The lack of causation between an alleged bribe payment and any alleged business obtained or retained is not a legal defense because the FCPA’s anti-bribery provisions prohibit the offer, payment, promise to pay or authorization of the payment of any money or thing of value. Indeed, several FCPA enforcement actions have alleged unsuccessful bribery attempts in which no business was actually obtained or retained.
Nevertheless, causation ought to be relevant when calculating FCPA settlement amounts, specifically disgorgement. However, the prevailing FCPA enforcement theory often seems to be that because Company A made improper payments to allegedly obtain or retain Contract A, then all of Company A’s net profits associated with Contract A are subject to disgorgement.
Call it the “but for” theory. “But for” the alleged improper payments, Company A would not have obtained or retained the business.
However, this basic enforcement theory ignores the fact that Company A (as is often the case in FCPA enforcement actions) is generally viewed as selling the best product for the best price and because of this, or a host of other reasons, probably would have obtained or retained the business in the absence of any alleged improper payments.
If this general issue is of any interest to you (and it ought to be because it is instructive on many levels) you should read a recent U.K. decision in a civil case arising out of the same core facts alleged in the 2010 FCPA enforcement action against Innospec (see here for the prior post).
In addition, if the so-called “victim” issue in FCPA enforcement actions is of interest to you (i.e. because the FCPA involves bribery and corruption, when there is an FCPA enforcement action, there must be a victim) , you also should read the recent U.K. decision because it is instructive on this issue as well.
Prior to discussing the recent U.K. decision, a bit of background is necessary.
In 2010, Innospec agreed to pay approximately $26 million to resolve DOJ and SEC enforcement actions (see here). The conduct was wide-ranging in that the enforcement action involved alleged violations of U.S. sanctions regarding doing business in Cuba in addition to alleged conduct in violation of the FCPA. Even as to the FCPA conduct, the enforcement action was wide-ranging and included “standard” Iraq Oil-for-Food allegations found in a number of previous enforcement actions (i.e. inflated commission payments to an agent which were then used to pay kickbacks to the government of Iraq) as well as alleged conduct in Indonesia.
The bulk of the enforcement action though concerned DOJ allegations that Ousama Naaman (Innospec’s agent in Iraq) paid various bribes to officials in Iraq’s Ministry of Oil (“MoO”) to “ensure” that a competitor’s product “failed a field trial test and therefore would not be used by the MoO” as well as other allegations that Naaman paid other bribes to officials of the MoO to obtain and retain contracts with MoO on Innospec’s behalf.
The DOJ’s criminal information alleged (or perhaps merely assumed) a casual connection between the alleged bribes and the failed field test, as well as two specific contracts: a 2004 Long Term Purchase Agreement (“LTPA”) and a 2008 Long Term Purchase Agreement.
As often happens in this day and age, an Innospec competitor used the core conduct alleged in the DOJ’s enforcement action “offensively” in bringing civil claims against Innospec and various individuals in a U.K. court.
As highlighted in the U.K. decision, the claims were brought by a Jordanian company which alleged that Innospec “conspired to injure the claimants by engaging in corrupt practices, in particular the bribery of officials within the [MoO] with the intention of inducing its refineries to buy TEL rather than MMT …”.
TEL refers to a lead based fuel additive called tetraethyl lead and MMT refers to methylcyclopentadienyl manganese tricarbonyl, a product developed as a manganese based octane boosting and antiknock additive which was less toxic than TEL.
The U.K. decision is extremely dense as to the facts and circumstances surrounding the MoO’s decision to use TEL vs. MMT.
Relevant to the “but for” causation topic of this post, and as described by the U.K. court, the claimants “claim damages for the losses they allege they have suffered as a consequence of the conspiracy on the basis that, but for the bribery and corruption, the MoO would have started to purchase MMT ….”. As further described by the U.K. court, ”the claimants also allege that between 2002 and 2008 payments were authorized by Innospec for travel and other expenses, including pocket money for Iraqi officials to incur goodwill and ensure continued orders of TEL.”
In the words of the U.K. court, in order for the claims to succeed, the claimants had to establish, among other things, that the decision to replace TEL with MMT “was not implemented because the promise of bribes by Mr. Naaaman procured the MoO to enter into the 2004 LTPA and that prevented sales of MMT” and “that, but for the promise of bribes, the decision would have been implemented and the MoO would have replaced TEL with MMT from early 2004 onwards, so that the counterfactual scenario on which the claim is based would have occurred.” (Confusing verbiage to be sure, but that is what the decision says).
As noted in the U.K. decision, Innospec denied that bribes or the promise of bribes induced the 2004 LTPA, lead to the requirement of the field test or its result, or induced the 2008 LTPA. Innospec argued that despite its admissions in the FCPA enforcement actions, the “court must look carefully and analytically at the evidence there is as to what bribes were paid and promised and when and whether any bribes paid or promised actually led to a decision different from that which would have been made anyway.”
In short, instead of merely alleging or assuming causation between alleged bribe payments and business or other benefits like the U.S. did in the FCPA enforcement action, the U.K. court held approximately 15 days of hearings with multiple witnesses to actually determine if there was a casual link between the alleged bribe payments or other benefits that Innospec obtained.
The end result of this process is that the U.K. court did not find any casual links and indeed found false certain allegations in the DOJ’s FCPA enforcement action.
For instance, as to the DOJ’s allegations that “Naaman, on behalf of Innospec, paid approximately $150,000 in bribes to officials of the MoO to ensure that MMT … failed a field trial test and therefore would not be used by the MoO as a replacement for TEL,” the U.K. court concluded that Naaman never made such payments. Indeed, the U.K. court noted Naaman’s admission (which occurred after resolution of Innospec’s FCPA enforcement action) ”that he had never in fact paid the U.S. $150,000 in bribes to MoO officials to fail the field test, but had simply pocketed the money himself.”
In the words of the court, ”this has an important impact on the issue of causation.”
Regarding Innospec’s admission in the FCPA enforcement action that Naaman did indeed make such payments, the U.K. court stated:
“Unbeknownst to Innospec at the time they admitted these allegations, Mr. Naaman never in fact paid any of these monies to Iraqi officials, but notwithstanding that, Innospec had committed the relevant offense under the Foreign Corrupt Practices Act by making payments to him, believing they were reimbursing him for bribes paid, even though in truth they were not.”
In the words of the U.K. court, Naaman became upset that Innospec was not reimbursing him for certain expenses he viewed as being owed to him and that Naaman “saw the field test on MMT as an opportunity to recoup those expenses and informed Innospec that he proposed bribing the Iraqi engineers to fail the field test. Innospec readily agreed and paid him some U.S. $150,000, expecting it would be used for bribes. He kept the funds himself, believing that MMT would fail the field test [...] On the material before the court, this was the first time it had emerged (some 10 months after Innospec signed the [U.S.] Plea Agreement) that money Innospec had paid to Mr. Naaman believing he had paid or promised to pay bribes was not so paid but simply pocketed by him.”
Regarding the 2004 LTPA that the DOJ alleged was a result of alleged improper payments to Iraqi officials, the U.K. court first noted the following about the U.S. invasion of Iraqi:
“[T]he U.S. authorities put Kellogg, Brown & Root in charge of procurement for the requirements of the Iraqi refineries, effectively replacing the finance department within the MoO. All spending had to be approved by KBR which was the only entity which could actually conclude contracts and purchase products.”
“It seems to me that claimants’ case overlooks the fact that any switch to MMT would have had to be approved by KBR, and the weight of evidence at this time in August 2003 and thereafter is that KBR was not particularly enamoured of MMT, pointing strongly to the likelihood that, even if the claimants were right that there was a decision to continue with TEL and not to switch to MMT, which was in some way induced by bribery, the MoO may well have been driven to the same decision irrespective of bribery, because of the attitude of KBR.”
Elsewhere, the U.K. court termed it “fanciful in the extreme” certain of claimants’ evidence which sought to establish causation between the alleged bribes and business to Innospec.
In short, the U.K. court concluded that the 2004 LTPA was not procured by bribery. Further the U.K. court stated:
“[T]he decision to enter the LTPA had to be and was endorsed by the American authorities . Since there is no basis for saying that they were corrupted by the payment or promise of bribes, that is further demonstration that the LTPA was not procured by bribery.”
Indeed, in the words of the U.K. court, “bribery [was] the least likely explanation” for certain MoO decisions regarding the conduct at issue. Elsewhere, the court stated that any suggestion that considerations made by the MoO “was induced or influenced by bribery by Innospec would be frankly ridiculous” and a “logical non-sequitur and a step too far.”
In closing, the U.K. court stated that even if it were wrong – and that the 2004 LTPA was procured by bribery ” that the MOO would always have followed the course they did, of continuing to use TEL given the octane boost they needed …”.
In terms of the 2008 LTPA, the U.K. court found that “no orders were ever placed under the LTPA, since the investigations by the U.S. authorities intervened.”
In short, what happened in the U.K. action was rather remarkable.
Certain facts alleged in a DOJ FCPA enforcement were subjected to an adversarial process and the resulting judicial scrutiny found certain facts false. Moreover, instead of merely alleging or assuming causation, as if often the case in FCPA enforcement actions as relevant to determining settlement amounts, the U.K. court analyzed causation and found it lacking.
The U.K. action is also instructive when it comes to analyzing whether there are so-called “victims” in all FCPA enforcement actions. In the past several years, there has been calls by some for portions of FCPA settlement amounts to be paid out to “victims” of the conduct alleged in the FCPA enforcement action. (See here and here for prior posts). The general theory seems to be – for example – that if an FCPA enforcement action alleges bribes paid in Nigeria, Nigerian citizens must therefore be the “victims” of the conduct and thus somehow entitled to compensation.
As highlighted in prior posts, while this proposal “feels good,” it is not warranted for many different reasons. In short, this proposal assumes two things: (i) that FCPA enforcement actions always represent provable FCPA violations; and (ii) that there is a always a casual connection between the alleged bribes influencing “foreign official” conduct, that then always causes harm to the citizens of the “foreign official’s” country.
As to the first issue, such an assumption is not always warranted given that the vast majority of FCPA enforcement actions are resolved via non-prosecution agreements, deferred prosecution agreements, neither admit nor deny SEC settlements, or SEC administrative orders. These resolution vehicles often represent the end result of a risk adverse business decision, not necessarily provable FCPA violations. For instance, in the words of the Second Circuit, SEC neither admit nor deny settlements are not about the truth, but pragmatism. For this reason, a typical FCPA resolution vehicle should not automatically trigger other actions or issues (whether plaintiff litigation, whistleblower bounties, or payments to an ill-defined group of alleged victims).
As to the second issue, such an assumption is also not always warranted. Several FCPA enforcement actions fit into one of the following categories: (i) unsuccessful bribery attempts; (ii) payments to receive what the company was otherwise legitimately owed by a foreign government; or (iii) other situations where – for a variety of reasons – there would seem to be a lack of causation between the alleged bribes influencing “foreign official” conduct, that then causes harm to the citizens of the “foreign official’s” country. Indeed, most corporate FCPA enforcement actions involve companies that are otherwise viewed as selling the best product for the best price. Moreover, as highlighted in this prior post, in one FCPA enforcement action a court found that an alleged bribery scheme benefited a foreign country.
Despite the above observations which I have long held, the failed field test allegations in the Innospec FCPA enforcement action legitimately caused me to ponder victim issues in FCPA enforcement actions. After all, the DOJ alleged that Iraqi MoO officials were induced to sabotage a field test of a competitor product that resulted in the more harmful product, from a public health standpoint, to stay on the market.
It was a relatively convincing casual connection between an FCPA enforcement action and potential victims.
However, as highlighted above, the U.K. court found the failed field test allegation false and otherwise found deficient other causal links between other alleged conduct and actual business or benefits obtained or retained.
In short, the U.K. action should instruct the proponents of “victim” compensation that hinging a policy proposal on FCPA resolution documents is not always sound or warranted.