Fact-Checking the FCPA Scaremongers

In my last post, I made a disparaging in-passing reference to assertions, by some critics of the US Foreign Corrupt Practices Act (FCPA), that companies could get in FCPA trouble if they do things like buy a foreign government official a cup of coffee, take her to a reasonably-priced business meal, cover her taxi fare, etc. In my view, that’s just wrong, both because the US government would not bring such a case, and because the FCPA wouldn’t cover such isolated, modest benefits. The reason, as the DOJ/SEC FCPA Resource Guide explains, is that such benefits, without more, would not be offered “corruptly”–that is, with the wrongful intent of inducing the official to misuse her official position). I described those who suggest that the FCPA would criminalize such minor benefits as “FCPA scaremongers.”

My use of that the term “scaremonger” seems to have touched a nerve with Professor Mike Koehler–the self-described “FCPA Professor”–who had this to say in his comment my earlier post:

Scaremongering? Recent FCPA enforcement action have included allegations about flowers, cigarettes, karaoke bars, and golf in the morning and beer drinking in the evening.

I responded by asking Professor Koehler to identify the most ridiculous example of an actual FCPA settlement in which a trivial benefit was the sole basis of the enforcement action, as opposed to a small part of a larger scheme to corrupt government officials into misusing their authority. Professor Koehler answered:

The following is a factual statement: recent FCPA enforcement action have included allegations about flowers, cigarettes, karaoke bars, and golf in the morning and beer drinking in the evening.

I take the position that the DOJ/SEC include such allegations in FCPA enforcement actions for a reason and not just to practice their typing skills.

I again asked for an example. Professor Koehler’s response was to send, not the name of any individual case, but rather the links to the DOJ and SEC sites with all enforcement documents, suggesting that I could go through them myself to find “numerous examples of inconsequential things of value” included in the government allegations. He also referred to “several speeches” by SEC enforcement chief Andrew Ceresney (I actually think it’s one speech, given by Mr. Ceresney in November 2015) that supposedly acknowledged the government’s sweeping view of FCPA-prohibited conduct.

Having tried unsuccessfully to get Professor Koehler to point me to a specific example, I did a bit of digging on my own to see if I could find out if it’s really true that the DOJ and/or SEC have brought FCPA enforcement actions in cases that involve nothing more than “flowers, cigarettes, karaoke bars, and golf in the morning and beer drinking in the evening.” What I found makes me even more confident that I was fully justified in my use of the term “FCPA Scaremongers,” with Professor Koehler as perhaps the FCPA Scaremonger-in-Chief. Here are the cases to which I’m fairly sure Professor Koehler was referring:

  1. SEC v. Eli Lilly & Co. (2012): I think Professor Koehler is getting the “cigarettes and karaoke bars” from the 2012 settlement with Eli Lilly, and in particular allegations regarding Lilly’s Chinese subsidiary’s bribery of Chinese doctors and health officials. (The complaint also discusses bribery schemes in Brazil, Poland, and Russia.) According to the complaint, among the benefits that Lillly-China sales reps offered to Chinese doctors were “spa treatments, meals, and cigarettes,” as well as “visits to bath houses and karaoke bars.” But as the complaint emphasizes, “[a]lthough the dollar amount of each gift was generally small, the improper payments were widespread throughout [Lilly’s Chinese] subsidiary.” According to the allegations, this was an orchestrated scheme, involving sales directors and regional managers in multiple provinces, to influence Chinese healthcare providers to purchase Lilly’s products. Further, the scheme involved falsified books and records–mainly falsified expense reports, which were used to cover the costs of the bribes. There’s no way to describe what Lilly’s sales reps in China were doing as ordinary, innocent, non-corrupt business-related socialization.
  2. In re SciClone Pharmaceuticals, Inc. (SPIL) (2016): I suspect this must be where Professor Koehler is getting “golf in the morning, beer drinking in the evening.” This is also a case involving a pharma company operating in China, and engaging in a sustained practice of offering gifts, vacations, and other benefits to Chinese healthcare professionals (HCPs). The SEC’s cease-and-desist order alleges that SPIL’s sales reps “provided weekend trips, vacations, gifts, expensive meals, foreign language classes, and entertainment to HCPs in order to obtain an increase in prescriptions”–a practice that the sales managers themselves described as “luring [the HCPs] with the promise of profit.” The SEC order goes on to list examples of some of the benefits that SPIL sales reps provided to those HCPs with the greatest ability to increase SPIL’s sales volume. Among these benefits were not only yearly invitations to the Qingdao Beer Festival (with “golf in the morning and beer-drinking in the evening”), but also included fancy dinners, lavish vacations (to the US, Japan, and domestic Chinese resorts), expensive gifts, etc. And these expenses were falsely recorded in SPIL’s books and records as things like business travel and conference honoraria, to disguise their true nature. Again, this was not a case that involved some business discussions over a friendly round of golf, followed by a series of substantive meetings, with a few drinks afterward ad the local bar–and it’s highly misleading to suggest otherwise.
  3. SEC v. Veraz Networks (2010): I think this must be where Professor Koehler is getting “flowers.” The SEC complaint in this case alleged that Veraz, a U.S. telecommunications company, violated the books and records provisions and internal controls provisions of the FCPA. (Perhaps, therefore, it’s important to emphasize right at the outset that even though the allegations in the complaint indicate bribery, the actual charges are under the FCPA’s accounting provisions, which in and of itself undercuts the suggestion that this case shows the absurd overbreadth of the anti-bribery provisions: Even the most innocent of expenses have to be properly recorded, and made pursuant to a reasonable system of internal controls.) It’s true that the complaint lists “flowers for the wife of the CEO” of a state-owned Vietnamese telecommunications company as one of the “questionable expenses” that Veraz approved (and failed to properly record in its books and records). If that were all there was, it might indeed be a sign of prosecutorial overreach. But it’s not all there was. The complaint also alleges other questionable “gifts and entertainment” for the Vietnamese company’s employees, as well as–more damningly–that a Veraz employee “made or offered illicit payments” to the CEO himself in order to win business for Veraz. (And this is on top of other allegations, also discussed in the complaint, about thousands of dollars worth of straight-up bribes paid in China, approved by a Veraz supervisor as part of what the supervisor himself described as a “gift scheme” to win business.)

So, after looking at the three cases from which I’m 95% confident Professor Koehler is getting his examples, I’m even more confident that these are not examples of FCPA enforcement actions brought on the basis of trivial, routine, incidental benefits provided to government officials in the course of ordinary business dealings. That’s not to say those cases might not be subject to other criticisms, such as the evidentiary support for the allegations and legal questions like the definition of “foreign official”–but that’s not what we’re focusing on right now.

And what about Mr. Ceresney’s speech, which Professor Koehler cites as evidence that the SEC and DOJ are willing to bring cases over trivial benefits provided in the context of ordinary business socialization and hospitality? I read the speech, and I’m at a loss as to where Professor Koehler is getting this concern. For what it’s worth, here’s the relevant passage from Mr. Ceresney’s speech:

Some have expressed concern about these cases, arguing that it is difficult to draw a clear line between what constitutes a violation and what does not, in cases involving less traditional items of value. In my view, these concerns are unfounded. The line between what is acceptable and what constitutes a violation of the law is in the same place it always has been: when something of value – which can include a gift, donation, favor, or hiring decision – is given or taken with intent to influence the foreign official in his or her official actions or obtain an improper advantage. While this analysis is dependent on the facts and circumstances of each particular case, it is the same analysis companies routinely conduct when considering how their employees interact with government officials in the course of business. The relevant questions include:

  • Was the gift, donation, favor, or hiring asked for by the foreign official?
  • Did the company official believe that the gift, donation, favor, or hiring would advance their business interests and help them obtain particular business, or at least obtain an improper advantage with the foreign official?
  • Was the gift, donation, favor, or hiring consistent with company policy and practice?
  • Were the company’s normal procedures followed in connection with the gift, donation, favor, or hiring?
  • Would the gift, donation, favor, or hiring have been made if there were no potential business benefit?

That all sounds fine to me. What’s to be upset about here?

One final point: In an apparent concession that there are not, in fact, any cases where small benefits, offered in the course of ordinary business hospitality, are the basis for an FCPA enforcement action, Professor Koehler insists that “[b]y including the substantive allegations [of the small benefits] in the enforcement action documents, even if the inconsequential things of value allegations are only part of the overall conduct at issue, the DOJ/SEC – it sure would seem – are suggesting that the conduct is prohibited by the FCPA.”

Um… no. No, it would not “sure seem” that the SEC and DOJ are saying that they would or could bring an enforcement action on the basis of small items (like the bouquet of flowers for the CEO’s wife) standing along. A lawyer who so advised a client would be acting incompetently. Three main reasons:(1) As a matter of both simple logic and standard practice, the mention of one specific factual assertion in the context of a criminal complaint (or settlement document or judicial opinion) need not and does not mean that this fact, standing alone, stripped of the larger context, would support a criminal conviction. (2) The DOJ and SEC have explicitly disavowed precisely the enforcement theory Professor Koehler intimates they’ve implied in various settlement documents (To quote the Resource Guide: “[I]t s difficult to envision any scenario in which the provision of cups of coffee, taxi fare, or company promotional items of nominal value would ever evidence corrupt intent …. DOJ’s and SEC’s anti-bribery enforcement actions have focused on small payments and gifts only when they comprise part of a systemic or long-standing course of conduct that evidences a scheme to corruptly pay foreign officials to obtain or retain business.”). (3) Perhaps one might disbelieve the DOJ/SEC denials in the Resource Guide… except that, to circle back to where we started, I have yet to see a single case which is inconsistent with the Resource Guide on this point.

In sum, there is no evidence whatsoever that a trivial benefit–flowers, golf, beer, etc.–is, without more, enough to support an FCPA enforcement action, or that the U.S. government would ever bring such a case. To imply otherwise, as Professor Koehler did is is comment on my last post and in numerous other posts on his blog (see here and here, for instance) is indeed scaremongering, and I’ll stand by that term.

7 thoughts on “Fact-Checking the FCPA Scaremongers

  1. Thanks for verifying my factual statement that begin this dialogue – that being “recent FCPA enforcement actions have included allegations about flowers, cigarettes, karaoke bars, and golf in the morning and beer drinking in the evening.”

    You are free to draw a different ultimate conclusion from this fact than me. That’s fine and I am not going to call you a name or the “in-chief” of anything for doing so.

    Regarding your label of me, I have consistently highlighted FCPA Inc. fear-based marketing and related issues for a number of years. Two posts, among others, that highlight this issue are below.

    http://fcpaprofessor.com/fear-based-fcpa-marketing/

    http://fcpaprofessor.com/marketing-the-fcpa-the-fcpa-risks-of-well-just-about-everything/

    A few other points in reference to your post.

    A concise summary of my FCPA views can be found at the below link.

    http://fcpaprofessor.com/books/

    The below link addresses a similar issue.

    http://fcpaprofessor.com/there-is-a-difference-between-the-fcpa-and-fcpa-enforcement/

    Yes, I do run – and have run since 2009 – a website called FCPA Professor.

    Many speeches by DOJ and SEC enforcement attorneys are not made public, but delivered at conferences where participants must pay to hear their public officials speak. In any event, another speech by Cerseney which touches upon the broad scope of anything of value is included below.

    http://fcpaprofessor.com/doj-and-sec-officials-talk-fcpa/

    In conclusion, I never once stated, suggested or implied that the small items of value listed in my original response were the exclusive basis for any FCPA enforcement action.

    I am happy to continue a constructive dialogue with you anytime.

    • I’m glad to hear that we are both in agreement that small benefits, provided openly in the context of ordinary business interactions, would not and could not be the basis of an FCPA enforcement action.

      Given that shared belief, I think it’s fair to say that those who claim or imply otherwise are indeed “FCPA scaremongers” — and this was all I was saying in the earlier post that triggered this exchange. If my belief that you yourself fell into that category was mistaken, then, well–my bad! (If that’s the case, then I’ll confess that I’m scratching my head a bit as to what you found so objectionable in the first post, but we can let that pass.)

      Like you, I am also happy to continue a constructive dialogue. And I recognize the value of your implicit but pointed advice that it would be better to avoid snark, sarcasm, and invective when engaging in these substantive debates. That’s good advice, which I’m sure you will follow on your own blog as well.

  2. Matthew, I appreciate your perspective. We held a conference in which a DOJ FCPA expert was speaking. During Q/A a member of the audience went after him aggressively about how we don’t know if a paying for cab ride will get us prosecuted. The individual was wasting everyone’s time and their opportunity to learn. I interrupted and said, “No one has ever been prosecuted for paying for a cab ride, no one will ever be prosecuted for paying for a cab ride, we are not going to do this… next question please.”

    • Thanks! I’ve had very similar experiences (though I lacked your courage to intervene). This is one of the reasons why I wanted to weigh in on this–it seems to be a fairly widespread misunderstanding, which I think is perpetuated (perhaps unintentionally) by some FCPA experts who, in their zeal to advocate for reforms of the statute, characterize both the statute itself and the government’s enforcement practices in a way that is highly misleading.

  3. Pingback: Fact-Checking the FCPA Scaremongers | Anti Corruption Digest

  4. There is some comfort in the fact that common sense tells us that a cab ride or a quick lunch can hardly be “corruptly” given.
    BUT the FCPA and the UK Bribery Act do not give great comfort that common sense will always apply.

    We should be grateful the Bribery Act is as moribund as the FCPA for its first 25 years. But the language in that act is clear, as we know.

    Common sense is not a defense to an aggressive DoJ prosecutor with an ax to grind or a reputation to establish. They are basically honorable, BUT they can allege nominal “gifts” and they can use them to build and bolster a case.

    One basic problem in this area – one that Prof Koehler has discussed – is that very few cases get litigated. Thus there is much that has not been definitively decided.

    Advising a client that the DoJ could not bring an action that included nominal items is wrong. Advising that there has been no conviction is correct, but that needs to be qualified by noting that these cases are regularly settled because the cost of litigating the uncertainties in the law is exorbitant, economic suicide for many.

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