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United States v. Kay

United States Court of Appeals, Fifth Circuit
359 F.3d 738 (2004)
ELI5:

Rule of Law:

Bribes paid to foreign officials to unlawfully reduce customs duties and tax liabilities can constitute a violation of the Foreign Corrupt Practices Act (FCPA), as such payments can be made to 'assist in obtaining or retaining business' by providing an unfair competitive advantage.


Facts:

  • American Rice, Inc. (ARI), a Houston-based company, exported rice to Haiti through its wholly-owned subsidiary, Rice Corporation of Haiti (RCH).
  • David Kay served as ARI's vice-president for marketing, and Douglas Murphy was its president.
  • Between approximately 1995 and 1999, Kay and Murphy allegedly orchestrated and authorized bribes to Haitian customs and tax officials.
  • The purpose of the bribes was to induce the officials to accept false bills of lading and other documents that understated the quantity of rice ARI was importing.
  • This scheme allowed ARI to report only about 66% of the rice it actually imported, significantly reducing its customs duties and sales taxes owed to the Haitian government.
  • To facilitate the scheme, ARI employees were directed to prepare two sets of shipping documents: one accurate set for internal use and one false set for Haitian officials.
  • The bribe amounts were calculated as a percentage of the value of the unreported rice or paid as a monthly retainer.

Procedural Posture:

  • A federal grand jury returned a superseding indictment charging David Kay and Douglas Murphy with 12 counts of violating the FCPA.
  • In the U.S. District Court for the Southern District of Texas, Kay and Murphy filed a motion to dismiss the indictment, arguing it failed to state an offense.
  • The district court granted the defendants' motion, holding as a matter of law that bribes for favorable tax treatment do not fall under the FCPA's 'obtain or retain business' clause.
  • The United States government, as plaintiff-appellant, appealed the dismissal to the U.S. Court of Appeals for the Fifth Circuit.

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Issue:

Do bribes paid to foreign officials to unlawfully reduce customs duties and sales taxes constitute a violation of the Foreign Corrupt Practices Act's prohibition on payments made to 'assist... in obtaining or retaining business'?


Opinions:

Majority - Wiener, Circuit Judge

Yes, bribes paid to foreign officials to unlawfully reduce customs duties and taxes can violate the FCPA because such payments can be intended to 'assist in obtaining or retaining business.' After finding the statutory phrase 'obtaining or retaining business' to be ambiguous, the court examined the FCPA's legislative history. The 1977 history reveals Congress's intent to cast a wide net over foreign bribery, prohibiting payments that disrupt market efficiency and not just those for securing specific contracts, while carving out a narrow exception for minor 'grease' payments. The 1988 amendments and their legislative history further clarified this broad scope, with a conference report explicitly stating that 'retaining business' includes payments for 'obtaining more favorable tax treatment.' The 1998 amendments, implementing an international convention, also supported a broad interpretation. Therefore, bribing officials to lower taxes can provide an unfair competitive advantage, reduce operating costs, and increase profit margins, which in turn can assist a company in obtaining or retaining business.



Analysis:

This decision significantly clarifies that the FCPA's 'obtaining or retaining business' element must be interpreted broadly, rejecting a narrow construction limited to bribes for securing or renewing specific contracts. The court established that corrupt payments made to reduce a company's operating costs, such as taxes or customs duties, fall within the statute's scope if they are intended to provide an unfair advantage that helps the company's business interests. This ruling broadens the potential liability for U.S. companies operating abroad, putting them on notice that bribery intended to improve profitability or competitive standing through cost reduction is prosecutable under the FCPA. It solidifies the understanding that the statute targets a wide range of corrupt payments that undermine fair competition.

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