Facilitating Payments or Bribes?

In Greece, it's the "little envelopes" that affect everyone from "hospital patients to fishmongers." (see here for the Wall Street Journal story).

In India, it's needing to "string up some wire and get licenses from the government" to start a "tiny business delivering telephone and Internet service" but "getting those things done without hassles require[s] a bribe." (see here for the story from National Public Radio).

In July 2009, Nature's Sunshine Products found out that it's about payments to Brazilian customs agents to import certain unregistered products into Brazil (see here).

Also in July 2009, Helmerich & Payne found out that it's about payments to various officials and representatives of the Argentine and Venezuelan customs services in connection with importation and exportation of goods and equipment (see here).

Numerous other examples abound.

Facilitating payments or bribes?

The FCPA has a specific exception for "facilitating or expediting payment[s] to a foreign official ... the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official."

Where a facilitating payment ends and where a payment to "obtain or retain business" begins is a difficult question.

U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) is commonly viewed as answering that question.

However, Kay merely holds that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, directly or indirectly, in obtaining or retaining business and that payments to a “foreign official” to reduce custom and tax liabilities can, under appropriate circumstances, fall within the statute. 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 key question, according to Kay, is whether the payments at issue were intended to lower the company's costs of doing business enough to assist the company in obtaining or retaining business. The Kay court recognized that “there are bound to be circumstances” in which such attenuated payments merely increase the profitability of an existing profitable company and thus, presumably, do not assist the payer in obtaining or retaining business. In fact, the court specifically stated: “…if the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

Post-Kay none of the above seems to matter much.

Because the Nature's Sunshine Products and Helmerich & Payne enforcement actions (as well as numerous other similar enforcement actions) were not challenged, it remains an open question whether the payments at issue in these cases, if subjected to judicial scrutiny, would satisfy the “obtain or retain business” element as interpreted in Kay or would be excepted as facilitating payments.

Many of these payments would appear attenuated to any specific cause-and-effect business nexus or otherwise would appear to have merely increased the profitability of an existing profitable business and, per the Kay holding, would presumably not satisfy this key FCPA antibribery element.

While some find facilitating payments to be a corrupt payment under a different name, the fact remains that the FCPA passed by Congress and signed by the President contains an express exception for facilitating payments.

It is this statute that the enforcement agencies are obligated to enforce and this express exception would certainly appear relevant to the above-described actions. Because these enforcement actions were not challenged, this obviously relevant defense was not explored in these cases and these post-Kay cases stand as de facto FCPA case law, notwithstanding the fact that the alleged conduct in these cases may have been excused because of the FCPA’s facilitating payment exception.

It's a complex world.

Congress recognized that when it passed the FCPA, including the facilitating payment exception.

The Kay court recognized that when concluding that not all such attenuated payments violate the FCPA.

More On Control Person (And Similar Theories of Liability)

Law.com / The National Law Journal (see here) recently ran an interesting Q&A with the former Assistant Chief of the DOJ Fraud Section regarding the recent Nature's Sunshine Products Inc. ("NSP") enforcement action (see here for my prior post). While the NSP enforcement action may well be the first FCPA enforcement action in which the SEC charged a corporate executive with an FCPA violation under a Section 20(a) "control person" theory of liability, the SEC has previously charged corporate executives under other indirect theories including aiding and abetting a company's FCPA violations by invoking Section 20(e).

For instance, in 2007, the SEC charged Monty Fu (the founder and, at various times, the Chief Executive Officer and Chairman of the Board of Syncor International Corporation) with aiding and abetting Syncor's FCPA books and records and internal control violations.

The evidence against Fu?

As alleged in the SEC complaint (see here), "...Fu had the authority to maintain compliance with existing internal controls, and to implement additional internal controls designed to comply with the FCPA's books and records and internal controls provisions, YET FAILED TO DO SO." (see para. 2, emphasis added).

In charging Fu both with direct violations of the FCPA's books and records and internal control provisions (albeit by alleging in the alternative that Fu knew or was reckless in not knowing that the problematic payments were improperly recorded on the company's books and records) and with aiding and abetting Syncor's violations, the SEC alleged that Fu "knowingly failed to implement a system of internal accounting controls sufficient to provide reasonable assurance that transactions were recorded in Syncor's books and records" in accordance with the FCPA (see para 22). As a result, the SEC charged that Fu "knowingly provided substantial assistance to Syncor" in connection with its violations (see para's 28 and 33).

Whether the SEC invokes section 20(a) or 20(e), the FCPA enforcement trend is clearly greater scrutiny of corporate executives and a greater SEC expectation that corporate executives play a meaningful role in ensuring enterprise-wide FCPA compliance.

In other words, if you are an executive of an issuer and you don't know what the acronym FCPA stands for, you better get educated.