The FCPA Is Not an All-Purpose Anti-Foreign-Illegality Law

A few months back, Adam Davidson did a terrific New Yorker piece on the Trump Organization’s shady business dealings in Azerbaijan, focusing on evidence of corruption, money laundering, and sanctions evasion in connection with the Trump Organization’s licensing deal for a Trump Tower in Baku, the country’s capital. While I greatly admired the piece, I nonetheless criticized one aspect of it: the argument that the Trump Organization’s licensing deal ran afoul of the Foreign Corrupt Practices Act (FCPA), an allegation which, it seemed to me, wasn’t adequately supported by the otherwise impressive body of evidence assembled in the piece. While I recognize that a piece written for a general audience can’t get too lost in the technical legal weeds, I do think that it’s important to convey an accurate sense of what the FCPA does, and what it doesn’t do.

I was reminded of this a couple weeks back when I read an otherwise incisive essay by the political commentator Heather Digby Parton (whose work I very much admire) on Ivanka Trump’s shady business dealings and possible legal violations. Though Ms. Parton’s piece focused mainly on the Trump Ocean Club in Panama (dubbed “Narco-a-Lago” in an excellent Global Witness report), she also brought up Mr. Davidson’s reporting on the Azerbaijan project, and repeated the suggestion that the Trump Organization’s involvement in this project likely violated the FCPA. In making this case, Ms. Parton states:

The Foreign Corrupt Practices Act requires that American companies not make profits from illegal activities overseas, and simply saying you didn’t know where the money was coming from isn’t good enough…. Courts have held that a company needn’t be aware of specific criminal behavior but only that corruption was pervasive.

I hate to be nitpicky, especially when it involves criticizing a piece I generally agree with by an author I admire, but this is simply not a correct statement of the law.

The FCPA is not an all-purpose prohibition on “mak[ing] profits from illegal activities overseas.” It’s a more specific prohibition on offering or paying bribes (or causing such bribes to be offered or paid) to foreign government officials, in order to obtain or retain business. (There’s also a complementary mandate, applicable only to issuers on U.S. exchanges, to maintain adequate internal controls and to keep accurate books and records.) In fact, the FCPA is a bit unusual in that the general default rule is that, absent a more specific statute, U.S. law does not prohibit US companies from “making profits” from illegal foreign activities; rather, each country is usually expected to enforce its own laws to activities taking place within its jurisdiction. Now, there may be many other laws that might apply in cases like those described in Mr. Davidson’s piece and the recent reports about the Panama project—anti-money laundering statutes, for example. And it may be possible, as I’ll discuss in a moment, that one or both of these cases does involve an FCPA violation. But I don’t think it’s helpful to suggest to general readers that the FCPA imposes a general prohibition from earning any profits from any illegal activities. (For example, a carmaker that sells lots of luxury vehicles in, say, Russia or Nigeria is not guilty of an FCPA violation simply by virtue of the fact that many of its customers may be able to afford these cars because of their involvement in illegal activities, and the automaker doesn’t “know where the money [is] coming from.”)

The second sentence in the passage quoted above is also somewhat misleading. It’s true that while the FCPA’s anti-bribery provisions criminalize payments that pass through third parties if the defendant “know[s]” that some or all of the payment will be used to bribe a foreign government official, courts have rejected a “head in the sand” approach, and suggested that the requisite “knowledge” can be inferred from circumstances, including the pervasiveness of corruption in the country. But it’s not true that as long as a company is aware that corruption in a given country is common, then it is strictly liable for any payments it makes that wind up used as bribes. Consider a company operating in a difficult environment, which hires a third party agent, does serious vetting and due diligence, finds no red flags, and pays what seems from all available evidence to be a reasonable fee for legitimate consulting services. If it turns out that some of this payment was in fact use to bribe a government official, the company has almost certainly not committed an FCPA violation. In this area, courts have rejected both a “head in the sand” defense and a strict liability standard.

Now, as I mentioned in my post on Mr. Davidson’s original piece, I do think that the allegations swirling around some of these Trump Organization projects do raise a very interesting, and to my knowledge unanswered, question about the scope of FCPA liability: When can a licensor be liable, under the FCPA, for bribes paid by a licensee? In many of these Trump Organization cases, the Trump Organization would license its name to a project owned and operated by other parties—in exchange for an up-front fee and a cut of the profits. At the same time, the reports on many of the projects, including the Azerbaijan project, the Panama project, and others, suggest that the Trump Organization (and, in those cases, Ivanka Trump in particular) were very involved in project details. Suppose the entity that owns and operates the project pays bribes to government officials. Suppose further that there’s no evidence of any direct involvement by the Trump Organization or any of its officers or employees in the bribery transaction, though there was a general awareness that corruption was widespread in the country, and perhaps also evidence that Trump Organization officials had reason to suspect that their business partners were engaged in shady dealings. Could there be an FCPA violation here? I can think of two possible legal theories that might justify an affirmative answer, though neither is airtight, and indeed both would involve a fairly aggressive interpretation of the statute’s scope:

  • First, one might argue that the licensing of the Trump name to the project could count as “corruptly … giving [some]thing of value to … any person, while knowing that all or a portion of such … thing of value will be … given … to any foreign official … in order to assist … in obtaining or retaining business[.]” The argument here would have to go something like this: The Trump Organization wanted its lucrative licensing deal in Country X. The Trump Organization further realized that licensing its name to the project would increase its value, which would in turn enable the local partner to pass on some of that added value to government officials, in the form of bribes, which would in turn ensure successful completion of the project, making the deal more profitable to the Trump Organization (presumably through the stream of future licensing fees). While not totally impossible, this seems to me like a very big stretch. The problem isn’t so much the “knowledge” element—I don’t think it would be too hard to show that the Trump Organization knew (in the relevant legal sense) that its local partner was bribing government officials in many of these cases. I also don’t think it’s too hard to make the case that the licensing deal involves giving a “thing of value” to the local partner, even though (as the Trump Organization’s lawyers often emphasize) the money is flowing from the local partner to the Trump Organization. The license to use the Trump name is, for whatever reason, economically valuable. The problem, as I see it, is showing that “all or a portion of” the particular “thing of value” transferred in this case (the license to use the Trump name) is then offered or given to a government official. The only way to get there is to argue that the increase in project value due to the license to use the Trump name in turn facilitated the bribe—that the increased brand value was then somehow converted (with the Trump Organization’s knowledge) into cash, and that cash was used to pay off government officials, in a way that would ultimately redound to the benefit of the Trump Organization. I’m generally a fan of fairly aggressive FCPA interpretations, but this seems like too much of a stretch even for me, though if you told me I had to I think I could write up a brief making the case.
  • Second, and to me more plausibly, I think it’s possible to analogize the licensor-licensee relationship to the parent-subsidiary relationship, for purposes of FCPA liability. As a general matter, parent corporations aren’t liable, under the FCPA’s anti-bribery provisions, for violations committed by subsidiaries. (The books and records and internal controls provisions are another matter, but put those aside for now.) However, a parent can be liable under the FCPA for its subsidiary’s conduct (1) if the parent directed or participated in the subsidiary’s bribe payments, or (2) if the parent so thoroughly dominated the subsidiary that the subsidiary can be considered an agent of the parent. I’m going to assume that the former situation doesn’t apply to the Trump Organization cases we’ve seen so far, though of course if evidence came out that the Trump Organization was telling its local partner in any of these countries to pay bribes to help get the project completed, that would change things. It’s the latter theory—that a subsidiary is the agent of the parent—that may be the best analogy for the potential liability of a licensor (such as the Trump Organization) for bribes paid by a licensee (such as the owners and operator of the Baku Trump Tower). Again, I’m not aware of any cases involving a licensor, but I can see a plausible case for extending the same principle—perhaps not in any garden-variety licensor-licensee relationship, but in one where the licensor was so thoroughly involved in the project, and where the licensee was so dependent on the support of the licensor and so responsive to the latter’s direction, that the licensee, despite its nominal legal independence, could be considered an agent of the licensor. That strikes me as at least plausible, though admittedly aggressive and highly dependent on evidence of the nature of the relationship. Even here, though, it’s worth pointing out that, again invoking the parent-sub analogy, liability would only attach to the licensor for conduct that occurred after the formation of the licensor-lincensee relationship, much as a company that acquires a subsidiary that was not previously subject to the FCPA is not liable under the FCPA for conduct that the acquired company may have engaged in prior to the acquisition.

So, there are some hard open questions about the extent to which the Trump Organization’s overseas activities may have run afoul of the FCPA. Frankly, given that the Trump Organization’s main lines of business are things like real estate development and casino gambling, and given the places where it does business and the cavalier attitude of the Trump family toward ethical standards and legal compliance, I’d actually be a bit shocked if the Trump Organization hadn’t violated the FCPA at some point. But in exploring these questions, I do think it’s important to get the basic features of the law right, even when writing for a general audience.

2 thoughts on “The FCPA Is Not an All-Purpose Anti-Foreign-Illegality Law

  1. Here, here. The media has had numerous not so fine FCPA moments (including David Barstow’s Pulitzer Prize winning Wal-Mart article). These numerous instances are frequently highlighted on FCPA Professor. See the below posts for additional information.

    http://fcpaprofessor.com/new-yorker-trump-organization-azerbaijan-story/

    http://fcpaprofessor.com/new-yorker-trump-organization-azerbaijan-story-2/

    http://fcpaprofessor.com/wal-mart-five-years-later/

    http://fcpaprofessor.com/once-again-not-the-medias-finest-fcpa-moment/

    http://fcpaprofessor.com/las-vegas-sands-reporting-not-the-medias-finest-fcpa-moment/

    http://fcpaprofessor.com/media-difficulty-accurately-describing-fcpa/

    Your post is not nitpicky. It is holding paid journalists accountable for their writing.

    Professor Mike Koehler
    http://www.fcpaprofessor.com

  2. Pingback: The FCPA Is Not an All-Purpose Anti-Foreign-Illegality Law | Matthews' Blog

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