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International Client Alert - March 2004.

Article Excerpt
U.S. COURT OF APPEALS HOLDS THAT BRIBES TO REDUCE FOREIGN TAX AND CUSTOMS OBLIGATIONS ARE PROHIBITED BY THE FCPA

The U.S. Court of Appeals for the Fifth Circuit has ruled that illicit payments made by a U.S. company to foreign customs officials to reduce the company's tax and customs burdens may, under the right circumstances, violate the U.S. Foreign Corrupt Practices Act (the "FCPA"). The court's reasoning in U.S. v. Kay has far-reaching implications, and will force many U.S. companies to rethink and scrutinize how their marketing staffs interact with foreign government officials.

In the Kay case, a U.S.-based rice grower and its foreign subsidiary were accused of paying bribes to Haitian officials to reduce the customs duties and sales taxes imposed upon the U.S. company's imports into Haiti. In 2002, a federal district court held that as a matter of law, bribes to reduce foreign tax and customs obligations were not prohibited by the FCPA.

Among other things, the FCPA prohibits a U.S. company from corruptly giving anything of value to a foreign government official to influence the official to make a decision in his or her official capacity, to induce the official to perform or to refrain from performing some act in violation of the official's duties, or to secure some wrongful advantage. In order to constitute a violation of the FCPA, these acts must be undertaken in order to assist the U.S. company "in obtaining or retaining business for or with any person."

The federal district court in Kay ruled that the alleged bribes in Haiti were made for the purpose of avoiding taxes and customs duties and that this type of behavior was not related to obtaining or retaining any particular piece of business. The district court reviewed the legislative history of the FCPA and essentially concluded that the law prohibits bribes of foreign government officials that lead directly to the award or renewal of contracts. The district court's narrow reading of the FCPA sent shockwaves through the international business and legal community. Although few U.S. companies viewed the district court's ruling as an invitation to bribe foreign tax or customs officials with impunity, it was nonetheless seen as drastically limiting the types of conduct prohibited by the FCPA.

The United States Court of Appeals for the Fifth Circuit disagreed and reversed the ruling. In contrast to the district court, the Fifth Circuit held that the "obtaining or retaining business" language in the FCPA did not require that a bribe be made to get a particular piece of business. Rather, the Fifth Circuit held that in enacting the FCPA, "Congress made the decision to clamp down on bribes intended to prompt foreign officials to misuse their discretionary authority for the benefit of a domestic entity's business in that country." The court found that Congress had intended to cast a "wide net over foreign bribery." The purpose of the FCPA is to criminalize "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." While a bribe must still in some way be related to increasing one's business opportunities to be unlawful, it does not have to relate directly to obtaining a particular piece of business or a particular contract. The Fifth Circuit concluded that a bribe paid to evade customs duties could in certain circumstances assist a U.S. company in obtaining or retaining business in a foreign country and could therefore be caught by the...