For more than 30 years, the Foreign Corrupt Practices Act (FCPA), which prohibits American companies and their employees and agents from paying bribes to foreign officials in order to obtain or retain business, has been a virtual blank slate for litigators. Since its passage in 1977, the Act has engendered only a handful of published decisions. FCPA law thus remains largely untested in the courts. This dearth of case law exists primarily because enforcement authorities have directed their resources toward corporations, which cannot undertake the life-or-death risk inherent in aggressively defending an FCPA case by taking it to trial and through to appeal.
The focus on corporations has begun to change. Since the beginning of the Obama administration, enforcement actions have often been directed at individuals who, unlike corporations, have greater incentives to defend themselves vigorously. Even with individuals, of course, there are strong incentives for them to plead guilty rather than subject themselves to the full power of U.S. prosecution authorities. Fighting FCPA charges can entail serious financial and emotional costs for individuals and families, even if the defense is successful. With individuals, however, the costs of settlement generally do not simply consist of financial penalties and compliance monitors; the costs include felony convictions that can detrimentally affect individuals and their families for the rest of their lives. In other words, for individuals the incentive to fight may often be stronger than the incentive to cooperate. As a result, there has been a substantial uptick in judicial decisions construing the FCPA.
What does this mean for the criminal defense bar? Simply put, it means that FCPA law will develop in sometimes unexpected ways, and it means that individuals will retain more criminal defense lawyers to defend FCPA cases. Because criminal defense lawyers will increasingly need to defend FCPA cases, this article provides a checklist of defenses that should be explored.
The Foreign Official Defense
The FCPA prohibits bribes to “foreign officials.”1 In cases in which the charge involves bribery of individuals working in the executive, legislative, or judicial branches of their governments, the question of whether the recipient is a “foreign official” is not difficult. But recent prosecutions have involved payments to mid-level employees of “state-owned companies” — that is, payments to employees who are not generally what a lay person would think of as a “foreign official.” For example, in a recent California prosecution, United States v. Carson,2 the government has alleged FCPA violations based on payments by employees of an American company (Controlled Components Inc.) to mid-level officers of state-owned oil, nuclear, and power companies in China, Korea, Malaysia, and United Arab Emirates. The government defends such prosecutions on the ground that the FCPA defines a “foreign official” as an “officer or employee of a foreign government or “any department, agency, or instrumentality thereof.” Thus, the argument goes, state-owned companies are “instrumentalities” of foreign governments, and their employees (even low-level ones) are “foreign officials” within the meaning of the Act.
As in most areas of the FCPA, there is little case law on the subject. In resolving the motion to dismiss in the Carson case, for example, the district court cited only three district court decisions as precedent, all of which had been decided in the past 18 months.3 Following this trio of earlier district court decisions, the Carson court upheld the notion that the targets of the payments in that case may be “foreign officials” in some circumstances, but decided that the question was ultimately one for the jury. In its May 18, 2011, order denying the motion to dismiss, the Carson court concluded that the jury would have to examine a list of factors (non-exhaustive) to determine if payments had been made to foreign officials: (1) the foreign state’s characterization of the entity and its employees; (2) the foreign state’s degree of control over the entity; (3) the purpose of the entity’s activities; (4) the entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions; (5) the circumstances surrounding the entity’s creation; and (6) the foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).
Given the small number of decisions on this subject, and the absence of any appellate precedent, it remains to be seen whether this fact-based analysis will prevail or whether courts will ultimately accept the Carson defendants’ argument that employees of a state-owned business enterprise are not, as a matter of law, “foreign officials” under the FCPA. Such a bright-line rule would greatly clarify the compliance obligations of businesses and individuals. In contrast, Carson’s complicated analysis poses severe practical difficulties, not only for companies and individuals seeking to determine whether the FCPA applies to their actions, but for lay juries attempting to determine whether an FCPA violation occurred. What remains clear, however, is that the “foreign official” defense will continue to be actively litigated, both in the context of legal motions and in the context of a defense theory at trial before the fact-finder.
Facilitating Payments
Another potential defense in an FCPA prosecution involves “facilitating payments.” Under the FCPA, it is not a crime to make “facilitating or expediting payment[s] to a foreign official … the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official.”4 A “facilitating payments” defense would commonly arise where the amount of the payment is small, and it is made to secure a routine, ministerial action to which the payer is already entitled, such as the processing of papers for a visa or providing phone or water service.5
The line between a “facilitating payment” and a bribe is a blurry one, however, and U.S. enforcement authorities have construed this exception quite narrowly.6 Only a handful of decisions have mentioned the exception, and those that have provide little assistance, other than to suggest that the exception is narrow, and applies to ministerial-type functions.7
As in other areas of the FCPA, the case law in this area is largely in its infancy, and it remains to be seen whether the narrow construction of the statutory “facilitating payments” exception will carry the day. Even if it does, however, this statutory exception should be explored in any case in which the allegations suggest that a relatively small payment may have been made to a government functionary for the purpose of securing ministerial activities.
Promotional Expenses
Another potential defense arises when the defendant is alleged to have paid for travel as well as room and board for foreign governmental officials coming to the United States. The FCPA expressly allows payments to foreign officials for expenses related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide.”8 This affirmative defense is difficult to apply, however, due largely to difficulties in determining what “reasonable” and “bona fide” really mean. In examining whether to pursue this defense, counsel should look to whether the promotional expenses were paid in showing plant facilities, holding business meetings, etc. The more the trip looks like a routine business trip, and the more that the company itself pays for meal and lodging expenses directly, the more viable the defense becomes. The other end of the spectrum is a situation involving family members accompanying the officials on the trip, receiving large sums of cash as “spending money,” and visiting entertainment locations such as Disneyworld or Las Vegas casinos.9 Of course, most cases will fall somewhere in between, but defense counsel should not hesitate to raise the promotional expenses issue simply because some expenses may not have a direct business purpose. Many, if not most, promotional business trips involve at least some entertainment and leisure activities that are not strictly related to a company’s core business; this defense should apply in such cases as long as those expenses are reasonable.
Local Law
The FCPA also contains an affirmative defense for payments to foreign officials that are “lawful under the written laws and regulations” of the foreign country.10 Like other FCPA doctrines, this “local law defense” has been interpreted very narrowly on the few occasions it has been tested. For example, in United States v. Kozeny,11 in response to allegations that David Bourke and others bribed Azeri officials to encourage privatization of the state-owned oil company in Azerbaijan, Bourke claimed that the payments were lawful under Azeri law because they were the product of extortion, which he reported directly to the President of Azerbaijan after he learned of the payments. This argument was based on a written Azeri law that provided in pertinent part: “A person who has given a bribe shall be free from criminal responsibility if with respect to him there was extortion of the bribe or if that person after giving the bribe voluntarily made a report of the occurrence.”12 The Azeri law existed precisely for the situation suggested by Bourke — an Azeri official extorted a bribe, which the payer (or an investor in the payer’s company, as in Bourke’s case) reported so that the government could know that it had a bribe-taker in its midst.
The district court in Kozeny assumed that the scenario alleged by Bourke was true, but held that it still did not qualify for the “local law” defense. According to the court:
For purposes of the FCPA’s affirmative defense, the focus is on the payment, not the payer. A person cannot be guilty of violating the FCPA if the payment was lawful under foreign law. But there is no immunity from prosecution under the FCPA if a person could not have been prosecuted in the foreign country due to a technicality (e.g., time-barred) or because a provision in the foreign law “relieves” a person of criminal responsibility. An individual may be prosecuted under the FCPA for a payment that violates foreign law even if the individual is relieved of criminal responsibility for his actions by a provision of the foreign law.
United States v. Kozeny13
Given the infrequency with which this issue has been litigated, it remains to be seen whether this narrow analysis will become the touchstone in assessing local law claims. If so, it is unlikely that such a defense will apply very often. Nonetheless, it is imperative that counsel defending an FCPA case review criminal laws in the country where the conduct took place to determine whether a plausible claim can be made that any payments were “lawful under the written laws and regulations” of the foreign country.
Jurisdictional Defenses
The jurisdictional provisions of the FCPA are broad, and clearly reach U.S. companies and their American employees, even for acts that take place entirely outside of the United States.14 In some recent enforcement actions, however, the U.S. enforcement authorities have based jurisdictional claims entirely on foreign wire transfers denominated in U.S. dollars, under the theory that such transfers proceed through a correspondent bank account in New York. This may stretch the broad jurisdictional provisions of the FCPA beyond even where they were intended to go, and the legitimacy of this theory is entirely untested in the courts. In cases involving foreign nationals or foreign companies, defense counsel should carefully examine the allegations and facts to determine whether a credible challenge to jurisdiction under the FCPA exists.
Business Nexus Requirement
By its terms, the FCPA does not criminalize every payment to a foreign official, but only payments made for the following three purposes:
(i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage … in order to assist [the company making the payment] in obtaining or retaining business for or with, or directing business to, any person.15
Payments made for either of the first two purposes — corruptly influencing official acts — are easy to spot and their scope has engendered little debate. The third improper purpose, however, is more difficult to apply both because it often involves administrative action similar to the circumstances in which facilitating payments can be made, and because there is confusion about the meaning of the “obtaining or retaining business” requirement. This language, which courts and commentators have labeled the “business nexus” requirement, was squarely at issue in United States v. Kay,16 where the government alleged that improper payments had been made to Haitian officials to obtain reduced customs and sales tax liabilities. The district court determined that such payments were not sufficiently linked to “obtaining or retaining business,” and dismissed the charges for failing to satisfy the “business nexus” requirement.
On appeal, the Fifth Circuit reversed, but in a narrow opinion that also emphasized the importance of the statutory requirement:
Although we recognize that lowering tax and customs payments presumptively increases a company’s profit margin by reducing its cost of doing business, it does not follow, ipso facto … that such a result satisfies the statutory business nexus element. Even a modest imagination can hypothesize myriad ways that an unwarranted reduction in duties and taxes … could assist in obtaining or retaining business … but that is not to say that such a diminution always assists in obtaining or retaining business. … There are bound to be circumstances in which such a cost reduction does nothing other than increase the profitability of an already-profitable venture or ensure profitability of some start-up venture. Indeed, if the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage — a conclusion that we are forbidden to reach.
United States v. Kay17
Kay accordingly held that the “business nexus” element is satisfied only when the government proves that “the bribery was intended to produce an effect, here through tax savings, which would assist in obtaining or retaining business.” Once again, this fact-based analysis provides little clarity about the scope of the FCPA’s reach other than to suggest that the government must prove a “business nexus” beyond a reasonable doubt. This is another issue of which counsel should be aware, and should pursue both through pretrial motions and potentially as a fact-based defense before the jury.
Mens Rea
Apart from presenting intent issues that are unique to the FCPA, such as the business nexus requirement, FCPA prosecutions may also present issues regarding whether the government’s proof demonstrates the high level of mens rea required by the statute. The FCPA prohibits only payments that are made “corruptly” to foreign officials or acts that are done “corruptly” within the United States in furtherance of prohibited conduct.18 In addition, to prosecute an individual criminally, the prosecution must prove that the payer’s violation of the statute was “willful.”19 Finally, when the payment is made indirectly, the prosecution must prove that the payment was made while “knowing” that all or part of the money would be used to bribe foreign officials.20 Since the FCPA is in part a criminal statute, the government, in bringing a prosecution, must prove beyond a reasonable doubt that the required mental state coexisted with the proscribed act, i.e., that the defendant acted with the requisite “corrupt intent” when the alleged misconduct occurred.21
It is worth emphasizing that, as in other areas of white collar law, the government has increasingly relied on the “willful blindness” doctrine as a potential substitute for proving willfulness and knowledge. Properly construed, that doctrine merely allows a finding of “knowledge” and “willfulness” in a situation where the evidence shows the defendant “actually knew but he refrained from obtaining final conformation. … This, and this, alone, is willful blindness.”22
Nonetheless, both inside and outside the FCPA context, this doctrine has often been extended to cases where “no actual knowledge existed,” but where a jury could determine from the evidence “the defendant had not tried hard enough to learn the truth.”23 A particularly egregious example of this occurred in the Frederic Bourke case.24 The government’s evidence contrasted Bourke’s supposed lack of due diligence when investing in a foreign oil company with that of another prospective investor. The government obtained an instruction allowing jurors to convict based on willful blindness. This created a situation in which jurors were essentially invited to infer Bourke’s “knowledge and willfulness” about bribery by the company based on a lack of due diligence by Bourke compared to another person who decided not to invest in the company. In other words, the doctrine appears to have been used in the Bourke case precisely because he supposedly had not tried hard enough to learn the truth, rather than because he actually knew the truth but actively avoided facts that would confirm it. In a recent decision, the Supreme Court made clear that this is not a proper use of the willful blindness doctrine.25
Such a defense will be particularly important in cases in which the defendant is a high-level company official, and the bribes were paid by an employee or third-party agent in the foreign country. In such cases, defense counsel seeking to defend on grounds of intent should be especially sensitive to the government’s likely request for a “willful blindness” instruction, and should make every effort to defeat the prejudice inherent in giving such an instruction.
Entrapment
A final defense on the checklist arises from the recent trend in all white collar cases, including FCPA prosecutions, for the government to import blue collar sting tactics into its arsenal. One recent FCPA prosecution, widely referred to as the “Shot Show case,” illustrates these new tactics. In the Shot Show case, the government obtained indictments against 22 executives in the military and law enforcement equipment industry, alleging they attempted to bribe African officials to win contracts to sell armor, weapons, and military gear. The African officials, however, were actually undercover FBI agents. At the center of this sting operation was Richard Bistrong, a confidential informant who was involved in a pending bribery case of his own. He allegedly connected the defendants with the undercover agents who solicited the bribes.
One likely response to sting operations like the one used in the Shot Show case will be an expanded use of the entrapment defense. As the Supreme Court has made clear, “government agents may not originate a criminal design, implant in an innocent person’s mind the disposition to commit a criminal act, and then induce commission of the crime so that the government may prosecute.”26 To prove entrapment, the defense must show (1) government inducement of a crime; and (2) a lack of predisposition on the part of the defendant to engage in criminal conduct.27 In federal court, predisposition is “the principal element of the defense of entrapment.”28
This defense is never an easy one. But it may be an easier one to pursue in white collar cases than blue collar cases due to the potential differences with regard to predisposition evidence. In any entrapment case, raising the defense generally opens the door to the presentation of similar convictions, which are relevant to the issue of predisposition. In white collar cases, however, the predisposition issue may often not be as dangerous. The fact than the predisposition issue is not a problem for the defendant will lead counsel to more readily invoke the defense, and at the very least force the jury to consider the government’s role in “manufacturing” crime. As white collar prosecutors increasingly seek to import sting operations into their arsenal, it is likely that the entrapment defense will receive more and more consideration from counsel attempting to formulate a vigorous defense.
Notes
1. The FCPA cannot be applied to prosecute the foreign officials themselves, even under a theory that they “conspired” with Americans to violate the statute. United States v. Castle, 925 F.2d 831 (5th Cir. 1991).
2. United States v. Carson, No. 8:09-cr-77-JVS (C.D. Cal. 2009).
3. United States v. Aguilar, No. 2:10-cr-1031-ACH (C.D. Cal. Apr. 20, 2011); United States v. Esquenazi, No. 1:09-cr-21010-JEM, ECF No. 309 (S.D. Fla. Nov. 19, 2010); United States v. Nguyen, No. 2:08-cr-00522-TJS, ECF No. 144 (E.D. Pa. Dec. 30, 2009).
4. 15 U.S.C. § 78dd-1(b).
5. See 15 U.S.C. § 78dd-1(f)(3) (defining “routine governmental action” as used in the facilitating payment exception).
6. The line is so blurry, in fact, that counsel advising companies about their FCPA compliance policies generally advise companies to prohibit facilitating payments altogether. One interesting question to ponder is whether enforcement authorities might rely on these compliance policies as a ground for prosecuting individuals who make a facilitating payment in violation of compliance policy, seeking to argue that doing so is “corrupt” even though the payment might otherwise comply with the law. In our view, this would be an extremely unfortunate development. The job of compliance counsel, in helping a company formulate a policy that errs on the side of caution and eliminates risk, is very different from the job of the criminal justice system, which is to prosecute individuals whose conduct has clearly crossed legal lines set by Congress.
7. For instance, in United States v. Kay, 359 F.3d 738, 751 (5th Cir. 2004), the government argued and the U.S. Court of Appeals for the Fifth Circuit agreed that the facilitating payments that pay for an official to issue a document or provide an inspection would not always be considered a facilitating payment. According to the Fifth Circuit in Kay, facilitating payments can be made only with respect to “very narrow categories of largely non-discretionary, ministerial activities performed by mid- or low-level foreign functionaries.”
8. 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A).
9. The Lucent Technologies settlement in 2007 revealed conduct of this sort, with Chinese officials being taken to various entertainment locations between 2000 and 2003 (Disneyland, the Grand Canyon, Universal Studios) that seemed to involve little or no business content.
10. 15 U.S.C. § 78dd-2(c)(1).
11. 582 F. Supp. 2d 535 (S.D.N.Y. 2008).
12. Id. at 538.
13. Id. at 539.
14. See 15 U.S.C. §§ 78dd-1(1); 78dd-1(g); 78dd-2(a); 78dd-3(a).
15. 15 U.S.C. § 78dd-1(a)(1).
16. 359 F.3d 738, 751 (5th Cir. 2004).
17. Id. at 759-60.
18. United States v. Kay, 513 F.3d 432, 446 (5th Cir. 2007); 15 U.S.C. §§ 78dd-1(a) and (g), 78dd-2(a) and (i), 78dd-3(a).
19. Id. at §§78ff(c)(2)(A), 78dd-2(g)(2)(A), 78dd-3(e)(2)(A).
20. Id. at §§ 78dd-1(a)(3), 78dd-2(a)(3), 78dd-3(a)(3).
21. See, e.g., United States v. Fox, 95 U.S. 670, 671 (1877) (“the criminal intent essential to a commission of a public offense must exist when the act complained of is done”).
22. United States v. Reyes, 302 F.3d 48, 54 (2d Cir. 2002).
23. United States v. Ferrarini, 219 F.3d 145, 157 (2d Cir. 2000).
24. See United States v. Bourke, currently on appeal before the U.S. Court of Appeals for the Second Circuit, Case No. 09-4704-cr(L).
25. Global-Tech Appliances Inc. v. SEB, Supreme Court Case No. 10-6, slip op. at 14 (May 31, 2011) (“The test applied by the Federal Circuit in this case departs from the proper willful blindness standard in two important respects. First, it permits a finding of knowledge when there is merely a “known risk” that the induced acts are infringing. Second, in demanding only “deliberate indifference” to that risk, the Federal Circuit’s test does not require active efforts by an inducer to avoid knowing about the infringing nature of these activities.”).
26. Jacobson v. United States, 503 U.S. 540, 548 (1992).
27. Mathews v. United States, 485 U.S. 58, 63 (1988).
28. Id. (quoting United States v. Russell, 411 U.S. 423, 433 (1973)).