How Business Gifts to a Foreign Partner Could Land You In a U.S. Prison 

by: Warren Strugatch, Global Trade Magazine October 2012 issue

Save money. Give better. Walmart execs were investigated under FCPA rules, targeted for bribing Mexican politicos to the tune of $24 million.

The New York Times broke the story this spring: “Vast Mexico Bribery Case Hushed Up by Walmart After Top-Level Struggle.” The world’s largest retailer, and Latin America’s biggest employer, stood accused of handing envelopes stuffed with cash—more than $24 million in total—to a small army of palms-out, provincial bureaucrats, local politicos and fixers. Senior executives covered the mess up, reported the Times. News of these activities, illegal in America under the Foreign Corrupt Practices Act (FCPA), proliferated globally and drained billions from the Arkansas retailer’s market capitalization.

With sales of $422 billion last year, Walmart became the largest whale targeted by federal prosecutors in the FCPA’s history, joining a roster that includes Johnson & Johnson, Avon, Siemens, Olympus and Pfizer. It’s not just big companies. The feds pursued, prosecuted and last year jailed a husband-and-wife Hollywood couple who made improper payments in connection with a Thai film festival. The feds called the payments bribery and the charges stuck. Last year, Gerald and Patricia Green went to jail—she was 56, he 76 at the time of his sentencing, and dependent on an oxygen tank. The Greens served six months in prison, followed by house confinement. Prosecutors originally wanted to put Gerald Green away for life.

To champions of the statute, the feds’ action in the Walmart case exemplifies what’s best in the law, at least theoretically. It levels the playing field and addresses the root causes of corruption, that is, the willingness of rich companies to pay illegal bribes, thus perpetuating inequity and lack of economic mobility. In this view, Washington is the “good cop,” punishing those who cheat and defending those who play fair.

“If the charges are true, Walmart deserves to be punished,” declares Eleanor Eaton, a Russian-born, Texas-based trade consultant. Having emigrated to the U.S. to study management, staying on to become an aerospace executive and then a consumer products marketer with Proctor & Gamble, Eaton still recoils from her homeland’s legacy of corruption. “A company that engages in systemic bribery as a business model then covers it up,” she declares, “is atrocious.”

As a growing number of companies and individuals face criminal and civil penalties, awareness of the statute is rising, along with concern over its expanding footprint. Those certain of their ability to distinguish between a friendly gift to a business partner and an under-the-table bribe to a corrupt official might want to think again. In any case, they should take pains to avoid learning the difference during a Justice Department probe. If one thing is clear, it’s this: Most of the “gray areas” that involve gift giving, special fees, favors, undisclosed payments or cash on the barrel head—any number of activities once defended as “business as usual,” “everybody does it” or “it’s customary here”—are remarkably difficult to pin down. And as far as definitive government guidance in terms of what’s legal versus what’s not, that advice is not yet available.

Surprisingly, even executives who spend months of the year jetting across time zones, hedging currencies and signing cross-border deals cringe to learn activities once dismissed with a wink or a nod—even written off as business expenses—have been criminalized. Take gift giving, for example. Stephen Wolf, executive director of The Capstone Advisory Group in Washington, calls offering gifts “an important, perhaps essential, part of doing business in some foreign cultures. Executives (who) brag about terrific agents and sales representatives and their great contacts abroad” might not realize routine business gift-giving in some countries constitutes bribery here. Adds Wolf: “Those ‘great contacts’ can land them in jail!”

A Vestige of the Watergate Era

The FCPA dates from a period in our history—the post-Watergate years—when the national mood was one of outrage at government dishonesty and systematic deception, accompanied by the particularly American belief that somehow honesty could be legislated and integrity codified. This mood prevailed in 1977 when President Jimmy Carter signed the Foreign Corrupt Practices Act into law. Simple in scope but startling in premise, the FCPA outlawed both the act of bribing a foreign official for commercial advantage, and the failure to put in place a system to prevent, reveal or thwart corrupt activity. In an attempt to legislate honesty and fairness, Washington had suddenly made American business people legally responsible for knowing the history and intentions of other individuals, specifically citizens of other countries, without ready access to such information or legal recourse. Established at a time when some foreign countries actually let companies expense their bribes—so entrenched into custom was the culture of gift-giving—the act seemed designed to claim the moral high ground for a country still climbing out of the moral morass of Watergate. As such, this claim to ethical leadership in the global market must have struck at least some observers as a pipe dream.

If a pipe-dream, this one bared sharp teeth. Violation of the act is a federal offense carrying penalties reaching hundreds of millions of dollars in fines, restitutions and seized assets; sentencing up to 20 years and immeasurable damage to reputations. Under the term “disgorgement of profits,” prosecutors have seized billions of dollars in fines and interest payments; there is talk in Washington of doubling current penalties. The feds took in a record $2.1 billion in fines in 2010, reflecting an escalating pattern of targeting big companies with correspondingly big overseas profits. As for jail, Richard L. Cassin, FCPA analyst, estimates prison terms average two years. “The sentencing range is huge,” he wrote on FCPABlog.com in February. “If there’s a pattern, we don’t see it.”


Enforcement Escalates

Early on, enforcement was lax. Investigators probed just several companies during the statute’s first full year on the books, maintaining that unhurried pace over two decades. Then came the string of white collar frauds—Enron, Worldcom, Computer Associates—and battling corruption was back in vogue. Mark Brzezinksi, a partner at McGuireWoods law firm in Washington, recalls Justice operating perhaps 10 probes in 2000. That number ballooned to more than 150 in 2010. Meanwhile, the SEC was investigating another 20 or so firms. Accounts suggest that level of activity continues today.

The escalation of FCPA enforcement troubles a number of export advocates. One is the U.S. Chamber of Commerce, which has questioned the act’s basic fairness and its impact on trade. In February, the chamber’s legal reform division pressed Justice and SEC officials to address questions concerning prosecutorial standards, compliance expectations and training guidelines. In particular, the chamber sought clarification on what’s known as mens rea, a legal term referring to how prosecutors reconstruct an individual’s thinking process at a key moment. The feds’ answer was, in effect, we’ll get back to you.

“To me, the difficulty with this law is the lack of clarity around interpretation,” says Bill Jordan, co-chair of the Litigation and Trial Practice Group of Alston & Bird, the Atlanta and Washington law firm. Ten years ago, Jordan was a senior Justice Department official; today, he defends some of those accused of violating the act. “The government takes a very aggressive interpretation of the ambiguous clauses of the FCPA,” he reflects. “Individuals have had their lives and fortunes taken from them, and their liberty put at risk.” He pauses. “There is a whole series of cases where the jury looks at what the government is doing and says, hey, that isn’t right.”

Homer Moyer, a partner with Miller & Chevalier law firm based in the capital, specializes in international anti-corruption law. Despite the rise in enforcement activity and penalties assessed, Moyer contends prosecutors are not necessarily pursuing corruption cases more aggressively, rather keeping up with the flow. In his view, more business is being done in regions where bribery is rampant; financial reporting requirements heightened under Sarbanes-Oxley, Dodd-Frank and other laws expose considerably more corruption; disgruntled employees trust whistle blower laws will protect them if they turn evidence; and competitors strike back at rivals who played an unfair card. Moyer, who has served as an independent compliance consultant to the SEC and chaired more than 30 national and international anti-corruption conferences, acknowledges investigations come in batches. Probing a company in one industry, he says, tends to produce evidence incriminating others in the field.


More Officials, More Bribe Opportunities

Not surprisingly, prosecutors have focused on activities in parts of the world where corruption is perceived as most rampant and where official approvals are required for a broad swath of activities handled without officials’ interference in more open countries. Also, industrializing countries actively seeking western technology transfers, sales of capital equipment, financial savvy or hard-currency funding, and as such are perceived as the most fertile grounds for corruption.

“If I am focused on Northern Europe, and doing business in both Denmark and Russia, I will recognize that Russia carries a much higher risk of corruption than Denmark,” says Moyer.

Logan Robinson, who teaches corporate governance at the Mercy School of Law in Detroit, contends there is increasing federal scrutiny of potentially illegal overseas activities. “We are seeing much more aggressive enforcement, and much more in the way of fines, than occurred initially [in the 1970s],” he says.

What’s a Bribe, What’s Not?

Those looking for clear direction in bribery avoidance will be disappointed. Ambiguity, ambivalence and shades of gray prevail. In general, beware of requests for payments that are not automatically assessed to your competitors, and try to deflect requests for non-cash compensation that involves family members. And keep the clearest possible line drawn between business and pleasure.

“Do you know how vast you were growing?”
As your business expands overseas, be sure to follow these tips to avoid the long arm of the law.

“An official might ask you casually about a job or internship for a son or daughter,” notes Alexandra Wrage, president of Trace International, a best-practices compliance firm in Annapolis, Maryland. Similarly, scheduling a week-long meeting in Las Vegas around a day of business meetings courts trouble—was this a real business meeting, the feds might ask, or a gifted week at a resort?

Wrage warns exporters not to obsess over deals with top officials and overlook possible concerns with distributors, licensees, consultants and customers. At the same time, recognize the law treats an official’s close family members as if they, too, are officials. Under the FCPA, everyone who works for a government—say an air steward employed on a state airline—is an official. Learning who’s related to whom, and how they do business, becomes your legal responsibility.

Ask questions; if your potential partner clams up, or speaks misleadingly, reconsider your relationship.

Good advice for exporters: Check up on the person you’re dealing with, ask for financial records, know their reputation and history, record your investigation and closely monitor expenses and payments. Also, reimburse no one without a detailed expense report.

Sign This, Please

Some compliance advisors suggest going further.

“Get a signed affidavit that says the party has done nothing that would violate either the Foreign Corrupt Practice Act or any local corruption laws,” advises Trip Mackintosh, chairman of the export controls department of Denver law firm Holland & Hart.

“Review your internal accounting controls to ensure all invoices are adequately detailed. Keep careful records. All these steps are designed to demonstrate that your relationship with this person has the appropriate anti-corruption safeguards.”

Alexander Gordin, a Manhattan-based investment banker and Ukraine-born trade consultant, warns exporters to scrutinize invoices, deal terms, contracts and correspondence for evidence of the kind of subtle corruption pervasive in many emerging markets. Are expenses higher than they might have been under similar circumstances, for example, but your distributor won’t explain why? Are you’re getting invoices without cost breakdowns? These could be close-to-the-vest business practices, or evidence to the feds you’re practicing international skullduggery.

“Corruption hasn’t become more controlled,” says Gordin. “Rather, it’s become more pervasive. You can’t do business overseas with your eyes closed. The question is not: Will you be asked to pay a bribe? It’s when they ask you to pay a bribe, what will you do?”


A Short List of Gray Areas Under FCPA

Who’s official, who’s not?

Ministers in a capital city are, obviously, officials. So may be the farmer who runs a provincial post office part time. So may be the pilot of a government-owned airplane, the moonlighting professor at a public university and the hospital physician whose family business distributes medical equipment.

Rule of thumb: Anyone on a government payroll is an official.


Reasonable fees

You can pay a fee to an official to accelerate a service—for example, to guarantee completing your permit process within seven days. However, you cannot pay a fee to get a permit to sell something prohibited, or to occupy a location ruled off limits. Size of gray area: Vast.

Rule of thumb: Avoid paying “upgrade” fees.


Vetting overseas partners

Ignorance of criminal behavior on the part of your partners is an acceptable defense—sometimes. Prosecutors will want to know if you took every possible step to learn your partners’ background before you signed any contracts with them, and that you made real attempts to monitor their activities once they signed with you.

Rule of thumb: Require affidavit attesting to partner’s clean history and knowledge of and commitment to FCPA compliance.


Systems in place

Have you trained your employees to recognize unethical or illegal behavior? Do you have anti-corruption compliance programs in place? Protection for whistleblowers? An invoice template that specifies each reimbursement?

Rule of thumb: Purchase a FCPA compliance module, or contract a consultant to create one for you.


Hard to Swallow

On August 7, Pfizer became the lates company to settle charges of conspiracy and violations of the Foreign Corrupt Practices Act, stemming from its Wyeth subsidiary’s business activities in Russia, Croatia, Kazakhstan and Bulgaria. The drug company agreed to pay a $15 million Justice Department penalty and more than $26.3 million to the Securities and Exchange Commission to disgorge profits it earned in these countries. “Those that attempt to make these illegal back-room deals to influence contract procurement can expect to be investigated by the FBI and appropriately held responsible for their actions,” thundered James McJunkin, assistant director in charge of the FBI’s Washington Field Office, in a statement.



About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

One Response to $100 HANDSHAKES

  1. Tory says:

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