Multinational corporations face three types of risk on compliance related mat ters: 1) the risks that they know, 2) the risks that they know they don’t know, and 3) the risks that they don’t know they don’t know. Payments made pursuant to the facilitating payments exception of the Foreign Corrupt Practices Act (“FCPA”) fall into all three categories of risk.
The facilitating payments exception of the FCPA permits payments to foreign officials “[t]o expedite or to secure the performance of a routine governmental action…” 15 U.S.C. §§ 78dd-1 (b) and (f) (3). The exception is very narrow. The payment may only be given to encourage an action to which the company is legally entitled (not an illegal or improper action), and the payment must be properly recorded to reflect the amount, purpose, and recipient of the payment.
The FCPA defines a “routine governmental action” as “an action which is ordinarily and commonly performed by a foreign official.” 15 U.S.C. §§ 78dd-1(f) (3)(A). Examples listed in the statute include: “(1) obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country; (2) processing governmental papers, such as visas and work orders; (3) providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country; (4) providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or (5) actions of a similar nature.” 15 U.S.C. §§ 78dd-1(f)(3)(A).
The FCPA prohibits any payments or gifts made to influence a foreign official—no matter how small. Companies have been prosecuted for even seemingly insignificant gifts to foreign officials. For example, in July 2009, UT Starcom, Inc. agreed to pay $1.5 million in penalties to the SEC for violation of the anti-bribery, books and records and internal controls provision of the FCPA. The charges stem from allegations that the general manager gave bottles of wine to agents of the government customer in Thailand. The estimated cost of each bottle of wine was $600 each.1 As this case demonstrates, there is no internal threshold or minimum dollar value for prosecution. Rather, the government will review the matter on a case-by-case basis, taking into consideration the specific facts surrounding the payments.
In addition, as a result of a November 2010 Deferred Prosecution Agreement entered into with Swiss freight forwarder and customs broker, Panalpina, FCPA investigations are increasingly focused on payments made by customs brokers, freight forwarders, and third party agents to customs officials (“Panalpina cases”). The Panalpina cases stem from a 2007 case in which four subsidiaries of UK-based Vetco International, an oil industry equipment and services provider, admitted to paying more than 370 corrupt payments to Nigerian customs officials between 2002 and 2005 to evade customs duties and to receive expedited processing of equipment imports. As a result of these payments, the company paid a significant fine and was required to engage an inde - pendent monitor to implement an effective compliance program. The government learned through its investigation of Vetco that many of the payments were made by the same major international freight forwarder and customs clearance company, Panalpina. An investigation into Panalpina’s actions led the Government to several other companies, like Vetco, that utilized Panalpina’s services in the same manner.
Despite international efforts to improve customs efficiency and transparency, many customs operations remain notorious centers of corruption. Added to that is the fact that the vague nature of the term “facilitating payments” blurs the distinction between problematic and unproblematic conduct. Third party agents who make a facilitation payment to move their shipments to the head of the processing line are in violation of the FCPA, while those who make payments to ensure that their shipments move through the clearance process without unnecessary delay are within the bounds of the law. This narrow distinction often proves incredibly difficult to navigate, and determination of what is acceptable often hinges on just one or two facts (or factors).
In order to avoid confusion regarding what constitutes a facilitating payment, a company must have sufficient internal controls in place to help minimize the risk. A multinational company must have a thorough knowledge of the com - pliance programs and business practices of local customs brokers, freight forwarders, or third party agents whom they contract to handle customs transactions. The company must ensure that these agents do not provide improper payments disguised as facilitating payments to customs officials. Keep in mind that outsourcing the management of import and export procedures to third-party customs brokers and freight forwarders does not relieve the company of legal responsibility for bribes paid during the customs process.
The FCPA, along with the laws of Australia, Canada, New Zealand and South Korea, treat such payments as necessary business transaction costs—distinct from bribes. However, the soon-to-be implemented UK Bribery Act categorically prohibits such payments.2 The UK Bribery Act took note of the diminishing return of the facilitating payment exception and completely banned the use of facilitating payments. In addition, due to the ambiguity surrounding what constitutes a facilitating payment, many multinational companies have made a conscious decision to adopt a zero tolerance policy. The decision to implement a zero tolerance policy is supported by the difficulties associated with training foreign agents and monitoring the conduct of third parties.
If your company decides to allow facilitating payments, at a minimum, there are three things that it must address: 1) thorough due diligence in the employment of any third party agent, which includes reviewing contractual language regarding compliance with the FCPA and maintaining audit rights; 2) authorization or approval by senior compliance officials for all such payments; and 3) training, training, training.