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Payments that 'grease the rails'

The FCPA’s ‘facilitating payments’ exception



January/February 2014

 

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This article is excerpted and adapted from the unpublished white paper, “An FCPA primer for an expanding American freight forwarding business,” which Tom Baugher, J.D., CFE, wrote in the course of his MBA studies.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

 

  

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‘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  

 

 

 


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Foreign Corrupt Practices Act (FCPA): What Fraud Examiners Should Know
2014 Fraud Examiners Manual US Edition
2014 CFE Exam Prep Course US Edition
2014 CFE Exam Prep Toolkit US Edition

 

 

 
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