FCPA Compliance Strategies for Extortion in Latin America

^[1]This post was co-authored by Maryna Kavaleuskaya ^[2], a Law Clerk at Miller & Chevalier.

Extortion can be an unfortunate reality for those doing business in Latin America. Rural highway shakedowns and intimidation by military personnel can and does occur in places like Venezuela. Underpaid and corrupt local police in Mexico sometimes invent violations just to request payments to look the other way. Immigration officials in Nicaragua might threaten to use their own needles to administer a required yellow fever shot if a traveler without her vaccination papers is not willing to otherwise pay a bribe.

This means that individuals working in the region can face difficult FCPA compliance questions when they receive extortion demands from local officials. What compliance best practices can companies adopt to manage these types of risks?

FCPA liability for extorted payments. The starting point is to understand the nature of FCPA liability for such payments. Under the FCPA’s anti-bribery provisions, payments to protect one’s health and safety are seen as an exception, because the payment would not satisfy a necessary element of the law – acting with corrupt intent. The legislative history of the FCPA specifically notes, “true extortion situations would not be covered by this provision since a payment to an official to keep an oil rig from being dynamited should not be held to be made with the requisite corrupt purposes.” S. Rep. No. 114, 85th Cong. 1 st Sess. (1977). The FCPA Resource Guide provides, “[s]ituations involving extortion [threat of improper expropriation, destruction, substantial damage of property or assets] or duress [threat of death or serious bodily injury] will not give rise to FCPA liability [as opposed to ‘mere economic coercion’] because a payment made in response to true extortionate demands under imminent threat of physical harm cannot be said to have been made with corrupt intent for the purpose of obtaining or retaining business.”

However, publicly-listed companies often overlook the fact that, if companies do not record the payments correctly in their books and records, and do not take follow-up actions to institute appropriate internal controls to prevent the issue from occurring again, the payments could still represent FCPA accounting violations. In the past, the U.S. Securities and Exchange Commission (“SEC”) has brought at least one civil administrative proceeding under the FCPA’s accounting provisions, against the Natco Group, for failure to accurately record what were arguable extortion payments made to local immigration officials.

Common FCPA compliance mechanisms for extortion risk. Companies working in countries that present such risk (such as Mexico, Colombia, Venezuela, and Ecuador) are wise to develop anti-extortion mechanisms and procedures to minimize relevant risks. The specific strategy would depend on the company’s specific operational profile, but generally could include the following steps:

Identify areas at risk of extortion and include an anti-extortion policy within the scope of the company’s compliance program;
Introduce the anti-extortion policy to employees, offering relevant trainings that include examples of extortion and role-playing scenarios;
Appoint a compliance manager specifically designated to provide employees with extortion-related advice, including in real time, such as an individual who is always available on his or her cellphone;
Ensure that employees report all extortion payments to the compliance department as soon as possible after the payment is made;
Draft a payments exception request/report form to be submitted with all employee reports, and disseminate it among employees who work in high risk environments. Such a form might indicate (1) whether there is a threat to the employee’s health/safety and/or property; (2) whether the request is for prior approval or the employee is reporting a payment already made; (3) additional information regarding the payment, such as payment date, name and title of government official requesting the payment, affiliated government entity, and amount and currency of the requested payment; (4) whether the company has made similar payments in the past to the same government official or government officials in the same or similar positions and if so, additional information on such payments, i.e. reasons for payment, context of request and any steps taken/considered to avoid need for the payment.
Accurately record the extortion payment in the company’s books and records.
Devote extra time during compliance audits to review transactions related to payments in high risk areas involving local police officers, licensing officials, immigration officials, military personnel, and other types of officials that might be positioned to extort funds.
Ensure that these procedures are consistent with the ways in which extortion is treated under local laws.

Note that repeated requests for such payments by the same official over time may undermine the legal defense under which such payments may be allowed. To avoid this, companies are expected to take follow up actions to minimize future risks. One such action recommended in the FCPA Resource Guide is to contact a relevant U.S. embassy for assistance. A company might contemplate reporting the solicitation to officials in the local country if circumstances allow.

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