Don't Pay Me, or Else! Extorted or Culturally Compelled Payments to Foreign Officials
Public Company Forum: Spring 2012
April 25, 2012
Most executives know that handing a foreign official a bag of cash to gain business is a bad idea. Many may even know that it’s illegal under the Foreign Corrupt Practices Act (FCPA), and that such a payment could quickly land them in jail and their company in bankruptcy.
But what if it’s not a bag of cash? What if it’s a handout to a customs agent so that your shipment clears customs on time? What if the work is in, say, Afghanistan? Or China? What if your shipment has already cleared customs, but the agent says he’ll withhold it until you pay him a handout? Oh, and did I mention that he’s armed?
What do you do then?
These sorts of scenarios play out daily all over the world, and to the extent that management ever learns of any resulting payments, they typically write them off as the cost of doing business overseas. “Well,” they shrug, “I guess that’s just the way you get things done over there.”
Wrong answer. Making these kinds of payments – whether they’re extorted, culturally expected, or both – still violates the FCPA, and thus the SEC and Department of Justice could very well bury your company in fines and send management to prison.
Extortion is Almost Never a Defense
Broadly speaking, the FCPA prohibits bribing foreign officials to obtain or retain business. Bribery means paying for better-than-fair, or preferential, treatment. Extortion, on the other hand, is the opposite of bribery; it’s where corrupt payment is demanded under the threat that you will otherwise suffer worse-than-fair, or discriminatory, treatment.
The customs scenario above is a good example of extortion because the agent treated you unfairly; he demanded an extra handout before releasing a shipment that had already cleared customs. Barring the very rare instance where the SEC and DOJ determine that this kind of payment is a permissible “facilitation payment,” the government will conclude that these extorted payments still violate the FCPA. In fact, the only time the government will excuse extorted payments is when the foreign official has threatened you with imminent death or serious bodily harm. Thus, if the Afghani agent demanded the handout and literally put his gun to your head, the government would begrudgingly admit that, yes, the payment was extorted and not banish you to prison for violating the FCPA. Thanks, Feds!
When in Rome, Do NOT Do As the Romans Do
In many countries, bribery is either tolerated or culturally expected in the business community. In China, especially, business is heavily dependent on the traditional notion of guanxi, where the exchange of favors and gifts drives successful business development. As one commentator recently explained:
The Chinese approach toward business transactions greatly values personal relationships and requires a certain level of gift exchange that may strike many Westerners as inappropriate. . . . [C]omplicating enforcement efforts is the fact that the modern Chinese political infrastructure rests upon a culture of corruption. . . . Indeed, despite increased enforcement efforts, the reality is that the Chinese government is losing the battle against corruption.
In response to these economic realities, both in China and elsewhere, U.S. companies have long criticized the FCPA as “bad for business,” placing them at a disadvantage to their foreign competitors. Congress, however, along with the SEC and DOJ, have all reiterated that the FCPA is in fact culturally blind, arguing that such blindness is necessary to restore faith in the international marketplace and strengthen economic development.
Well then, what do you do?
Compliance Plans: A Must for Public Companies Operating Abroad
Ultimately, whether an extortionate or culturally driven request for payment is lawful is a highly factual inquiry that requires analysis by seasoned compliance and legal counsel. To that end, the SEC and DOJ have repeatedly urged public companies to implement anti-corruption compliance plans. Such a plan will help prevent misconduct and also improve your position with regulatory authorities in the event of an investigation.
While the specific parameters of compliance plans can, and should, vary based on the scope of the company's foreign operations, all such plans must have procedures and controls governing payments to foreign officials (especially those for gifts, meals and other hospitalities) and mechanisms for personnel to report suspicious payment requests to compliance or other corporate management. These efforts will provide the framework for addressing difficult or unusual requests for payments. In addition, there are several general guidelines that should govern all payment requests from foreign officials. These are:
- Document all such payments thoroughly and accurately in the company’s books and records. Obtain receipts whenever possible. If a payment was coerced or extorted, explain the circumstances in detail, making clear why there appeared no reasonable alternative.
- If culturally compelled to exchange gifts or hospitalities, use either perishable gifts (fruit baskets, wine) or those embossed with your corporate logo (pens, shirts). For hospitalities, do not invite extraneous family members and avoid recreational or entertainment-related side trips.
- Avoid giving gifts and hospitalities, of any kind, to officials with whom you have pending applications or contracts.
W.C. Turner Herbert is guest author for the Spring 2012 issue. Turner is a litigator in Parker Poe’s Government Investigations & White Collar Defense group. His practice focuses on identifying and assessing potential exposure under the Foreign Corrupt Practices Act (FCPA), export control laws (including ITAR), federal firearms laws, and defending clients in related enforcement actions. Mr. Herbert also has considerable experience designing corporate compliance programs in these areas.
Additional Articles from the Spring 2012 Public Company Forum:
Doug's Note: The JOBS Act
What’s New With Stock Buybacks?
Say on Pay: We Got an “A+.” Should We Still Worry?
What’s Market? Are Non-Binding Auditor Ratification Votes “Required?”
Dodd-Frank Act Progress Report: Spring 2012