Confusing “Guidance” from DOJ and SEC on Third Party Liability

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http://corruptioncrimecompliance.com/wp-content/uploads/2012/11/imagesCAAQ2Q0H.jpgThe FCPA Guidance is a terrific contribution to FCPA law and policy.  I have the utmost respect and admiration for the DOJ and SEC professionals who enforce this law.  They are true public servants. 

A testament to the importance of the FCPA Guidance is the absence of any meaningful or persuasive criticism of the FCPA Guidance.  Of course, the FCPA Paparazzi will try and strike fear in the hearts of corporate counsel and compliance officers in a misguided effort to “market” legal services.  FCPA bloggers sometimes confuse “commentary” with agenda-driven interpretations and analysis.  Criticisms are not persuasive unless grounded in an accurate interpretation of the law. 

In this context, I turn to the FCPA Guidance on third party liability.  Initially, there is nothing that strikes me as “wrong” or in error in the portions of the guidance explaining the law as it applies to third party liability.  The description is fair and accurate and the list of “red flags” is also helpful (see FCPA Guidance at pp. 21-23).

My concern is later in the FCPA Guidance (pp. 31-32) in Scenario 1 which involves potential successor liability for third-party conduct in the acquisition of a company not previously subject to the FCPA. 

Specifically, the situation involves Company A’s due diligence prior to the acquisition of a Foreign Company in which it discovers that Foreign Company has made “potentially improper payments” in the form of excessive commissions to a third party agent related to a government contract. 

The FCPA Guidance blesses Company A’s decision to disclose the “potentially improper payments,” to suspend and terminate the employees involved, and the third-party agent and makes sure that the payments have stopped. 

Perhaps I am being hyper-technical here, but the FCPA Guidance confuses the difference between a red flag and a violation of the FCPA.  The payment of “excessive commissions” to a third party is certainly a red flag but without any evidence that the third party made, promised or attempted to make an illegal bribe to a foreign official, no violation has occurred.  It may be bad business to pay excessive commissions but it is not a violation of the FCPA.  A red flag is not a violation of the law but, if unaddressed, it can expose a company to liability if a bribe is subsequently paid.   

The distinction is made even clearer in Scenario 2 on page 31 of the FCPA Guidance in which Company A learns post-closing that Foreign Company’s sales revenues depended on payment of excessive commissions to a third party agent “to make the right person happy at Foreign Government Agency” and that such payments have to continue in order for Company A to retain the business under the contract.  

Under Scenario 2, and in contrast to Scenario 1, there is evidence cited in the hypothetical that the third party agent made payments to a foreign official to retain business, and that the scheme continued after the acquisition so that Foreign Company’s business did not suffer.

Maybe I am making a mountain out of a molehill but it is important to focus on what the FCPA prohibits.  A criminal violation of the FCPA requires proof beyond a reasonable doubt of an offer to pay, a payment, a promise to pay, or an authorization to pay money or anything of value to a “foreign official.” 

In the absence of proof that a third party made such an offer, a payment or promised to pay money or anything of value to a foreign official (with corrupt intent to induce the foreign official to act contrary to his or her official responsibilities, in order to obtain or retain business), the payment of an “excessive commission” to a third party agent does not violate the FCPA.    

To the extent that the FCPA Guidance suggests otherwise, it should be corrected or clarified.

Topics:  Compliance, DOJ, FCPA, FCPA Resource Guide, SEC

Published In: Administrative Agency Updates, General Business Updates, Criminal Law Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Group Law Firm | Attorney Advertising

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