Aggressive federal enforcement of the Foreign Corrupt Practices Act poses significant risks to Minnesota corporations doing business abroad. Effective compliance programs are critical to reduce liability exposure, but having good defense strategies in the back pocket may be equally important.
Imagine that corrupt foreign tax officials refuse to process your company’s tax refunds unless you pay millions under the table. You comply. Should you or your company be criminally or civilly liable under the Foreign Corrupt Practices Act (“FCPA”), which prohibits bribes intended to “obtain or retain business”?
In December 2013, Archer Daniels Midland Company (“ADM”)—the “supermarket to the world” known to Minnesotans for its plants, mills, and elevators that dot the state—agreed to pay the federal government $54 million to settle claims that the company’s Ukrainian subsidiary bribed Ukrainian officials solely to secure the return of its own money in the form of overdue tax refunds. The settlement raises numerous questions of interest to Minnesota companies doing business abroad and casts a troubling light on the government’s enforcement of the FCPA. Although the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) have targeted the perpetrators of reprehensible, planet-wide corruption schemes, prosecuting ADM because a foreign subsidiary paid bribes to get back its own money, rather than to obtain or retain business, smacks of overreaching.
Naturally, many factors would have entered into the settlement negotiations. These include the amount of the settlement relative to ADM’s assets (it had $90 billion in net sales in 2013); the DOJ’s refraining from criminally charging ADM itself; the absence of any claims against ADM’s officers individually; the absence of criminal—as opposed to civil—charges for the accounting violations alleged in addition to the antibribery violations; the credit given in the published plea agreement for ADM’s self-reporting and cooperation; and ADM’s willingness to relinquish various defenses. Although attorneys not involved in the case can only speculate on the merits of the parties’ cases, as the filed pleadings are really negotiated settlement documents, several of ADM’s potential defenses appear meritorious. The settlement therefore suggests that a future defendant, faced with similar charges but a less attractive settlement package, should drive a harder bargain or defend in court.
What Is the FCPA?
Congress enacted the FCPA in 1977 to level the playing field for honest businesses and to restore faith in the global marketplace. The antibribery provisions of the FCPA prohibit: (1) corruptly; (2) offering or furnishing; (3) anything of value; (4) to a foreign official; (5) to obtain or retain business.1 It applies to issuers of securities traded on U.S. stock exchanges, U.S. businesses and individuals (i.e., “domestic concerns” as defined in the statute), and foreign businesses and individuals acting in the United States (i.e., “persons” as defined in the statute).
The FCPA provides an exception for “facilitating payments” intended to expedite “routine governmental actions,” which are “ministerial, non-discretionary activities performed by mid- or low-level functionaries.”2 The statute also delineates affirmative defenses where the conduct is legal in the host country or where the thing of value provided to the foreign official constitutes a bona fide business expenditure.
In addition to prohibiting foreign bribery, the FCPA requires businesses to keep accurate books and maintain effective internal accounting controls. Mischaracterizing bribes on the company books (e.g., as after-sales service fees or insurance premiums) violates the federal securities laws. The books and records and internal control provisions of the FCPA apply to all issuers of securities traded on U.S. markets, not only to issuers that bribe foreign officials.
The DOJ and the SEC share responsibilities for enforcing the FCPA. The DOJ wields criminal enforcement authority with respect to issuers and both criminal and civil enforcement authority over “domestic concerns” and foreign “persons.” The SEC holds administrative and civil enforcement authority with respect to issuers. DOJ and SEC cases are often investigated and prosecuted simultaneously.
Certain aspects of the FCPA are notoriously vague. The statute penalizes offering or giving something of value to a foreign official. Can a donation to a charity be a prohibited bribe if the charity is administered by a foreign official but the official himself is given nothing? The statute also limits liability to bribes given to “foreign officials.” Is every employee of a state-owned organization or business a “foreign official” even if the government is a minority owner of the entity or the employees are medical or technical personnel at a public hospital? 3 The statute further requires intent to “obtain or retain business” for liability to attach. Do bribes paid solely to obtain favorable customs treatment or secure the payment of overdue tax refunds violate the FCPA, or do they constitute permissible “facilitating payments?”
The government’s enforcement policies exploit and exacerbate these ambiguities. The paucity of FCPA litigation has resulted in little judge-made law by which parties may judge the merits of a claim. Unsurprisingly, given its role as a partisan actor in an adversarial system, the government asserts expansive interpretations of FCPA liability in bringing charges. It routinely asserts parent liability for subsidiary conduct without regard for the separate corporate identities of the parent and the subsidiary and without alleging a factual basis for such liability. It also applies a strict liability standard for accounting violations despite the statutory requirements that the issuer’s books and records reflect transactions “in reasonable detail,” and that the issuer’s internal accounting controls provide “reasonable assurances” of the integrity of the issuer’s accounting.
The explosion in FCPA enforcement since 2007, however, has greatly raised both the probability of becoming entangled in an FCPA investigation and the cost of settling it. The government brought 105 FCPA actions from 1977 to 2007 and 230 from 2007 to 2012.4 Between 2010 and 2013, the government “recovered” approximately $3 billion from FCPA defendants.5 The ten largest FCPA settlements—including Siemens AG’s record $800 million settlement in 2008—were made after 2007.6 And although many FCPA cases have involved companies doing business in Argentina, China, Iran, or Nigeria, the geographic reach of FCPA enforcement continues to expand. Until the ADM settlement, for example, there were no publicly known FCPA proceedings involving Ukraine.
Between 1977 and 2008, the only FCPA action involving a Minnesota company was the 1989 indictment of Napco International, Inc. of Hopkins for violating the FCPA in connection with the Republic of Niger’s defense procurement. In 2008, AGA Medical Corporation of Golden Valley agreed to pay a $2 million fine for FCPA violations resulting from kickbacks to Chinese hospitals and physicians. In 2013, MTS Systems Corporation of Eden Prairie and Imaging Sensing Systems, Inc. of St. Paul both announced internal investigations into potential FCPA violations. Also in 2013, the DOJ and the SEC announced they were terminating their three-year FCPA investigation of Maplewood-based 3M Company, and their five-year investigation of Fridley-based Medtronic, Inc. Moreover, a business can be penalized for violating the FCPA even in the absence of foreign bribery allegations, as when the former CFO of Minnetonka-based Digi International, Inc. settled accounting violation claims with the SEC. To avoid the high costs of investigation, settlement, and monitoring Minnesota businesses must not only maintain effective compliance programs, but also defend vigorously if they are not offered reasonable settlements.
The ADM Bribery Case
As is typical of FCPA defendants, ADM ran into trouble not through its own conduct, but the conduct of a foreign subsidiary. ADM owned 80 percent of Alfred C. Toepfer International G.m.b.H. (“Toepfer International”), a Hamburg-based agricultural trading company that, like ADM itself, is active worldwide. In 2002, Toepfer International’s Ukrainian subsidiary, Alfred C. Toepfer International (Ukraine), Ltd. (“Toepfer Ukraine”), began paying bribes to Ukrainian officials to obtain refunds of value-added taxes that it had paid to the Ukrainian government. Toepfer Ukraine was entitled to refunds of value-added taxes, which were assessed at a rate of 20 percent, for commodities Toepfer Ukraine purchased in Ukraine and subsequently shipped out of the country. At one point, Ukraine owed Toepfer Ukraine $46 million in overdue tax refunds. In other words, the Ukrainian government was unjustifiably retaining $46 million of ADM shareholder value.
The DOJ alleged that the bribes commenced in 2002 but did not allege specific amounts of bribes for the period from 2002 to 2006. In January 2007, Toepfer Ukraine received tax refunds of $11.1 million and $28 million as a result of paying bribes to Ukrainian officials via a U.K.-based export company. The DOJ alleged that Toepfer Ukraine also channeled bribes through a Ukrainian insurance company, but alleged no specific amounts paid through that channel. According to the DOJ’s allegations, in total Toepfer Ukraine paid $22 million in bribes to obtain $100 million in tax refunds, thereby “resulting in a benefit” of “roughly $41 million.” Beyond the specific payments referenced above, those numbers are not supported by factual allegations. Nor did the DOJ allege that Toepfer Ukraine received any monies it was not owed.
In an information filed simultaneously with the settlement on December 20, 2013, the DOJ criminally charged Toepfer Ukraine with conspiracy to violate the FCPA, but charged no other violations. Although the publicly filed information does not necessarily reflect the government’s best or entire case, the absence of a charge that Toepfer Ukraine (or any other entity) actually violated the FCPA suggests that the DOJ recognized there was no direct antibribery case to be made.
The DOJ certainly alleged acts of bribery by Toepfer Ukraine that would have been violations of a comprehensive antibribery statute like the United Kingdom’s 2010 Bribery Act. It also alleged a conspiracy among Toepfer International, Toepfer Ukraine, the U.K. export company, and the Ukrainian insurance company. But the absence of facts supporting the “obtain or retain business” element vitiates the alleged conspiracy to violate the FCPA and provides a shaky basis for the $17.8 million criminal fine that ADM agreed to pay.
A review of the public filings in the DOJ’s action and the SEC’s accompanying action suggest that Toepfer Ukraine could have moved to dismiss the DOJ’s conspiracy charge on the basis that it failed to allege a conspiracy to violate the FCPA. Toepfer Ukraine paid bribes solely to obtain tax refunds it was already owed, not to “obtain or retain business.” In the leading case on the “obtain or retain business” requirement, the 5th Circuit held that determining whether a bribe for favorable tax treatment “was intended to produce an effect … that would ‘assist in obtaining or retaining business’” was a question of fact for the jury.7 The DOJ’s information did not allege any facts that would establish a connection between the bribes and “obtaining or retaining business.” It did not allege, for example, that Toepfer Ukraine intended its receipt of tax refunds to make Ukrainian farmers more likely to continue selling their crops to the company.
Additionally, Toepfer Ukraine could have raised the statutory exception for “facilitating payments” aimed at expediting “the performance of a routine governmental action.” Case law indicates that the government bears the burden of pleading and proving that the charged conduct is not covered by an exception.8 Jurors would likely view paying a tax refund to which a company is legally entitled as a nondiscretionary, “routine governmental action.” On the other hand, payment of tax refunds is not specifically included in the examples of routine governmental actions provided in the statute, and the amount of the tax refunds, $11 million and $28 million, respectively, may strain the definition of “routine.”
The $17.8 million fine that ADM paid to settle the suit is substantially less than the $27.3 million to $56.6 million range calculated in the plea agreement pursuant to the U.S. Sentencing Guidelines. Yet this “discount” may be illusory. Under the sentencing guidelines, the culpability score determines the multipliers to be applied to the base fine, thereby yielding a presumptive “fine range.” Per section 2C1.1(a)(2), the Base Offense Level for bribery was 12. Two points were subsequently added for multiple bribes under subsection (b)(1). But then a remarkable 22 points were added under subsection (b)(2) and section 2B1.1 for “benefit received more than $20,000,000.” That is debatable. Arguably, Toepfer Ukraine did not receive any benefit because it paid bribes solely to secure the return of its own money. Arguably, Toepfer Ukraine suffered a loss, not only from having to make an additional, unlawful payment to obtain its tax refunds, but also from the delayed receipt of the refunds. “Benefit,” as used in the sentencing guidelines, plainly means a benefit to which one is not entitled, just as theft involves taking the “property of another,” not one’s own property.9 The base fine of $45.5 million recited in the plea agreement assumes that Toepfer Ukraine obtained a benefit to which it was not entitled. If ADM had taken the case to trial and established that the bribes did not produce a “benefit,” the offense level of 14 would have dictated a base fine of only $85,000.
In sum, Toepfer Ukraine could have mounted a defense with respect to liability on the basis that it did not pay bribes to “obtain or retain business” and on the basis that the bribes were permitted “facilitating payments.” It also could have defended at sentencing on the basis that it did not obtain a benefit from the bribery, but rather sustained substantial losses. Future defendants faced with less attractive settlement options will want to explore similar defense opportunities.
The ADM Accounting Case
In addition to settling the DOJ’s criminal antibribery action, ADM settled the SEC’s civil action for $36.5 million—more than twice the amount of the criminal settlement. The SEC’s civil complaint alleged that ADM itself was liable for violations of the “books and records” and “internal controls” provisions of the FCPA.10 The government’s theory that a parent corporation is automatically and strictly liable for accounting violations committed by a foreign subsidiary presents another potential defense opportunity for FCPA defendants. The statute provides no clear basis for disregarding the separate corporate identities of parent and subsidiary or for disregarding the statutory “reasonableness” standards.
Although the allegations in the DOJ and SEC proceedings overlap, different facts bear on the accounting violation claims. In 2002, Toepfer International executives advised ADM tax executives that Toepfer Ukraine was required to make “charitable donations” to recover tax refunds owed to it by the Ukrainian government. ADM apparently learned that Toepfer International booked the unpaid tax refunds as a balance sheet receivable that was written down approximately 30 percent per year. ADM personnel communicated internally about the potential illegality of the “donations,” but no action by ADM in response to this potential illegal activity or the dubious bookkeeping is alleged.
In 2004, potential illegal activity in recovering tax refunds in Ukraine again came to the attention of ADM personnel. ADM learned that its Swiss joint venture partner used “various VAT optimization structures” in recovering refunds. No action by ADM in response to this information is alleged. In 2007, ADM’s European finance department allegedly questioned Toepfer International’s 20 percent reserve on its $40 million receivable for tax refunds (the specifics are not easily understood from the complaint). Again, no responsive action by ADM is alleged.
It appears that ADM failed to respond effectively to a number of accounting red flags that could have alerted it to misconduct by Toepfer International and Toepfer Ukraine and to inaccuracies in these subsidiaries’ books. It also appears that these subsidiaries intentionally concealed their misconduct from the parent, ADM. Was ADM therefore liable for accounting violations under the FCPA?
With respect to the books and records requirement, the SEC alleged that “[d]ue to the consolidation of [Toepfer International’s] financial results into ADM’s, ADM’s financial records also failed to reflect the true nature of the payments.” It then recited the relevant statutory language, alleging that ADM, “through its subsidiary, failed to keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its transactions and disposition of its assets.” The SEC specifically alleged that the subsidiaries mischaracterized bribes in their books as “prepayments for feed barley” and “insurance premiums.”
But mischaracterizations by its subsidiaries do not necessarily imply inaccuracies in ADM’s own books. It is a question of fact whether ADM’s books incorporated false statements or were distorted by the subsidiaries’ false statements. The government did not allege a single specific inaccuracy in ADM’s own reporting or bookkeeping; it simply assumed that the consolidation rendered ADM’s books unreasonably inaccurate. Although ADM’s own information on that question may have been a factor in its decision to settle, the reasonable accuracy of a defendant parent corporation’s own books could serve as a defense to accounting violation claims.
Apart from the question of fact, there is the question of law: can ADM be held liable for its subsidiaries’ violations? The books and records provision at section 78m(b)(2)(A) requires the “issuer”—defined as “any person who issues or proposes to issue any security”—to keep books and records that reasonably and accurately reflect “the transactions and dispositions of the assets of the issuer.” ADM, Toepfer Ukraine, and Toepfer International are legally separate persons. On the statute’s face, ADM’s books are not required to record bribery payments by Toepfer Ukraine, which involved Toepfer Ukraine’s transactions and assets rather than ADM’s. Although it has been argued that Congress intended the books and records requirement to reach foreign subsidiaries, the “starting point” for statutory construction “must be the language employed by Congress.”11 The terms “issuer” and “person” are not ambiguous here. The plain language indicates that ADM cannot properly be held liable for misrepresentations in the books and records of its subsidiaries.
The internal controls requirements of section 78m(b)(2)(B) similarly provide a defense opportunity. The SEC alleged, in conclusory fashion, that “ADM’s anticorruption policies and procedures relating to [Toepfer International] were decentralized and did not prevent improper payments by [Toepfer International] to third-party vendors in the Ukraine or ensure that these transactions were properly recorded by [Toepfer International].” This allegation misconstrues the legal standards for two reasons. First, the statute does not clearly require management to control subsidiary transactions or subsidiary bookkeeping, either of which potentially could eliminate the protections of separate corporate identities. Second, the statute does not impose liability for “failure to prevent,” which involves a strict liability standard, but for failure to maintain internal controls that provide “reasonable assurances” regarding the issuer’s transactions and bookkeeping. The SEC did not describe ADM’s anticorruption policies and procedures or allege any specific failures of its internal controls. (The missed red flags, however, may have supported such allegations.) Congress’s apparent failure to account for separate corporate identities in the legislation therefore provides potential opportunities for future defendants.
Finally, the SEC alleged that ADM received a benefit of “roughly $33 million” as a result of Toepfer Ukraine’s obtaining tax refunds. ADM and the SEC agreed to entry of a $36.5 million judgment, consisting of $33.3 million in disgorged profits and $3.1 million in prejudgment interest. As noted above, tax refunds to which one is legally entitled but must pay a bribe to obtain may fall outside the scope of “benefits” as the term is used in the statute. Arguing that payments to which one is entitled cannot properly be the subject of a disgorgement remedy therefore presents yet another opportunity to defend against civil actions brought by the SEC.
With over $20 billion in annual exports, Minnesota businesses risk being targeted by the government’s aggressive FCPA regime. The DOJ and SEC are able to apply their own interpretations of the FCPA and effectively transform the FCPA into an unlimited anticorruption statute because FCPA cases almost always settle without judicial examination of the law or the facts. Minnesota businesses should not forgo legitimate transactions merely because the government may overstep its role, but they must seek to prevent FCPA liability proactively by maintaining effective compliance programs.
But even the best compliance programs cannot completely eradicate potential FCPA violations. If a business becomes involved in an FCPA proceeding, the ADM case points to defense opportunities. Potential defenses include (1) enforcing the “obtain or retain business” language; (2) enforcing the “facilitating payments” exception; (3) asserting the separate corporate identities of parent and subsidiary; and (4) contesting the government’s claims as to the “benefit” of the transaction to the defendants. Defendants may also be able to leverage personal jurisdiction requirements and statutes of limitations to mount effective defenses.
Although an increasing number of Minnesota businesses have fallen victim to the federal government’s attempts to expand FCPA liability beyond its statutory confines, overzealous enforcement has resulted in many cases presenting potentially meritorious defenses. Companies undoubtedly face powerful incentives to settle rather than litigate FCPA enforcement actions. Yet settlement conditions demanded by enforcement agencies may exact too high a price or be legally unjustified because the alleged conduct does not violate the FCPA. Given the government’s questionable legal positions and overreaching with respect to the FCPA, it is more important than ever to identify opportunities to defend your client and put the government to its burden of proof.
William G. Carpenter (BA, Stanford; JD, University of California-Berkeley; PhD, Princeton) practices securities law and commercial litigation at Briol & Associates, PLLC.
Thomas P. Stutsman (JD, Yale Law School; LLM, Sichuan University) is an attorney at Briol & Associates, where he focuses on white-collar crime and civil fraud.
1 See, 15 U.S.C. §78dd-1(a)(1).2 15 U.S.C. §78dd-1(b); see, United States v. Kay, 359 F.3d 738, 751 (5th Cir. 2004).
3 The 11th Circuit Court of Appeals has recently issued an opinion essentially confirming the DOJ’s interpretation of the “foreign official” requirement. See, United States v. Esquenazi,–F.3d–, 2014 WL 1978613 (05/16/014).
4Amy Deen Westbrook, “Double Trouble: Collateral Shareholder Litigation Following Foreign Corrupt Practices Act Investigations,” 73 Ohio St. L.J. 1217, 1220 (2012).
5 See, Michael Koehler, “SEC Enforcement of the FCPA—Year in Review,” FCPA Professor (01/06/2014); Michael Koehler, “DOJ Enforcement of the FCPA—Year in Review,” FCPA Professor (01/08/2014). The FCPA Professor blog is located at www.fcpaprofessor.com.
6 Richard L. Cassin, “Alcoa Lands 5th on our Top Ten List,” The FCPA Blog (01/10/2014). The FCPA Blog is located at www.fcpablog.com.
7 Kay, 359 F.3d at 756.
8 See, SEC v. Jackson, 908 F. Supp. 2d 834, 856-57 (S.D. Tex. 2012) (government bears burden of proving inapplicability of facilitating payments exception).
9 See, e.g., Minn. Stat. §609.52, subd. 2(1).
10 15 U.S.C. §78m(b)(2)(A) and (B).
11 H. Lowell Brown, “Parent-Subsidiary Liability Under The Foreign Corrupt Practices Act,” 50 Baylor L. Rev. 1, 21 (Win. 1998); American Tobacco Co. v. Patterson, 456 U.S. 63, 68 (1986).