Companies still struggle mightily when it comes to crafting policies that address the use of facilitation payments.

The payments—sometimes called “grease payments”—are small sums given to foreign officials to expedite normal business transactions, such as clearing goods through customs. Some distinguish them from bribes, which are typically meant to entice foreign officials to commit acts they might otherwise not do, such as awarding a contract.

Facilitation payments, unlike other types of bribery, are completely exempted out of Foreign Corrupt Practices Act enforcement actions. It would seem, then, that companies could allow their use, or at least easily justify the practice when defending against an enforcement action. There are a couple of legal areas, however, that trip companies up when they try to use the facilitation payment exemption.

Equally important is the administrative nightmare of allowing facilitation payments where they might be legal, but then trying to ban them in parts of the company where they are illegal, such as entities or persons that are subject to the U.K. Bribery Act, which bans the practice.

This discussion was recently renewed in light of a Department of Justice FCPA enforcement action against Archer Daniels Midland Co.  From 2002 to 2010, the company's Ukrainian subsidiary rolled up value-added tax receivables of up to $46 million. After several years of little response from tax authorities to its application for VAT refunds for goods purchased in Ukraine, ADM responded to the problem by engaging in bribery and corruption to help them get the money that they believed they were owed. ADM paid approximately $18 million in bribes to obtain the tax rebates it considered it was entitled to receive. The key question is whether the admitted bribes paid by ADM fell within the facilitation exception or, put another way, whether the Justice Department was over-reaching in prosecuting ADM for bribes paid to obtain something they were legally entitled to receive, that being the said tax rebates.

The primary legal decision that applies to the use of facilitation payments and their legality under the FCPA was rendered in U.S. v. Kay.  In this case, the Fifth Circuit Court of Appeals exhaustively reviewed the legislative history of the FCPA, from its passage in 1977, through the two amendments in 1988 and 1998. Initially, the Kay decision stands for the proposition that if a defendant intends the paying of bribes to be a quid pro quo, which would assist (or is meant to assist) the payor in obtaining or retaining business, it is a violation of the FCPA. Further, it specifically stated that the “business nexus is not to be interpreted narrowly.” The facts in Kay were different than those presented in the ADM matter.

The Kay decision spoke to the issue of facilitation payments, similar to those made in the context of the ADM settlement, when it said: “This observation is not diminished by Congress' understanding and accepting that relatively small facilitating payments were, at the time, among the accepted costs of doing business in many foreign countries.” One important point there is that facilitating payments must be “relatively small.” Whatever they might be, ADM's payments of approximately $18 million to obtain the tax refunds that it was entitled to receive is certainly not “relatively small.” 

With the admonition that the business nexus requirement is not to be interpreted narrowly, however, I believe the holding in Kay is such that it is not a stretch to see the conduct engaged in by ADM did assist, or was meant to assist, it in doing business in Ukraine. Indeed, the Kay decision states: “In addition, the concern of Congress with the immorality, inefficiency, and unethical character of bribery presumably does not vanish simply because the tainted payments are intended to secure a favorable decision less significant than winning a contract bid.” Thus I look at Kay and see the conduct of ADM as falling within the broad outlines of the Kay decision.

With the admonition that the business nexus requirement is not to be interpreted narrowly, however, I believe the holding in Kay is such that it is not a stretch to see the conduct engaged in by ADM did assist, or was meant to assist, it in doing business in Ukraine.

When the Walmart bribery scandal erupted some commentators claimed that the bribes paid in Mexico were simply facilitation payments because they were made only to obtain licenses and permits to construct stores and do business in Mexico. The argument goes that Walmart would have received these licenses and permits at some point anyway, and the company was paying to simply speed up the process. However, Walmart paid up to $240,000 to speed things up and whatever a facilitation payment is, $240,000 is not a relatively small amount. Lastly, Walmart in no way recorded these payments properly on its books and records as facilitation payments, but tried to hide them as other types of payments, such as payments to law firms for legal fees.

In addition to the ADM enforcement action, there have been three other FCPA enforcement actions where facilitation payments were a central issue. In an enforcement action against Con-way Inc., the global freight forwarder agreed to pay a $300,000 penalty for making hundreds of relatively small payments to customs officials in the Philippines. The value of the payments Con-way was fined for making totaled $244,000 and were made to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations.

In an enforcement action against energy exploration company Helmerich & Payne, the company's facilitation payments were in the range of $2,000 to $5,000, but were not properly recorded, and were made to import and export goods that were not within the respective country's regulations; to import goods that could not lawfully be imported; and to evade higher duties and taxes on the goods.

Finally, we have the Panalpina enforcement action. While the specific amounts of the bribes paid were not disclosed in the settlement documents, Panalpina, acting as freight forwarder for its customers, made payments to circumvent import laws, reduce customs duties and tax assessments, and to obtain preferential treatment for importing certain equipment into various countries, primarily in West Africa.

In addition to the requirement that facilitation payments be “relatively small” is the equally important requirement that they be properly recorded on the company's books and records. This means that such payments must be recorded as facilitation payments and not disguised as some other type of payment or entry.

Lastly, a word about the administrative difficulties of allowing facilitation payments in your company but then excluding those subject to the U.K. Bribery Act, which does not allow facilitation payments. This means that all British citizens in your company and anyone who works for a U.K. subsidiary cannot make facilitation payments. So you need to have a second set of policy requirements for those employees and a way to verify compliance with the U.K. Bribery Act.

What Makes Them Valid?

From the enforcement actions and the Kay decision what lessons might be drawn for a valid facilitation payment?

What is the size of payment? If a facilitating payment is over $1,000 you are arguing for the exemption from a point of weakness. The presumption of good faith is against you. You might be able to persuade the government if the amounts are under $1,000, but anything over this amount and the government may well make further inquiries. So, for instance, the Justice Department might say that all facilitation payments should be accumulated together and this would be a pattern and practice of bribery.

Are we asking for a routine governmental action? The key question here is whether you are entitled to the action otherwise. Is your company entitled to this action, or is it asking the government official to look the other way on some requirement? Is the company asking the government official to give it a break that it is not otherwise entitled to receive, or that is not available to others?

Does the seniority of the governmental official matter? This is significant because it changes the presumption of whether something is truly discretionary. The higher the level of the governmental official involved, the greater chance his decision is discretionary.

Does the action have to be non-discretionary? Yes, because if it is discretionary, then a payment made will appear to be obtaining some advantage that is not available to others.

What approvals should be internally required? A facilitation payment is something that must be done with an appropriate process. The process should have thought and the decision made by people who are the experts within the company on such matters.

How should facilitation payments be recorded? Facilitation payments must be recorded accurately. Your company should have a category entitled “facilitation payments” in its internal accounting system. The labeling should be quite clear, and they are critical to any audit trail so recording them is quite significant.

What is your monitoring program? There must always be ongoing monitoring programs to review your company's internal controls, policies, and procedures regarding facilitation payments.

The ADM enforcement action may extend the logic of the Kay decision regarding what constitutes a violation of the FCPA. But in doing so, it puts companies on notice that the Justice Department will look very closely at any claim that a bribe is simply that a company is receiving something to which it was already entitled to receive or even that the payment was simply a facilitation payment. The practical reality is that the administrative time and cost is simply not worth the potential risk. Furthermore, the risk of getting the facilitation payment exemption wrong is too great and companies should just ban them altogether.

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