Reading the news with FCPA goggles on is an occupational hazard.
So it was when reading this recent Wall Street Journal concerning the dysfunctional Venezuelan government and the impact on air travel in the country. According to the article”the cash-strapped government [is] holding back on releasing $3.8 billion in airline-ticket revenue because of strict currency controls,” and because of this, international airlines “have slashed service to Venezuela by half since January, adding another layer of frustration to daily life” in Venezuela. The article further states that “despite several months of talks over the money Venezuela owes to airlines, little progress has been made” and that “about two-thirds of the 24 airlines that are affected, including those with the most money tied up in Venezuela, haven’t reached a payment agreement with the state.” The article adds that those airlines “that have reached deals lack guarantees that the funds will be released.”
The question is posed: can Foreign Corrupt Practices Act issues arise if a company makes payments to a foreign official who refuses, in the absence of such payments, to release funds legitimately owed to the company?
Your mind is probably wondering through the statutory elements.
Congress tells us in the FCPA’s legislative history that “the word ‘corruptly’ connotes and evil motive or purpose.” How can seeking what one is legally entitled to receive evil?
Obtain or retain business.
In U.S. v. Kay, the 5th Circuit did conclude that payments outside the context of foreign government procurement “could” violate the FCPA, but only if 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 we are forbidden to reach.”
Thus, how can seeking what one is legally entitled to receive satisfy the “obtain or retain business” element?
The FCPA expressly excludes from the anti-bribery provisions payments made “to expedite or to secure the performance of a routine government action by a foreign official.”
How can seeking what one is legally entitled to receive not fit within the exception for “secur[ing] the performance of a routine government action”?
Despite the above legal authority, there have been at least three – what can only be called dubious – FCPA enforcement actions based on companies or individuals seeking what they are legally entitled to receive.
In 2013, the DOJ and SEC extracted $54 million from Archer Daniels Midland Co. and related entities. As explained in the article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action,” the principal feature of the enforcement action was that ADM and its shareholders were victims of a corrupt Ukraine government which refused to release value-added tax refunds legitimately owed to the company. In the words of the DOJ, “the Ukrainian government did not have the money to pay VAT refunds that it owed to companies that sold Ukrainian goods outside of Ukraine.” Likewise, the SEC acknowledged that the “Ukrainian government determined to delay paying the VAT refunds owed or did not make any refunds payments at all.”
Prior to the ADM action, there was a 2010 SEC action against Joe Summers concerning conduct in Venezuela. The title of this previous post was “Paying to Secure Receivables Is Now Bribery?” and it began as follows.
“Attention to companies (and employees) operating around the world. If you are party to a contract, and a mid-level employee at the entity receiving services under the contract holds up payment of money the company is legitimately entitled to receive, but the mid-level employee requests payment in order to release the funds, and you make the requested payment, you are violating the Foreign Corrupt Practices Act.”
As highlighted in the previous post, part of the SEC’s allegations included the following.
“Following widespread strikes and civil unrest in Venezuela in late 2002, Pride [...] and other companies performing work for PDVSA (PDVSA is the Venezuela state-owned oil company) had difficulty collecting outstanding receivables from PDVSA. By early 2003, Pride [...] had significant unpaid receivables for services that it had provided to PDVSA. In or around March or April 2003, Pride [...] received information that a mid-level PDVSA accounts payable employee was holding up the payment of funds owed to Pride [...] and wanted a payment of approximately $30,000 in order to release the funds due. In or around March or April 2003, Summers authorized a payment of approximately $30,000 to a third party, believing that all or a portion of the funds would be offered or given by the third party to an employee of PDVSA for purposes of securing an improper advantage in receiving payment from PDVSA. Shortly thereafter, in or around April 2003, Pride [...] received overdue payments from PDVSA for work that Pride [...] had performed.”
A third example of an FCPA enforcement action being based on a dysfunctional government not paying a company money it was legitimately owed was highlighted in this previous titled “One of the More Dubious FCPA Enforcement Actions of All-Time” concerning a 1994 DOJ enforcement action against Vitusa Corporation and its President Denny Herzberg.
As highlighted in the previous post, the DOJ alleged that Vitusa (a New Jersey corporation engaged in the business of selling commodities and other goods) “entered into a lawful contract to sell milk powder to the Government of the Dominican Republic.”
The DOJ then alleged as follows.
“Although Vitusa delivered the milk powder to the Government of the Dominican Republic, the Dominican government did not pay Vitusa promptly for the milk powder received and, in fact, maintained an outstanding balance due for an extended period of time. Vitusa, therefore, made various efforts to collect the outstanding balance due, including contacting officials of the United States and Dominican Governments to obtain their assistance in securing payment in full.”
According to the DOJ, “during the pendency of the contract, Servio Tulio Mancebo (a citizen of the Dominican Republic) communicated to Herzberg a demand made by a foreign official [a senior official of the Government of the Dominican Republic] which called for the payment of a ‘service fee’ to that official in return for the official using that official’s influence to obtain the balance due to Vitusa for the milk powder contract from the Dominican Government.” According to the DOJ, “Herzberg agreed to Mancebo’s proposal that Vitusa would pay a ‘service fee’ indirectly to the foreign official.” Thereafter, the DOJ alleged that the Government of the Dominican Republic made payment of $63,905.12 to Vitusa on the contract, but that following Herzberg’s instruction, “Mancebo retained $20,000 from that payment.” According to the DOJ, Vitusa and Herberg knew “that all or a portion of the money would be given to the foreign official for the purpose of inducing the official to use that official’s position and influence with the Government of the Dominican Republic in order to obtain and retain business, that is, full payment of the balance due for Vitusa’s prior sale of milk powder to the Government of the Dominican Republic.” Based on the above allegations, the DOJ charged Vitusa with violating the FCPA’s anti-bribery provisions.
In recent years, it has become popular to talk about the “victims” of FCPA enforcement actions and feel good proposals have even been made suggesting that “victims” (you know, the citizens of country x which served as the locus of an FCPA enforcement action) are deserving of compensation from the FCPA settlement amount.
As the above examples highlight however, sometimes the “victims” of FCPA enforcement actions are the companies or related individuals resolving the actions because they were legitimately owed money by a dysfunctional government that refused to pay.