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Analysis: Navigating the Legal Pitfalls of the 'Facilitation Payments' Exception By SEVERIN IAN WIRZ Published: March 30, 2012 © 2012 Main Justice
When the Senate Subcommittee on Multinational Corporations began investigating
the corporate corruption scandals in the 1970s that would captivate the country, it
uncovered foreign bribes both small and large. Companies disclosed payments that ranged
from the routine exchange of envelopes to secure police protection in Italy, to the more
worrisome multi-million dollar payments directly to political campaigns in Korea.
When Congress eventually passed the Foreign Corrupt Practices Act in 1977
outlawing corporate bribery of foreign public officials, the drafters made an exception for a
narrow group of bribes that they termed “facilitation payments, " small payments meant to
grease the wheels of corrupt foreign bureaucracies.[i] Under the statute, the FCPA’s
criminal anti-bribery provisions do not apply to payments made “to expedite or to secure
the performance of a routine governmental action by a foreign official,” i.e., so-called
facilitation or grease payments.[ii]
Thirty-five years later, companies and their counsel are still trying to figure out
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what activity falls under the exception and what liability they may still face for making such
payments. We were reminded of this problem just this past month when several Noble
Corporation executives were charged by the SEC for FCPA violations for participating in a
bribery scheme with Nigerian customs officials to obtain permits for oil rigs there.
Apparently, even though the company treated the payments as “facilitation payments”, (or
at least booked them as such out of a special account entitled “facilitation payments”), the
DOJ and SEC weren’t buying it.[iii] And while most companies officially outlaw all forms of
facilitation payments,[iv] navigating the fine line between a bribe, a facilitation payment,
and a legitimate government levy can be a very delicate balance.
The Story of the Hapless Widget Company
In determining what activity falls under the exception, it helps to consider an
example: the scenario of the hapless U.S. widget company. The company exports goods
around the world (widgets being in particularly high demand right now), until one day a
low-level customs official in a foreign country informs the company that its shipment is
being held at port because of a clerical error in the company’s paperwork. The company
can resubmit the paperwork, but it will take weeks to reprocess and release the shipment
from port, costing the company hundreds of thousands of dollars in losses. The company
knows that it can follow a common, unofficial practice and pay the customs official a
thousand dollars to “jump the queue” in line and release the goods earlier, which it does.
Years later, an internal audit reveals that this has become a regular activity, and that over a
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period of 6 years the company has paid over $25,000 in small payments to customs officials
to expedite the customs process. Is this cause for concern for the company’s legal team, or
would it qualify under the facilitation payments exception?
Before deciding whether the payments fit under the exception, a legal adviser would
do well to first ask whether the company has properly recorded the payments on its books.
While the FCPA makes an exception for facilitation payments under its criminalization
provisions, no such exception exists under its record-keeping provisions. When BJ Services
Company made a 10,994 peso payment (roughly $3,700) to an official employed by
Argentina's Secretary of Industry and Commerce in order to expedite equipment that it was
importing into the country, for example, the SEC had no problem both identifying the
payment as a facilitation payment as well as penalizing the company for having improperly
recorded the payment on its books.[v] Helmerich & Payne, Inc. made the same mistake in
2009 by concealing the true nature of more than $10,000 in facilitation payments made to
Argentine and Venezuelan customs officials over a five-year period.[vi] All payments – even
small ones – must be recorded on the company’s books.
But assuming that our company dutifully recorded these payments on its books and
records, what next? Aren’t a few thousand dollars here or there to pass customs what
Congress had in mind when it carved out the exception? In its own words, Congress said
that it wanted to distinguish between “payments which cause an official to exercise other
than his free will in acting or deciding…and those payments which merely move a
particular matter toward an eventual act or decision or which do not involve any
discretionary action.”[vii] Unlike bribes that fall under the statute, facilitation payments are
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made to “government employees whose duties are essentially ministerial or clerical”[viii]
and include such payments as expediting shipments through customs, securing required
permits, obtaining adequate police protection, and transactions which involve the “proper
performance of duties”.[ix] Congress was explicit, however, that it would not allow
payments “made to influence the passage of law, regulations, the placement of government
contracts, the formulation of policy or other discretionary fundamental functions.”[x]
Congress amended the FCPA in 1988, in part to further clarify the facilitation
payments exception, noting that the exception only applied to payments meant to procure
“routine governmental action”.[xi] “In short,” wrote the Fifth Circuit Court of Appeals
in United States v. Kay in interpreting the statute, “Congress sought to prohibit the type of
bribery that (1) prompts officials to misuse their discretionary authority and (2) disrupts
market efficiency and United States foreign relations, at the same time recognizing that
smaller payments intended to expedite ministerial actions should remain outside of the
scope of the statute.”[xii]
So where does our hapless U.S. company come out now? Small payments to low-
level government employees? Check. In order to expedite shipments through customs?
Check. Not influencing any laws or regulations? Check. We should be in the clear, right?
Unfortunately, we’re not out of the woods yet and probably shouldn’t be fooled by these
superficial distinctions. In truth, the facilitation payments exception is quite narrow and
any practitioner needs to be aware of the peculiar pitfalls that arise when trying to fit
within its limited parameters.
Considerations and Criteria Under the Exception
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• Payment Amount. Unfortunately for our widget company, the amount of the payment has
almost no bearing on its legality. Take, for example, the kind of small payments that are
commonly thought to fall under the exception: greasing the customs official. In looking at a
sampling of cases, defendants have been charged with violating the FCPA for payments to
customs officials ranging from as little as $30,000, to payments as high as $2.1 million. (See
Table below). Most recently, three employees from Noble Corporation were charged for
making $50,000 worth of payments to Nigerian custom officials over a four year period.
Even payments for a few hundred dollars can be aggregated together over a period of
several years, and the SEC and DOJ have prosecuted both large and small amounts equally.
• Identity of the Recipient. While the FCPA’s pre-1988 legislative history distinguishes
between “foreign officials” and “government employees whose duties are essentially
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ministerial or clerical”, the SEC and DOJ, in practice, have not made that distinction. Those
companies caught bribing heads of state and senior officials have unsurprisingly been
found liable,[xiii] but so too have many companies that only bribed relatively mid-level and
low-level officials.[xiv]
• Discretionary Authority of the Recipient. Perhaps, then, our best indicator for liability lies
in the distinction drawn by the 1988 amendments between 1) small payments meant to
induce the recipient to bend the rules, and 2) those payments intended to get the foreign
official to provide a service that he already is responsible for doing (i.e., to “move a
particular matter toward an eventual act”). At first glance, this seems promising. In past
cases, companies that have made payments to customs officials to get them to forge
documents,[xv] ignore tax laws,[xvi] avoid health regulations,[xvii] and otherwise act
improperly,[xviii] have predictably not received the benefit of the exception. But
unfortunately neither have companies that are forced to pay governments in order to get
them to perform even basic governmental functions.
Take, for example, Vitusa Corporation, a New Jersey company that pled guilty in
1994 under the FCPA. In October 1989, Vitusa entered into a lawful contract to sell milk
powder worth about $3.3 million to the Dominican Republic’s government, but as of 1991
the government still owed Vitusa large amounts of money in principal and interest for late
payments on the contract. Vitusa made various unsuccessful efforts to collect the amount
due, including contacting the U.S. Embassy in Santo Domingo, until eventually a middleman
informed the company that the only way it would receive its balance is if it paid a senior
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official of the government of the Dominican Republic a “service fee” to release the
funds.[xix] When Vitusa paid the $20,000 “service fee” in order to recover the $163,000
that it was owed, the company was rewarded for its trouble with a DOJ investigation, a
guilty plea, and an extra $20,000 fine.[xx]
It’s easy to question why Vitusa didn’t fit within the FCPA’s facilitation payment
exception. The company clearly wasn’t looking for preferential treatment given that the
Dominican Republic already had a contractual obligation to pay Vitusa. In the words of the
FCPA’s drafters, wasn’t Vitusa simply intending to effect the “proper performance of
duties”? Nor does a payment of twenty thousand dollars seem so large either, especially
compared to most FCPA payments. It appears, then, that the only explanation is that the
DOJ fixated on the seniority of the recipient, who is only described in the government’s
statement of facts as an “unnamed senior official”.[xxi] But if this is the case, then the
government clearly resorted to the same false distinction between senior and lower
government officials that the FCPA’s 1988 amendments were meant to clarify. Perhaps the
lesson here is that while we know that the DOJ has never given a company the benefit of the
doubt based on a government official’s lack of seniority, paying someone higher up in the
governmental hierarchy is seemingly sufficient to convert an otherwise pure grease
payment into a bribe, even when the senior official is not abusing any of his discretionary
authority.
And so, like most companies faced in this situation, perhaps our hapless widget
company would be better off assuming that the facilitation payment exception does not
apply to them. Our example demonstrates the high cost that careless clerical errors can
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cost in the eyes of unscrupulous customs officials. Even in such murky waters, though,
company counsel would be smart to tread carefully and assume that the facilitation
exception is simply not an option.
State of Play
That the facilitation payments exception has gotten progressively smaller in the
United States over the years makes sense when looking at the world-wide trend. The
Organization for Economic Co-operation and Development (OECD) and several NGOs,
including Transparency International, have called for an end to facilitation payments. The
United Nations Convention Against Corruption (UNCAC) also does not differentiate
between bribery and facilitation payments, and lawyers from the law firm of Skadden,
Arps, Slate, Meagher & Flom have dubbed the facilitation payments exception “a remnant of
another era”.[xxii]
The international scorecard is less one-sided: many countries, including Canada,
Germany, Norway, Australia, New Zealand, South Korea, and Switzerland still allow for the
exception, while others, like Mexico, Poland, Russia, France, the United Kingdom, Italy and
Spain, do not.[xxiii] French authorities have apparently brought charges against a
defendant for as little as trying to speed up the procedure for obtaining a residence
card,[xxiv] and Australia’s Attorney-General’s Department released a consultation paper
last November stating that it is now considering repealing the facilitation payments
exception.[xxv] Commentators will probably continue to argue back and forth on the value
of the exception, but those companies operating in multiple jurisdictions would be better
off trying to eliminate the custom altogether. And for all those widget companies out there
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that still allow for facilitation payments, remember to properly track all payments in
accordance with the FCPA’s accounting provisions, lest even those ephemeral expenditures
that do fit within the exception become cause for liability.
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Appendix: Cases Pertaining to the Facilitation Payment Exception*
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Severin Ian Wirz is a member of the New York bar and former associate at Hughes Hubbard & Reed LLP,
where he worked on FCPA matters.
[i] See 15 U.S.C. § 78dd-1(b), -2(b), -3(b) (2010)
[ii] Id.
[iii] See Non-Prosecution Agreement, In re Noble Corp., at ¶¶33-36 (Nov. 4, 2010).
[iv] A 2008 study published by the international law firm of Fulbright & Jaworski found
that 80% of U.S. companies and 61% of U.K. companies officially prohibit facilitating
payments. See Fulbright & Jaworski, 2008 Litigation Trends Survey shows U.S. Companies
Preparing for Rise in Litigation Following Two Years of Declines, BUS. WIRE, Oct. 14, 2008.
[v] In re BJ Services Co., SEC Cease and Desist Order, Sec. Exchange Act Release No. 49390,
at ¶9 (March 10, 2010).
[vi] Non-Prosecution Agreeement, U.S. v. Helmerich & Payne, at ¶16 (July 29, 2009); see
also, SEC v. Chiquita Brands Intn’l., Accounting and Auditing Release No. 1464, (Oct. 3, 2001)
(sanctioning Chiquita for improperly recording on books and records payments to acquire
renewal of Colombian import license).
[vii] H.R. Rep. No. 95-640, at 6 (1977)
[viii] H.R. Rep. No. 95-640, at 8 (1977)
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[ix] S. Rep. No. 95-114, at 10 (1977)
[x] H.R. Rep. No. 95-640, at 8 (1977)
[xi] 15 U.S.C. §§ 78dd-1(b) & (f)(3)(A).
[xii] United States v. Kay, 359 F.3d 738 (5th Cir. 2004).
[xiii] See e.g., Plea Agreement, U.S. v. KBR, Statement of Facts at ¶3 (Feb. 11, 2009) (pleading
guilty to having paid bribes to “top-level executive branch officials” and “high-level
Petroleum Ministry officials”).
[xiv] See e.g., Plea Agreement, U.S. v. Vetco Gray Controls, Inc., (Feb. 6, 2007) (describing
payment scheme to Nigerian customs officials); SEC v. Nature's Sunshine Products, Inc.,
Douglas Faggioli and Craig D. Huff, Case No. 09CV672 (D. Utah, Filed July 31, 2009)
(describing scheme to bribe Brazilian customs agents).
[xv] Non-Prosecution Agreement, In re Noble Corp., at ¶18 (Nov. 4, 2010).
[xvi] See In re Helmerich & Payne, Sec. Exchange Act Release No. 60400 (July 30, 2009)
[xvii] See Kay, 359 F.3d at 738 (5th Cir. 2004).
[xviii] See generally Appendix found below.
[xix] Plea Agreement, U.S. v. Vitusa Corp., Information at ¶11 (Oct. 1994).
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[xx] Id.
[xxi] Id. at ¶7.
[xxii] John Carrol & Lisa Marino, The Incredible Shrinking FCPA Facilitation Payment
Exception, N.Y. L. J. (Oct. 13, 2009).
[xxiii] It should also be noted that the UK’s Serious Fraud Office has taken the public
position that making a grease payment is unlikely to give rise to a prosecution. In a
statement to the Daily Telegraph, published on September 23, 2010, Robert Amaee, the
head of anti-corruption enforcement at the UK Serious Fraud Office, stated that: “We
certainly don’t condone facilitation payments and never will . . . But whether we prosecute
depends on whether it falls within our criteria. Is it significantly serious?” Richard Tyler,
SFO to prosecute ‘serious’ overseas bribes, Telegraph, Sept. 23, 2010 (available
athttp://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8019024/SFO-to-
prosecute-serious-overseas-bribes.html).
[xxiv] See OECD: FRANCE: PHASE II REPORT 5 (2004) (discussing Act No. 2000-595 of June
30, 2000) (citing Cass. Crim., 12 January 2000).
[xxv] Available at http://www.ag.gov.au/foreignbribery.