The United States Court of Appeals for the Fifth Circuit recently issued its opinion in United States of America v. Kay, No. 02-20588 (5th Cir. Feb. 4, 2004), a much-anticipated ruling regarding the scope of the Foreign Corrupt Practices Act ("FCPA"). The specific issue on appeal was whether bribes paid to obtain a reduced customs duty or a reduced tax bill were payments made to "obtain or retain business" within the prohibitions of the FCPA. The Fifth Circuit’s answer: "Maybe." Finding the FCPA’s scope to be quite expansive, the Fifth Circuit ruled that bribes paid to evade customs duties and taxes could fall within the prohibitions of the FCPA. Whether such bribes violate the law, however, depends on whether the bribery was intended to produce an effect that would "assist in obtaining or retaining business."
In 2001, a grand jury charged David Kay and Douglas Murphy of American Rice, Inc., a Houston-based company that exports rice to foreign countries, including Haiti. The defendants were charged with paying bribes and authorizing the payment of such bribes to induce customs officials in Haiti to accept bills of lading and other documents that understated by one-third the quantity of rice American Rice shipped into Haiti. The indictment spelled out in detail how Kay and Murphy allegedly bribed Haitian customs officials to accept the false documents, which, by understating the amount of rice imported into Haiti, significantly reduced American Rice’s customs duties and sales taxes. In contrast to this detailed description of the bribery scheme, however, the indictment merely paraphrased the FCPA element critical to the case—the allegation that the payments were made "in order to assist American Rice, Inc. in obtaining and retaining business for, and directing business to American Rice, Inc…."
The Department of Justice and the Securities and Exchange Commission (SEC) have long taken the position that the plain language of the anti-bribery provision of the FCPA supported a broad reading of the "obtain or retain business" element of the statute. The SEC has secured settlements involving payments made to reduce tax obligations based on its expansive reading of the statute. Some commentators and defense attorneys, however, had disagreed about the FCPA’s scope. Kay was the first litigated case to squarely address whether payments made to reduce the payor’s obligations to pay taxes, etc. fell within the prohibitions of the statute.
The district court sided with the defendants and dismissed the indictment. Finding the plain language of the FCPA ambiguous, most of the court’s opinion focused on the legislative history of the FCPA. The court determined that Congress had twice (in 1988 and 1998) considered and rejected statutory language that would have expanded the scope of the "obtain or retain business" provision to cover the conduct alleged in the indictment, i.e., payments made to influence governmental decisions or payments made to obtain an "improper advantage." The court thus concluded that the allegations in the indictment did not fall within the scope of the FCPA. United States v. Kay, 200 F.Supp. 2d 681, 686 (S.D. Tex. 2002).
The Fifth Circuit agreed with the district court’s conclusion that the anti-bribery provision was ambiguous because Congress had phrased the business nexus requirement represented by the "obtain or retain business" language "obliquely" and had not suggested "how remote or proximate the business nexus must be." Slip Op. at 14. The Fifth Circuit’s agreement with the district court stopped there, however.
The Fifth Circuit’s interpretation of the FCPA’s legislative history differed sharply from the district court’s view. The Fifth Circuit focused on the Senate’s original legislative proposal and the 1976 SEC Report that was the impetus for the legislation. The Fifth Circuit concluded that there was no reason to believe that Congress thought there was any difference between a bribe paid to a government official in order to receive a construction contract and a corporation’s obtaining a contract from one government official by submitting the lowest bid while at the same time bribing a different government official to reduce taxes and thereby ensure that the underbid venture was profitable. Slip Op. at 21-22. The court said: "Avoiding or lowering taxes reduces operating costs and thus increases profit margin, thereby freeing up funds that the business is otherwise legally obligated to expend." Id. at 22. Thus, the court held that whether the bribes alleged in the indictment were a violation turned on whether they were intended to lower American Rice’s cost of doing business in Haiti enough to have a sufficient nexus to garnering business in Haiti or to maintaining or increasing business operations that American Rice already had in Haiti. Id.
The Fifth Circuit viewed the narrow "facilitating payments" exception to the FCPA as evidence of Congress’s intention to "cast an otherwise wide net over foreign bribery." Id. at 23. In potentially sweeping language, the Fifth Circuit concluded that Congress’s target was "bribery paid to engender assistance in improving the business opportunities of the payor or his beneficiary, irrespective of whether that assistance be direct or indirect, and irrespective of whether it be related to administering the law, awarding, extending, or renewing a contract, or executing or preserving an agreement." Id.
In sharp contrast to the district court, the Fifth Circuit found that the FCPA’s legislative history in 1988 and 1998 supported a broad interpretation of the statute. The Fifth Circuit was not influenced by Congress’s rejection of proposed language seeking to expand the "obtain or retain business" language in 1988. Rather, the Fifth Circuit relied on a controversial 1988 Conference Report that stated that the "retaining business" language had always included payments "for the purpose of obtaining more favorable tax treatment." Rejecting the district court’s decision to give no weight to what it viewed as the belated interpretation of the disappointed sponsors of a rejected bill, the Fifth Circuit viewed the Conference Report as providing a "direct explanation of why Congress elected not to include the newly proposed language." Id. at 30.
The Fifth Circuit also concluded that the 1998 Organization of Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (commonly known as the "OECD Convention") supported the Fifth Circuit’s interpretation of the FCPA. In enacting the OECD Convention, the Fifth Circuit noted that Congress amended the FCPA to prohibit making a payment to secure an "improper advantage" that will assist in obtaining or retaining business. Rejecting the defendants’ argument that Congress’s failure to directly alter the "obtain or retain business" language supported their position, the Fifth Circuit concluded that there was no need for Congress to amend the business nexus requirement with the "improper advantage" language. Id. at 33.
Having concluded that payments made to evade customs duties or taxes could violate the FCPA, the Fifth Circuit considered the sufficiency of the indictment against Kay and Murphy. The Fifth Circuit had to decide whether the government had to provide specific factual allegations to support the business nexus element or if it could merely parrot the "obtain or retain business" language, as did the indictment against the defendants. Holding that the business nexus element of the statute did not go to the "core of criminality" of the FCPA, the Fifth Circuit concluded that the indictment’s paraphrasing of the "obtain or retain business" language was sufficient. Id. at 47. Interestingly, however, the Fifth Circuit suggested that the defendants might ask the district court on remand to compel the government to allege more specific facts regarding how the payments were intended to assist American Rice in obtaining or retaining business. Id. at 2.
While the Kay decision at first glance may appear sweeping in scope, the debate over the "obtain or retain" language is far from over. The case suggests that in some cases the government may have to plead facts supporting the existence of a business nexus in a case involving a payment to reduce duties or taxes. Moreover, making such an allegation is one thing; proving that such a payment was intended to assist in obtaining or retaining business may be a much more difficult matter.
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