Category: Bribery and Corruption

What is an “Instrumentality” under the FCPA?

compliance and bribery

If your are trying to figure out whether a company is a private company or an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act you are already in trouble. To reach that point in the FCPA analysis you’ve already paid a bribe, or are thinking of paying a bribe. (If you’re just thinking about it; Don’t do it.) Otherwise you’ll end up in the position of Joel Esquenazi and Carlos Rodriguez.

The two owned a Florida telecommunications company that was doing business with Telecommunications D’Haiti, S.A.M. (“Teleco”), a company closely linked to the Haitian government. They were paying bribes to officials of Teleco. They were hiding these payments, so they were also involved in money-laundering. The bribery scheme was uncovered by the Internal Revenue Service. Esquenazi and Rodriguez were convicted of FCPA violations and money-laundering.

They appealed their convictions arguing that Teleco was not an “instrumentality” of a foreign government under the FCPA. Instrumentality is not defined in the FCPA and this is the first appellate decision to tackle the definition.

The Court started with the premise that “an instrumentality must perform a government function at the government’s behest…. What the defendants and the government disagree about, however, is what functions count as the government’s business.”

Esquenazi and Rodriguez had a losing hand. The Court looked to the “grease payment” exception under the FCPA. That allow facilitation payments of a “routine government action.” That provision goes on to list phone service as a type of routine government action. At this point, it’s clear they are losing the case.

The Court did not stop there, but decided to use its stature as the first case deciding this issue to provide a list of factors to help future courts decide if the government controls an entity:

  • the foreign government’s formal designation of that entity;
  • whether the government has a majority interest in the entity;
  • the government’s ability to hire and fire the entity’s principals;
  • the extent to which the entity’s profits, if any, go directly into the governmental fisc,
  • the extent to which the government funds the entity if it fails to break even; and
  • the length of time these indicia have existed.

Again, I don’t think any company should be looking at these factors to decide whether or not to pay a bribe. If you pay it, your attorneys are going to be looking at this list to see if they can keep you from going to jail.  Esquenazi and  Rodriguez were sentenced to lengthy jail terms: Esquenazi receiving 15 years and Rodriguez receiving 7 years.

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Best Practices Under the FCPA and Bribery Act

FCPA Compliance

Tom Fox is prolific writer on the Foreign Corrupt Practices Act. He publishes the excellent FCPA Compliance and Ethics Blog. One of the downsides to a blog is that it’s a running commentary and not a narrative guide. Blogs are great for sharing ideas among practitioners. But a blog does not come together as a nuts and bolts tool.

Tom took action and organized some of his best posts into Best Practices Under the FCPA and Bribery Act. Now you can pull a comprehensive collection off your shelf to help you create and manage a world class compliance program for bribery and corruption.

The book is a “best of” collection, but organized topically, making it a great resource for the FCPA practitioner.

I was not an unbiased reader of the book. I’ve spoken with Tom many times and spent some time with him at the Compliance Week conference in 2010. Tom kindly mentioned me in the acknowledgements and sent me a copy of the book.

My only demerit on the book is that there is little new material that did not appear on his blog.

Pay to Play and the Supreme Court

Supreme Court

The US Supreme Court struck down some campaign finance limitations in McCutcheon v. Federal Election Commission. My first question was whether this court ruling would impact the Securities and Exchange Commission’s Rule 206(4)-5. The answer is “no.”

Mr. McCutcheon wanted to contribute $1776 dollars to a long list of political candidates. Each individual contribution is less than the $2600 federal limit. But the sheer number of candidates and political groups he targeted would violate the aggregate limits.

It was this aggregate limit that the Supreme Court struck down. The case did not strike down the individual limit.

The First Amendment protects political campaign contributions as a type of free speech. Therefore, any restrictions on political contributions must promote a compelling state interest and undertake the least restrictive means to further the state interest.

The Supreme Court has found that the government can regulate campaign contributions that target “quid pro quo” corruption or its appearance. Individual campaign contributions can be limited to prevent the dollars for political favors problem. That is a compelling state interest.

SEC Rule 206(4)-5 is specifically targeted at the corruption or appearance of corruption problem. The SEC can point to specific instances of government investments being tied to political contributions. It’s unlikely that the SEC’s pay-to-play rule will be overturned anytime soon.

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Image of the Supreme Court is by Matt H. Wade

Follow-Up Purchase of a Business from a Foreign Official

compliance and bribery

There are obstacles when trying to buy a business from a foreign official. The Foreign Corrupt Practices Act prohibits giving or offering anything of value to any foreign official with a corrupt intent to assist in obtaining or retaining business. It is not a flat prohibition on business relationships. But all of the recent FCPA enforcement has made businesses skittish when dealing with a foreign official in a business relationship.

The latest Department of Justice’s Foreign Corrupt Practices Act Opinion Procedure Release is evidence of the overly-cautionary approach.

A US investment banking/wealth management firm bought a majority interest in a foreign financial firm. The seller retained a minority interest in the foreign firm and was locked-out from selling for five years. The seller ends up getting appointed as a high-level government official, responsible for financial industry regulation. Suddenly, the firm’s minority shareholder is a government official.

The US firm wants to buy the remaining minority interest, but the red alarm of the FCPA is flashing. Even worse, the contractual formula for calculating the sales price for the minority interest no longer works. It results in a zero value when there is significant value. There would be litigation if the US firm tried to enforce that zero dollar purchase price.

The US firm and foreign official do the right thing for a conflict situation. They hire a third party to value the asset and base the sales price on that value. The parties even use a “leading, highly regarded, global accounting firm” to determine the value.

As for the official acts, the foreign official has recused himself from any actions that would involve the firm and has notified his agency of his relationship with the firm.

The firm received assurances from the foreign country that the sale of the minority interest would not violate local law.

Shouldn’t that have been enough? The parties documented the transaction price, walled the regulatory agency, and got a legal opinion that the transaction did not violate local law. That should have been enough to eliminate any signs of corrupt intent that would result in violation of the FCPA. Even more, buying the minority interest would remove the ongoing conflict that the foreign official had with owning an interest in a regulated entity.

But one or both sides decided they wanted more and used the Department of Justice’s FCPA opinion procedure. It’s one of the funky features of the FCPA that you can ask the government if it’s okay to do something. This is the DOJ’s first Opinion Procedure Release of 2014 and only the second release since October 2012.

The firm then went through an 8 month process with the Department of Justice to get this Opinion Procedure Release. It seems like overkill.

I would suspect the parties thought the transaction was high profile enough that it would attract the attention of the Department of Justice. Then the firm would need to sit through a Department of Justice investigation on the transaction and possibly print a press release about the investigation. It seems from the steps that the firm took, it could tell a good story and provide all the right documentation. You would think that the DOJ would quickly see that there was no story and go away quickly.

The Opinion Release acts a preventive measure. There are clearly red flags associated with the transaction. The firm and foreign official appeared to have done a great job addressing the concerns.

References:

Sometimes It Pays to Be Corrupt

Maxim Mironov
Maxim Mironov

Maxim Mironov of the IE Business School in Spain, has some research showing that corruption can lead to success. At least it appears to be successful in Russia. Mironov devised a method for measuring a Muscovite’s “propensity to corrupt” using data on traffic accidents and traffic violations from 1997 to 2007. He then used this data to analyze the managements of tens of thousands of Russian companies.

According to his research, one standard deviation increase in his “propensity to corrupt” of firms’ management corresponds to an increase in the annual revenue growth rate by 1.9%.

Mironov started with a huge database of traffic violations in Moscow, with 6.7 million violations over a 10 year period. He then mixed that together with the data on 159,000 traffic accidents, drivers license information, and type of automobile. Using the drivers’ license data he tied employment information for the individuals.

An average driver commits 0.115 traffic violations per year and participates in
0.003 traffic accidents per year.  An average driver is 38.9 years old and has a driving experience of 3.3 years.  An average person earns $6,640 per year and travels 15.2 kilometers to
work.

He his calculation on a “propensity to corrupt” is based on variations on the number of reported traffic violations and how that differs from the average. People with similar driving habits, similar demographic characteristics, and  income level should have similar numbers of reported traffic violations. But Moscow is notoriously corrupt and traffic stops can end in an exchange of cash instead of a reported traffic violation. Mironov uses that decreased level of traffic violations as an indication that the person was willing to pay a bribe instead of the reported traffic violation. That measure then becomes his Propensity to Corrupt.

Assuming you agree with Mironov’s propensity to corrupt at a correct measurement you can come to the conclusion that management’s propensity to give bribes leads to improved performance of the company. You can look at it data another way and say that corruption leads to a marked decrease in corporate performance and the economy as whole.

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The New Resource Guide to the FCPA

The Securities and Exchange Commission and the Department of Justice jointly released A Resource Guide to the U.S. Foreign Corrupt Practices Act (.pdf). The 120-page guide provides a detailed analysis of the U.S. Foreign Corrupt Practices Act and closely examines the SEC and DOJ approach to FCPA enforcement.

The guide addresses a wide variety of topics including who and what is covered by the FCPA’s anti-bribery and accounting provisions; the definition of a “foreign official”; what constitute proper and improper gifts, travel, and entertainment expenses; facilitating payments; how successor liability applies in the mergers and acquisitions context; the hallmarks of an effective corporate compliance program; and the different types of civil and criminal resolutions available in the FCPA context. On these and other topics, the guide takes a multi-faceted approach toward setting forth the statute’s requirements and providing insights into SEC and DOJ enforcement practices. It uses hypotheticals, examples of enforcement actions and matters that the SEC and DOJ have declined to pursue, and summaries of applicable case law and DOJ opinion releases.

The Resource Guide is a  response to the Phase 3 review by the OECD Working Group on Bribery. That report from that review recommended that the US anti-bribery efforts could be enhanced by consolidating publicly available information on the application of the FCPA. This Resource Guide is that consolidation.

Adoption and the FCPA

The latest Opinion Procedure Release from the Department of Justice comes from a group of non-profit adoption agencies. Based on the stories I’ve heard from friends who have adopted from overseas, I’m not surprised that adoption agencies are concerned about the Foreign Corrupt Practices Act. Opinion Release No. 12-02 is focused on an event hosted by the agencies and not the actual adoption practices. This is the second opinion release focused on adoption agencies.

Nineteen adoption agencies want to host 18 officials involved in the adoption process. The event sounds like a typical business/entertainment gathering:

  • Business class airfare on international portions and coach airfare for domestic portions of flights;
  •  Two or three nights hotel stay at a business-class hotel;
  • Meals; and
  • Transportation.

To minimize the concerns of concerns of corruption, the agencies put a few protections in place:

  1. Entertainment events will be of nominal value
  2. The agencies will not pick the attendees, but leave it up to the government agency.
  3. Souvenirs will have a business logo and be of nominal value.
  4. No stipend or spending money.

This sounds familiar because the Department of Justice dealt with very similar issues last year in Release 11-01. This year’s request sounds like there will be a bit more entertainment involved, but nothing extravagant.

The fact pattern does reflect anything new. I think it’s how most businesses would treat the situation. I suppose that’s helpful. But it also reflects a paranoia about the FCPA. It’s not a violation for merely giving something of value to a foreign official, there needs to be corrupt intent for a violation of the bribery sections of the FCPA. Obviously, a company should be anxious when a government official is involved and there should be heightened scrutiny. There was nothing about this release that has not been covered in other releases.

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Royalty Is Not Always a Foreign Official

I’m not quite sure how royalty works in various parts of the world. From the latest FCPA Opinion release, the parties to a business deal also did not fully understand. The proposed business relationship has some serious red flags so I’m not surprised the parties requested the opinion. According to the release, submission for a release was part of the contract.

The requestor was going to make payments to a member of the country’s royal family. (Red flag – But a key issue is whether he is Foreign Official.) The Royal Family Member was going to lobby his home country’s embassy to engage the requestor as the country’s lobbyist in the United States. (Lobbying the government = another red flag) The Royal Family Member would be working on a commission for 20% of what requestor receives for business. (red flag) The Royal Family Member can also identify other opportunities for the Requestor in the foreign country subject to a separate engagement. (red flag)

The whole opinion hinges on the definition of “Foreign Official” under the FCPA and whether the Royal Member falls under that definition. The FCPA defines a “foreign official” as

any officer or employee of a foreign government or any department, agency, or instrumentality thereof, . . . 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. § 78dd-2(h)(2)(A)

The Department of Justice looks to FCPA Opinion Release 10-03 and United States v. Carson, et al., No. 09-cr-00077 (C.D. Cal. 2011) and distills the factors in those sources to three factors to determine whether a member of a royal family is a “foreign official”:

(i) how much control or influence the individual has over the levers of governmental power, execution, administration, finances, and the like;

(ii) whether a foreign government characterizes an individual or entity as having governmental power; and

(iii) whether and under what circumstances an individual (or entity) may act on behalf of, or bind, a government.

This royal family member:

  1. has no official or unofficial title or role in the Foreign Country’s government
  2. has no official or unofficial power over any aspect of the Foreign Country’s governmental decision-making process, executive function, administration, finance
  3. has no direct or indirect power to award the business the Requestor seeks
  4. cannot, by virtue of his membership in the royal family, ascend to a governmental position
  5. has no benefits or privileges because of his status as a Royal Family Member
  6. has no relationship—personal, professional, or familial—with the decision-makers in the Foreign Country’s Embassy and the Foreign Country’s government who will decide whether to award the business

As the FCPA Professor Mike Koehler points out, this opinion procedure release creates more uncertainty in the definition of a foreign official. Past advice has focused on the purpose of the payments and not just the mere status of the official. The Carson decision looks to the entity to determine if it is a government organization.

The facts and circumstances about the royal family member sound unique to me. (Again, pointing out that I don’t understand how the various royal family members related to their home countries.) We don’t know the foreign country based on the opinion release. It would seem based on points 4 and 5 that the royal family is largely ceremonial in the country and not in a position of power in the government. Otherwise, the royal family itself would be foreign government instrumentality.

There is new guidance expected this month from the DOJ and SEC that is meant to consolidate the advice given on the FCPA. Perhaps that will help clear up some of the confusion over who is a foreign official.

Sources:

Image is the Crown of Rus-Ukrania by Alexandr Synytsa

FBI and FCPA

In addition to learning about the FBI’s compliance program, understanding white collar criminals, and a visit to the FBI Academy, the FBI Corporate Compliance Officer Outreach Event included a very frank discussion of the Foreign Corrupt Practices Act. The program brought in attorneys from the Department of Justice to discuss their approach to bringing FCPA cases.

Anyone who has read the FCPA Opinion releases may be surprised to hear the practical approach spoken by the presenters. The opinion releases paint a vary minimal threshold for ordinary business entertainment expenses to not be outside the boundaries of a bribe.

The presenters started off with four types of payments that are not bribes:

  1. Facilitation payments (still suspect)
  2. reasonable and bona fide gifts and entertainment
  3. duress payments, when there is a threat of physical harm
  4. Extortion

They pointed out that the key to a bribery case is the corrupt intent. They painted a picture that the DOJ has a hard time finding proof of corrupt intent and an even harder time convincing a jury that there was corrupt intent. In my view, that leaves a lot of grey areas between the de minimis standard in the opinion releases and the much larger payments in prosecuted cases.

They pointed to the Morgan Stanley case as one where the firm’s compliance program stopped the DOJ from seeking further prosecution. As to the compliance defense and credits under the sentencing guidelines for effective compliance programs, the speakers admitted that you rarely see those in cases. However, that is because the DOJ rarely brings cases when they see an effective compliance program.

The last piece of news was to be on the lookout for some substantial guidance on the FCPA. The guidance is not coming out  as a response to the Chamber of Commerce or other critics of the FCPA. It’s a response to the OECD’s review of the US corruption laws in 2010. The Phase III report recommended consolidation and summarization of available information on the application of the FCPA. This guidance will be that consolidation. To meet the deadline of the OECD report, we should expect the guidance to come out in October.

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