Court Rules That Bribes to Reduce Foreign Duties/Taxes Can Violate FCPA, but Government Must Prove “Business Nexus”

Last week, the United States Court of Appeals for the Fifth Circuit issued its long-awaited decision in the Kay case, holding, in “diametric opposition to the district court,” that bribes paid to tax and customs officials can violate the U.S. Foreign Corrupt Practices Act (“FCPA”). United States v. Kay, No. 02-20588 (5th Cir. Feb. 4, 2004). In a rare statutory construction decision, which turned on the court’s reading of the legislative history of the FCPA, the court largely validated the U.S. Government’s longstanding view of the scope of the FCPA’s anti-bribery prohibitions, but held that the Government must show that an alleged bribe had some “business nexus.”

Rejecting opposing per se arguments by both the Government and the defendants, the court ruled that bribes to foreign tax and customs officials, as a matter of law, are neither always outside the scope of the FCPA nor always violations of the statute. Rather, the court construed what it termed the “business nexus” element to require proof “that the bribery was intended to produce an effect . . . that would ‘assist in obtaining or retaining business.’” (p. 36). Giving several hypothetical examples, the court made clear that the FCPA covers bribes that may only indirectly “assist” a company in getting or keeping business. The court nonetheless made clear that proof that a bribe increases a company’s profit margin is not, by itself, sufficient. The court’s decision will thus require prosecutors to allege and prove a business nexus. However, the court unequivocally rejected the District Court’s narrow reading of the statute regarding the scope of activities that create a business nexus, which would have substantially eroded FCPA prohibitions and left the United States in violation of its international treaty obligations.

In Kay, two officials of the Houston-based company American Rice, Inc. were indicted for alleged payments to customs officials in Haiti in order to induce them to accept false bills of lading and other documentation that intentionally understated the quantity of rice shipped to Haiti, thereby significantly reducing American Rice’s customs duties and sales taxes. The United States District Court for the Southern District of Texas held as a matter of law that such payments were outside the scope of the anti-bribery prohibition of the FCPA, because they were not payments made to “obtain, retain, or direct business to any person” as required by the statute.

On appeal, the Court of Appeals held that the District Court erred in holding as a matter of law that such payments could never fall within the scope of the FCPA. The court agreed that the statutory element that a bribe must “assist” a company to “obtain or retain business” is “ambiguous,” (p. 14) and the court thus based its decision on a 20-page discussion of the statute’s legislative history. Reading the legislative history to reflect an intention by Congress to prohibit more than just bribes that help companies secure government contracts, the court found that bribing foreign officials to lower taxes and customs duties can also assist a company in “obtaining or retaining business.”

The Court of Appeals then separately analyzed the sufficiency of the indictment, which, although more detailed on other points, was bare boned on the business nexus element. If this element went to the “core of criminality” of the FCPA, the court noted that more would be required of the indictment. On this question, however “whether the lack of detail in that part of the indictment that deals with this one element is more like an absence of detail as to how the crime was committed than a failure to specify what the crime was” (p. 42) the court found that, unlike the quid pro quo element, the business nexus element “does not go to the FCPA’s core of criminality” and that it was therefore acceptable for the indictment simply to parrot the statute. (p. 47).

The Court of Appeals remanded the case to the District Court for further proceedings consistent with its opinion. Thus, absent defendants’ requesting a rehearing en banc or petitioning the Supreme Court for a writ of certiorari, the case will be remanded to the District Court. Were the case to go to trial, the Government would have the burden of alleging and proving some business nexus. Because the Court of Appeals opinion suggests that such a burden may not be a heavy one, the decision will likely increase pressure on the defendants to enter a plea.

Because litigated FCPA cases are rare, and because of the potentially broad implications of the District Court decision, the Kay case has been closely watched. The case dealt with a basic issue of the statutory scope of the FCPA and challenged a longstanding enforcement view of the statute’s reach. A different result on appeal also would have put the United States out of compliance with the OECD Anti-bribery Convention, and therefore probably would have required amendment of the statute. In addition, the decision will have immediate direct effects on at least two other pending cases, including the Government’s case against two executives of Baker Hughes, and the Halliburton case in Nigeria, both of which involve tax payments.

The practical effects of the decision for most companies will be limited, as most did not change their FCPA compliance programs on the basis of the District Court’s decision. Although the opinion suggests that, in addition to facilitating payments, there may be other categories of improper payments that are not covered by the FCPA’s prohibitions, those categories are likely to be narrow ones. The court’s decision has given additional meaning to the business nexus element that should be factored into any specific risk analysis, but it does not provide much support to the notion that the business nexus element offers either a safe haven or a new robust line of defense. Indeed, the Court of Appeals decision does nothing to counter the otherwise rising tide of compliance expectations.

For more information, please contact:

Homer Moyer, hmoyer@milchev.com, 202-626-6020

John Davis, jdavis@milchev.com, 202-626-5913

Kathryn Cameron Atkinson, katkinson@milchev.com, 202-626-5957

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