:
“[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”
Despite the equivocal nature of the Kay holding, the decision clearly energized the enforcement agencies and post-Kay there has been an explosion in FCPA enforcement actions where the alleged improper payments have nothing to do with obtaining or retaining foreign government business. Many of these enforcement actions are profiled in my article “The Façade of FCPA Enforcement” (here at pages 971-976). None of these enforcement actions were challenged or subjected to meaningful judicial scrutiny and the Kay decision remains the only caselaw on the FCPA’s key “obtain or retain business” element.
For original source documents related to the Kay enforcement action see here.
The other FCPA enforcement action referenced by the WSJ is the 2004 enforcement action against Schering-Plough. Notably this was only an SEC civil enforcement action and only charged FCPA books and records and internal control violations.
The SEC civil complaint (here) alleged that Schering-Plough violated the FCPA when its wholly-owned Polish subsidiary (“S-P Poland”) improperly recorded a bona fide charitable donation to a Polish foundation where the founder/president of the foundation was also the director of a government health fund (the “Director”) that provided money to hospitals throughout Poland for the purchase of pharmaceutical products. According to the SEC, “during thc period in which the payments were being made to the foundation, S-P Poland’s sales two of its oncology products, increased disproportionately compared with sales of those products in other regions of Poland.” As is typical in SEC FCPA enforcement actions, there was no meaningful judicial scrutiny of this action and the company settled the charges without admitting or denying the SEC’s allegations.