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companies should be aware of the risks involved in engaging third-party agents or intermediaries. The fact that a bribe is paid by a third party does not eliminate the potential for criminal or civil FCPA liability.131

For instance, a four-company joint venture used two agents—a British lawyer and a Japanese trading company—to bribe Nigerian government officials in order to win a series of liquefied natural gas construction projects.132 Together, the four multi-national corporations and the Japanese trading company paid a combined $1.7 billion in civil and criminal sanctions for their decade-long bribery scheme. In addition, the subsidiary of one of the companies pleaded guilty and a number of individuals, including the British lawyer and the former CEO of one of the companies’ subsidiaries, received significant prison terms.

Similarly, a medical device manufacturer entered into a deferred prosecution agreement as the result of corrupt payments it authorized its local Chinese distributor to pay to Chinese officials.133 Another company, a manufacturer of specialty chemicals, committed multiple FCPA violations through its agents in Iraq: a Canadian national and the Canadian’s companies. Among other acts, the Canadian national paid and promised to pay more than $1.5 million in bribes to officials of the Iraqi Ministry of Oil to secure sales of a fuel additive. Both the company and the Canadian national pleaded guilty to criminal charges and resolved civil enforcement actions by SEC. 134

In another case, the U.S. subsidiary of a Swiss freight forwarding company was charged with paying bribes on behalf of its customers in several countries.135 Although the U.S. subsidiary was not an issuer under the FCPA, it was an “agent” of several U.S. issuers and was thus charged directly with violating the FCPA. Charges against the freight forwarding company and seven of its customers resulted in over $236.5 million in sanctions.136

Because Congress anticipated the use of third-party agents in bribery schemes—for example, to avoid actual knowledge of a bribe—it defined the term “knowing” in a way that prevents individuals and businesses from avoiding liability by putting “any person” between themselves and

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the foreign officials.137 Under the FCPA, a person’s state of mind is “knowing” with respect to conduct, a circumstance, or a result if the person:

•is aware that [he] is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or

•has a firm belief that such circumstance exists or that such result is substantially certain to occur.138

Thus, a person has the requisite knowledge when he is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.139 As Congress made clear, it meant to impose liability not only on those with actual knowledge of wrongdoing, but also on those who purposefully avoid actual knowledge:

[T]he so-called “head-in-the-sand” problem—vari- ously described in the pertinent authorities as “conscious disregard,” “willful blindness” or “deliberate ignorance”—should be covered so that management officials could not take refuge from the Act’s prohibitions by their unwarranted obliviousness to any action (or inaction), language or other “signaling device” that should reasonably alert them of the “high probability” of an FCPA violation.140

Common red flags associated with third parties include:

•excessive commissions to third-party agents or consultants;

•unreasonably large discounts to third-party distributors;

•third-party “consulting agreements” that include only vaguely described services;

•the third-party consultant is in a different line of business than that for which it has been engaged;

•the third party is related to or closely associated with the foreign official;

•the third party became part of the transaction at the express request or insistence of the foreign official;

•the third party is merely a shell company incorporated in an offshore jurisdiction; and

•the third party requests payment to offshore bank accounts.

Businesses may reduce the FCPA risks associated with third-party agents by implementing an effective compliance program, which includes due diligence of any prospective foreign agents.

United States v. Kozeny, et al.

In December 2011, the U.S. Court of Appeals for the Second Circuit upheld a conscious avoidance instruction given during the 2009 trial of a businessman who was convicted of conspiring to violate the FCPA’s anti-bribery provisions by agreeing to make payments to Azeri officials in a scheme to encourage the privatization of the Azerbaijan Republic’s state oil company. The court of appeals found that the instruction did not lack a factual predicate, citing evidence and testimony at trial demonstrating that the defendant knew corruption was pervasive in Azerbaijan; that he was aware of his business partner’s reputation for misconduct; that he had created two U.S. companies in order to shield himself and other investors from potential liability for payments made in violation of the FCPA; and that the defendant expressed concerns during a conference call about whether his business partner and company were bribing officials.

The court of appeals also rejected the defendant’s contention that the conscious avoidance charge had improperly permitted the jury to convict him based on negligence, explaining that ample evidence in the record showed that the defendant had “serious concerns” about the legality of his partner’s business practices “and worked to avoid learning exactly what [he] was doing,” and noting that the district court had specifically instructed the jury not to convict based on negligence.

What Affirmative Defenses Are Available?

The FCPA’s anti-bribery provisions contain two affirmative defenses: (1) that the payment was lawful under the written laws of the foreign country (the “local law” defense), and (2) that the money was spent as part of demonstrating a product or performing a contractual obligation (the “reasonable and bona fide business expenditure” defense). Because these are affirmative defenses, the defendant bears the burden of proving them.

The Local Law Defense

For the local law defense to apply, a defendant must establish that “the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country.”141 The defendant must establish that the payment was lawful under the foreign country’s written laws and regulations at the time of the offense. In creating the local law defense in 1988, Congress sought “to make clear that the absence of written laws in a foreign official’s country would not by itself be sufficient to satisfy this defense.”142 Thus, the fact that bribes may not be prosecuted under local law is insufficient to establish the defense. In practice, the local law defense arises infrequently, as the written laws and regulations of countries rarely, if ever, permit corrupt payments. Nevertheless, if a defendant can establish that conduct that otherwise falls within the scope of the FCPA’s anti-bribery provisions was lawful under written, local law, he or she would have a defense to prosecution.

In United States v. Kozeny, the defendant unsuccessfully sought to assert the local law defense regarding the law of Azerbaijan. The parties disputed the contents and applicability of Azeri law, and each presented expert reports and testimony on behalf of their conflicting interpretations. The court ruled that the defendant could not invoke the FCPA’s affirmative defense because Azeri law did not actually legalize the bribe payment. The court concluded that an exception under Azeri law relieving bribe payors who voluntarily

disclose bribe payments to the authorities of criminal liability did not make the bribes legal.143

Reasonable and Bona Fide Expenditures

The FCPA allows companies to provide reasonable and bona fide travel and lodging expenses to a foreign official, and it is an affirmative defense where expenses are directly related to the promotion, demonstration, or explanation of a company’s products or services, or are related to a company’s execution or performance of a contract with a foreign government or agency.144 Trips that are primarily for personal entertainment purposes, however, are not bona fide business expenses and may violate the FCPA’s anti-bribery provisions.145 Moreover, when expenditures, bona fide or not, are mischaracterized in a company’s books and records, or where unauthorized or improper expenditures occur due to a failure to implement adequate internal controls, they may also violate the FCPA’s accounting provisions. Purposeful mischaracterization of expenditures may also, of course, indicate a corrupt intent.

DOJ and SEC have consistently recognized that businesses, both foreign and domestic, are permitted to pay for reasonable expenses associated with the promotion of their products and services or the execution of existing contracts. In addition, DOJ has frequently provided guidance about legitimate promotional and contract-related expenses— addressing travel and lodging expenses in particular— through several opinion procedure releases. Under the circumstances presented in those releases,146 DOJ opined that the following types of expenditures on behalf of foreign officials did not warrant FCPA enforcement action:

•travel and expenses to visit company facilities or operations;

•travel and expenses for training; and

•product demonstration or promotional activities, including travel and expenses for meetings.

Whether any particular payment is a bona fide expenditure necessarily requires a fact-specific analysis. But the following non-exhaustive list of safeguards, compiled from several releases, may be helpful to businesses in evaluating

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whether a particular expenditure is appropriate or may risk violating the FCPA:

•Do not select the particular officials who will participate in the party’s proposed trip or program147 or else select them based on pre-determined, meritbased criteria.148

•Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of a receipt.149

•Do not advance funds or pay for reimbursements in cash.150

•Ensure that any stipends are reasonable approximations of costs likely to be incurred151 and/or that expenses are limited to those that are necessary and reasonable.152

•Ensure the expenditures are transparent, both within the company and to the foreign government.153

•Do not condition payment of expenses on any action by the foreign official.154

•Obtain written confirmation that payment of the expenses is not contrary to local law.155

•Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred.156

•Ensure that costs and expenses on behalf of the foreign officials will be accurately recorded in the company’s books and records.157

In sum, while certain expenditures are more likely to raise red flags, they will not give rise to prosecution if they are (1) reasonable, (2) bona fide, and (3) directly related to (4) the promotion, demonstration, or explanation of products or services or the execution or performance of a contract.158

What Are Facilitating or Expediting Payments?

The FCPA’s bribery prohibition contains a narrow exception for “facilitating or expediting payments” made in furtherance of routine governmental action.159 The facilitating payments exception applies only when a payment is made to further “routine governmental action” that involves non-discretionary acts.160 Examples of “routine governmental action” include 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.161 Nor does it include acts that are within an official’s discretion or that would constitute misuse of an official’s office.162 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.

Examples of “Routine Governmental Action”

An action which is ordinarily and commonly performed by a foreign official in—

obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;

processing governmental papers, such as visas and work orders;

providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country;

providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or

actions of a similar nature.

Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action. But, like the FCPA’s anti-bribery provisions more generally, the facilitating payments exception focuses on the purpose of the payment rather than its value. For instance, an Oklahomabased corporation violated the FCPA when its subsidiary paid Argentine customs officials approximately $166,000 to secure customs clearance for equipment and materials that lacked required certifications or could not be imported under local law and to pay a lower-than-applicable duty rate. The company’s Venezuelan subsidiary had also paid Venezuelan customs officials approximately $7,000 to permit the importation and exportation of equipment and materials not in compliance with local regulations and to avoid a full inspection of the imported goods.163 In another case, 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.164

Labeling a bribe as a “facilitating payment” in a company’s books and records does not make it one. A Swiss offshore drilling company, for example, recorded payments to its customs agent in the 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.165

Although true facilitating payments are not illegal under the FCPA, they may still violate local law in the countries where the company is operating, and the OECD’s Working Group on Bribery recommends that all countries encourage companies to prohibit or discourage facilitating payments, which the United States has done regularly.166 In addition, other countries’ foreign bribery laws, such as the United Kingdom’s, may not contain an exception for facilitating payments.167 Individuals and companies should therefore be aware that although true facilitating payments

are permissible under the FCPA, they may still subject a company or individual to sanctions. As with any expenditure, facilitating payments may still violate the FCPA if they are not properly recorded in an issuer’s books and records.168

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