In a government-led Foreign Corrupt Practices Act (FCPA) investigation, the Third Circuit recently upheld a lower court decision compelling an attorney to testify before a grand jury about attorney-client privileged communications on the basis that those communications fell under the crime-fraud exception to the attorney-client privilege. The Third Circuit’s aggressive application of the crime-fraud exception here cautions companies to ensure that privileged advice be evaluated carefully and, if rejected, that the record reflect the reasons for doing so.
Five companies retained a consulting firm (“the Client”) to assist them in obtaining financing for oil and gas projects from a UK Bank, owned by several foreign nations. After the UK Bank approved two of the projects, the companies paid nearly $8 million in “success fees” to the Client. The Client subsequently made $3.5 million in payments to the sister of the banker who oversaw the financing process, despite her having no involvement or role in any of the Client’s projects.
Prior to making the payments, the President of the Client consulted with an independent attorney about his intent to pay the banker to ensure no delays in the approval process. The attorney asked whether the Bank was a government entity and whether the banker was a government official. Based on the Client’s response, the attorney opined that the payments might run afoul of the FCPA; described conduct that might violate the FCPA; and advised the Client not to make the payments. The Client disagreed, and informed the attorney that the Client intended to make the payments as planned. The Client had no further communication or relationship with the attorney.
During an investigation of the Client, the government subpoenaed the attorney to appear and testify before the grand jury. The District Court questioned the attorney in camera with only his counsel present, and determined that the crime-fraud exception applied. The Client’s appeal, among other things, challenged the finding that the crime-fraud exception applied.
Regarding the applicability of the crime-fraud exception, the Court applied the two-part test set forth in In re Grand Jury, 705 F.3d 133, 151 (3d Cir. 2012), which requires that for a party to circumvent attorney-client privilege, it “must make a prima facie showing that (1) the client was committing or intending to commit a fraud or crime, and (2) the attorney-client communications were in furtherance of that alleged crime or fraud.” The Court found that the firm had a pre-existing intent to make the payment, thereby satisfying the first factor in the analysis. The Court then inferred that the attorney’s statement that the FCPA applied to payments to government officials effectively shaped the firm’s criminal conduct—i.e., the routing of payments through the banker’s sister—and therefore the communication was in furtherance of the crime.
Although the Court acknowledged that “this was a close case,” its conclusion seriously impinges on a company’s ability to communicate openly with its attorneys. The attorney’s advice in this situation was merely to lay out what the law stated. Just because the Client did not ultimately follow the attorney’s advice should not be a basis to negate the privilege. This decision has the potential to chill clients from seeking advice in the first place. Worse, the only way for an attorney to avoid the reasoning in this case is to communicate to the client only that the conduct is illegal without describing the legal principles that make it illegal.