One such occasion has been the recent Layne Christensen enforcement action (see here for the prior post). The theme, which appears to have first been floated by lawyers representing Layne Christensen, but repeated by many others (see here and here for instance), is that the enforcement action was SEC only because of the company’s voluntary disclosure, cooperation and remedial actions.
That’s one narrative.
But some have bucked this narrative and have thankfully injected some informed thought into the conversation surrounding the Layne Christensen enforcement action. And for this, the various individuals identified below receive FCPA Professor apple awards.
This other narrative is that the conduct alleged in the SEC’s enforcement action does not even violate the FCPA’s anti-bribery provisions.
This Shearman & Sterling Client publication, with former DOJ FCPA enforcement Philip Urofsky listed as the lead author, states:
“While a relatively unremarkable case at first glance, the SEC’s charges against Layne Christensen reflect a troubling approach by enforcement agencies to disregard the “business nexus element” of the FCPA’s anti-bribery provisions. These recent practices appear to contradict the Fifth Circuit’s opinion in United States v. Kay and create greater uncertainty as to the scope of the statute.”
Although a seemingly unremarkable case in a field known for blockbuster settlements, Layne Christensen illustrates a troubling practice by the SEC and US Department of Justice to disregard the “business nexus element” of the FCPA. Specifically, the FCPA states that to violate the anti-bribery provisions of the law, the defendant must pay a bribe “to assist the issuer in obtaining or retaining business . . . .” While it is often the case that bribes are paid on a quid pro quo basis in exchange for the award of valuable contracts, there are additional scenarios, like that seen in Layne Christensen, where the bribes merely assisted the defendant to improve its profit margins. In United States v. Kay, the Fifth Circuit held that bribes made in exchange for a reduction in tax liability or customs duties did not per se violate the statute without proof that the increased profits were used to obtain or retain some form of business.”
“Layne Christensen is further evidence that the DOJ’s and SEC’s current approach to the “business nexus element” of the FCPA flies in the face of Kay. By charging companies (often under extreme pressure to settle the case against them) with facts that do not show how the bribes were used to assist in obtaining or retaining business, the DOJ and SEC have created significant uncertainty as to the scope of the FCPA.”
“The SEC’s case against Layne Christensen demonstrates that the government continues to follow the practice … [of] treating the “business nexus requirement” as a seemingly unnecessary feature of the FCPA.”
“Strikingly, short of simply parroting the language of the statute, the SEC made no effort to allege facts as to what specific business was obtained or retained as a result of the reduced tax liability and customs duties. Such a pleading is clearly at odds with the Fifth Circuit’s opinion in Kay which stated that while bribes in exchange for increased profitability could violate the FCPA, they would not, per se, constitute criminal conduct without an allegation that the increased profits were used to obtain or retain business.”
“Whether the DOJ’s and SEC’s approach to the business nexus element of the FCPA stems from a misinterpretation of Fifth Circuit’s opinion or an active attempt to challenge Kay remains to be seen. Nevertheless, the lack of clarity ultimately disadvantages defendants who may be pressured to settle charges over conduct which does not necessarily constitute a crime.”
This is not the first time Urofsky, et al have rightly noted the DOJ/SEC’s unhinged enforcement theories relevant to “obtain or retain business.” (See here for a prior post).
Charles Leeper (DrinkerBiddle) is also deserving of an apple award for his writing on the Layne Christensen enforcement action. He writes:
“According to the Consent Order, between 2005 and 2010 Layne’s subsidiaries made approximately $800,000 in improper payments to foreign officials in various African countries in order to: (1) realize improper tax benefits; (2) secure custom clearance of equipment; (3) avoid assessed customs duties and penalties; and (4) secure work permits for, and avoid deportation of, their employees. While the SEC alleged that Layne realized financial benefits of approximately $3.9 million by making these payments, the Consent Order does not allege that Layne obtained business from the African governments in question, or even that Layne improved its competitive position in those countries on account of these payments. Other than a single rote reference to the alleged purpose of “obtain[ing] or retain[ing] business,” the Consent Order contains no indication that the SEC’s investigation produced evidence satisfying the business nexus element of the FCPA.
Layne’s voluntary disclosure and substantial cooperation likely contributed to the relatively modest penalty that it was assessed by the SEC. But it is equally likely that the SEC showed uncommon leniency, and the DOJ declined prosecution altogether, because an essential element of the FCPA could not be readily proven.”
Apple awards as well for commentary in this Global Investigations Review article.
“[A] number of lawyers are saying the DoJ failed to file charges as Layne did not satisfy the business-nexus element of the FCPA, which requires violating companies to have paid bribes “to assist the issuer in obtaining or retaining business”. They say the SEC’s decision to bring an administrative proceeding despite the business-nexus element not being met, is part of larger trend in both the SEC and the DoJ to wrongly pursue such cases. Kelly Kramer at Mayer Brown in Washington, DC, agreed that the SEC and DoJ are ignoring the precedent set by Kay. “There is very little court guidance. As a consequence the SEC and DoJ have adopted their own interpretation of the FCPA. Essentially, they presume that bribes that increase corporate profits also help companies to obtain or retain business,” he said. “But that is not always true. The DoJ and SEC seem to be using this presumption to avoid the business-nexus element.” Kramer added that as there are so few appellate FCPA cases, due to the tendency for companies to settle, the SEC and DoJ have created their own “common law of settlement”, which has persuasive value for general counsels, but lacks any legal weight.”
The above commentary should not come as a surprise to frequent readers of FCPA Professor. The issue of whether the SEC could have actually proved its allegations in the Layne Christensen enforcement action were first flagged in this prior post.
More broadly, I have been writing about the DOJ/SEC’s unhinged “obtain or retain business” theories for years.
See “The Facade of FCPA Enforcement” (an extensive discussion of the Kay case starts at pg. 918 and concludes: 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 involve customs duties and tax payments or are otherwise alleged to have assisted the payer in securing foreign government licenses, permits, and certifications which assisted the payer in generally doing business in a foreign country. These enforcement actions are profiled [elsewhere in the article.] Because none of these actions have been challenged, it remains an open question whether the payments at issue in these cases, if subjected to judicial scrutiny: (i) would satisfy the FCPA’s “obtain or retain business” element; or (ii) were too attenuated to obtaining or retaining business (such as merely increasing the profitability of an existing profitable business) and thus, per the Kay holding, not a violation of this key FCPA anti-bribery element.”).
See “FCPA Enforcement As Seen Through Wal-Mart’s Potential Exposure” (“[T]he enforcement theory that payments to a foreign official outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny four times. The enforcement agencies lost three of those cases and the fourth case—the Fifth Circuit’s decision in Kay—is equivocal. The decision merely holds that payments to a foreign official outside the context of foreign government procurement can, under appropriate circumstances, fall within the statute. Given the facts and circumstances the Kay court found relevant, it is a highly fact-dependent question whether a payment to a foreign official outside the context of foreign government procurement is subject to the FCPA. A key portion from the Kay ruling logically implicated by Wal-Mart’s alleged payments is the following: ‘‘there are bound to be circumstances in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.’’).
See “Why You Should Be Alarmed by the ADM Enforcement Action” (The Kay court did conclude that payments outside the context of foreign government procurement ‘‘could’’ violate the FCPA, but only if the payments were intended to lower a company’s cost of doing business enough to assist the company in ‘‘obtaining or retaining’’ business. Specifically, the court stated: If 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 business would be unnecessary, and thus surplusage—a conclusion that we are forbidden to reach.”
[The FCPA Apple Award recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics. There is no prize, medal or plaque awarded to the FCPA Professor Apple Award recipient. Just recognition by a leading FCPA website visited by a diverse group of readers around the world. There is no nomination procedure for the Apple Award. If you are writing something informed, candid and fresh about the FCPA or related topics, chances are high that I will find your work during my daily searches for FCPA content.]