The FCPA’s statutory defences and considerations for corporate compliance

February 2023  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2023 Issue

For companies doing business in the global marketplace, it is well understood that engaging in corrupt payments of money or gifts to non-US government officials to obtain business or otherwise gain a commercial advantage carries with it a significant risk of prosecution under the US Foreign Corrupt Practices Act (FCPA). Moreover, because of the expertise and resources enjoyed by the US Department of Justice (DOJ), staying on the right side of this law in the context of dealings with government officials and personnel is a necessary centrepiece of many if not most companies’ compliance programmes.

The FCPA does, however, provide for certain exceptions and defences pursuant to which a company may lawfully provide things of value to non-US government officials. In the day to day management of a compliance programme, employees not infrequently raise questions about what conduct is protected.

Counsel and compliance personnel responsible for advising employees need to have a solid understanding of FCPA exceptions and defences to provide timely and practical advice in real-life situations.

Exceptions and defences

First, the FCPA expressly excludes from its reach “any facilitating or expediting payment... the purpose of which is to expedite or to secure the performance of a routine governmental action”. This carve out for so-called ‘grease’ payments was narrowly drawn to cover only the performance of ministerial, nondiscretionary duties. For example, it allows entities and individuals to avoid liability for certain payments associated with “routine governmental action”, which includes official acts “ordinarily and commonly performed” in connection with obtaining visas, permits or licences abroad, as well as mail services and setting up utility services.

Second, under the ‘local law defence’, a defendant may avoid liability by establishing that the payment, gift, offer or promise of anything of value was “lawful under the written laws and regulations” of the relevant foreign official’s home country.

Lastly, the FCPA includes an affirmative defence for “reasonable and bona fide expenditure”, for “promotion, demonstration, or explanation” of a company’s services or performance. This affirmative defence can apply, for example, to an official’s travel or lodging expenses incurred in the context of legitimate promotional activity. In some circumstances, but always with strict compliance safeguards, it can also apply to justify product discounts or other benefits for a government official that serve legitimate business purposes.

Unlike the ‘facilitating payments’ exception, which, while largely untested at trial, arguably requires the government to prove its inapplicability, the ‘local law’ and ‘reasonable and bona fide expenditure’ defences are affirmative defences that defendants must prove.

Case law and enforcement guidance

The FCPA is an area where there is scant case law, and the decisional law that exists tends to deal with issues other than the statute’s exceptions and defences. There is, however, enforcement guidance that can be helpful in understanding the facilitating payments exception, local law defence and promotional expenses defence.

The first source consists of opinions issued by the DOJ in response to scenarios posed by companies that would like to understand if the DOJ would pursue an FCPA enforcement action. These ‘opinion releases’ cover a broad range of topics. Now, these opinion releases do not constitute precedent and are limited to the specific company request. In addition, a company is unlikely to present a scenario that the company itself believes violates the law. Thus, the DOJ opinion releases often reflect very extensive controls and safeguards. Nonetheless, valuable principles can be gleaned from the opinion releases. In particular, a significant number of opinion releases address the promotional expenses defence. In-house counsel and compliance personnel are wise to consider these opinions when crafting policies and providing advice.

The second primary source of guidance is the ‘DOJ/SEC FCPA Resource Guide’. In addition to elaborating on the elements comprising a violation and describing enforcement cases, the Resource Guide discusses the FCPA’s exceptions and affirmative defences, even providing some hypotheticals. While application of this guidance requires judgment – and the more complex or ‘grey’ the circumstances, the more that is the case – these are useful resources for lawyers and compliance professionals. The DOJ’s views as to all three exceptions and defences are covered in the Resource Guide, though it should be noted that the DOJ construes these exceptions and defences quite narrowly.

For example, regarding the ‘local law’ defence, the Resource Guide insists that “the absence of written laws in a foreign official’s country would not by itself be sufficient to satisfy this defence”, suggesting that only a law that affirmatively permits the payment would suffice. Regarding the ‘reasonable and bona fide expenditure’ defence, the Guide notes that such expenditures, even if they do not ultimately give rise to prosecution, nonetheless ‘raise red flags’.

Practical considerations in addressing FCPA compliance

The promotional expenses affirmative defence is by far the most important of the FCPA exceptions and defences. It comes up most frequently in advising clients on the permissible bounds of dealing with non-US government personnel, and when properly applied it can be quite important for a company in pursuing business goals while avoiding unlawful activity.

The defensibility of any particular situation will depend on the facts, but the following questions are useful to consider. Is the expense demonstrably linked to a legitimate promotional or contract performance need, such as the demonstration or explanation of a company’s products and services? Is the scope or value of the benefit consistent with a legitimate business purpose and not excessive in relation to that purpose (e.g., length of trip, luxury level of the accommodations, amount of product discount, etc.)? Is the governmental agency or employer aware of the amount, purpose and recipients of the hospitality, travel or other benefit associated with the company’s promotional expenditures? Are the officials who will receive the benefit chosen by the agency as opposed to chosen by the company providing the benefit? Is the company conducting only routine business with the agency, with no special circumstances that would render the timing, recipients, or other aspects of the promotional expenses suspect? To the full extent feasible, are any expenditures dealt with through payments to third-party vendors rather than to the officials themselves (e.g., hotel operators or travel agents)?

In contrast, rarely will the local law defence protect conduct otherwise prohibited by the FCPA. And as the Resource Guide suggests, the DOJ can be relied upon to interpret this defence narrowly. The only federal court to have interpreted this provision has done so as well, ruling that the fact that the defendant could be relieved of liability under local law for making payments under circumstances amounting to extortion was not sufficient, since the focus of the local law defence “is on the payment, not the payer” (see United States v. Kozeny, (2008)). Furthermore, while some local laws may not be as detailed as the FCPA, it would be unwise to rely on a gap or silence under local law as an affirmative defence.

That said, it is often important to understand local law in the context of FCPA compliance advice. Where local law does not clearly prohibit the conduct, that is at least a factor in evaluating the compliance risk under the FCPA, because it is relevant to the question of corrupt intent. Moreover, one form that the local law defence can take is where the payment is directed by a governmental authority, such as a court.

Finally, the facilitation payments exception often comes up as a question because of the frequency in some contexts, unfortunately, with which officials carrying out regulatory activities constituting ‘routine governmental action’ may demand payments. The difficulty comes in accurately assessing whether the exception applies. Certainly, the mere fact that a payment is demanded in the context of licensing and permitting, visa approvals or customs inspections is insufficient.

Nor is the fact that a payment is for a low dollar amount determinative (although, conversely, a very high dollar amount will not be defensible). Rather, a careful analysis is required as to whether the governmental action involves discretion or judgment, as opposed to being a merely ministerial act to which the company is entitled under local legal or procedural requirements. This analysis is difficult for a layperson and allowing company personnel who are not legally trained to make such an assessment can mean taking on significant risk.

Moreover, in some non-US jurisdictions, like the UK, facilitation payments are illegal. Perhaps because of these factors, as well as because of a growing sense among many compliance professionals that, while permitted by the FCPA, facilitation payments can be corrosive, we have seen more and more companies prohibit or at least make strong efforts to curtail the practice.

Companies that are most successful in providing effective rules and guidance for their personnel with respect to the FCPA’s exceptions and affirmative defences do so by providing clear, simple principles that err on the side of caution, and that a layperson can understand and apply to real-life circumstances, while at the same time strongly encouraging or even requiring consultation with legal or compliance personnel. Providing easily understood rules of the road helps to ensure that situations that are clearly non-compliant will be avoided in the first place, while those that fall into a grey area will be brought to subject matter experts for guidance and direction.

 

Iris E. Bennett and Patrick F. Linehan are partners and Jessica D. Maneval is an associate at Steptoe & Johnson LLP. Ms Bennett can be contacted on +1 (202) 429 8125 or by email: ibennett@steptoe.com. Mr Linehan can be contacted on +1 (202) 429 8154 or by email: plinehan@steptoe.com. Ms Maneval can be contacted on +1 (202) 429 6748 or by email: jmaneval@steptoe.com.

© Financier Worldwide

BY

Iris E. Bennett, Patrick F. Linehan and Jessica D. Maneval

Steptoe & Johnson LLP

©2001-2024 Financier Worldwide Ltd. All rights reserved. Any statements expressed on this website are understood to be general opinions and should not be relied upon as legal, financial or any other form of professional advice. Opinions expressed do not necessarily represent the views of the authors’ current or previous employers, or clients. The publisher, authors and authors' firms are not responsible for any loss third parties may suffer in connection with information or materials presented on this website, or use of any such information or materials by any third parties.