FCPA Compliance and Ethics Blog

November 12, 2013

Of Princelings and Princess-lings – Does Their Employment Have Corrupt Intent?

There was an excellent article this weekend in the Financial Times (FT), entitled “Finance: Plugged Into the Party”, where reporters Henry Sender and Tom Mitchell explored the hiring of sons and daughters of Chinese government officials, in what now might be called the ‘Era of the Prince-lings’. However, it appears that this era is closing when they noted, “amid a US regulatory probe and a new political climate in China, the era is coming to an end.” The article detailed how the practice of hiring the sons and daughters of high government officials began in the early 1990s. The practice seems have begun with the hiring of the first princess-ling – Margaret Ren, the daughter-in-law of a former Chinese Premier.

Given this long standing practice I wondered how it might be viewed under the Foreign Corrupt Practices Act (FCPA). In last year’s FCPA Guidance, it related that to violate the FCPA, an offer, promise, or authorization of a payment, or a payment, to a government official must be made “corruptly.” As Congress noted when adopting the FCPA, the word “corruptly” means an intent or desire to wrongfully influence the recipient:

In order for a corporation to be criminally liable under the FCPA, it must be found to have acted corruptly. The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, wrongfully to direct business to the payor or his client, to obtain preferential legislation or regulations, or to induce a foreign official to fail to perform an official function.

The Guidance goes on to relate that the FCPA focuses on intent, so that it does not require that a corrupt act succeed in its purpose. Further, a foreign official need not solicit, accept or indeed receive a bribe for the FCPA to be violated. The Guidance points to the Innospec enforcement action in which “a specialty chemical company promised Iraqi government officials approximately $850,000 in bribes for an upcoming contract. Although the company did not, in the end, make the payment (the scheme was thwarted by the U.S. government’s investigation), the company still violated the FCPA and was held accountable.” Further, this is why “Regardless of size, for a gift or other payment to violate the statute, the payor must have corrupt intent—that is, the intent to improperly influence the government official. The corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.”

But, beyond corruptly, for an individual to be criminally liable under the FCPA, that person must act ‘willfully’. The Guidance notes that the FCPA does not define ‘willfully’ but the Guidance points to its construction by federal court decisions. Indeed in US v. Kay, the US Supreme Court upheld jury instructions stated that willfully is “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law” thereby connoting a willful act is one which is committed both voluntarily and purposefully, and with a bad purpose in mind. The Guidance went on to cite the US Supreme Court in Bryan v. United States, for the proposition that “[a]s a general matter, when used in the criminal context, a ‘willful’ act is one undertaken with a ‘bad purpose.’ In other words, in order to establish a ‘willful’ violation of a statute, ‘the Government must prove that the defendant acted with knowledge that his conduct was unlawful.’”

So what if we look at JP Morgan Chase under the above. The FT article reports that the Securities and Exchange Commission (SEC) is looking into whether the Bank hired the sons of two government officials to “get lucrative mandates from the Chinese Ministry of Railways and Everbright Bank.” Further, this investigation has “turned up internal documents linking hires to mandates JPMorgan was trying to win, raising questions about whether the recruits were signed up on merit or purely for their pedigree”.

The article goes on to note that that any possible enforcement actions for such Princeling hiring’s could well be complicated by the fact that “many of the princelings can boast impressive qualifications, such as an Ivy League education.” They can also be “highly experienced, highly qualified people in their own right.” Even if these people were well-connect in mainland China and this is one of the reasons they were hired does this rise to the level of “The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position”. Further, what if there is some type of mixed motive but no outward indicia of corruption; is that sufficient to bring a FCPA violation?

I do not pretend to have any insight into how the JPMorgan Chase investigation will turn out. Last week, it JPMorgan Chase indicated that the dreaded ‘Where Else’ question of FCPA investigations had been asked when it revealed that the original investigation in hiring practices had expanded into other countries. However, I believe that simply the hiring of the sons and daughters of government officials does not violate the FCPA. There still must be corrupt intent. To overcome any such suspicion, I think the key is to ‘Document, Document, and Document’ your hiring practices to demonstrate that any family members of government officials are qualified for any position that you might offer them and they went through the same hiring process as all other candidates.

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 gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

December 17, 2012

Days of Future Passed: The Moody Blues and the End of Facilitation Payments?

Nights in White Satin, never reaching the end,

Letters I’ve Written, never meaning to send

This past weekend I caught the Moody Blues’ tour celebrating the 45th anniversary of their seminal classic album, “Days of Future Passed”. This was the second album released by the band and while I had always thought of it as the first rock concept album, it is seen by many rock critics as a precursor to progressive rock music. Bill Holdship, Yahoo! Music, said that the band “created an entire genre here.” Robert Christgau noted that it was “closer to high-art pomp than psychedelia.” And finally, Allmusic editor Bruce Eder calls the album “one of the defining documents of the blossoming psychedelic era, and one of the most enduringly popular albums of its era.” The band had its core members of Justin Hayward, John Lodge and Graeme Edge playing at the concert and I can assure you that even in their 70s, they can still rock.

I thought about this album and its title while reading the Memorandum and Order from District Judge Keith Ellison in the Security and Exchange Commission (SEC) civil action filed against current and former officers of Noble Corporation, Mark A. Jackson and James R. Ruehlen. The Foreign Corrupt Practices Act (FCPA) commentariat has gone both ways on interpreting the Court’s Order; witness the headline by the FCPA Professor, “Judge Grants Jackson And Ruehlen’s Motion To Dismiss SEC’s Monetary Claims – Finds That SEC Was Not Diligent In Bringing Case And That SEC Failed To Negate Facilitation Payments Exception – However Judge Allows SEC To File An Amended Complaint”, in contrast with Dick Cassin on the FCPA Blog, whose headline read “Great guidance from the bench: ‘The FCPA casts a wide net”. However, I found one other part of the Court’s ruling by far the most interesting. It was the section which discussed whether the defendant’s claims that their actions met the facilitation payment exception under the FCPA. The Court granted the SEC leave to amend to proffer facts which would overcome the facilitation payment exception.

The allegations of facilitation payment exception as a defense in this lawsuit turn on permits called Temporary Import Permits (TIPs) in Nigeria. As set out in the Court’s ruling, “TIPs allow drilling rigs to operate in Nigerian waters without payment of permanent import duties. Under Nigerian law, the Nigeria Customs Service (“NCS”) grants TIPs for rigs that will be in the country for only one year. NCS may, in its discretion, grant up to three six-month extensions to a TIP. Upon the expiration of a TIP and any TIP extensions, NCS requires the rig to be exported from Nigeria. If the owner of the rig wishes to continue using the rig after the expiration of a TIP and any applicable extensions, he can either convert the rig to permanent import status and pay the appropriate permanent import duties, or he can export the rig and seek a new rig TIP to re-import the rig. In order to obtain a TIP or an extension, the rig owner must submit an application thought a licensed customs agent as the NCS does not deal directly with rig owners such as Noble. The SEC alleged that the defendants authorized customer agents to submit false paperwork and pay bribes to NCS officials to obtain these TIPs. In other words, the SEC alleged that the Nobel officials knew that the company was not entitled to obtain the TIPs as they did not meet the basic requirements for the granting of such licenses.”

Judge Ellison, in his ruling, noted that the “SEC alleges that Defendants authorized payments to foreign officials in order to obtain TIPs based on false paperwork, in contravention of what Defendants knew was the proper process for obtaining TIPs. As discussed supra in Part III.A.1, the SEC pled sufficient facts to support the allegation that Defendants knew these payments would be going to Nigerian government officials to obtain TIPs in a manner that violated Nigerian law. The grant of permits by government officials that have no authority to grant permits on the basis sought is in no way a ministerial act nor can it be characterized as “speeding the proper performance of a foreign official’s duties.” Similarly, if payments were made to induce officials to validate the paperwork while knowing it to be false, that too would not qualify as simply expediting a ministerial act.” [all citations by Court omitted]

The FCPA states that it “shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action . . .” Further, the FCPA has a list of examples of facilitation payments in the definition of routine governmental actions, which include the following:

  • Obtaining permits, licenses, or other official documents;
  • Processing governmental papers such as visas and work orders;
  • Providing police protection, mail services, scheduling inspections;
  • Providing utilities, cargo handling; or
  • Actions of a similar nature.

The key has always been whether the function in question was a “routine governmental action” because a facilitation payment is clearly a bribe. From the Court’s discussion, it is clear that it is thinking that if the end goal of a facilitation payment is to obtain something that the person or entity making the facilitation knows that they are not entitled to, then it cannot be a facilitation payment because it is not a “routine governmental action”.  However, the Court also focused on “corruptly” and cited to the legislative history of the statute for the following:

The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, . . . to induce a foreign official to fail to perform an official function. The word “corruptly” connotes an evil motive or purpose such as that required under 18 U.S.C. 201(b) which prohibits domestic bribery. As in 18 U.S.C. 201(b), the word “corruptly” indicates an intent or desire to wrongfully influence the recipient.

As part of its instructions to the SEC to re-plead the Court said that it should plead Nigerian law to show this corrupt intent. If the SEC does this and the illegal nature of the defendants’ actions under Nigerian law forms a basis of a successful action, how long do you think it will be before the entire concept of the facilitation payment comes in an enforcement action as there is no country in the world which allows bribery of its own government officials?

If the Court continues down this path, we may see the United States move towards a de facto end of the facilitation payment exception. The OECD, among others, has urged the United States to ban these types of bribes. The UK Bribery Act has no such exception under it. Numerous commentators, including Jon Jordan, have argued eloquently for the facilitation payment exception to end.

So what about the Moody Blues and Days of Future Passed? Just as many people remember only the song “Nights In White Satin” from the album and do not recall its greater importance as the either the first concept album or as a precursor to progressive rock, analysts and commentators may miss the significance of Judge Ellison’s ruling as it may signal the first step on the judicial journey to end facilitation payments.

For a copy of the Court’s ruling, click here.

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 gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

November 19, 2012

The FCPA Guidance: An Exploration of ‘Corruptly’ and ‘Willfully’

I am back from my surgery and convalescence and I wanted to thank everyone for the good wishes and thoughts. I would also like to give a very big special thanks to Mary Shaddock Jones for her entire series of timely and topical articles that she and her associate Miller Flynt wrote while I was out. I would also like to thank Candice Tal, Founder and CEO of Infortal Worldwide and Alexandra Wrage, Founder and President of Trace International, for their articles as well. I hope that you enjoyed the articles from all of these great compliance practitioners.

Today I wanted to begin to look at the Department of Justice (DOJ) “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (the “Guidance”), which was released last week and available (at no cost) here. My review will be through the prism of Major League Baseball (MLB) and the events last week where the owner of the Florida Marlins completely and utterly neutered the team through the fire sale give away of all of the team’s talent. The giveaway of the Marlins talent was so devastating that I can only say that the Houston Astros are no longer the worst team, nor have the lowest payroll, in baseball. Jeffrey Loria, owner of the Marlins, promised all of the Marlin fans, politicians and voters of south Florida that if they publicly funded a new stadium for him to the tune of $400MM, he would commit to paying for and fielding a competitive baseball team. Not only did he not tell the truth to those folks, he apparently continued to ‘dissemble’ while assembling his now traded talent. According to Sports Illustrated, “Shortstop Jose Reyes and left-hander Mark Buehrle, two of the five Marlins headed to Toronto in a pending blockbuster, are upset that the team broke verbal promises to them regarding trades, according to major-league sources. The Marlins do not award no-trade clauses, but club officials, while recruiting Reyes and Buerhle as free agents last offseason, assured both players that they would not be moved, sources said. Buehrle knew the Marlins’ history of dumping high-priced players, and it concerned him, according to a friend. Team president David Samson, however, told both Buehrle and his wife, Jamie, that the team was committed to a long-term vision, sources said. A source close to Reyes, asked if the shortstop also received verbal assurances from the Marlins that he would not be traded, responded, “The answer is yes. A vehement yes.””

I thought about the above while reading the Guidance. Initially I would note that despite the protestations of numerous of the FCPA commentariatti, the Guidance is an excellent resource for the compliance professional. It collects, in one very usable volume, the DOJ and SEC enforcement actions, Opinion Releases, current compliance best practices, and relevant Prosecutorial and Sentencing Guidelines. The item which caught my eye with regard to the Marlins giveaway of their players was the section on “What Does “Corruptly” Mean”. Fortunately for Loria, he is not subject to the FCPA as the definition cited by the DOJ reads as follows:

In order for a corporation to be criminally liable under the FCPA, it must be found to have acted corruptly. The word “corruptly” is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, wrongfully to direct business to the payor or his client, to obtain preferential legislation or regulations, or to induce a foreign official to fail to perform an official function.

The Guidance goes on to relate that the FCPA focuses on intent, so that it does not require that a corrupt act succeed in its purpose. Further, a foreign official need not solicit, accept or indeed receive a bribe for the FCPA to be violated. The Guidance points to the Innospec enforcement action in which “a specialty chemical company promised Iraqi government officials approximately $850,000 in bribes for an upcoming contract. Although the company did not, in the end, make the payment (the scheme was thwarted by the U.S. government’s investigation), the company still violated the FCPA and was held accountable.” Further this is why “Regardless of size, for a gift or other payment to violate the statute, the payor must have corrupt intent—that is, the intent to improperly influence the government official. The corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.”

But beyond corruptly, for an individual to be criminally liable under the FCPA, that person must act ‘willfully’. The Guidance notes that the FCPA does not define ‘willfully’ but the Guidance points to its construction by federal court decisions. Indeed in US v. Kay, the US Supreme Court upheld jury instructions stated that willfully is “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law” thereby connoting a willful act is one which is committed both voluntarily and purposefully, and with a bad pursose in mind. The Guidance went on to cite the US Supreme Court in Bryan v. United States, for the proposition that “[a]s a general matter, when used in the criminal context, a ‘willful’ act is one undertaken with a ‘bad purpose.’ In other words, in order to establish a ‘willful’ violation of a statute, ‘the Government must prove that the defendant acted with knowledge that his conduct was unlawful.’”

So what if we look at Jeffery Loria under these two requirements of the FCPA? First, under the corporate requirement of ‘corruptly’ do you think that he misled the voters of Florida when he told them that if they built it, they (top notch ballplayers) will come because Loria would pay for them. Remember its “offer, payment, promise, or gift, must be intended to induce the recipient” but that payment does not have to be made, or in Loria’s case withdrawn. What about under the individual requirement of ‘willfully’ regarding Loria’s and the Marlin’s statements to the players it signed? Here the standard is “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law”. Were they doing a bad act when they promised that they would not be traded and then they were unceremoniously traded? I guess the bottom line is that Mr. Loria had better be glad he is not subject to the UK Bribery Act where bribery of both public officials and regular citizens is a violation of that law.

Or here in Houston we could simply celebrate that there is a worse owner than Jim Crane because, you know, we got new Astros uniforms from him. I feel better already.

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 gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

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