There's always a danger that an unhealthy corporate practice, even an illegal one, will gain internal acceptance and legitimacy simply because it happens all the time.
Entries in Monsanto (4)
Questions about ambiguity in the Foreign Corrupt Practices Act have been around since its inception. See, for example, our post Looking Again At U.S. v. Kay (November 7, 2007). The Supreme Court will answer those questions soon, either by granting review of Kay and deciding what "obtaining or retaining business" means, or by refusing to take the case and allowing the government to continue its "expansive enforcement" of the law. Here's what's happening.
David Kay and Douglas Murphy were sentenced in 2005 to 37 and 63 months in prison respectively for violating the FCPA. They bribed Haitian officials in order to reduce their company's taxes. The Fifth Circuit denied their final request for a rehearing in January 2008, and in April they petitioned the U.S. Supreme Court for review. Kay v. United States (Docket: 07-1281) is on the docket of the Justice's opening conference on September 29, 2008 for the Court's October 2008 term. The petition for certiorari and all cert-stage briefs are available at scotusblog.com.
Kay and Murphy are arguing, among other things, that the only bribes outlawed by the FCPA are those intended to assist in obtaining or retaining business. That's the so-called "business nexus" element of an offense. And, they say, the bribes they paid to reduce taxes don't fit within the business nexus element at all.
They're supported by the U.S. Chamber of Commerce -- "the world’s largest business federation." It hopes the Supreme Court will hear the case and use it to draw new limits around FCPA enforcement. The Kay case, the Chamber says, has obliterated the business nexus element. Because of that, it says, American executives are now exposed to "expansive enforcement" of the FCPA that threatens them "with prison for conduct not criminalized by the plain language of the statute."
To illustrate the government's expansive approach, the Chamber's amicus brief includes a unique list of FCPA enforcement actions. These are cases based on bribes paid to foreign officials for something other than a direct award of work. We show footnotes from the brief in square brackets.
In the wake of Kay, there have been numerous FCPA actions predicated in part or in whole on payments made to reduce or avoid regulatory burdens, and many additional cases remain under investigation. Among others, the DOJ and SEC have entered into resolutions with companies alleged to have paid bribes to obtainWhat does the government say? That in the context of the entire statute, the language is not ambiguous. "The business nexus element requires that a bribe to a foreign official be made 'in order to assist [the company] in obtaining or retaining business for or with * * * any person.' 15 U.S.C. 78dd-1(a)(1). The word 'business' is ordinarily understood to mean a 'commercial or mercantile activity customarily engaged in as a means of livelihood.' Webster’s Third New International Dictionary of the English Language 302 (1993). Thus, the statutory language does not restrict the FCPA’s coverage to the award or renewal of contracts, but more broadly reaches actions that assist in obtaining or retaining business. Moreover, the FCPA carves out an exception from its prohibition for payments for 'routine governmental action.' 15 U.S.C. 78dd-1(b); see also 15 U.S.C. 78dd-1(f )(3) (defining 'routine governmental action'). That exception would be superfluous if the statute were limited in the manner that [Kay and Murphy] propose."
(1) government inspection reports and laboratory certifications;
(2) reductions in annual employment tax obligations;
(3) reductions in general tax obligations;
(4) refunds on previous tax payments;
(5) customs clearance for goods or equipment that were improperly or illegally imported;
(6) customs clearance for goods delayed due to the failure to post bonds with sufficient funds to cover duties and tariffs;
(7) encourage the repeal or amendment of national regulations limiting foreign investments;
(8) repeal of a government decree requiring an environmental impact study to be conducted;
(9) expedited government registration certifications required by law to produce, warehouse, or market products in the country; and
(10) beneficial changes to laws and regulations relating to land development.
Additional ongoing investigations implicate payments to bribe tax, customs and administrative officials to obtain (1) reduced tax obligations; (2) importation of construction equipment in violation of customs regulations; (3) customs clearance for goods and equipment; (4) immigration and tax benefits; and (5) a beneficial tax audit.
2 See SEC v. Delta & Pine Land Co., No. 07-cv-01352 (D.D.C. filed July 25, 2007); In the Matter of Delta & Pine Land Co., SEC Admin. Proceeding File No. 3-12712, Cease & Desist Order at 3 (July 26, 2007), available at http://www.sec.gov/litigation/admin/ 2007/34-56138.pdf
3 In the Matter of Bristow Group Inc., SEC Admin. Proceeding File No. 3-12833, Cease & Desist Order at 3 (Sept. 26, 2007), available at http://www.sec.gov/litigation/admin /2007/34-5633.pdf; Press Release, SEC Institutes Settled Enforcement Action Against Bristow Group for Improper Payment to Nigerian Gov’t Officials and Other Violations (Sept. 26, 2007), available at http://www.sec.gov/news/press/2007/2007-201.htm.
4 In the Matter of Baker Hughes Inc., SEC Admin. Proceeding File No. 3-10572, Cease & Desist Order (Sept. 12, 2001), available at http://www.sec.gov/litigation/admin/34-44784.htm; SEC v. KPMG Siddharta Siddharta & Harsono, No. H-01-3105 (S.D. Tex. filed Sept. 11, 2001); SEC v. Mattson, No. H-01-3106 (S.D. Tex. filed Sept. 11, 2001).
5 SEC v. Triton Energy Corp., No. 97-cv-00401-RMU (D.D.C. filed Feb. 27, 1997).
6 In the Matter of BJ Servs. Co., SEC Admin. Proceeding File No. 3-11427, Cease & Desist Order (Mar. 10, 2004), available at http://www.gov/litigation/admin/34-49390.htm.
7 United States v. Vetco Gray Controls Inc., No. 07-cr-004 (S.D. Tex. filed Jan. 5, 2007).
8 SEC v. BellSouth Corp., No. 02-cv-00113-ODE (N.D. Ga. filed Jan. 15, 2002). It is worth noting that the Senate originally proposed language that would have prohibited payments made for the purpose of “obtaining or retaining business … or directing business to, any person or influencing legislation or regulations of [the foreign] government.” S. 305, 95th Cong. § 103 (1977) (emphasis added). This language was ultimately rejected in favor of the current statute.
9 See News Release, Monsanto Announces Settlements With DOJ and SEC Related to Indonesia (Jan. 6, 2005), available at http://Monsanto.mediaroom.com/index.php?s=43&item=278.
10 See SEC v. Dow Chem. Co., No. 07-cv-336 (D.D.C. filed Feb. 12, 2007).
11 United States v. Halford, No. 01-cr-00221-SOW-1 (W.D. Mo. filed Aug. 3, 2001); United States v. Reitz, No. 01-cr-00222-SOW-1 (W.D. Mo. filed Aug. 3, 2001); United States v. King, No. 01-cr-0190-DW (W.D. Mo. filed June 27, 2001).
Kay and Murphy reply this way:
Though the Government's reading is consistent with one broad dictionary definition of "business", the court of appeals correctly recognized that other common and narrower definitions of "business" render petitioners' conduct perfectly lawful: "[T]he word business can be defined at any point along a continuum from a 'volume of trade,' to 'the purchase and sale of goods in an attempt to make a profit,' to 'an assignment' or a 'project.'" (quoting Webster's Encyclopedic Unabridged Dictionary 201 (1989)). The spectrum of potential meanings thus runs from a person who hopes to "improve his business" in terms of seeking to better his general economic performance to one who hopes to "receive the business" of a customer in terms of obtaining a particular relationship or contract. Notably, the limiting phrase, "for or with . . . any person" (15 U.S.C. § 78dd-1(a)(1)(B)) favors the latter interpretation. The statutory text is accordingly ambiguous.For those interested in the history of the case, it dates back to Kay and Murphy's indictment in 2001 for bribes they paid in Haiti in the late 1990s. At trial, the district court dismissed the indictment, agreeing that the FCPA's language of “obtaining or retaining business” didn't cover payments to reduce taxes or customs duties. In 2004, the Fifth Circuit Court of Appeals reversed, holding that the payments might fall within the FCPA's prohibitions by giving companies a commercial advantage. It remanded the case for the trial court to decide if there was sufficient evidence that the bribes could satisfy the business nexus element.
The Fifth Circuit's choice of the broadest, government-favoring interpretation of "business" produced a startlingly sweeping interpretation of this frequently employed provision of federal criminal law—one that criminalizes all payments intended to have any positive effect on the company. Under that broad theory, the court of appeals was able to conclude that, because "[a]voiding or lowering taxes reduces operating costs and thus increases profit margins, thereby freeing up funds that the business is otherwise legally obligated to expend", such conduct "assist[s] . . . in obtaining or retaining business" within the meaning of the FCPA. The Government accordingly urges that criminal liability attaches whenever "the resulting savings benefit the company's existing business." The problem is that "[t]he same can be said about virtually any contact with a foreign official that somehow—and no matter how indirectly—enables the company to take some action that reduces costs or otherwise benefits it."
In 2005, a jury convicted Kay and Murphy. They appealed again to the Fifth Circuit, this time also arguing that the mens rea element of an FCPA offense was missing from their indictments. In October 2007, the Fifth Circuit affirmed their convictions. They filed a petition for rehearing en banc, which was denied in January 2008. With appeals to the Fifth Circuit exhausted, in April they petitioned the Supreme Court for review.
International joint ventures bring very high risks under the U.S. Foreign Corrupt Practices Act. Unreliable partners -- those who might pay bribes to foreign officials to help the business -- need to be spotted early and either avoided or controlled. Like any courtship and marriage, the process of finding and keeping a suitable joint venture partner involves lots of work (and a dash of luck). The work part should be reflected through an effective compliance program aimed at managing the risks. Here, for example, are five (of many) joint venture-directed compliance elements:
1. Due Diligence. Take all necessary and prudent precautions through well-documented due diligence to ensure that business relationships are formed only with reputable and qualified joint venture partners.
2. Board or Management Reviews. Examine the suitability of all prospective joint venture partners for purposes of compliance with the Foreign Corrupt Practices Act. Review the adequacy of due diligence performed in connection with the selection of overseas partners, as well as the joint venture's selection of agents, subcontractors and consultants for business development outside the United States. Reviewers should not be subordinate to the most senior officer of the Company's department or unit responsible for the relevant transaction.
3. Compliance Obligations in the Joint Venture Documents. Include in all joint venture agreements representations and undertakings by the joint venture partners, with periodic re-certifications, that no payments of money or anything of value have been or will be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, or candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government or an instrumentality thereof to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the Company is a participant
4. Audits and Approvals. Retain audit rights over the joint venture. Agree with all partners that the joint venture will not hire an agent, subcontractor or consultant without the Company's prior written consent (to be based on adequate due diligence).
5. Right to Terminate. Make sure all joint venture documents allow for immediate and unfettered termination for any breach of compliance-related obligations.
This list is not exhaustive.
See, for example, U.S. v. Monsanto Company, Deferred Prosecution Agreement, Appendix B, Remedial Compliance Program (January 6, 2005).
View the Monsanto Deferred Prosecution Agreement Here.
FCPA Violations Disclosed During Monsanto's Pre-Acquisition Due Diligence
July 26, 2007 -- The Securities and Exchange Commission has settled Foreign Corrupt Practices Act enforcement actions against Delta & Pine Land Company, a Mississippi-based cottonseed producer, and its 100% owned subsidiary, Turk Deltapine, Inc. From 2001 to 2006, Turk Deltapine made payments of approximately $43,000 to officials of the Turkish Ministry of Agricultural and Rural Affairs in order to obtain various governmental reports and certifications that were necessary for Turk Deltapine to obtain, retain and operate its business in Turkey.
The improper payments were first discovered by U.S. officers of Delta & Pine in 2004. Instead of stopping the payments, Delta & Pine made arrangements to fund them through a third party supplier in Turkey. The payments violated both the antibribery provisions and the accounting standards. Delta & Pine and Turk Deltapine jointly agreed to pay a $300,000 civil penalty and engage an independent compliance consultant.
Monsanto Company acquired Delta & Pine on June 1, 2007. The payments came to light in connection with Monsanto's pre-acquisition due diligence and were then reported to the SEC. The Department of Justice has not yet indicated whether it will seek criminal enforcement action against Delta & Pine, Turk Deltapine, or any of their respective directors, officers, employees and agents.
View the SEC's Complaint here.
View the Cease and Desist Order here.