The Foreign Corrupt Practices Act: compliance issues in the tax and customs arena.

• Author: Atkinson, Kathryn Cameron

Among the many changes in the legal and business landscape following the Enron scandal and the Sarbanes-Oxley Act of 2002 has been a dramatic increase in the pace and ferocity of enforcement of the Foreign Corrupt Practices Act (FCPA), which prohibits improper payments to influence foreign officials who have the power to affect a company's business. (1) Enforcement officials at the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are pursuing more and more cases and securing settlements that include criminal fines and penalties, disgorgement of ill-gotten gains, prison terms for individual wrongdoers, and ongoing compliance monitoring obligations. Recent FCPA cases have been closely followed in the press, in boardrooms, and in sales meetings, and have prompted many companies to redouble their anti-corruption compliance efforts. One Lower-profile aspect of these cases is that they arise not only in the traditional area of government procurement, but also in the arenas of customs duties, tax assessments, and tax controversies.

Consider, for example, an FCPA case that came to a dramatic conclusion earlier this year. On June 29, 2005, the District Court of the Southern District of Texas sentenced two former executives of American Rice, Inc. for violations of the FCPA. (2) The defendants were convicted of violations arising from payments to Haitian officials to reduce the Company's customs duties and sales tax assessment. The court agreed with DOJ recommendations and sentenced David Kay, the Vice President of Caribbean Operations, to 37 months in prison, and Douglas Murphy, the President and Chief Executive Officer, to 63 months in prison. These sentences are the longest provided for in any FCPA case to date.

This article examines these cases and their importance for tax personnel and tax advisers navigating international business waters.

1. Overview

   Stated simply, the FCPA prohibits the payment of "anything of value" to "foreign officials" (including employees of state-owned or controlled companies and public international organizations), political candidates or political parties, for the purpose of securing improper influence or business advantage. (3) In some cases, companies can be held liable for payments made by third parties acting on their behalf, whether or not the company had actual knowledge of the payment. Issuers of securities on U.S. exchanges are also required to maintain, and to ensure that their affiliates maintain, accurate accounting records and a system of internal controls to ensure accountability for assets. (4)

   The DOJ and SEC enforce the FCPA. In addition, section 162(c) of the Internal Revenue Code, which predates the FCPA, prohibits the deduction of bribes, including payments that violate the FCPA, as business expenses. (5)

   In the early spring of 2002, Douglas Murphy and David Kay, then president and vice-president, respectively, of American Rice, Inc., a U.S. corporation and "issuer" for SEC and FCPA purposes, were indicted in a criminal prosecution brought by the DOJ in federal district court in Texas. (6) The DOJ charged Murphy and Kay with 12 counts of violating the FCPA, alleging that they had authorized payments to customs officials in Haiti to induce the officials to accept false documents underestimating by one-third the quantity of rice shipped, thereby reducing the customs duties owed on the shipments. This underreporting resulted in discrepancies between volumes on import documentation and actual sales volumes, which allegedly led Murphy and Kay to authorize additional payments to sales tax officials to accept underreporting of sales--again, reducing the company's tax liability.

   The defendants launched a vigorous challenge to the charges. They argued, and the district court initially agreed, that payments to tax and customs officials to obtain favorable tax or customs treatment are not made to "obtain, retain, or direct business to any person," as prohibited by the statute. (7) The U.S. Court of Appeals for the Fifth Circuit held, however, in "diametric opposition to the district court," that bribes paid to tax and customs officials can violate the FCPA if the bribery "was intended to produce an effect that would assist in obtaining or retaining business." (8)

   At trial on remand, the defendants made the following arguments: (1) the payments were made to avoid costly operational delays in the customs clearance process and, thus, fell within the statutory exception for "facilitation" payments; (2) Haitian officials extorted the payments, negating criminal intent; and (3) the payments were not made to "obtain or retain business," because they were intended to increase profits of an already profitable business. (9)

   The jury rejected all these arguments, and found Kay and Murphy guilty on 12 counts of violating the FCPA and 1 count of conspiracy to violate the statute. (10) The jury also convicted Murphy of obstruction of justice stemming from false statements he made to the SEC during its investigation of the payments. (11) The sentences imposed evidence the personal risks to corporate executives who authorize improper payments. Murphy's longer sentence speaks specifically to the consequences of obstructing justice and abusing positions of trust, one focus of the DOJ post-Enron.

   Thus, the Kay case clarifies that the FCPA applies to nearly all payments made in a business context, a position that the DOJ has long held, but that has not been tested in court. It confirms the relevance of the tax and customs cases that went before it, which, while Kay wound its way through the courts, had been called into question. Given the increasing costs of FCPA compliance failures, this attention on tax and customs reinforces the importance of exercising vigilance in supervising expenditures in foreign operations.

2. Tax and Customs Cases

   The Kay case is the latest in a line of FCPA enforcement matters involving payments to reduce customs and tax assessments. The cases demonstrate the various ways in which corruption can arise in the tax and customs context. They also track the upward trend in enforcement penalties that has characterized FCPA enforcement more generally.

   1. Triton Energy

      It was a tax-related case in 1997 that ushered in the modern era of increased SEC enforcement of the FCPA. The case involved Triton Energy Corporation, an oil and gas company operating in Indonesia. (12) At the time, the Triton matter was the first case brought by the SEC under the antibribery provisions of the FCPA in more than ten years.

      The complaint filed by the SEC alleged violations of both the antibribery and accounting and internal control provisions of the FCPA by Triton and two of Triton Indonesia's officers. (13) It alleged that Triton Indonesia, with the knowledge and participation of the two individuals, made a series of payments totaling approximately US $450,000 to an independent agent for the purpose of influencing certain decisions of Indonesian officials involving an oil field joint venture in Indonesia of which Triton Indonesia was the operator. The payments were disguised as fictitious transactions for the purchase of project goods and services through false invoices from companies affiliated with the agent. The payments were made:

      * to government auditors assessing the company's tax liability;

      * to an Indonesian government auditing board assessing interest obligations on back taxes;

      * to government auditors and the auditing board in connection with their audits of the project's recoverable costs; and

      * to tax authorities to secure corporate and value added tax (VAT) refunds.

      At the time of the case, these alleged payments fell far outside the prototypical FCPA context of obtaining a government contract.

      The parent company was alleged, in effect, to have put its head in the sand concerning its subsidiary's activities...