Extractive (incl. oil & gas), Facilitation payments, Russia - Written by on Wednesday, December 29, 2010 7:36 - 0 Comments

Facilitation payments the real deal: Danger ahead

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No prosecution of grease payment violations? Really?

This morning the we read an article published on Risk.net entitled “Bribery Act unlikely to see firms pursued for facilitation payments”.

This is an attractive proposition for many and in terms of telling people what they want to hear it’s a winner.

However, we counsel caution.

The road to compliance and the issue of grease payments is a slippery one fraught with danger.

£1 million plus: the SFO prosecution criteria

On the face of it it appears unlikely the Serious Fraud Office will pursue organizations for making small facilitation payment(s).

A quick look at its prosecution criteria reveal that it is only interested in crimes of £1 million plus (although it’s worth noting in passing that the Crown Prosecution Service has no lower limit threshold and could also prosecute).

But, and this is a BIG but:

Don’t bet your life on it

However (even putting to one side the CPS question), unlike the commentator in the article who says: “…I’m not even sure I will ever live long enough to see a prosecution over a facilitation payment.”

…we wouldn’t stake our lives on it.

Prosecutions for “facilitation payments” have already taken place

It has already happened in the US; and the US is the bell weather for UK enforcement when it comes to the Bribery Act.

Panalpina (a Swiss based freight forwarding company) and a number of its customers agreed in November in a US plea bargain to pay US$236.5 million in penalties and disgorgement in relation to the payment of customs officials for customs clearance.  There is a nice post on the Panalpina settlement on the FCPA blog.

A customs payment made to a customs official to ease goods through customs is something most would consider a facilitation payment.  Against this backdrop it is noteworthy that the US (which broadly speaking has an exemption for such payments) investigated and ultimately entered into deferred prosecution agreements in relation to them.  In other words, it highlights the difficulties attached with facilitation payments even in the US where there is supposedly an exemption.

As part of that investigation, according to the DOJ press release, a well known UK company (Royal Dutch Shell Plc) became embroiled through a subsidiary and ultimately agreed in settlement to pay $30 million in criminal penalties in relation to $2 million paid to subcontractors for the purposes of making such payments.

Heads the prosecutors win. Tails you lose.

If your business is subject to the FCPA and takes advantage of the facilitation payment exemption (which is, on the basis of Panalpina, easier said than done) complying with the US rules to take advantage of the exemption (broadly properly recording the bribe as a bribe in the books and records of the organisation) will be all the evidence the UK SFO (as well as local) prosecutors will require to successfully prosecute if your business is also subject to Bribery Act compliance.

Myths exposed

The Panalpina case exposes a couple of myths:

Myth 1. Facilitation Payments will not be prosecuted

First, given that the US is a bell weather for the UK when it comes to enforcement of anti corruption laws (the US FCPA is the grand daddy of the Bribery Act) and the SFO and the DOJ are working hand in glove to enforce the laws, it is a bold statement to say that no one will be prosecuted for the making of facilitation payments.

Myth 2. Facilitation payments are one off events

Second, the reality is that it is unlikely that the making of a facilitation payment will be a one off event.

Instead, as in Panalpina, it is likely to be customary as was the case here where payments were routinely made to customs officials to obtain customs clearance. In the DOJ’s press release in November it said: “Panalpina admitted that between 2002 and 2007, it paid thousands of bribes totaling at least $27 million to foreign officials in at least seven countries, including Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan. Also today, Panalpina’s customers, including Shell Nigeria Exploration and Production Company Ltd. (SNEPCO), Transocean Inc. and Tidewater Marine International Inc., admitted that the companies approved of or condoned the payment of bribes on their behalf in Nigeria and falsely recorded the bribe payments made on their behalf as legitimate business expenses in their corporate books, records and accounts.” [our emphasis]

In fairness, the commentator does say that “…the payment of small sums to facilitate business will probably not lead to charges being levelled at firms, unless they become endemic to the firm.”

In other words that multiple or customary making of facilitation payments could result in charges.   The problem with facilitation payments is that these types of payments are highly likely to be customary and therefore if made perceived by the SFO to be endemic and therefore risk prosecution.

We have posted on various occasions on facilitation payments.  The SFO have said they require organisations to impose a blanket ban on them and work to stamp them out.  They have said that they will be looking to see that firms are working toward completely stamping out the practice of making grease payments (implying it would appear a degree of tolerance while companies work toward this aspirational goal).  However, a couple of points seem clear.

1. The tolerance of the SFO is conditioned on real efforts to stop such payments

2. Such tolerance as the SFO has is unlikely to remain around forever.

Organisations should grasp the nettle now.

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