While much of the white-collar bar awaits the Supreme Court's decisions in the trio of honest services fraud cases on its docket (Jeffrey Skilling, Conrad Black and Bruce Weyhrauch) why not talk about the FCPA and honest services fraud!
What is honest services fraud? Stay tuned for the Supreme Court's decisions.
For present purposes, honest services fraud is part of the mail and wire fraud statutes and is found at 18 USC 1346 which simply states that the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.
What does this have to do with the Foreign Corrupt Practices Act?
It turns out, not much, but that is not how the DOJ saw it when charging James Giffen in 2004. (For more on the Giffen case see here).
The Giffen superceding indictment focuses on charges that he made unlawful payments totaling more than $78 million to the former Prime Minister and Oil Minister of Kazakhstan in violation of the FCPA.
In addition to the FCPA charges, the indictment also alleged that Giffen's actions violated 18 USC 1346 by depriving the citizens of Kazakhstan of the honest services of their government officials.
Yes, you did read that correctly - the DOJ alleged that Giffen deprived the citizens of Kazakhstan of the honest services of their government officials. That is why the Giffen honest services fraud charge is one of the more curious "tag-a-long" charges ever in an FCPA enforcement action.
Unlike most FCPA defendants (corporate and individual) Giffen mounted, and still is mounting, an aggressive legal defense.
In 2004, Giffen moved to dismiss portions of the charges that alleged a scheme to deprive the citizens of Kazakhstan of the honest services of their government officials. He asserted that application of the honest services fraud theory of Section 1346 to Kazakhstan impermissibly extended the mail and wire fraud statutes to cover activities beyond Congress' original intent.
Judge William Pauley of the Southern District of New York agreed with Giffen and granted his motion to dismiss portions of the charges that alleged a scheme to deprive the citizens of Kazakhstan of the honest services of their government officials. See U.S. v. Giffen, 326 F.Supp.2d 497 (S.D.N.Y. 2004).
In so holding, Judge Pauley stated that the DOJ offered "the slenderest of reeds to support its expansive interpretation." Among other things, Judge Pauley noted that the DOJ could not point to "any decision where a court upheld application of the honest services theory in an international setting involving a foreign government and its citizens."
When the DOJ pointed to "two 25-year old indictments" charging a similar theory, Judge Pauley noted that the DOJ "has not unearthed any published decision on the issue" and that the DOJ "conceded that there were no court decisions addressing the validity of the two 25-year old indictments." Judge Pauley further stated that just because certain U.S. Attorneys were able to obtain indictments "under an intangible rights theory, grounded between a foreign government and its citizenry, is not the kind or quality of precedent this Court need consider."
Accordingly, Judge Pauley concluded that "Congress did not intend that the intangible right to honest services encompasses bribery of foreign officials in foreign countries" and that "application of Section 1346 to Giffen [was] unconstitutional."
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As FCPA practitioners well know, many current FCPA legal theories are aggressive, untested and not supported by any case law or other meaningful precedent or guidance.
If challenged, would a judge (like Judge Pauley in Giffen) conclude that the DOJ offered the "slenderest of reeds" to support its expansive interpretations?
What case law would the DOJ cite to support certain of its aggressive interpretations (such as employees of seemingly "commercial" enterprises being "foreign officials" under the FCPA)? Would DOJ not have to concede that there are no court decisions addressing the validity of its interpretations?
All interesting (and important) questions to ponder while awaiting the Supreme Court's honest services fraud decisions.
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Besides the question of the expansive view of the definition of foreign official, there is the question of the breadth of the underlying conduct itself. Kay expanded the definition from the literal “obtain or retain business” to a business nexus test. The 5th Circuit sent case back to the District Court to determine if lowering customs duties gave the ARI a business advantage. Before and after Kay, DOJ has charged a number of companies with violations of the anti-bribery provisions, for fact patterns which, on their face, would not support an allegation of “obtain or retain business” or “gain a business advantage”. There is never an analysis in the settlement documents that provides a link between the statute or the Kay analysis and the charged activity. How many of these fact patterns would support the charges if litigated?
ReplyDeleteGreat comment and I agree.
ReplyDeleteIn my forthcoming article, "The Facade of FCPA Enforcement" (Georgetown Journal of International Law) an entire section is devoted to the "obtain or retain business" element and post-Kay enforcement actions.
I argue that the Fifth Circuit’s equivocal holding in U.S. v. Kay is far from a stamp of approval of the enforcement agencies’ aggressive interpretation of this element.
In fact, the Kay court empathically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA.
The court then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.
Despite the equivocal nature of the Kay holding, the decision clearly energized the enforcement agencies and post-Kay there has been an explosion in FCPA enforcement actions where the alleged improper payments involve customs duties and tax payments or are otherwise alleged to have assisted the payor in securing foreign government licenses, permits, and certifications which assisted the payor in generally doing business in a foreign country.
Because none of these actions have been challenged, it remains an open question whether the payments at issue in these cases, if subjected to judicial scrutiny, would satisfy the FCPA’s “obtain or retain business” element or whether such payments were too attenuated to obtaining or retaining business or merely increased the profitability of an existing profitable business and thus, per the Kay holding, would presumably not satisfy this key FCPA antibribery element.