Archive for the ‘Opinion Procedure Release’ Category

The FCPA Mulligan Rule?

Tuesday, October 19th, 2010

The FCPA Opinion Procedure regulations (here) state that issuers and domestic concerns subject to the FCPA may “obtain an opinion of the Attorney General as to whether certain specified, prospective — not hypothetical — conduct conforms with the Department’s present enforcement policy regarding the antibribery provisions of the Foreign Corrupt Practices Act.”

Since 1980, the DOJ has issued 55 FCPA opinion procedure releases (see here and here).

In nearly every instance the DOJ expresses an opinion that it does not intend to take any enforcement action as to the disclosed facts or conduct? If my figures are correct, in 54 of the 55 opinion procedure releases (98%) the DOJ expressed such an opinion. [The only exception would appear to be 98-01 (here)].

Perhaps you already knew this, but recently I learned something that may help explain this 98% no enforcement statistic.

What did I learn?

That often times, when the requestor senses that it will not receive a favorable DOJ opinion, it simply withdraws the request. I confirmed that this practice does indeed occur with a former high-ranking DOJ FCPA official and others.

Call it the FCPA mulligan rule.

Sec. 80.15 of the opinion procedure regulations specifically states that “a request submitted under the foregoing procedure may be withdrawn prior to the time the Attorney General issues an opinion to such request.”

But here is the issue as I see it.

How does the requestor get the sense that it will receive an unfavorable DOJ opinion so that it can withdraw the request before the opinion procedure is publicly released?

After all, Sec. 80.09 of the regulations, titled “no oral opinion,” states: “no oral clearance, release or other statement purporting to limit the enforcement discretion of the Department of Justice may be given.”

This would seen to eliminate DOJ oral communications to the requestor as to DOJ’s initial observations which may then motivate the requestor to withdraw the request.

Sec. 80.8 of the regulations requires that the Attorney General “respond to the request by issuing an opinion …”. So if the initial DOJ observation which then motivates the requestor to withdraw the request is communicated in writing, should the writing be made public in the same fashion as the opinions that are actually released? Would this not add to the mix of information available as to the FCPA?

As long as I am in question mode, let me throw out this question (see here for the prior post) – should DOJ’s declination decisions be made public?

At a recent public event, I asked Charles Duross (DOJ FCPA chief) this question and he said (see here) that it was a “difficult issue.” In a recent video (here – start at the 6 minute mark), William Stuckwisch (DOJ) wondered aloud whether DOJ declination decisions should be made public. Last, but not least, in this recent Q&A with Sue Reisinger of Corporate Counsel Billy Jacobson (a former high-ranking DOJ FCPA official) stated: “The Justice Department could publicize cases anonymously that it has not brought because of the company’s actions.”

My Two Cents On The FCPA’s Affirmative Defenses

Thursday, September 9th, 2010

Students looking for scholarship ideas, should consider the Foreign Corrupt Practices Act.

Why?

There is a good chance that publication of an article will generate coverage and discussion on the blogosphere and elsewhere.

Case in point is Kyle Sheahen’s “I’m Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act.” (see here).

For prior coverage of Sheahen’s article see here, here and here.

Sheahen’s article is about the FCPA’s two affirmative defenses – the so-called local law and promotional expense defenses.

Big picture, Sheahen terms these defenses as being “hollow,” “illusory,” and “useless in practice.”

For starters, I respectfully disagree with Sheahen’s statement that “business and businessmen accused of giving bribes to foreign officials have fared poorly in federal courts” as well as the implication that this somehow supports his thesis.

The three FCPA trials cited from 2009 – Frederick Bourke, William Jefferson, and Gerald and Patricia Greene were a mixed bag for the DOJ, not slam-dunk successes.

For starters, the jury found Jefferson not guilty of substantive FCPA anti-bribery violations (see here).

Sure, Bourke was found guilty by a jury of conspiracy to violate the FCPA and the Travel Act (as well as making false statements to the FBI) (see here), yet when the DOJ alleges that one is a key participant of a “massive bribery scheme” yet secures only a 366 day sentence (see here) from a judge who remarks that “after years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both” – I struggle to put such a case in the decisive “win” category for the DOJ. Plus, Bourke’s case is currently on appeal (see here).

The Green case (see here) would seem to represent the cleanest win for the DOJ even though the sentencing judge expressed concerns whether the Green’s conduct caused any harm in sentencing the couple to six months in prison thereby rejecting the DOJ’s recommended ten year sentence. (See here).

Sheahen’s article was published before the Giffen Gaffe (see here). Giffen aggressively mounted a legal defense and, whether for legal, political or other reasons, the case that began with charges that Giffen made “more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan” ended with a one-paragraph superseding information charging a misdemeanor tax violation. Further, back in 2004, Giffen was successful in having FCPA-related criminal charges dismissed when the trial court judge (see here) concluded that the DOJ offered “the slenderest of reeds” to support the collateral criminal charge.

Going back in time …

George McLean won his FCPA case when the Fifth Circuit concluded, see 738 F.2d 655 (5th Cir. 1984) that the FCPA, as it then existed because of the subsequently repealed Eckhardt Amendment, barred prosecution.

Donald Castle and Darrell Lowry (two Canadian “foreign officials”) won their FCPA-related cases, see 741 F.Supp. 116 (N.D. Tex. 1990), when the court dismissed their criminal indictments. The DOJ asserted that even though the officials could not be prosecuted under the FCPA, they could be prosecuted under the general conspiracy statute (18 USC 371) for conspiring to violate the FCPA. However, the court declined DOJ’s invitation to extend the reach of the FCPA through the application of the conspiracy statute to Castle and Lowry.

Richard Liebo was acquitted, following a three week jury trial, of several counts including nine counts of violating the FCPA’s anti-bribery provisions and one count of violating the FCPA’s accounting and record keeping provisions. See 923 F.2d 1308 (8th Cir. 1991). He was found guilty of one FCPA count concerning his company’s purchase of honeymoon airline tickets for the cousin and close friend of Captain Ali Tiemogo, the chief of maintenance for the Niger Air Force. In connection with this conviction, the Eighth Circuit found that the district court “clearly abused its discretion in denying Liebo’s motion for a new trial” and remanded for a new trial.

Hans Bodmer didn’t fare too badly either in 2004 when Judge Shira Scheindlin (the same judge in the Bourke case) held that the portion of the criminal indictment “charging Bodmer with conspiracy to violate the FCPA contravenes the constitutional fair notice requirement, and the rule of lenity demands its dismissal.”

Of course, the DOJ has had its fair share of FCPA successes, but it remains a misperception that FCPA defendants have “fare[d] so badly” in FCPA trials as Sheahen, and others, have asserted.

Returning to the substance of Sheahen’s article, he discusses the October 2008 Bourke decision by Judge Scheindlin (see 582 F.Supp.2d 535) – a case of first impression on the FCPA’s local law defense.

Bourke argued that the FCPA’s local law affirmative defense was applicable because, under Azeri law even though the payments were illegal, he was relieved from criminal responsibility when he reported the payments at issue to the President of Azerbaijan.

Judge Scheindlin disagreed, drawing a hard line between payments – the focus of the FCPA’s local law affirmative defense in her mind – and the related issue of whether a person could not be prosecuted in the foreign country because a provision may relieve that person from criminal responsibility.

Judge Scheindlin concluded that “an individual may be prosecuted under the FCPA for a payment that violates foreign law even if the individual is relieved of criminal responsibility for his actions by a provision of the foreign law.”

I agree with Sheahen’s statement that Judge Scheindlin’s decision of first impression narrowed the FCPA’s local law defense “to the point of extinction.”

I would go a step further and argue that Judge Scheindlin’s decision would seem to violate the basic axiom that a statute should be construed so that effect is given to all of its provisions, so that no part will be inoperative or superfluous, void or insignificant.

In other words, courts should not suppose that Congress intended to enact unnecessary statutes and there is a presumption against interpreting a statute in a way that renders it ineffective.

The local law affirmative defense was added to the FCPA in 1988 and we must presume that Congress intended to enact the affirmative defense for some reason.

It was widely assumed by Congress in 1977 (when the FCPA was enacted), and by the Congress that amended the FCPA in 1988 to include the local law defense as well, that no nation’s written law permitted bribery of its officials.

Yet, given Judge Scheindlin’s narrow construction of the local law defense, the decision would appear to render the local-law defense (a statutory term that must have some meaning) inoperative, superfluous and insignificant.

As to the promotional expense defense, I would respectfully disagree with Sheahen’s apparent conclusion that the defense is meaningless just because it has never been successfully invoked by an FCPA defendant at trial.

Because of the “carrots” and “sticks” the DOJ and SEC possess in an FCPA enforcement action, and because of the resolution vehicles typically offered to FCPA defendants to resolve an FCPA enforcement action (such as non and deferred prosecution agreements) there is much about the FCPA that has never been subjected to judicial scrutiny.

That does not mean however that an element or defense not successfully invoked at trial renders that element or defense meaningless or hallow.

Indeed, Sheahen discusses the FCPA Opinion Procedure Release process. Through this mechanism, those subject to the FCPA have gained degrees of comfort from DOJ “no enforcement” opinions that are based on the promotional expense defense.

Although the Opinion Procedure Releases are not precedent, countless others in the legal, business, and compliance communities find comfort in these releases, as well as the statute itself, when analyzing real-world conduct for potential FCPA exposure.

FCPA enforcement is in need of many fixes and indeed the Opinion Procedure Release process is likely not the best way for the DOJ to make its enforcement positions known.

However, these structural flaws in FCPA enforcement, coupled with the typical ways in which FCPA enforcement actions are resolved, necessarily leads to the conclusion that the FCPA’s affirmative defenses are “hollow,” “illusory,” and “useless in practice.”

*****

I provided Sheahen with my draft post so that he could respond and here is what he said.

“Professor Koehler,

Thank you for your thorough analysis. Although DOJ’s trial record in FCPA prosecutions is not a clean sheet, the government has still been substantively successful in almost every FCPA case that has gone to trial. Further, the fact remains that no FCPA defendant has successfully invoked either the local law or the promotional expenses defense in an FCPA enforcement action.

Also, while I agree that the promotional expenses defense provides some guidelines for compliance with the FCPA, neither it nor the local law defense provide a meaningful defense to an enforcement action. Accordingly, Congress must take action to ensure that individual and corporate defendants have the actual ability to raise the affirmative defenses contemplated by the statutory scheme.

Thanks again and all the best,

Kyle Sheahen
sheahen2010@lawnet.ucla.edu

A Narrow Opinion Procedure Release

Wednesday, September 8th, 2010

The DOJ recently issued FCPA Opinion Procedure Release No. 10-03 (see here).

As I discuss in this post, the disclosed facts suggest a broad range of potential issues, but the DOJ’s analysis is strangely narrow and would appear to contain a key acknowledgment (in contrast to prior opinion procedure releases) that local law does indeed matter when determining who is a “foreign official” under the FCPA.

The disclosed facts are as follows.

The “Requestor” is a “limited partnership established under U.S. law,” “headquartered in the U.S.,” and “engaged in development of natural resources trading and infrastructure.”

As described in the release:

“The Requestor is pursuing an initiative with a foreign government regarding a novel approach to particular natural resource infrastructure development. Because the approach is relatively novel and the market is dominated by a consortium of established companies, the Requestor determined that it required assistance in entering into discussions with the foreign government.”

The solution?

According to the release, the Requestor plans to contract with a consultant (a U.S. partnership whose sole owner is a U.S. citizen) who just so happens to have “extensive contacts in the business community and the government in the foreign country” and who “previously and currently holds contracts to represent the foreign government and act on its behalf, including performing marketing on behalf of the Ministry of Finance, and lobbying efforts in the U.S.”

In other words, to get things done in the foreign country, the Requestor would like to turn to someone who knows how to get things done in the foreign country and indeed someone who appears to have a track record of getting things done for the foreign government itself as the consultant is a “registered agent of the foreign government” and has “represented ministries of the foreign government that will play a role in the discussions of the Requestor’s initiative.”

Sounds like plenty of red flags.

In addition, according to the release, “the Consultant will be paid a signing bonus by the Requestor at the time the consulting contract is signed.” Further, the release notes that the “bulk of any payment by the Requestor to the Consultant under the contract will come in the form of success fees, should the Consultant’s efforts result in the foreign government entering into a business relationship with the Requestor.”

Ordinarily, the DOJ views third-party success fees in connection with foreign government business with a high-degree of suspicion.

But not so when it comes to the Requestor’s proposed consultant.

The release contains several “safeguards” the Requestor put in place to “ensure that no conflict of interest would arise between the Consultant’s representation of the Requestor and the Consultant’s separate and unrelated representation of the foreign government.”

Most FCPA enforcement actions involve allegations that a company paid something of value – such as a success fee – to a third-party, such as a consultant, who then provides a portion of the money to a “foreign official” in violation of the FCPA.

The analysis is often whether the company provided the thing of value to the third-party under circumstances that suggest the company was “aware of a high probability” that the thing of value would be passed along to the “foreign official.”

Although the Requestor’s disclosed facts do not suggest a perfect analogy, it is interesting to note that the DOJ’s analysis is not focused on the broad range of potential issues suggested by the disclosed facts.

Rather, in the words of the DOJ, “its opinion is limited to the narrow question of whether the Consultant would be a ‘foreign official’ for purposes of the payments under the consulting contract.”

On this issue, the DOJ stated that because the Consultant is ordinarily “an agent of the foreign government” the Consultant and its employees could be “foreign officials” for purposes of the FCPA “in certain circumstances.”

However, the DOJ was “satisfied that for purposes of the contract with the Requestor” the Consultant will “not be acting on behalf of the foreign government” and that therefore the Consultant is not a “foreign official.”

In its “foreign official” analysis, the DOJ cites local law – a reference to the Requestors disclosure that: “[a]s a matter of law local, the Consultant and its employees are not employees or otherwise officials of the foreign government, and the Requestor has secured a local law opinion that it is permissible for the Consultant to represent both the foreign government and the Requestor at the same time.”

The DOJ’s apparent acknowledgment that local law is indeed relevant in determining who is a “foreign official” under the FCPA is encouraging – even though it stands in contrast to the DOJ’s prior statements in opinion procedure releases.

For instance, in Opinion Procedure Release No. 94-01 (see here) the DOJ opined that a general director of a state-owned enterprise being transformed into a joint stock company is a “foreign official” under the FCPA despite a local law opinion that the individual would not be regarded as either a government employee or a public official in the foreign country.

Similarly, in Opinion Procedure Release No. 08-01 (see here) the DOJ opined that the “Foreign Private Company Owner” at issue was a “foreign official” for purposes of the FCPA notwithstanding the fact that other government officials in the country at issue concluded that the relevant privatization regulations did not apply to the “Foreign Private Company Owner” because he was not a government official for purposes of the regulations.

Even though the DOJ’s analysis in Opinion Procedure Release 10-03 is limited to the narrow question of whether the Consultant “would be a ‘foreign official’ for purposes of the payments under the consulting contract” it does seem to recognize that Requestor’s proposed relationship with the Consultant could perhaps pose some problems.

The substance of DOJ’s analysis ends as follows:

“The Department does not opine on any other aspect of the proposed contract or any other prospective conduct involved in the Request. Indeed, while the Consultant is not a foreign official for FCPA purposes under the limited facts and circumstances described by the Requestor, the proposed relationship increases the risk of potential FCPA violations. This opinion does not foreclose the Department from taking enforcement action should an FCPA violation occur during the execution of the consultancy.”

Requestors are usually able to gain some level of comfort from a DOJ “no enforcement action” opinion in an FCPA Opinion Procedure Release. However, given this last paragraph, the Requestor in Opinion Procedure Release 10-03 may still have some sleepless nights ahead.

*****

As to an oft heard criticism of the FCPA Opinion Procedure Release system – that it takes too long and thus is of little value in a world where business decisions must be made in days or weeks, not months – the release notes that materials were submitted by the Requestor on March 9th, supplemental materials were submitted by the Requestor on August 2nd, and the DOJ release was issued on September 1st.

Digi’s Disappearing Act … And A Proposal

Wednesday, August 4th, 2010

SEC filings are carefully crafted, tightly worded documents created by in-house specialists and often vetted by outside professionals. In short, precise words matter in SEC filings.

In a July 22nd 8-K filing (here), Digi International Inc. provided an update on its previously disclosed FCPA internal investigation including this statement: “[t]he investigation also identified certain books and records and related internal controls issues under the FCPA.” (emphasis added).

Given the above wording, it would seem reasonable to conclude that the company (with the assistance and input from outside counsel) identified conduct that implicated the FCPA. Why else would the disclosure contain the clause “under the FCPA”?

Fast forward to August 2nd when the company issued a press release (here) stating, in reference to the July 22nd 8-K and the investigation, that: “Digi has now received confirmation through discussions with representatives of the DOJ and the SEC that they will not be initiating any enforcement proceedings against Digi.”

That’s quite the disappearing act. And a quick one at that.

As noted in a prior post (here) Digi is “the leading supplier of multifunction communication devices to the U.S. Federal Government.”

FCPA enforcement (or lack of enforcement in this case) is already largely an opaque process and Digi’s curious disappearing act serves as another example for why transparency and accountability in FCPA enforcement is needed.

So here is my proposal to shed more light on the DOJ and SEC’s enforcement of the FCPA.

In instances such as Digi (i.e. when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC and when the DOJ and the SEC decline enforcement) require the DOJ and the SEC to publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

Here is why I think the proposal makes sense and is in the public interest.

For starters, the DOJ and the SEC are already wildly enthusiastic when it comes to talking about FCPA issues. Enforcement attorneys from both agencies are frequent participants on the FCPA conference circuit and there seems to be no other single law that is the focus of more DOJ or SEC speeches than the FCPA. Thus, there is clearly enthusiasm and ambition at both agencies when it comes to the FCPA.

Further, both the DOJ and the SEC have the resources to accomplish this task. Both agencies have touted the increased FCPA resources in their respective offices and the new personnel hired to focus on the FCPA. Combine enthusiasm and ambition with sufficient resources and personnel and the proposal certainly seems doable.

Most important, the DOJ is already used to this type of exercise. It is called the FCPA Opinion Procedure Release (see here) a process the DOJ frequently urges those subject to the FCPA to utilize.

Under the Opinion Procedure regulations, an issuer or domestic concern subject to the FCPA can voluntarily disclose prospective business conduct to the DOJ which then has 30 days to respond to the request by issuing an opinion that states whether the prospective conduct would, for purposes of the DOJ’s present enforcement policy, violate the FCPA.

The DOJ’s opinions are publicly released (see here for the most recent one) and the FCPA bar and the rest of FCPA Inc. study these opinions in great detail in advising clients largely because of the general lack of substantive FCPA case law.

If the DOJ is able to issue an enforcement opinion as to voluntarily disclosed prospective conduct there seems to be no principled reason why the enforcement agencies could not issue a non-enforcement opinion as to voluntarily disclosed actual conduct

Such agency opinions would seem to be more valuable to those subject to the FCPA than the already useful FCPA Opinion Procedure Releases. If the enforcement agencies are sincere about providing guidance on the FCPA, as they presumably are, such agency opinions would seem to provide an ideal platform to accomplish such a purpose.

Requiring the enforcement agencies to disclose non-enforcement decisions after a voluntary disclosure could also inject some much needed discipline into the voluntary disclosure decision itself – a decision which seems to be reflexive in many instances any time facts suggest the FCPA may be implicated.

(For more on the important voluntary disclosure decision and the role of FCPA counsel see here.)

Notwithstanding the presence of significant conflicting incentives to do otherwise, it is hoped that FCPA counsel advises clients to disclose only if a reasonably certain legal conclusion has been reached that the conduct at issue actually violates the FCPA. Accepting this assumption, transparency in FCPA enforcement would be enhanced if the public learned why the enforcement agencies, in the face of a voluntary disclosure, presumably disagreed with the company’s conclusion as informed by FCPA counsel. If the enforcement agencies agreed with the conclusion that the FCPA was violated, but decided not to bring an enforcement action, transparency in FCPA enforcement would similarly be enhanced if the public learned why.

A final reason in support of the proposal is that it would give companies such as Digi a benefit by contributing to the mix of public information about the FCPA.

In most cases, companies spend millions of dollars investigating conduct that may implicate the FCPA and on the voluntary disclosure process. When the enforcement agencies decline an enforcement action, presumably because the FCPA was not violated, these costs are forever sunk and the company can legitimately ask why it just spent millions investigating and disclosing conduct that the DOJ and the SEC did not conclude violated the FCPA.

However, if the enforcement agencies were required to publicly justify their declination decision, the company would achieve, however small, a return on its investment and contribute to the mix of public information about the FCPA – a law which the company will remain subject to long after its voluntary disclosure and long after the enforcement agencies declination decision. Thus, the company, the company’s industry peers, and indeed all those subject to the FCPA would benefit by learning more about the DOJ and the SEC’s enforcement conclusions.

Transparency, accountability, useful guidance, a return on investment.

All would be accomplished by requiring the enforcement agencies to publicly justify a declination decision in the limited instances where no enforcement action follows a voluntary disclosure.

A Results Based Opinion Procedure Release?

Tuesday, July 27th, 2010

The Department of Justice recently issued (see here) an FCPA opinion procedure release – a meaningful event in the FCPA arena given the general lack of substantive FCPA case law. [To read more about the detailed requirements of the Foreign Corrupt Practices Act Opinion Procedure process (see here and here)]

Reading Opinion Procedure Release 10-02, in which a “non-profit, U.S. based microfinance institution” was the Requestor, I found myself returning to the same question – is this a results-based DOJ opinion?

The big-picture facts are as follows: to get a government-issued license, an entity subject to the FCPA is directed by a government agency to provide something of value to an institution whose board members include a sitting government official and a former government official.

According to the DOJ’s analysis, an analysis that mentions the word “humanitarian” more than once, the contemplated conduct would not cause the DOJ to take any enforcement action.

As explained below, a relevant factor in the DOJ’s opinion is the due diligence the Requestor undertook. Yet, if … say an oil and gas company … undertook similar due diligence steps would such due diligence be viewed as perfuctory or superficial?

Was the humanitarian, non-profit microfinance institution viewed a bit differently than a similarily situated for-profit company?

Was the DOJ’s mindset as to the red flags involving the non-profit along the following lines – this must be legitimate until it is proven that it isn’t?

Conversely, is the DOJ’s mindset as to red flags involving for profit companies, particularly those in high-risk industries, along the following lines – this must be illegal until it is proven that it is legal?

I don’t know the answers to these questions and by posing them I am not drawing any conclusions myself.

Merely interesting questions to ponder while reviewing the facts of Opinion Procedure Release 10-02.

The facts are as follows.

The Requestor is “in the process of converting all of its local operations to commercial entities that are licensed as financial institutions, in order to permit them to attract capital and expand their services to include offerings such as savings accounts, microinsurance and remittances.”

“One of those operations is a wholly-owned subsidiary in a country in Eurasia” which is “currently organized as a limited liability company under the laws of the Eurasian country and operates under a special non-banking financial institution license from the Central Bank of that country” and whose activities are “currently overseen by an agency of the Eurasian country (the ‘Regulating Agency’).”

“As part of its oversight of the Eurasian Subsidiary and [its] proposed transition to commercial status, the Regulating Agency has pressed the Eurasian Subsidiary to take steps to ‘localize’ its grant capital to ensure that it remains in the Eurasian country.”

“Among other things, the Regulating Agency has insisted that the European Subsidiary make a grant to a local microfinance institution [Local MFI] in an amount equal to approximately 33 percent of the Eurasian Subsidiary’s original grant capital.”

“The Regulating Agency has provided a list of Local MFI’s in the Eurasian country and has stated that the Eurasian Subsidiary could not fulfill its localization obligation unless it provided grant funding to one or more of them.”

According to the release, the Requestor “is concerned that compelled grants to an institution on a short list of institutions – without appropriate safeguards – raise red flags under the FCPA.” (emphasis added).

According to the relase, the Regulating Agency rejected the Requestor’s alternative proposals and insisted on the above described arrangement.

The thing of value demanded by the Regulating Agency is not exactly spare change.

According to the release:

“To meet the Regulating Agency’s requirements, the Eurasian Subsidiary proposes to contribute a total of $1.42 million to expand the loan and technical capacity of a Local MFI which previously has received grant funding from the foreign aid community. Of the $1.42 million, $1.07 million would be used to increase the Local MFI’s loan capital – to more than triple its current loan capital. The remaining $350,000 would be used in support of the grant: (a) $50,000 to pay for loan tracking and reporting management system software; (b) $120,000 for capacity-building services and support, including hiring six additional staff members and retaining vendors to provide training and other technical assistance; and (c) $180,000 for the engagement of two independent organizations to monitor and audit the use of the proposed grant (the “Proposed Grant”).”

As referenced above, the Requestor conducted certain due diligence in connection with the “compelled grant.”

According to the release:

“The Eurasian Subsidiary undertook a three-stage due diligence process to vet the potential grant recipients and select the proposed grantee. First, it conducted an initial screening of six potential grant recipients by obtaining publicly available information and information from third-party sources. Based on this review, it ruled out three of the six MFI candidates as generally unqualified to receive the grant funds and put them to effective use. Second, the Eurasian Subsidiary undertook further due diligence on the remaining three potential grant recipients. This due diligence was designed to learn about each organization’s ownership, management structure and operations; it involved requesting and reviewing key operating and assessment documents for each organization, as well as conducting interviews with representatives of each MFI to ask questions about each organization’s relationships with the government and to elicit information about potential corruption risk. Based on the information obtained during this second-stage review, the Eurasian Subsidiary ruled out two of the three remaining potential grant recipients: one for conflict of interest concerns, the other after the discovery of a previously undisclosed ownership change in the entity. As a third round of due diligence, the Eurasian Subsidiary undertook targeted due diligence on the remaining potential grant recipient, the Local MFI. This diligence was designed to identify any ties to specific government officials, determine whether the organization had faced any criminal prosecutions or investigations, and assess the organization’s reputation for integrity.”

The release notes that this “final round of due diligence did not identify information of potential corruption in connection with the Proposed Grant.”

However, it did “uncover that one of the board members of both the Local MFI and the Local MFI’s Parent Organization is a sitting government official in the Eurasian country and that other board members are former government officials.”

According to the release:

“The sitting government official, however, serves in a capacity that is completely unrelated to the microfinancing industry. In addition, under the law of the Eurasian country, sitting government officials may not be compensated for this type of board service, and the Local MFI confirmed that neither its own board members nor the board members of the Local MFI’s Parent Organization receive compensation for their board service. The proposed grant agreement would expressly prohibit the Local MFI from transferring any of the grant funds to the Local MFI’s Parent Organization or otherwise using the grant funds to compensate board members of either the Local MFI or the Local MFI’s Parent Organization.”

The release then mentions several “significant controls” proposed by the Requestor as to the Proposed Grant, including “the grant agreement would expressly prohibit the Local MFI from transferring any of the grant funds to the Local MFI’s Parent Organization or otherwise using the grant funds to compensate board members of either the Local MFI or the Local MFI’s Parent Organization.”

Based on these core facts, the DOJ’s analysis is:

“the Department does not intend to take any enforcement action with regard to the proposed transaction…”

The DOJ first stated that the Requestor was subject to the FCPA’s anti-bribery provisions and that the Proposed Grant to the Local MFI was indeed “for the purpose of obtaining or retaining business.”

The DOJ framed the question as follows:

“The issue presented is whether the Proposed Grant would amount to the corrupt giving of anything of value to any officials of that country in return for obtaining or retaining business. Based on the due diligence that has been done and with the benefit of the controls that will be put into place, it appears unlikely that the payment will result in the corrupt giving of anything of value to such officials.”

The DOJ stated:

“As an initial matter, it is important to note that the expressed motivation of the Regulating Agency here is to ensure that grant money given to the Eurasian Subsidiary for humanitarian purposes in the Eurasian country continues to be used for humanitarian purposes in that country. The Requestor was concerned, nevertheless, that without due diligence and appropriate controls, such a grant could carry a significant risk that the result might be the transfer of things of value to officials of the Eurasian country.”

The DOJ continued:

“The Department is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations. As noted above, the Requestor conducted three rounds of due diligence. The controls that the Requestor proposes would ensure with reasonable certainty that the grant money from the Eurasian Subsidiary would not be transferred to officials of the Eurasian country. As noted, these controls include the following: the staggered payment of grant funds; ongoing monitoring and auditing; the earmarking of funds for capacity-building; a prohibition on the compensation of board members; and the institution of an anti-corruption compliance program.”

The DOJ then lists three other opinion releases that deal with charitable-type grants or donations and ultimately states that the Proposed Grant “is consistent with the Department’s past approach to grant-related requests.”

This is the curious aspect of the DOJ’s analysis because the Requestor’s Proposed Grant was not charity or a donation, rather it was a “compelled grant” (a term DOJ used earlier in the release) specifically requested by the Regulating Agency as a condition to the Requestor obtaining the desired license.

Results-based opinion?

You be the judge.

For other coverage of Opinion Procedure Release 10-2, see here, here and here.