Richard Craig Smith, Thaddeus Rogers McBride, Kimberly Sullivan Walker and Mark L. Jensen
May 18, 2010
On April 19, 2010, the U.S. Department of Justice (“DOJ”) issued Opinion Procedure Release No. 10-01 (the “Opinion”) in which the DOJ announced that it would not take enforcement action under the Foreign Corrupt Practices Act (“FCPA”), against a U.S. company that proposed to pay a foreign official for services the foreign official would provide on behalf of the U.S. company. The Opinion, the first issued by the DOJ in 2010, is available at: http://www.justice.gov/criminal/fraud/fcpa/opinion/.
Background. Under the FCPA, issuers of securities in the United States and “domestic concerns,” i.e., U.S. companies and other organizations resident in the United States, may request an opinion from DOJ as to whether certain prospective conduct would violate the anti-bribery provisions of the FCPA. 28 C.F.R. § 80.1 (2010). Opinion procedure releases are only binding on the DOJ and the parties that submit or join in the request. They are also limited to the facts presented in the request. Nevertheless, opinion procedure releases are useful to companies and their counsel given the relative dearth of guidance from the DOJ about situations — such as the one addressed in the Opinion — that companies often encounter when operating in developing countries, where the business and governing elite are often small and desirable business partners are often foreign officials as that term is defined in the FCPA.
Facts. The opinion request was submitted by a U.S. company (“USCO”) that was party to a contract with a U.S. government agency (the “USG”) to design, develop and construct a facility (the “Facility”) in a foreign country (the “Country”). According to the Opinion, the underlying facts are as follows:
- The USG has an agreement with the Country whereby the USG provides assistance to the Country, including by developing the Facility.
- Pursuant to its contract with the USG, and at the direction of the USG, USCO is required to hire and compensate individuals to work at the Facility.
- Separately, the Country appointed — then instructed the USG to hire — a particular individual to serve as Facility director (the “Director”). In turn, the USG instructed USCO to hire this individual as the Director.
- USCO entered into a subcontract with a company (“Hiring Co”) to hire and compensate personnel at the Facility.
- Through its local subsidiary, Hiring Co entered into a proposed, one-year service contract (the “proposed contract”) whereby the Director would be paid a salary of $5,000 per month.
- Under the proposed contract, the Director would provide services at the direction of the Country.
- Both the USG and the Country contemplate that the responsibility for paying the Director would pass to the Country at the conclusion of the proposed contract.
- The Director is a foreign official in the Country. The Director’s responsibilities as a foreign official, however, are “separate and apart” from his responsibilities as the Director, and the Director’s position as a foreign official did “not relate” to the Facility.
- The Director would not perform any services on behalf of, or make any decisions affecting, USCO, either as the Director or in his role as a foreign official. USCO would not provide any “direction” to the Director as to his role as Director.
Analysis. The DOJ’s conclusion that it would not take any enforcement action in this matter appears to rest on two primary bases. First, the DOJ noted that the Director would be hired pursuant to an agreement between the U.S. government and another country’s government. The existence of this contract could bring such payments within the FCPA’s affirmative defense for certain payments made to or for the benefit of a foreign official where the payment is “directly related to . . . the execution or performance of a contract with a foreign government or agency thereof.” 15 U.S.C. § 78dd-1(c)(2). To qualify for this affirmative defense, the payments made to the government official would still need to be reasonable and bona fide. Id. Presumably, the DOJ concluded that $5,000 per month was both reasonable and bona fide under the circumstances.
Second, the DOJ noted that the Director, even though he would be paid by USCO, would “not be in a position to influence any act or decision affecting” USCO. The DOJ also noted that USCO did not play any role in selecting the Director, the Director’s responsibilities would be “separate and apart” from his role as a foreign official, and the Director (both as Director and in his role as a foreign official) would not perform any services on behalf of USCO. Thus, the DOJ determined that the Director would have “no decision-making authority over matters affecting [USCO], including procurement and contracting decisions.” By these comments, DOJ appears to have reached the conclusion that USCO’s proposed payments to the Director would not evidence any corrupt intent, which the government must establish to prove a violation of the FCPA’s anti-bribery provisions.
Arguably, either of the above bases would have been adequate for the DOJ to decline enforcement action in this matter. The Opinion’s key takeaway, however, is how just a few critical facts can determine the enforcement outcome. There are numerous FCPA enforcement actions involving alleged corrupt payments to foreign officials, such as cash payments or the provision of lavish gifts and entertainment unconnected to any legitimate business purpose. There is even a recent enforcement action by the Securities and Exchange Commission (“SEC”) alleging corrupt payments consisting of travel and entertainment expenses made pursuant to contractual provisions and the provision of employment to foreign officials and their family members, as well as inappropriate consultancy arrangements.
In the UTStarcom case, the SEC alleged that UTStarcom, Inc.’s (“UTSI”) Chinese subsidiary provided nearly $7 million worth of overseas trips to employees of Chinese government-controlled telecommunications companies that were UTSI customers. These trips were purportedly necessary to provide training to the customer’s employees, and even contractually required. In reality, however, the majority of the training trips consisted of visits to popular U.S. tourist destinations where UTSI had no operations. The SEC also alleged that UTSI provided or offered full-time employment along with salary and benefits to employees of Chinese and Thai government customers and their family members. Despite receiving salary, benefits and even U.S. green cards, none of these individuals ever worked for UTSI in any capacity.
The SEC’s final allegation was that UTSI paid approximately $1.7 million to consultants in China and Mongolia under circumstances that indicated a high probability the payments were actually bribes for foreign officials. To resolve the SEC’s allegations, UTSI entered into a settlement and agreed to pay a $1.5 million civil penalty.
Summary. Under the FCPA, a payment to or for the benefit of a foreign official is permissible in certain circumstances, such as those underlying the Opinion. As UTSI and others have discovered, simply because a payment is made to or for the benefit of a foreign official pursuant to an employment agreement or contractual provision will not insulate against FCPA liability. The Opinion is therefore a useful reminder that, when making any payment to or for the benefit of a government official, the payment must be reasonable and bona fide, and other objective factors should be present to demonstrate the payment is not intended to corruptly influence the official to obtain or retain business or direct business to any person. Good records of any such payment should also be maintained to demonstrate that the payment was made openly and transparently. These critical facts can determine whether a company may engage in a profitable international business arrangement or face a potentially ruinous FCPA enforcement action brought by the DOJ or SEC.
This article was prepared by Richard C. Smith (firstname.lastname@example.org or 202 662 4795), Thaddeus R. McBride (email@example.com or 202 662 0287), Kimberly S. Walker and Mark L. Jensen from Fulbright’s White Collar Crime Practice Group and Government Investigations and Enforcement Practice Group.
 It is not clear from the Opinion whether Hiring Co is a U.S. company.
 Additional analysis regarding the UTStarcom case is available on Fulbright’s website. See Fulbright Client Briefing, DOJ and SEC Impose Penalties Against UTStarcom for FCPA Violations (Jan. 6, 2010), available at http://www.fulbright.com/index.cfm?fuseaction=publications.detail&pub_id=4295&site_id=494.
 Separately, UTSI entered into a non-prosecution agreement with the DOJ to resolve FCPA issues related to the travel and entertainment provided to UTSI’s Chinese customers. Under that agreement, UTSI agreed to pay an additional $1.5 million fine to the DOJ, implement a rigorous compliance program, and submit periodic compliance reports to the DOJ.
Richard Craig Smith
Thaddeus Rogers McBride
Kimberly Sullivan Walker
Mark L. Jensen