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Entries in Affrmative Defense (40)
Prague to Perth is more than 15 hours of flying time. Stops in Hong Kong to break up the trip are common, and for some people, necessary. But don't say that to the SEC.
Last week on Corruption, Crime & Compliance, I wrote that the increase in FCPA enforcement has led to 'mass hysteria,' whipped up by lawyers and others.
A few years ago, after a dozen or so enterprising law students asked me what FCPA-related topics were ripe for research, I answered with a post on the FCPA Blog.
A powerful, detailed rebuttal to the U.S. Chamber of Commerce’s proposals to amend the U.S. FCPA launched this month. Professorial powerhouses David Kennedy (Harvard Law School) and Dan Danielsen (Northeastern School of Law) issued their 84 page analysis, Busting Bribery: Sustaining the Global Momentum of the Foreign Corrupt Practices Act.
The chances of amending the FCPA this term are low, says Michael Volkov.
When Kyle Sheahen wrote in this space about how useless the FCPA's two affirmative defenses are, he kicked up a storm, especially about promotional expenses. Some readers agreed and others didn't (here and here). Here's Kyle's reply:
Dear FCPA Blog,
My thanks to everyone who responded with posts and comments. As Tom Fox thoughtfully said, the debate about promotional expenses is both useful and important, particularly because many corporations construct compliance programs in accordance with the language of the defense.
My article attempts to identify the parameters of permissible conduct as defined by enforcement actions and DOJ opinions. But as another commenter said, determining what payments are “reasonable” for purposes of the defense remains an open question for individuals and corporations seeking to comply with the FCPA.
Further, while the promotional expenses defense is a useful (albeit flawed) compliance tool, it offers little protection for FCPA defendants facing an enforcement action. As I asked in my article, how would a defense permitting only “reasonable and bona fide” payments help FCPA defendants when the government must allege that the payments were made corruptly? Or as one commenter put it, “it is a non-sequitur to say that defenses ‘work’ – just not ‘at trial.’ Defenses that do not work ‘at trial’ are not defenses at all.”
While the promotional expenses defense provides some inconclusive guidelines for compliance with the FCPA, it doesn't provide a meaningful defense to an enforcement action. That's the problem Congress should fix.
Thanks again for providing a forum for this debate and I welcome any further comments or emails.
All the best,
From a perspective different than previous commenters (here), I'd like to state the case for the value of the defense.
Generally, enforcement actions that discuss promotional expenses -- including those Kyle cited in his paper -- involve expenses that were neither bona fide nor reasonable as required by the FCPA. The cases include:
Lucent Technologies - $10 million in trips, primarily to vacation destinations in the U.S., including $34,000 for five days of sightseeing, wrapped onto a three day trip of business activity.
Ingersoll Rand - holiday excursion to Florence after visiting the company’s facilities in Vigante, Italy. The excursion to Florence included payment of $1000 in “pocket money”.
Metcalf & Eddy - first-class travel to the U.S. for foreign officials and per diem cash payments equivalent to 150% of estimated daily expenses.
Syncor -the SEC said payments for promotional expenses came “mostly came in the form of sponsorships for the doctors' attendance at educational seminars, including payments for registration fees, travel, lodging, and meals” but also included “gifts of computer equipment, software, office furniture, and medical supplies to doctors and their hospitals; sponsorships of social functions and fundraisers at the hospitals; funds provided to cover the cost of temporary employees at the hospitals; and payments made for outside testing when a particular hospital's laboratory equipment was not functioning properly.”
Titan Corporation - there's a reference to an authorization for a $20,000 payment for promotional travel expenses, with the notation that it was unclear if the payment was made. However this was in the context of at least $2 million paid in bribes to government officials. Even if the $20,000 was not paid, there were other facts on which to base the enforcement action.
I would argue that none of the above enforcement actions involved promotional expenses which were either bona fide or reasonable. Based on the foregoing, I think companies subject to the FCPA have sufficient guidance on what constitutes a bona fide or reasonable promotional expense. I also believe the cases cited in the article can be used as solid teaching points on what is not bona fide or reasonable without having to try and ascertain the intent to corrupt.
On Monday, Kyle Sheahen told us how useless the FCPA's two affirmative defenses are. He suggested that Congress fix the local-law and promotional-expenses defenses.
But at least two readers, one from the private sector and another from the DOJ (apparently), dissented. Both believe the defenses work, just not at trial. Here's what they had to say.
From Compliance Officer, August 16:
While the promotional expenses defense might not be useful at trial, it is the underpinning for a lot of companies' compliance programs around gifts. Companies must give gifts when operating internationally; it is simply too much a part of a lot of cultures to avoid. When operating in the public sector, however, these gifts present FCPA issues.
Companies use the promotional expenses defense to justify their permissive gift-giving policies.
From a compliance perspective, the problem with the defense isn't its utility---or lack thereof---at trial, but rather that it permits gifts during the course of the contracting process. When I'm analyzing a gift, I look at the potential for corrupt intent, and the affirmative defense. During the contracting process, you're more squarely under the defense, but to my mind, the optics are worse when looking at potentially corrupt intent. It looks like you're giving the gift to get the contract.
But if the gift is just to "maintain the relationship" (a phrase I hear quite often), you're less covered by the defense, but there's less chance that you're trying to get a quid pro quo.
And from Federal Prosecutor, August 17:
One cannot deduce from the lack of successful uses of statutory defenses at trial the conclusion that those defenses are meaningless.
In practice, trials take place in but a small subset of cases brought, cases brought are but a small subset of investigations, investigations look at but a small subset of real-life situations, and only a small subset of real-life situations are going to raise these particular factual issues in the first place. The ability of these statutory defenses to steer behavior within acceptable limits and to ward off prosecution cannot be judged by how many trial defendants get off on them. There is no need for a legislative fix just to even the odds for trial defendants.
That the law ain't broke is best exemplified by the author's dismissive discussion of OECD's suppression of affirmative defenses based on extortion. This is a considered policy choice to flush out corruption by giving no quarter to businessmen who wittingly profit from it. Permitting a defense based on extortion would simply take the heat off of businessmen to comply with the law, to report corrupt officials squeezing them, and to blow the whistle on their competitors who take the easy way. The end result of such a defense -- more corruption. Admittedly, though, there may be more exciting trials for law students to follow.
There's provocative new FCPA scholarship from Kyle Sheahen, left, UCLA Law '10 and an incoming associate at the New York office of King & Spalding.
He told us about it in this note:
* * *
Dear FCPA Blog,
It’s no secret that FCPA defendants fare poorly at trial. There are many reasons for that, but I wanted to look at the factor most amenable to legislative fix – the hollow nature of the FCPA’s affirmative defenses.
I recently finished an article analyzing the two affirmative defenses under the FCPA. Partly in response to the FCPA Blog’s post Calling All Pundits, I assess the promotional expenses defense in detail and also cover the local law defense (including the Southern District of New York’s decision in United States v. Kozeny).
The article concludes that after over twenty years as part of the FCPA, the two affirmative defenses added to the statute in the 1988 amendments have provided little meaningful protection for FCPA defendants. Neither defense has ever been successfully invoked by an FCPA defendant at trial.
I go on to recommend that if the right to trial by jury is to mean anything in today’s world, individual and corporate defendants must have the actual ability to raise the affirmative defenses contemplated by the statutory scheme. If Congress wants FCPA defendants to have any chance at all, it must take action to ensure that the defenses are meaningful.
The article is slated to appear in the Wisconsin International Law Journal in early 2011. In the meantime, I welcome any comments or suggestions from your readers. I can be reached at email@example.com
The current working version of the article -- titled "I'm Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act" -- can be downloaded from SSRN.
Thank you very much,