Payments that 'grease the rails'

An amendment to the U.S. FCPA allows for “facilitating payments” to supposedly even out the playing field for U.S. companies with global units. But is it better to avoid the morass that this change to the act has created?

This article is excerpted and adapted from the unpublished white paper, “An FCPA primer for an expanding American freight forwarding business,” which Tom Baugher, J.D., CFE, wrote in the course of his MBA studies.

An American mining company was operating in a developing country.

The company’s local advisor told it that it needed to make a one-time payment to a clerk in a governmental office. The payment would guarantee no delay in the approval of a permit the company had submitted to enlarge roads from its mine to the port. The company made the payment and the clerk stamped the permit application.

A few months later, the local advisor told the company that it would now need an environmental permit to build a road through protected wetlands. The advisor told the company that he was good friends with the director of the foreign country’s department of natural resources and could “make the problem go away” with a modest cash payment. The company made the payment and the director issued the permit. If the company hadn’t had made the payment it probably wouldn’t have received the permit.

Question: In this case example [from page 26 of “A Resource Guide to the U.S. Foreign Corrupt Practice Act,” issued by the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC)], was the company guilty of violating the FCPA when it made the payments to the government? It clearly broke the law when it made the made the second payment to the director of the department of natural resources. The DOJ could criminally prosecute the company, the vice president who authorized the payment and the local advisor under the act. However, the company was within the law when it paid the first fee under a “facilitation payment” (AKA “grease payment”) amendment to the law. This 1988 amendment, which the U.S. Congress passed to help even out the playing field for U.S. businesses, often can be more trouble than it’s worth. For example, even though the payment to the clerk would qualify as a facilitating payment, it may violate other laws, both in the foreign country and elsewhere. Also, if the company doesn’t accurately record the payment, it could violate the FCPA’s accounting provisions.

FCPA PRIMER

In 1977, President Jimmy Carter signed the FCPA into law after a series of investigations — beginning with Watergate — revealed that U.S. companies were involved in bribery and questionable payments to officials in foreign countries.

The SEC began investigations predicated on the theory that secret slush funds for unaccountable international disbursements violated laws requiring that public companies file accurate financial statements. The SEC discovered that more than 500 companies made questionable payments and “had paid hundreds of millions of dollars in bribes to foreign government officials to secure business overseas.”¹ Moreover, these companies were also falsifying their financial records to conceal the payments.²

These excesses had gained a great deal of public and political attention and Congress decided to act. It considered two possible courses of action: 1) criminalizing just the failure to disclose corrupt payments or 2) criminalizing both the failure to disclose payments and the payments themselves. There was substantial argument that the latter approach would seriously disadvantage U.S. companies abroad. Congress, however, chose the stricter approach.³ When they passed the act in 1977, the House of Representatives stated:

The payment of bribes . . . is unethical. It is counter to the moral expectations and values of the American public. But not only is it unethical, it is bad business as well. It erodes public confidence in the integrity of the free market system. It short-circuits the marketplace by directing business to those companies too inefficient to compete in terms of price, quality or service, or too lazy to engage in honest salesmanship, or too intent upon unloading marginal products. In short, it rewards corruption instead of efficiency and puts pressure on ethical enterprises to lower their standards or risk losing business.⁴

The FCPA mandates in two distinct, yet related, areas. The first provision prohibits covered persons and entities from engaging in bribery of foreign government officials to obtain or retain business.⁵ The act defines covered persons and entities as all U.S. persons, U.S. companies and foreign companies listed on U.S. stock exchanges or that are required to file reports with the SEC, and foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the U.S.⁶

The second provision mandates GAAP accounting standards and requires companies to:

(a) Make and keep books and records that accurately and fairly reflect the transactions of the corporation.⁷
(b) Devise and maintain an adequate system of internal accounting controls. 

This prong of the act is designed to prohibit off-the-books accounting through provisions designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.” (See S. Rep. No. 95-114, page 7.)

Here are three cases of definite FCPA violations:

Case No. 1
A subsidiary of an Oklahoma-based corporation violated the FCPA when it paid Argentine customs officials approximately $166,000 to 1) secure customs clearance for equipment and materials that lacked required certifications or couldn’t be imported under local law and 2) to pay a lower-than-applicable duty rate.

The company’s Venezuelan subsidiary had also paid Venezuelan customs officials approximately $7,000 to 1) allow the importation and exportation of equipment and materials not in compliance with local regulations and 2) to avoid a full inspection of the imported goods. (See the Non-Pros. Agreement, In re: Helmerich & Payne, Inc., July 29, 2009.)

Case No. 2
Three subsidiaries of a global supplier of oil drilling products and services were criminally charged with authorizing an agent to make at least 378 corrupt payments (totaling approximately $2.1 million) to Nigerian Customs Service officials for preferential treatment during the customs process, including the reduction or elimination of customs duties. (See Criminal Information, Vetco Gray Controls Inc., et al., No. 07-CR-004, Southern District of Texas, Jan. 5, 2007.)

Case No. 3
A Swiss company was fined $82 million for paying $27 million to foreign officials in Kazakhstan, Saudi Arabia, Algeria and Nigeria to expedite customs clearance and import permits for its clients. These clients were also investigated and fined a total of $155 million. (See “Panalpina Settlements Announced With $236.5 Million In Penalties,” By Samuel Rubenfield and Joseph Palazzolo, The Wall Street Journal, Nov. 4, 2010.)

‘GREASE PAYMENTS’ EXCEPTION

In 1988, Congress passed the Omnibus Trade and Competitiveness Act of 1988 to comport the FCPA with the International Anti-bribery Convention and allow U.S. businesses more latitude in competing with foreign competitors.

The act makes a narrow exception for “facilitating or expediting payments” made to further a routine governmental action that involves non-discretionary acts. [See 15 U.S.C. §§ 78dd-1(b), “Prohibited foreign trade by issuers.”]

When the House of Representatives passed this amendment, it stated that “such payments should not be condoned.”(See House Report No. 100-40, page 77.) Examples of such payments are “a gratuity paid to a customs official to speed the processing of a customs document” or “payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity be performed in any event.” (See House Report No. 95-640, page 8.)

The joint DOJ-SEC FCPA Guide states that “routine governmental action” includes: “processing visas, providing police protection or mail service, and supplying utilities like phone service, power, and water. Routine government action does not include a decision to award new business or to continue business with a particular party. Nor does it include acts that are within an official’s discretion or that would constitute misuse of an official’s office. Thus, paying an official a small amount to have the power turned on at a factory might be a facilitating payment; paying an inspector to ignore the fact that the company does not have a valid permit to operate the factory would not be a facilitating payment.”

In commenting on the limited nature of the facilitating payment exception a court stated:

A brief review of the types of routine governmental actions enumerated by Congress shows how limited Congress wanted to make the grease exceptions. … [R]outine governmental action does not include the issuance of every official document or every inspection, but only (1) documentation that qualifies a party to do business and (2) scheduling an inspection — very narrow categories of largely non-discretionary, ministerial activities performed by mid- or low-level foreign functionaries.⁸  

ACCOUNTING FOR FACILITATING PAYMENTS (AND OTHER HAZARDS)

Labeling a bribe as a “facilitating payment” in a company’s books and records doesn’t make it one. For example, an offshore drilling company recorded payments to its customs agent in a subsidiary’s “facilitating payment” account, even though company personnel believed the payments were, in fact, bribes. The company was charged with violating both the FCPA’s anti-bribery and accounting provisions. (See SEC v. Noble Corp., No. 10-cv-4336 Southern District of Texas, Nov. 4, 2010.)

Furthermore, even legitimate facilitating payments may still violate the FCPA if they aren’t properly recorded in a company’s books and records.

Violating host nation laws
Although facilitating payments aren’t illegal under the FCPA, they may still violate host nation laws. For example, the U.K.’s Organisation for Economic Co-operation and Development’s Working Group on Bribery recommends that all countries encourage companies to prohibit or discourage facilitating payments “in view of the corrosive effect of small facilitation payments, particularly on sustainable economic development and the rule of law.” (See “Phase 3 Report on Implementing the OECD Anti-bribery Convention in the United States, October 2010,” p. 24.)

The U.K. Bribery Act doesn’t contain a facilitation payment exception. However, David Green, director of the U.K. Serious Fraud Office, has remarked that a small one-time payment would most likely not be prosecuted as a matter of judicial discretion. (See “Man on a mission,” by Tim Harvey, CFE, JP, November/December 2013, Fraud Magazine.)

Payment of facilitation can also come uncomfortably close to other criminal prohibitions such as mail fraud, wire fraud, the U.S. Travel Act, money laundering and false statements. These laws may be violated even when all of the elements necessary for an FCPA prosecution aren’t present.

Reasonable and bona fide expenditures defense
The act also permits reasonable gifts, travel and entertainment for bona fide business purposes. (Bona fide purposes refer to the promotion, demonstration, or explanation of products or services or the execution or performance of a contract.) For example, if foreign officials are travelling to inspect a company’s facilities for a legitimate business purpose, the company may pay for business class airfare, and moderately priced dinners and entertainment. [See 15 U.S.C. §§ 78dd-1(c)(2), “Prohibited foreign trade by issuers.”] However, trips primarily for personal entertainment purposes aren’t bona fide business expenses and may violate the FCPA’s anti-bribery provisions.

For example, the DOJ declined to prosecute a company that had provided a promotional tour for a foreign official and his wife. The couple had already planned a trip to the U.S. at their own expense, and the company had paid for only reasonable and necessary domestic expenses for the extension of their travel. The couple’s entire trip didn’t exceed $5,000.⁹

Local law defense
Foreign payments that are statutorily legal in the country in which they are made don’t violate the FCPA. [See 15 U.S.C. §§ 78dd-1(c)(1), “Prohibited foreign trade practices by issuers.”] In other words, a company may successfully defend an alleged corrupt payment under the FCPA if it was legal according to the written laws of the host country at the time the company paid it. However, this defense rarely works because very few countries have written laws permitting bribery.

The requirements for this defense can be exacting. In one case, a host nation had a law that absolved a bribe payer of culpability if he voluntarily disclosed its payment. The court ruled that the defendant couldn’t assert the local law defense because the local law didn’t actually legalize the bribe payment. [See United States v. Kozeny, 582 F. Supp. 2d 535, 537-40 (S.D.N.Y. 2008).] Accordingly, the executive was convicted.

CHOICES, CHOICES …

So, company executives have a strategic non-market decision to make when deciding whether to make facilitation payments. (Non-market forces are social, political, economic and cultural factors.)

Choice 1: pay facilitation
Paying facilitation is legally and ethically defensible. Practically, however, this choice can be problematic. First, regulatory agencies and courts narrowly construe the facilitation payment exception. Second, research suggests that facilitation payments are counterproductive to efficient business management and lead to higher costs of capital. (See “Does ‘Grease Money’ Speed Up the Wheels of Commerce?” by Daniel Kaufmann and Shang-Jin Wei, National Bureau of Economic Research, Working Paper No. 7093, 1999.) 

On the other hand, a non-market strategy is only one half of a company’s integrated strategy. The other half is often driven by the desire to increase market share through expansion into developing markets in which grease payments are required. A market component that focuses on growth requires an aggressive posture.

If a facilitation payment policy is adopted it needs to be combined with a robust compliance program, which will help prevent, detect and mitigate FCPA violations. Lanny Breuer, when he was assistant attorney general, said, “You don’t get a free pass by saying, ‘We’re doing business in a country where we believe bribery is rampant. If you’re in a country that ... poses greater challenges, I’m going to want to know what did your compliance program do to deal with that. ... If it’s state-of-the-art and you truly were prepared for the environment you were in, that will be helpful to you.” (See “DoJ Warns on Heightened Fraud Enforcement,” by Melissa Klein Aguilar, June 2, 2010, Compliance Week, subscribers only.)

Furthermore, a company can decide to prohibit future grease payments after it has established a toehold in these new markets. It will be harder to switch policy mid-stream, but it can be done. Employees who are contacts with host nation officials will be able to point to a newly enacted corporate policy for the switch.

Choice 2: don’t pay
As an alternate strategy, a company could decide to not make grease payments but still attempt to conduct business in the new country. We have ample theoretical and practical support for this option. For example, BP doesn’t pay for facilitation (even prior to the U.K. Bribery Act). CEO Lord Browne wrote to employees in 2002 stating, “We work within the law in every one of the 100 countries in which we operate and we work to our standards, which are often higher than the legal requirement. … We will not engage in bribery or corruption in any form including facilitating payments.” In 2003, BP backed-up this rhetoric by firing 165 people for violating the company’s ethics standards, according to David P. Baron in his book, “Business and Its Environment,” page 768.

Similarly, Cummins Inc. distributes a “Primary Ethical Guide” to assist employees when they’re deciding on making payments. Payments are allowable only if three conditions are met:

• The payment is required to induce the official to perform a routine act, which he is already under a duty to perform. 
• The payment is consistent with local practice. If the payment is consistent with local practice, it is reasonable to assume that it is consistent with public expectations of official behavior. 
• There is no reasonable alternative available for obtaining the official act or service at issue. (See “Business and Its Environment,” page 769.)

Cummins accepts that failure to make such facilitation payments may cause it to lose business, but they’re prepared to accept a loss of business rather than make an “ethically unacceptable payment” that “not only violates fundamental principles of fair dealing but also hampers efficient economic development and undermines social cohesion.” (See information on Cummins’ practices in “Business and Its Environment,” page 769.)

There has also been at least one well-recognized study that suggests that facilitation payments are counterproductive to efficient business management. The authors concluded that “[w]e find that firms that pay more bribes are also likely to spend more, not less, management time with bureaucrats negotiating regulations, and face higher, not lower, cost of capital.” (See, “Does ‘Grease Money’ Speed Up the Wheels of Commerce?”)  

Wharton School of Business Professor Thomas Donaldson further advocates that “managers should deem a practice permissible only if they can answer no to both of the following questions: Is it possible to conduct business successfully in the host country without undertaking the practice? And is the practice a violation of a core human value?” (See “Business and Its Environment,” page 752.) In applying Donaldson’s rubric to making facilitating payments then if business can proceed — albeit it at a slower pace — without paying facilitation, then it shouldn’t be paid.

Choice 3: don’t conduct business in that country
A company may choose to insulate itself from this whole morass by simply not doing business in countries where grease payments are necessary. This wouldn’t be the first time a business has forgone market opportunities because of non-market conditions. For example, Baron reported in his book, “Business and Its Environment,” that Unilever withdrew from Bulgaria citing pervasive corruption. A Unilever executive said, “It was impossible for us to do business without getting involved in corruption. So we took the logical step and accepted the consequences. That meant packing our bags.” (See “Business and Its Environment,” page 762, quoting the Feb. 16, 1999, issue of The Wall Street Journal.) Similarly, Shell left Russia reportedly due to rampant corruption. BP on the other hand chose to stay in Russia, but has refused to pay bribes. (See “Business and Its Environment,” page 767.)

MORASS CREATED BY THE FCPA AMENDMENT

U.S. companies with global units often have to deal with complex issues when trying to make profits overseas. Their fraud examiners need to know the problems that the facilitations payments amendment of the FCPA might cause so they can advise their compliance directors and top management.

Thomas Baugher, J.D., CFE, is a special agent with the FBI Tampa, Fla., division. 

¹ See S. Rep. No. 95-114, 1977, page 6; H.R. Rep. 95-640, page 4; see also, “The Payoff: Lockheed’s 70-Day Mission to Tokyo,” by A. Carl Kotchian, Saturday Review, July 9, 1977, page 7. “Lowlights” of these payments have been recounted as: contributing $4 million to a foreign political party, leasing a helicopter for a foreign political candidate and a head of government, promoting the interests of foreign governments in matters of delicate U.S. foreign policy and national security, paying $1.25 million in exchange for the repeal of tax regulations, satisfying the bribery demands of foreign generals, incorporating a Swiss company to hire or contract with key figures in foreign countries to promote sales abroad and using a governmental line of credit to make questionable payments overseas. Also see “Combating Corruption Under International Law,” by Alejandro Posadas, Duke Journal of Comparative & International Law, 2000.

² U.S. Securities and Exchange Commission, “Report of the Securities and Exchange Commission on Questionable and Illegal Corporate Payments and Practices,” May 19, 1976, pages 2, 3.

³ The Senate “concluded that the criminalization approach was preferred over a disclosure approach. Direct criminalization entails no reporting burden on corporations and less of an enforcement burden on the Government. The criminalization of foreign corporate bribery will to a significant extent act as a self-enforcing, preventive mechanism.” S. REP. No. 95-114, 1977, page 10. 

⁴ H.R. Rep. No. 95-640, 1977, page 4, 5 [hereinafter H. R. Rep. No. 95-640]. 

⁵ Specifically, the anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person. See the DOJ's "FCPA: A Resource Guide to the U.S. Foreign Corrupt Practices Act."   

⁶ Foreign officials may “not be charged with violating the FCPA itself, since the [FCPA] does not criminalize the receipt of a bribe by a foreign official,” according to United States v. Blondek, 741 F.Supp. 116, 117 (N.D. Tex. 1990), affirmed by United States v. Castle, 925 F.2d 831 (5th Cir. 1991), (“We hold that foreign officials may not be prosecuted under 18 U.S.C. § 371 for conspiring to violate the FCPA.”) Foreign officials, however, can be charged with violating the FCPA when the foreign official acts as an intermediary of a bribe payment. See, e.g., Information, United States v. Basu, No. 02-cr-475 (D.D.C. Nov. 26, 2002), (“World Bank employee charged with wire fraud and FCPA violations for facilitating bribe payments to another World Bank official and Kenyan government official”) and United States v. Sengupta, No. 02-cr-40 (D.D.C. Jan. 30, 2002).

⁷ A company’s books include those of its consolidated subsidiaries and affiliates. Therefore, a company will be held responsible for improper acts of such subsidiaries. With respect to minority and non-controlled interests, a company must put forth its “best efforts” to prevent and detect FCPA violations.

⁸ United States v. Kay; 359 F.3d 738, 750-51 (5th Cir. 2004). Internal footnote omitted; emphasis in original.

⁹ See U.S. Dept. of Justice, FCPA Rev. Press Release 83-02, July 26, 1983 (no longer available).

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