This is the second in a series of five articles that will be posted this week examining current trends in FCPA and anti-corruption enforcement. The posts are excerpts from a forthcoming article by Thomas Gorman and William McGrath.
One of the defining characteristics of the new era of enforcement is an aggressive application of the statutes. The lack of litigated cases and court decisions interpreting key provisions of the Act effectively translates prosecutorial charging discretion into the interpretation of the statute. At the same time vague terms in the Act at times provides little meaningful guidance for those involved in international business transactions.
Aggressive interpretation begins with expanding the reach of the Act. Jurisdiction under the FCPA is broad but it has limits. In the first instance it is keyed to the mails or any other means or instrumentality of interstate commerce “in furtherance of” any illegal offer or payment. Under these provisions virtually any use of the mail, phone, fax, e-mail, text message or any other method of interstate transportation is sufficient according to enforcement officials. See, e.g. 15 U.S. C. Section 78dd-2(h)(5). This remains the only predicate for prosecuting non-U.S. issuers under the bribery provisions.
The reach of the statutes was augmented in 1998 when amendments were added extended jurisdiction based on the nationality principal to conform the FCPA to the OECD convention. This extended jurisdiction to cover the unlawful acts of any U.S. person or entity outside the U.S. 15 U.S. C. Section 77dd-1(g); 15 U.S.C., Section 78dd-2(i). The amendments also extended jurisdiction to include non-U.S. persons who engage in prohibited conduct while in the U.S. 15 U.S.C. Section 78dd-3(a).
The DOJ’s settlement with JGC Corporation, a Japanese engineering and construction firm, illustrates the broad view of FCPA jurisdiction used by enforcement officials. The company was one of the joint partners in the TSKJ, a consortium involving the now infamous Bonnie Island bribery scheme in Nigeria discussed later in this series. The company is based in Japan. It is not a domestic concern and its shares are not registered for trading in the U.S. Nevertheless, the DOJ asserted jurisdiction over the company based on two theories. One is conspiracy. The other is aiding and abetting, and “non-U.S. person” jurisdiction under §78dd-3. The criminal information filed as part of the deferred prosecution alleged that JGC either conspired with, or aided and abetted, “domestic concerns” and “issuers” to pay bribes in violation of the FCPA. The U.S. also contended that it had jurisdiction over JGC under a territorial jurisdiction theory based on acts done “while in the U.S. making use of the mail or means of interstate commerce.” This assertion was based on claims that JGC aiding a “domestic concern” in causing U.S. dollar payments to be wire transferred from a bank in Amsterdam to a financial institution in Switzerland via a correspondent bank in New York. A similar approach has been used in other cases.
In United States v. Patel, Case No. 1:09-CR-335 (D.D.C.),however, the DOJ suffered a setback in utilizing this approach. Patel is one of the “Gun Show” cases based on the largest FBI sting operation ever conducted in an FCPA case, discussed later in this series. The initial trial ended with a hung jury.
As part of the case the U.S. asserted territorial jurisdiction over a British subject, who sent a DHL package containing a contract from the United Kingdom to the United States. Judge Leone, in an oral opinion on a motion under Fed. Crim. Rule 29, held that Mr. Patel, a non-U.S. person, was not in the territory of the United States when he made use of the mails or means of interstate commerce and, thus, did not fall under the statutes making it unlawful “while in the U.S. to make use of the mail or means of interstate commerce.”
In a number of cases a parent company has become entangled in FCPA charges through the acts of a subsidiary. The Armor Holdings case employed this approach. There a U.K. subsidiary of Armor Holdings, Inc. which is an issuer and a subsidiary of BAE, made payments to a third party intermediary, which in turn made payments to a U.N. official who directed business to the U.K. subsidiary. A second subsidiary disguised the payments in its books and records which were made to intermediaries who brokered sales of goods to foreign governments. The SEC charged Armor Holdings with violations of the anti-bribery provisions as well as the books and records sections on the theory that the company controlled its subsidiaries. The complaint alleged that the subsidiaries were agents of the parent but offered little supporting detail. SEC v. Armor Holdings, Inc, Case No. 1:11-cv-01271 (D.D.C. Filed July 13, 2011).
Enforcement officials also appear to be expanding what constitutes a bribe. Since the time the statute was written, facilitating or so-called grease payments have been excluded from the scope of the bribery provisions. The Act exempts “any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.” The statute goes on to define routine government action in terms of “obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country . . . processing governmental papers. . . providing police protection, mail pickup and delivery, or scheduling inspections . . . providing phone service, power and water . . . [and] actions of a similar nature.” See, e.g., 15 U.S.C. Sections 78dd-1(f).
Despite the directive of Congress, the exclusion seems to be vanishing. Many of the payments in the Panalpana case discussed earlier were to customs officials for facilitation. In the recent action liquor giant Diago plc, a company with ADR’s traded in the United States, the SEC seems to have taken a similar approach. The action against the company is a settled cease-and-desist proceeding based on violations of Exchange Act Sections 13(b)(2)(A)&(B) stemming from small payments to government owned liquor store operators for product placement, label registration, lobbying fees and promotion. The bulk of the payments do not seem to be bribes. Another payment was to a Korean Customs Service official as a reward for assistance in negotiating a tax refund. Rewards are not bribes, but gratuities under domestic U.S. law. Gratuities are not violations of the FCPA, which requires that the defendant make the payment “corruptly” and to influence official decisions. The company was charged, however, with the improper recordation of the payments in its books and records. In the Matter of Diago plc, Adm. Proc. File No. 3-14410 (July 27, 2011). This is an approach that enforcement officials have used in a number of cases.
In contrast, in Noble, discussed in the first part of this series, the payments were actually booked in a facilitating payments account. There government officials scrutinized the nature of the payments involved, concluding that they were in fact bribes, not facilitation payments. Accordingly the SEC charged the company with violations of the books and records provisions. SEC v. Noble Corporation, Case No. 4:10-cv-4336 (S.D. Tex. filed Nov. 4, 2010); SEC Litig. Rel. No. 21728 (Nov. 4, 2010); See also SEC v. Pride International, Inc., Civil Action No. 4:10-cv-4335 (S.D. Tex. filed Nov. 4, 2010)(payments booked as related to customs services).
A related issue arises with respect to payments made under compulsion. The statute limits the concept of bribery to payments made corruptly and to obtain or retain business. Under those terms payments made under distress or by compulsion should not be considered bribes. The SEC’s case in NATCO Group seems to ignore this point. The company is a Houston based issuer. While doing business in Kazakhstan using local workers and expatriates, local immigration authorities claimed the expatriates did not have the proper documentation and threatened to impose fines and to either jail or deport the worked if the company did not pay the fines. Management paid the fines based on the belief that the workers would otherwise be jailed according to the Order for Proceedings. The local subsidiary also made payments to facilitate the proper visas. To secure the payments a consultant provided the local subsidiary with bogus invoices totaling $80,000 for the funds. The invoices were necessary under local law to withdraw the money from the bank. The company reimbursed the invoices although it knew what they were for. Despite the fact that the payments do not appear to be bribes NATCO settled the case based on FCPA books and records charges. In the Matter of NATCO Group, Inc., Adm. Proc. File No. 3-13742 (Jan. 11, 2010); SEC v. NATCO Group, Inc., Civil Action No. 4;10-CV-98 (S.D. Tx. Jan. 11, 2010).
Finally, the expansive definition of who is a foreign official – another key limitation of the bribery provisions – coupled with the vague test for determining who falls within the definition leaves any person doing business abroad at risk. The term is defined in the Act to include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency or instrumentality.” 15 U.S.C. Section 78dd-2(h)(2). The term “agency or instrumentality” includes state-owned enterprises and their employees.
In view of the increasing trend in many countries to utilize state owned entities the question of who is a foreign official is critical. This question has been litigated in three recent cases, United States v. Carson, No. 08-09-cr-0007 (C.D. CA.), U.S. v. Esquenazi (S.D. Fla.) and U.S. v. Lindsey Mfg, No. 2:10-cr-01031 (C.D. CA.). Each case involved allegations of payments to an employee of a state owned enterprise. Critical to each case was the question of what is an “instrumentality.” In each case the court concluded that the question should be analyzed based on all the facts and circumstances of the case by the trier of fact.
The difficulty with this test is that many state owned enterprises appear to be no different than any other business organization. In addition, the facts and circumstances analysis can only be made after careful study of all the pertinent facts and circumstances. With hindsight the test can be applied with difficulty. For business organizations encountering these organizations on a daily basis the resolution of the question is much more difficult. While it is obvious that bribery is not an appropriate way to conduct business, the question here can impact every-day decisions regarding routine matters such as travel and entertainment, plant tours, gifts, gratuities and similar items. Yet paying for these items for potential customers is routine in many industries. If, however, the customer turns out with hindsight to be a “foreign official” because he or she is employed at an “instrumentality” the routine payment becomes a bribe that could end with a prison term. See, e.g., DOJ Press Release No. 09-1390 (Dec. 31, 2009)(settled action with UTSarcom, Inc. where company arranged and paid for employees of Chinese state-owned telecommunications companies to travel to popular tourist destinations in the U.S. supposedly as part of a trip for training). See also 15 U.S.SC. Sections 78dd-1(c)(2), 78dd-2( c )(2). Cf., FCPA Review Procedure Release No. 08-03 (July 11, 2008)(approving limited payments). Viewed in this context the vague definition in the Act and the test for who is a foreign official becomes a trap suggesting unfair enforcement.