FCPA Compliance and Ethics Blog

August 9, 2013

Who Watches the Watchmen? A Look at Anti-Bribery Risks in the Legal Profession

Teodoro Obiang Mangue  has led a life that few could easily relate to.   At age 8, his father organized a coup against his uncle to assume the Presidency of Equatorial Guinea.  Thirty years later, his father continues to maintain a tight grip over the country and Teodoro (nicknamed “Teodorin”) has become the heir apparent, comfortably coasting for the time being as Minister of Agriculture and Forestry.

Equatorial Guinea is a small country of about 600,000 people on the west coast of Africa.  Much in Equatorial Guinea changed in the 1990s when large offshore oil deposits were discovered and the country quickly became one of the leading oil producers in sub-Saharan Africa.  But while the elite in government enjoyed their newfound wealth, none have enjoyed it with quite as much flair as Teodoro.  Among his list of expensive toys are  several Bugattis, a couple Ferraris, Lamborghinis and Bentleys,  a $38.5 million private jet, and a $30 million Malibu home bought in 2006 that was later ranked as the 6th most expensive residential purchase in the United States that year.  Not bad for someone whose official salary is only $60,000 a year.  The true tragedy of the situation, however, is that the majority of Equatorial Guineans live below the poverty line, and the country ranks 136 of the 186 nations on the United Nation’s Human Development Index.  This hasn’t stopped a playboy millionaire like Teodoro, though, who’s reportedly spent nearly $700,000 just to rent Microsoft co-founder Paul Allen’s 303-foot yacht for a weekend.

The Bribery Bar

For years, the international community has tried to expose Obiang’s illegitimate wealth, and in 2010, the United States Senate’s Permanent Subcommittee on Investigations published a scathing report on Obiang’s use of U.S. lawyers, bankers, real estate agents and escrow agents to launder $110 million in suspect funds out of Equatorial Guinea and into the United States.  The report, entitled Keeping Foreign Corruption Out of the United States: Four Case Histories, shows how two U.S. lawyers, Michael Berger and George Nagler, actively helped Obiang to circumvent U.S. anti-money laundering controls at U.S. banks by allowing him to use their attorney-client and law office accounts as conduits for his funds.  The two-step process of first transferring the funds to the lawyers’ attorney-client and law office accounts before transferring the funds to U.S. banks helped mask the fact that the funds were coming from Equatorial Guinea, which most banks flag as a high risk country due to its reputation for corruption.  According to the report, Mr. Berger and Mr. Nagler assisted Mr. Obiang to hide his identity from the banks by, among other things, setting up shell companies for Mr. Obiang and failing to disclose to the banks that Mr. Obiang was the beneficial owner of those companies.  “The Obiang case history,” summarized the Senate Subcommittee report, “demonstrates how a determined [politically exposed person] can employ the services of U.S. attorneys to bring millions of dollars in suspect funds into the United States through U.S. financial institutions.“

A few months after the Senate published its findings on Obiang, the International Bar Association, in cooperation with the Organization for Economic Co-operation and Development (OECD) and the United Nations Office on Drugs and Crime (UNODC), published the results of their own survey entitled Risks and threats of corruption and the legal profession.  The survey’s goal was to alert readers “to the unfortunate fact that lawyers are indeed approached to act as agents/middlemen in transactions that could reasonably be suspected to involve international corruption.”  Indeed, the results of the survey were disconcerting:

  • Nearly half of all respondents stated that corruption was an issue in the legal profession in their own jurisdiction;
  • More than a fifth of respondents said they have or may have been approached to act as an agent or middleman in a transaction that could reasonably be suspected to involve international corruption; and
  • Nearly 30 per cent of respondents said they’d lost business to corrupt law firms or individuals who have engaged in international bribery and corruption.

That lawyers are routinely involved in bribery schemes should come as little surprise to those in the FCPA bar. Some of the biggest cases brought under the Foreign Corrupt Practices Act have involved lawyers, including:

  • Hans Bodmer, a Swiss lawyer, who pleaded guilty in 2004 to helping move money in Viktor Kozeny’s scheme to bribe Azeri officials and gain control over the state-run oil company;
  • Jeffery Tessler, a British lawyer, who was hired by the TSKJ consortium to funnel bribes to high-ranking Nigerian officials regarding contracts to build liquefied natural gas facilities in Nigeria; and
  • Pablo Alegría Con Alonso and José Manuel Aguirre Juárez, two Mexican attorneys accused of assisting Walmart to deliver cash to mayors, city council members, urban planners, and all manner of government bureaucrats in Mexico in order to secure business in the country.

Legal Obligations

Why are members of the legal profession so often implicated in these bribery schemes?  Part of the problem may be due to a lack of client transparency.  In many countries, lawyers have no obligation to look into the source of their client’s funds, even if their client is a high-risk, politically exposed person.   In the US, for example, lawyers have been excluded under the Patriot Act to conduct anti-money laundering due diligence, unlike banks and other financial institutions.  Other countries that have no direct anti-money laundering measures applicable to lawyers include China, India and Canada.

Even when a lawyer is aware that their client is engaged in illegal behavior, many legal professionals may feel a contradictory obligation to refrain from revealing confidential information that they’ve gained as part of the attorney-client relationship.   This issue was brought center-stage in the early 2000s after the Enron, WorldCom and Tyco scandals, which showed just how much attorneys knew of the illicit behavior going on without doing anything to stop it.  Now, in the wake of Sarbanes Oxley, the American Bar Association’s Model Rules of Professional Conduct state that once a client has used the lawyer’s services in furtherance of a crime, the lawyer must withdraw completely from representation.

Still, many lawyers remain unaware of their responsibilities, especially those having to do with corruption.  As a result, the IBA has made it a goal to continue to inform lawyers of their duties not to perpetuate bribery schemes.  Earlier this year, it published an Anticorruption Guidance meant for bar associations around the world to develop anti-corruption initiatives that are relevant to practitioners in their jurisdictions, and last year, the IBA coordinated with the OECD, the UNODC and 40 law schools selected from various countries to pilot the use of anti-corruption training into the syllabus of law degrees.

Increasing Due Diligence

Another problem in this area is the fact that law firms are so rarely vetted themselves for anti-bribery.  In fact, more than two-thirds of respondents in the 2010 IBA survey said that their law firms had never been subject to anti-corruption or anti-money laundering due diligence conducted by foreign clients; more than 90 per cent stated that less than 25 per cent of clients required them to certify that they had any anti-corruption compliance program at all.  Often, that means that companies operating in foreign jurisdictions are choosing who to hire for legal advice based solely on reputation.  In its 2010 report, the IBA wrote “that clients are unaware of their own due diligence responsibilities and/or that they do not consider lawyers as intermediaries who could engage in corrupt acts and/or be subject to anti-corruption rules and regulations.”  The dilemma brings to mind the Latin phrase quis custodiet ipsos custodes?  –  “who watches the watchmen?“

As companies become increasingly aware of these risks, many are now asking to conduct at least some level of due diligence on their outside lawyers.   And if this was something that at one time would have been frowned upon in the legal profession, many foreign lawyers, like other third party intermediaries, are seeing due diligence as a way to distinguish themselves from their peers.  Earlier this Summer, TRACE International partnered with the Pan-African Lawyer’s Union (PALU) to offer free TRAC profiles to African lawyers and law firms.  The TRAC certification offers PALU law firms an online platform to rapidly exchange baseline due-diligence information with potential clients.  For those companies operating in the high-speed world of complex international commercial negotiations and international dispute resolution, TRAC is a quick and easy way to gain comfort with an outside law firm.

Conclusion

Lawyers, as guardians of the law, play a vital role in the fight against corruption.  Yet the unfortunate reality is that some abuse their positions to perpetuate bribery schemes.   Companies, aware that there is a growing expectation for them to conduct due diligence on a broader range of third parties, are now beginning to weigh outside counsel as potential risks.  After all, if bribery  doesn’t discriminate based on profession, then nor should a company’s due diligence program.  All of that is a good thing for honest lawyers, companies that want to do right, and, in the end, the innocent victims of corruption.

Severin Wirz, Attorney and Manager, Advisory Services ,TRACE International, Inc. He can be reached via email  at wirz@TRACEinternational.org and phone at 410) 990 0076.

TRACE is a non-profit membership association helping companies to raise their anti-bribery standards.  As part of its commitment to transparency in the legal profession, TRACE is waiving the fee for all attorneys and law firms who would like to subscribe to TRAC.  Simply visit www.tracnumber.com and apply the code: OPENLAW2013.  This code will remain valid for the whole month of August.   

March 4, 2011

Documentation and the TRACE Due Diligence Guidebook

One of the themes coming out of the talks given by representatives of the Department of Justice and Securities and Exchange Commission at FCPA compliance conferences is that of documentation. While many companies focus on the specifics of a best practices FCPA compliance program, we believe that companies should also make documentation an over-arching principal in their compliance programs. By this we mean that everything done or performed within the context of your FCPA compliance program should be documented so that if your company is investigated, it can quickly and efficiently provide documentation of its work. Not much will give you more credibility with a prosecutor than responding quickly with documentation of your compliance program.

With this in mind we reviewed the TRACE Due Diligence Guidebook: Doing Business With Intermediaries Internationally chapter on documentation. Initially we would note that volume, available on the TRACE International website, is designed to be used by “business people, compliance officers, in-house counsel, and those responsible for vetting their company’s international business representatives. It incorporates the due diligence “best practices” of more than 150 companies, representing diverse industries in different countries.” It is an excellent resource for the FCPA compliance practitioner and we would recommend it to you.

Chapter Seven of the Guidebook deals specifically with the issue of documentation. It indicates that for any best practices compliance program, documentation through a   detailed written record of your company’s foreign business representative review process is mandated. This written record should include documentation of the review process utilized by your company, a summary of the risk assessment which were used to determine the appropriate level of due diligence, copies of all records relating to your due diligence, the contract and your management of the foreign business relationship after the contract is signed. This documentation should be maintained for the duration of the business relationship and in accordance with your company’s document retention policy.

The TRACE Guidebook recommends several specific areas to focus your documentation upon. These include:

  • A written commitment by the foreign business representative to avoid even the appearance of an inappropriate payment and to report any requests by customers for inappropriate payments to the identified point of contact within management;
  • Express language prohibiting the foreign business representative from offering or giving anything of value to a customer in order to secure a business advantage;
  • Guidelines as to when the foreign business representative should seek approval for any hospitality or customary gifts; and
  • A requirement to certify compliance annually.

In addition to documenting the due diligence process, a written contract should be considered as a key part of your company’s documentation process. The TRACE Guidebook also makes clear that no foreign business representative should be engaged or certainly paid, without a written contract, detailing the full scope of the engagement. The TRACE Guidebook suggests several standard concepts which should be included in any foreign business representative contract. These terms and conditions should include the following:

  • Compensation should be paid to a foreign business representatives only in accordance with the terms and conditions of the written contract;
  • The written contract should require the foreign business representatives to comply with all applicable anti-bribery laws and regulations and should describe the elements of those laws;
  • The written contract should require the foreign business representative to comply with all applicable local law requirements, such as registration and other regulatory requirements;
  • Foreign business representatives should be required to certify annually that they have  complied with all laws and policies;
  • The written contract should permit immediate termination of contract without compensation in the event of a violation of anti-bribery laws;
  • The written contract should prohibit the foreign business representative from assigning its contract rights to a third party which has not gone through your company’s full due diligence process and from employing a third party to provide the services described in the written contract without first obtaining the approval of the company;
  • The written contract should allow the company to audit the foreign business representative’s books and records upon credible allegations of misconduct or reasonable suspicion of improper payments; and
  • The foreign business representative should be required to provide prompt notice of any change of ownership. The foreign business representative also should be required either to advise the company of any other changes or to confirm that all other information previously provided remains accurate on a regular basis.

The TRACE Due Diligence Guidebook: Doing Business With Intermediaries Internationally is an excellent resource for you to use a guidebook in either performing due diligence on your company’s foreign business representatives or as a benchmark for your current program. It is just one of the resources available on the TRACE International website which we commend to you.

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, 2011


December 18, 2009

END OF GREASE PAYMENTS COMING

As recently reported in WragBlog, the 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 are 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 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.

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. In the absence of any legislative action to roll back the facilitation payment exception, the Department of Justice (DOJ) and the SEC plainly have set out to repeal it on a case-by-case basis. 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.

Blog at WordPress.com.