FCPA Compliance and Ethics Blog

November 11, 2010

The End of the FCPA Facilitation Payment Exception?

In November, 2009 the Organization for Economic and Co-operation and Development (OECD) announced a new recommendation at the OECD’s celebration of “International Anti-Corruption Day” and the Tenth Anniversary of the “Entry into Force of the OECD Anti-Bribery Convention”. This change relates to facilitation payments (aka “grease payments”) which remain legal under the Foreign Corrupt Practices Act (FCPA). 

OECD Secretary-General Angel Gurría described these low-level payments, designed to expedite performance of a “routine government action” such as obtaining mail delivery, phone or power service, as “corrosive . . . particularly on sustainable economic development and the rule of law”. 

Facilitation payments, also known as “expediting payments” or “grease payments,” are bribes paid to induce foreign officials to perform routine functions they are otherwise obligated to perform. Examples of such routine functions include issuing licenses or permits and installing telephone lines and other basic services. The only countries that permit facilitation payments are the United States, Canada, Australia, New Zealand and South Korea. Facilitation payments, however, are illegal in every country in which they are paid. They have come under increasing fire under the FCPA as inconsistent with the totality of US policy on anticorruption. 

This change by the OECD brings the considerable problems associated with facilitation in the international business arena into keener focus. Just like large commercial bribes, grease payments abuse the public trust and corrode corporate governance. Treating them as anything other than outright bribery muddies the compliance waters and adds confusion where there should be clarity. This new stance by the OECD, coupled with the passage of the UK Bribery Act which bans facilitation payments and increased enforcement under the FCPA, may well bode the end of facilitation payments. 

I.          TRACE Facilitation Payments Benchmark Survey 

In October, 2009, TRACE International published the results of its “Facilitation Payments Benchmark Survey”. TRACE conducted a global survey with the following objectives: (1) to understand how facilitation payments are perceived in the international business community, including the level of risk they are deemed to pose and the compliance challenges they present; and (2) to map corporate policies on facilitation payments, including whether they are permitted and, if so, the types of safeguards corporations impose on their payment. 

The results of the TRACE survey reveal a definitive move by corporations to ban facilitation payments, coupled with an awareness of the added risk and complexity presented by facilitation payments: 

  • 76% of survey respondents believe it is possible to do business successfully without making facilitation payments given sufficient management support and careful planning.
  • Over 70% believe that employees of their company either never, or only rarely, make facilitation payments, even if their corporate policy permits facilitation payments.
  • Over 93% revealed that their job would be easier, or at least no different, if facilitation payments were prohibited in every country.
  • Nearly 44% reported that their corporations prohibit facilitation payments or simply do not address them because facilitation payments are prohibited together with other forms of bribery.
  • Almost 60% of respondents reported that facilitation payments pose a medium to high risk of books and records violations or violations of other internal controls.
  • Over 50% believe a company is moderately to highly likely to face a government investigation or prosecution related to facilitation payments in the country in which the company is headquartered. 

II. Facilitation Payments under the FCPA 

The original version of the FCPA, enacted in 1977, contained an exception for payments made to non-US officials who performed duties that were “essentially ministerial or clerical”. In 1988 Congress responded by amending the FCPA under the Omnibus Trade and Competitiveness Act to clarify the scope of the FCPA’s prohibitions on bribery, including the scope of permitted facilitation payments. An expanded definition of “routine governmental action” was included in the final version of the bill, reflecting the intent of Congress that the exceptions apply only to the performance of duties listed in the subcategories of the statute and actions of a similar nature. Congress also meant to make clear that “ordinarily and commonly performed actions”, with respect to permits or licenses, would not include those governmental approvals involving an exercise of discretion by a government official where the actions are the functional equivalent of “obtaining or retaining business for, or with, or directing business to, any person”. 

The FCPA now contains an explicit exception to the bribery prohibition for any “facilitation or expediting payment to a foreign official, political party, or party official for the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official”. “Routine government action” does not include any decision by a public official to award new business or continue existing business with a particular party. The statute lists examples of what is considered a “routine governmental action” including:

  • obtaining permits, licenses, or other official documents to qualify a person to do business in a country;
  • processing government papers, such as visas or work orders;
  • providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or transit of goods across country;
  • providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products from deterioration; and
  • actions of a similar nature. 

There is no monetary threshold for determining when a payment crosses the line between a facilitation payment and a bribe. The accounting provisions of the FCPA require that facilitation payments must be accurately reflected in an issuer’s books and records, even if the payment itself is permissible under the anti-bribery provisions of the law

 III.             Risks associated with relying on the “facilitation payments” exception. 

Facilitation payments carry legal risks even if they are permitted under the anti-bribery laws of a particular country. In the US enforcement agencies have taken a narrow view of the exception and have successfully prosecuted FCPA violations stemming from payments that could arguably be considered permissible facilitation payments. Violations of the accounting and recordkeeping provisions of the FCPA are also more likely when a company makes facilitation payments. Abroad, countries are increasingly enforcing domestic bribery laws that prohibit such payments. Companies that allow facilitation payments face a slippery slope to educate their employees on the nuances of permissible payments in order to avoid prosecution for prohibited bribes. 

A.    US enforcement authorities construe the exception narrowly. 

Other than as discussed above, there is no definitive guidance on circumstances in which the facilitation payments exception applies. There may be less risk of enforcement by US authorities in cases involving bona fide facilitation payments that are made specifically for one of the purposes enumerated in the FCPA. However, companies still face the risk of at least facing a governmental inquiry to explain the circumstances surrounding the payments, possibly resulting in penalties based on an unanticipated restrictive interpretation of the exception. As noted by the FCPA Professor, the recent Noble Non-Prosecution Agreement noted that the payments made by Noble’s Nigerian customs’ agent Panalpina, to facilitate the importation of its rigs into Nigeria did “not constitute facilitation payments for routine governmental actions within the meaning of the FCPA”.

B. Potential non-compliance with the FCPA’s accounting and recordkeeping provisions. 

While the anti-bribery provisions of the FCPA permit facilitation payments, the accounting and recordkeeping provisions of the law nevertheless require companies making such payments to accurately record them in their books and records. Companies or individuals may be reluctant to properly record such payments, as it shows some semblance of impropriety and effectively creates a permanent record of a violation of local law. However, failure to properly record such expenditures may result in prosecution by the Securities and Exchange Commission (SEC) even if the underlying payments themselves are permissible. One example of prosecution resulting from the misreporting of seemingly permissible facilitation payments involves Triton Energy Corporation, which settled an investigation by the SEC involving multiple alleged FCPA violations, including the miss-recording of facilitation payments. An Indonesian subsidiary of the company had been making monthly payments, of approximately $1,000, to low-level employees of a state-owned oil company in order to assure the timely processing of monthly crude oil revenues. The SEC did not charge that these payments violated the anti-bribery provisions of the FCPA; however, these payments were miss-recorded in corporate books and therefore violated the FCPA’s accounting and recordkeeping provisions. Triton Energy consented to an injunction against future violations of the FCPA and was fined $300,000. 

C. Increased enforcement of non-US laws that do not recognize an exception for facilitation payments. 

While the FCPA and certain other national anti-bribery laws contain exceptions for facilitation payments, such payments typically are considered illegal in the country in which they are made; there is not any country in which facilitation payments to public officials of that country are permitted under the written law of the recipient’s country. Accordingly, even if a particular facilitation payment qualifies for an exception of the FCPA, it, nevertheless, is likely to constitute a violation of local law – as well as under anti-bribery laws of other countries that also might apply simultaneously – and thus exposes the payer, his employer and/or related parties to prosecution in one or more jurisdictions. While enforcement to date in this area has been limited increased global attention to corruption makes future action more likely. Countries that are eager to be seen as combating corruption are prosecuting the payment of small bribes with greater frequency. 

D. Corporate approaches to facilitation payments may exceed the legitimate scope and applicability of the exception.

As demonstrated in the TRACE Benchmark Survey, businesses struggle with how to address the “facilitation payments” exception in their compliance policy and procedures, if the subject is covered at all. Businesses should be wary of allowing employees to decide on their own whether a particular payment is permissible. Unless such payments are barred completely or each payment is subject to pre-approval (which in many cases would be unrealistic (e.g., passport control)), there is always the risk that an employee, agent or other person whose actions may be attributed to the company will make a payment in reliance on the exception when in fact the exception does not apply. In addition, the temptation to improperly record otherwise permissible facilitation payments has been discussed above. 

IV.             End of facilitation payments?


The global business environment has changed even as the FCPA has remained static. After his prepared remarks at the Compliance Week 2010 Annual Conference, Assistant Attorney General for the Criminal Division of the US Department of Justice, Lanny Breuer took several questions from the audience. One of his more interesting responses was regarding facilitation payments and whether the US was moving towards the OECD/UK Bribery Act model of not allowing such payments. He responded that it was a question which needed consideration as compliance standards are evolving on a world wide basis. However, as of this date, Breuer was not aware of any proposed change in the FCPA on this issue but that it may be visited in the not too distant future. 

US companies should recognize the weakening of the argument supporting a facilitation payment exception and should develop compliance policies that do not permit any kind of grease payments. A policy that prohibits all payments (unless there is high level of legal and compliance approval) will relieve businesses of the compliance burden of differentiating between lawful and unlawful payments. From the point of view of the modern global corporation, a compliance regime that attempts to differentiate between “good” corrupt payments and “bad” corrupt payments will do more harm than good. 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The author can be reached at tfox@tfoxlaw.com. 

© Thomas R. Fox, 2010

Additional Proposed Amendments to the Foreign Corrupt Practices Act

Ed. Note-we are pleased to post a guest article by our colleague James McGrath.

A fortnight ago, the US Chamber Institute for Legal Reform issued a white paper entitled “Restoring Balance – Proposed Amendments to the Foreign Corrupt Practices Act”.  Written by Andrew Weissmann and Alixandra Smith, it is the Institute’s response to stepped-up FCPA enforcement activities over the past five years that have highlighted deficiencies in the statute.  These shortcomings make for onerous investigations, prosecutions, and penalties seemingly beyond its legislative intent.  This article suggests two additional amendments not in response to any textual deficiency, but rather, to evolving government enforcement philosophy.       

The FCPA is only a small part of the larger effort to get American business entities to behave ethically and police themselves, thereby ensuring good corporate citizenship. Since 1991, Chapter Eight of the United States Sentencing Guidelines has provided the framework for these efforts by mandating that companies institute and maintain vibrant compliance and ethics programs to ensure that corporations and their employees are trained in, and adhere to, morally-sound practices within their industries.  When there are ethical lapses, as infamously seen with Enron, et al., the Guidelines mandate that companies to respond to these breakdowns. 

These responses require businesses to impartially investigate what happened and why, and then to take remedial action to ensure that such breakdowns do not recur.  Remedial action may include retraining of employees, wholesale or partial re-vamping of compliance and ethics programs, self-reporting of perceived law-breaking to enforcement authorities, or a combination of these.  When companies do self-report and are prosecuted in criminal or civil actions brought by the government, resulting prison sentences, fines, and other penalties – including the disgorgement of profits – can be reduced significantly by cooperating with a federal agency’s investigation of the same.    

The problem with the current state of the FCPA is it’s imprecision.  An anti-bribery statute, it prohibits U.S. companies from giving, promising, or authorizing the giving of anything of value to a foreign official in order to secure a business advantage in a foreign country.  See 15 U.S.C. §78dd-1 through 15 U.S.C. §78dd-3. However, the statute specifies no culpable mental state such as “intentionally” or “knowingly”, provides little guidance as to what constitutes “anything of value”, and is vague in its definition of a “foreign official”.  Further, it contains no provisions defining a company’s liability for the prior acts of a company that it has later acquired or for that of a subsidiary acting without the parent’s knowledge.

Compounding this muddy state of affairs is the DOJ’s very aggressive stance on FCPA enforcement.  In recent years, it has essentially taken the positions that: (1) the FCPA is a strict liability offense, (2) the value threshold can be very low, even de minimus, (3) a foreign official can be almost any foreign national, and (4) successor and subsidiary liability is unlimited.  This makes tough sledding for companies doing business overseas, and DOJ Criminal Division Assistant Attorney General Lanny Breuer’s promise at Compliance Week 2010 of even more heightened FCPA enforcement surely influenced the US Chamber Institute’s formulation of its proposed amendments to that statute. 

The Institute white paper suggests five changes to the law: (1) addition of an affirmative “compliance defense”, (2) limiting corporate liability for prior acts of a company it has later acquired, (3) positing “willfulness” as the culpable mental state under the statute, (4) limiting a company’s liability for the acts of its subsidiaries, and (5) more clearly defining a “foreign official”. 

All of these are excellent proposals, and amending the FCPA by their incorporation would clarify the statute and go a long way toward leveling the enforcement playing field.  However, given statements made in the aforementioned May 27, 2010 address, two more amendments should be considered.  

As noted earlier, an effective compliance and ethics program requires companies to conduct internal investigations into possible FCPA violations.  In his presentation, Mr. Breuer advised that when a possible violation has been discovered, the corporation should (1) seek the government’s input on the front end of its internal investigation, (2) describe its work plan for conducting the inquiry, and (3) be responsive to DOJ questions, suggestions, and requests to expand the scope of the investigation.

From an internal investigations perspective, this “call first” demand constitutes a seismic shift in the government’s perception of its role in the process and should present tremendous business and legal concerns for a company in its crosshairs.  What the DOJ is asking for is access to the inner workings of private-sector companies and how they conduct themselves in a way that has heretofore not been seen.  

At present, when an FCPA violation occurs, there is generally the following investigatory timeline: (1) occurrence of the perceived corporate wrong, (2) performance of the company’s internal investigation, and (3) determination by the company of whether to self-report and cooperate with the government’s parallel investigation and potential litigation. 

In this sequence, the company conducts its own inquiry before making the critical decision to implicate itself or not.  Because these internal investigations are usually conducted by outside counsel, if no wrong is found by that independent investigation, its results are protected from disclosure to third parties by operation of the attorney-client privilege.  See: Upjohn Co. v. United States, 449 U.S. 383 (1981).  This safeguard to the company is vital.  In an era of global markets and instant information, the protection of an exonerated company’s reputation may very well save it from complete ruin, as the mere specter of dirty laundry can be damning on Wall Street.  

Alternatively, if a company contacts and co-ordinates its internal investigation from the outset with the DOJ, its ability to protect the direction, yield, and publicity of any such inquiry will be nil.  Dirty or not, it will have waived attorney-client privilege and laid open it entire operation to government investigators.  That should be unnerving to even the most ethical company. 

A line of cases beginning with Coolidge v. New Hampshire, 403 U.S 443 (1971) stands for the proposition that government  agents need not ignore evidence of other illegal activities they happen upon when they are lawfully present, even on an unrelated matter.  This “plain view” exception to the probable cause and warrant requirement is never lost on law enforcement.  It is therefore not difficult to imagine aggressive government investigators with access to a company’s every last document and memoranda hunting until they find wrongdoing to prosecute, be it the FCPA violation that they were invited in on, or something else. That is a daunting prospect to consider.

 This is not to advocate that companies should be able to hide their illegalities and avoid prosecution.  Quite the contrary.  The USSG laudably balances the sometimes-competing and sometimes-cooperating interests of ensuring self-policing, respecting corporate privacy, and doing justice by prosecuting wrongdoers.  To establish a precedent where the government is called into, and becomes a partner in, every FCPA internal investigation flies in the face of Chapter Eight of the USSG by eradicating the self-policing that is its purpose.  

To be clear, adhering to Mr. Breuer’s suggestion of early government involvement in a company’s internal investigation is not always going to be unacceptable or ill-advised.  Whether to do so or not is a business and legal decision that is best made by corporate leadership.  However, allowing his present request to ripen into a future demand, and then into a policy that over the course of time and through stare decisis becomes the law of the FCPA land, usurps the authority of Congress and is wrong. 

As a result, any prospective legislation amending the FCPA should protect the balance of interests in corporate criminal and civil prosecutions already struck by the USSG.   Involving the DOJ at the outset of the internal investigation process as mandatory for receiving cooperation credit under the Guidelines should be expressly prohibited.  And for those companies that do invite the government in as investigatory partners from the beginning, there should be some transactional or use immunity – or at least some limitation on penalties and sanctions – for other wrongs uncovered during the course of the FCPA investigation in recognition of their good-faith efforts to cooperate with the government.  

While neither of the foregoing proposals can nor will remedy the adverse publicity aspect of early DOJ involvement where elected, the former does safeguard corporate privacy and attorney-client privilege interests, while the latter fairly and justly limits the impact of a “corporate plain view” violation.    These are adviseable as counterweights to continued and vigorous government FCPA enforcement activity and will maintain a level playing field between companies seeking to ethically do business abroad and the DOJ. 

James J. McGrath is a former prosecutor and the managing partner of McGrath & Grace, Ltd., a law firm that specializes in conducting independent corporate internal investigations. He can be reached at james.mcgrath@mcgrath.grace.com.

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