“Charitable Giving” — A Way Around the FCPA? Part I

The facts below were alleged in a recent case involving Hyperdynamics Corporation, an American firm whose sole asset is an oil concession in Guinea:

* In 2005 the Secretary General of Guinea told the company that “further review” of its concession was necessary.  On August 1, 2006, the company’s CEO founded the NGO American Friends of Guinea and on September 22, 2006, the government approved a renegotiated concession.

* In September 2007, following critical reports in the local news about the renegotiated concession and government threats to cancel it, the Secretary General visited Hyperdynamics’ Houston office.  Over the next year American Friends of Guinea “delivered and paid for antibiotics and glucose fluids for men, women, and children who were stricken with cholera and . . . planned new water well projects to get to the source of solving the problem.”

* On September 11, 2009, the Guinean government and the company signed a memorandum affirming with modifications its oil concession.  On September 29 Hyperdynamics donated stock in the company to American Friends of Guinea.

* In September 2011 after a new, transition government was installed, a further dispute about the concession arose.  That year the firm donated $20,000 worth of computer equipment to the Ministry of Mines and some $8,000 -$10,000 to the Guinean Offshore Department of Environment.

Assuming these allegations are true, do they amount to a “payment . . .  to [a] foreign official for purposes of influencing any act or decision of such foreign official in his official capacity” and thus constitute a violation of the U.S. Foreign Corrupt Practices Act?

Before answering the question, perhaps it would be useful to know what the U.S. Department of Justice and the Securities and Exchange Commission, the two agencies that share responsibility for enforcing the FCPA, have to say about charitable contributions.  In their joint 2012 Resource Guide to the U.S. Foreign Corrupt Practices Act the two assure companies that the law “does not prohibit charitable contributions or prevent corporations from acting as good corporate citizens.”  At the same time the two agencies warn: “Companies, however, cannot use the pretense of charitable contributions as a way to funnel bribes to government officials.”

The Guide offers two examples to illustrate the difference between a genuine act of charity and one that is a pretense.  In the first the subsidiary of a large pharmaceutical company contributed to a small, domestic charity dedicated to restoring a castle in the country where it was seeking business.   The charity was headed by an official who could direct business to the company, and internal company documents termed the contributions “dues” its local subsidiary had to pay to get the official’s help.  The “contributions” were a significant portion of the subsidiary’s promotional budget, did not comply with the company’s charitable giving policies, and were structured to avoid internal accounting rules.

In the second case, as a condition of getting a license to do business as a bank, a firm was required to make a grant to a local micro-finance institution.  Before making an almost $1.5 million contribution the firm undertook what the Guide calls “an extensive, three-stage due diligence process” that involved determining who ran the institution and whether it had the capacity to manage such a large grant.  The donor imposed significant conditions on the grantee including requiring independent monitoring and auditing of its funds, an agreement to train staff on fund management, a prohibition on compensation to board members, and the adoption and implementation of an anticorruption compliance program.

From the descriptions it is easy to see which of the two examples passed muster under the FCPA.  The pharmaceutical one recounts facts that led the SEC to find that drug-maker Schering-Plough had violated the act, the second is based an opinion the Department of Justice issued concluding  the contribution was not a violation.  It is hard to say from the bare allegations in Hyperdynamics case whether, if true, the contributions were a disguised bribe or genuine acts of corporate philanthropy.  One would like to know a good deal more, and the Resource Guide helpfully offers some questions one might ask before making a decision –

1) What is the purpose of the payment?

2) Is the payment consistent with the company’s internal guidelines on charitable giving?

3) Is the payment at the request of a foreign official?

4) Is a foreign official associated with the charity and, if so, can the foreign official make decisions regarding your business in that country?

5) Is the payment conditioned upon receiving business or other benefits?

The Hyperdynamics case itself suggests several more.  What is the nature of the regime?  Are entrepreneurial opportunities, as a former U.S. Ambassador to the country has written, “embedded in a crony capitalism feeding on official bribery?”  Was public corruption at the time of the contributions “deep-seated” as several commentators assert?  At the time Hyperdynamics secured its concession was there a history of corruption in the grant of concessions  — as an FBI investigation that led to the cancellation of the largest mineral concession ever awarded in the country and ongoing investigations in multiple jurisdictions of the concessionaire wold suggest?

But what if a court were simply presented with the bare allegations recited above and asked if true do they, on their face, state a plausible claim of an FCPA violation, one that merits further investigation.  That was the question United States District Court Judge Melinda Harmon was asked to decide in Parker v. Hyperdynamics.  How, dear reader, do you think she should rule?  (Those wishing to know how Judge Harmon did in fact rule are advised, as American television series always say at the end of Part I, “to stay tuned for Part II.”)

4 thoughts on ““Charitable Giving” — A Way Around the FCPA? Part I

  1. I look forward to the second installment . . . From a resource-allocation perspective, is it possible for FCPA enforcers to successfully distinguish between donations made by good corporate citizens and those made to evade the FCPA? It seems that distinguishing questions the DOJ and SEC might ask could, with minimal effort, be answered affirmatively even by those who are trying to break the law without the consequences. On the other hand, deeming all charitable donations a payment in violation of the FCPA would clearly be over-inclusive, making illegal a number of genuine donations that are no doubt having a positive impact in foreign countries.

    • Thanks for the comment. I think the DoJ/SEC Resource Guide does a nice job of suggesting how to distinguish genuine charitable contributions from disguised bribes, at getting at whether the contribution was a quid in return for quo.

  2. In addition to the questions listed, I think it would be useful to know whether the funds benefited the official personally. In Hyperdynamics, on the facts written here, it seems like donations, while undeniably valuable, could have served broader purposes than merely enriching an official with influence over the relevant business in the country. The extent to which asking that question is relevant might depend on the goals of FCPA enforcement. To me, on the one hand, regardless of who contributions enrich, if they’re part of a quid pro quo, that seems problematic, but on the other, like Nathan, I imagine that deeming all charitable donations would be over-inclusive, particularly when those donations confer a broader positive impact rather than enrich one individual. On that thought, while I can see why a history of corruption in concessions is relevant and vital to understanding the nature of a payment, I wonder how that consideration can be designed so as to not create a system in which effectively any charitable contribution in an area with a corruption-heavy history would be deemed improper.

    • Thanks for your comment. I think the best approach to distinguishing genuine donations from bribed masquerading as bribes is to ask if the contribution is a quid in response for a quo. If it is, then it should be considered a bribe. For example: “our company will make a $1 million contribution to charity X if the government will give the company an oil concession.” I see your point: Suppose the charity were a genuine charity. It provided health, education, or some other basic service to citizens that the government simply couldn’t afford to provide. But I think such a scenario is quite unrealistic. Why wouldn’t the government simply demand a $1 million fee or advance royalty in return for awarding the concession and then provide the service itself? Or take the $1 million and then donate it the charity itself? Why would it do something indirectly that it could do directly?

      My guess is that “American Friends of Guinea” was told by those with the power over oil concessions to see that the medicine went to a certain region or certain ethnic group. Yes, some Guineans were better off as a result, but offsetting that is the harm from the corrupt award of the concession.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s