When A Government Customer Does Not Pay

26 February 2018

Examining the root causes of certain Foreign Corrupt Practices Act enforcement actions is not meant to rationalize or condone the conduct at issue, but just to better understand the circumstances given rise to the enforcement action in the first place.

For instance, like several other FCPA enforcement actions highlighted in this post, a root cause for a portion of the conduct alleged in the recent PDVSA related individual enforcement action (see below) is that Venezuela was unable to pay its bills and that alleged “foreign officials” offered to pay the outstanding bills (among a stack of many no doubt) in exchange for things of value.

 the DOJ announced that additional criminal charges were unsealed “against five former Venezuelan government officials for their alleged participation in an international money laundering scheme involving bribes made to corruptly secure energy contracts from Venezuela’s state-owned and state-controlled energy company, PDVSA.”


The indictment charges the following individuals:

  • Luis Carlos De Leon Perez (De Leon) described as dual citizen of the U.S. and Venezuela who was previously employed by instrumentalities of the Venezuelan government. De Leon is charged with one count of conspiracy to commit money laundering; four counts of money laundering; and one count of conspiracy to violate the FCPA.
  • Nervis Gerardo Villalobos Cardenas (Villalobos) described as a citizen of Venezuela who was previously employed by instrumentalities of the Venezuelan government. Villalobos is charged with one count of conspiracy to commit money laundering; one count of money laundering; and one count of conspiracy to violate the FCPA.
  • Cesar David Rincon Godoy (Cesar Rincon) described as a citizen of Venezuela who was employed by PDVSA and its subsidiaries, including Bariven (a PDVSA procurement subsidiary responsible for equipment purchases) and is alleged to be a “foreign official.” Cesar Rincon is charged with two counts of conspiracy to commit money laundering and four counts of money laundering.
  • Alejandro Isturiz Chiesa (Isturiz) described as a citizen of Venezuela who was employed by Bariven and is alleged to be a “foreign official.” Isturiz is charged with one count of conspiracy to commit money laundering and five counts of money laundering.
  • Rafael Ernesto Reiter Munoz (Reiter) described as a citizen of Venezuela who was employed by PDVSA and is alleged to be a “foreign official.” Reiter is charged with one count of conspiracy to commit money laundering and four counts of money laundering.

As stated in the DOJ’s release:

“The indictment alleges that the five defendants, all of whom were then-current officials of PDVSA and its subsidiaries or former officials of other Venezuelan government agencies or instrumentalities, were known as the “management team” and wielded significant influence within PDVSA.  According to the indictment, the management team conspired with each other and others to solicit several PDVSA vendors, including vendors who were residents of the United States, and who owned and controlled businesses incorporated and based in the United States, for bribes and kickbacks in exchange for providing assistance to those vendors in connection with their PDVSA business.  The indictment further alleges that the co-conspirators then laundered the proceeds of the bribery scheme through a series of complex international financial transactions, including to, from or through bank accounts in the United States, and, in some instances, laundered the bribe proceeds in the form of real estate transactions and other investments in the United States.”

In the DOJ’s release, John Cronan (Acting Assistant Attorney General of the DOJ’s Criminal Division) stated:

“Corruption threatens economic and political stability, and victimizes ordinary law-abiding people by diverting public funds into the pockets of corrupt officials and bribe payers. The charges announced today demonstrate our commitment to fighting corruption at its source and to prosecuting those who allegedly launder their illicit gains through American financial institutions and real estate.  Through cases like this, we are sending a strong message to corrupt foreign officials: if you launder your ill-gotten gains through the United States, you will be prosecuted.”

Ryan Patrick (U.S. Attorney – Southern District of Texas) stated:

“Effective deterrence of corruption requires prosecution of culpable individuals, wherever those individuals are located. We will continue to enforce the FCPA against those that avail themselves of the privileges of the American marketplace.”

Mark Dawson (Special Agent in Charge – U.S. Immigration and Customs Enforcement’s Homeland Security Investigations in Houston) stated:

“This case is an example of what can be accomplished when international law enforcement agencies work together to thwart complex cross-border crimes. HSI is committed to upholding the rule of law and investigating those that would participate in illegal practices.”

The indictment contains a section titled “Gifts and Other Things of Value” which references the following:

  • a beach house in Parrot Cay in the Bahamas;
  • a  luxury hotel in Aruba;
  • two $107,500 armored cars
  • a $10,300 handbag
  • invoices for English classes for two children of a “foreign official” (one in the amount of $16,672 and the other in the amount of $8,755).

Elsewhere the indictment references: “recreational travel, vehicles, gifts (including watches and wine), meals, and entertainment.

The FCPA conspiracy charges against De Leon and Villalobos are most interesting as they seem to conflict with U.S. v. Castle, 925 F.2d 831 (1991), a Fifth Circuit decision which held that “foreign officials” could not be prosecuted for conspiring to violate the FCPA.

Although De Leon and Villalobos (unlike the other three defendants) are not technically alleged to be “foreign officials” they are both alleged to have been previously employed by instrumentalities of the Venezuelan government (which is basically saying that they were “foreign officials” without specifically saying so).


It is difficult to square the enforcement theory that seeking what one is legally entitled to receive equates to a violation of the FCPA’s anti-bribery provisions with several actual legal elements.

Corrupt intent? Congress tells us in the FCPA’s legislative history that “the word ‘corruptly’ connotes and evil motive or purpose.” How can seeking what one is legally entitled to receive evil?

Obtain or retain business? In U.S. v. Kay, the 5th Circuit did conclude that payments outside the context of foreign government procurement “could” violate the FCPA, but only if payments were intended to lower a company’s cost of doing business enough to assist the company in “obtaining or retaining” business.  Specifically, the court stated:

“If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining business would be unnecessary, and thus surplusage – a conclusion we are forbidden to reach.”

How can seeking what one is legally entitled to receive satisfy the “obtain or retain business” element?

Facilitating payments? The FCPA expressly excludes from the anti-bribery provisions payments made “to expedite or to secure the performance of a routine government action by a foreign official.” How can seeking what one is legally entitled to receive not fit within the exception for “secur[ing] the performance of a routine government action”?

Back to the recent PDVSA individual enforcement action in which the DOJ alleged in the indictment:

“Beginning in at least 2010, Venezuela began to experience a liquidity crisis as the profits earned through PDVSA, which historically had been a significant source of revenue to the Venezuelan government as a result of its oil reserves, were insufficient to meet the government’s expenses. Numerous analysts began to speculate that PDVSA could default on its debt, and the government made public commitments for PDVSA to increase oil production.

Given these liquidity problems, PDVSA was unable to pay all of its vendors in a timely manner, but remained under pressure to continue to escalate oil production.

In or about 2011, Rincon and Shiera [individuals previously charged with violating the FCPA’s anti-bribery provisions in connection with the same core conduct] were approached by a group of individuals who consisted of then-current PDVSA officials and individuals outside PDVSA with influence at PDVSA, including De Leon, Villalobos, and Istruriz, referred to as the ‘management team.’ The management team offered to give Rincon’s and Shiera’s companies payment priority over other PDVSA vendors, ensuring that Rincon’s and Shiera’s companies would get a least partial payment on outstanding PDVSA invoices, and to provide Rincon’s and Shiera’s companies with assistance in winning future PDVSA business, in exchange for providing a bribe to the management team in the amount of 10% of all payments Rincon and Shiera received from PDVSA. The management team made offers to other vendors known and unknown to the Grand Jury. In addition, individual members of the management team solicited additional bribe payments from Rincon and Shiera. (emphasis added).

De Leon and Villalobos explained that the bribe proceeds would be split and would be shared among De Leon, Villalobos, Rincon, Istruriz, Reiter [and other officials].

Rincon and Shiera agreed to make the payments to the management team in exchange for payment priority and assistance in winning future PDVSA contracts.”

The recent PDVSA individual enforcement action is not the first time the dubious enforcement theory that seeking what one is legally entitled to receive equates to a violation of the FCPA’s anti-bribery provisions has been used.

In 2013, the DOJ and SEC extracted $54 million from Archer Daniels Midland Co. and related entities.  As explained in the article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action,” the principal feature of the enforcement action was that ADM and its shareholders were victims of a corrupt Ukraine government which refused to release value-added tax refunds legitimately owed to the company.  In the words of the DOJ, “the Ukrainian government did not have the money to pay VAT refunds that it owed to companies that sold Ukrainian goods outside of Ukraine.”  Likewise, the SEC acknowledged that the “Ukrainian government determined to delay paying the VAT refunds owed or did not make any refunds payments at all.”

Prior to the ADM action, there was a 2010 SEC action against Joe Summers concerning conduct in – you guessed it –  Venezuela.  The title of this previous post was “Paying to Secure Receivables Is Now Bribery?” and it began as follows.

“Attention to companies (and employees) operating around the world. If you are party to a contract, and a mid-level employee at the entity receiving services under the contract holds up payment of money the company is legitimately entitled to receive, but the mid-level employee requests payment in order to release the funds, and you make the requested payment, you are violating the Foreign Corrupt Practices Act.”

As highlighted in the previous post, part of the SEC’s allegations included the following.

“Following widespread strikes and civil unrest in Venezuela in late 2002, Pride […] and other companies performing work for PDVSA (PDVSA is the Venezuela state-owned oil company) had difficulty collecting outstanding receivables from PDVSA. By early 2003, Pride […] had significant unpaid receivables for services that it had provided to PDVSA. In or around March or April 2003, Pride […] received information that a mid-level PDVSA accounts payable employee was holding up the payment of funds owed to Pride […] and wanted a payment of approximately $30,000 in order to release the funds due. In or around March or April 2003, Summers authorized a payment of approximately $30,000 to a third party, believing that all or a portion of the funds would be offered or given by the third party to an employee of PDVSA for purposes of securing an improper advantage in receiving payment from PDVSA. Shortly thereafter, in or around April 2003, Pride […] received overdue payments from PDVSA for work that Pride […] had performed.”

A third example of an FCPA enforcement action being based on a dysfunctional government not paying a company money it was legitimately owed was highlighted in this previous titled “One of the More Dubious FCPA Enforcement Actions of All-Time” concerning a 1994 DOJ enforcement action against Vitusa Corporation and its President Denny Herzberg.

As highlighted in the previous post, the DOJ alleged that Vitusa (a New Jersey corporation engaged in the business of selling commodities and other goods) “entered into a lawful contract to sell milk powder to the Government of the Dominican Republic.”

The DOJ then alleged as follows.

“Although Vitusa delivered the milk powder to the Government of the Dominican Republic, the Dominican government did not pay Vitusa promptly for the milk powder received and, in fact, maintained an outstanding balance due for an extended period of time.  Vitusa, therefore, made various efforts to collect the outstanding balance due, including contacting officials of the United States and Dominican Governments to obtain their assistance in securing payment in full.”

According to the DOJ, “during the pendency of the contract, Servio Tulio Mancebo (a citizen of the Dominican Republic) communicated to Herzberg a demand made by a foreign official [a senior official of the Government of the Dominican Republic] which called for the payment of a ‘service fee’ to that official in return for the official using that official’s influence to obtain the balance due to Vitusa for the milk powder contract from the Dominican Government.” According to the DOJ, “Herzberg agreed to Mancebo’s proposal that Vitusa would pay a ‘service fee’ indirectly to the foreign official.”  Thereafter, the DOJ alleged that the Government of the Dominican Republic made payment of $63,905.12 to Vitusa on the contract, but that following Herzberg’s instruction, “Mancebo retained $20,000 from that payment.” According to the DOJ, Vitusa and Herberg knew “that all or a portion of the money would be given to the foreign official for the purpose of inducing the official to use that official’s position and influence with the Government of the Dominican Republic in order to obtain and retain business, that is, full payment of the balance due for Vitusa’s prior sale of milk powder to the Government of the Dominican Republic.” Based on the above allegations, the DOJ charged Vitusa with violating the FCPA’s anti-bribery provisions.

In recent years, it has become popular to talk about the “victims” of FCPA enforcement actions and feel good proposals have even been made suggesting that “victims” (you know, the citizens of country x  which served as the locus of an FCPA enforcement action) are deserving of compensation from the FCPA settlement amount.

As the above examples highlight however, sometimes the “victims” of FCPA enforcement actions may be the companies or related individuals resolving the actions because they were legitimately owed money by a dysfunctional government that refused to pay.

Some governments in Asia can be very slow paymasters.  Only Korea, Taiwan, China, Japan and Singapore score above 50 out of 100 for “Payment of Suppliers” in the World Bank’s Benchmarking Public Procurement Report 2017, with 12 scoring less than 50.  The World Bank also notes that, unsurprisingly, longer delays in payments are associated with economies with higher perceived rates of corruption (Doing Business 2017, Annex: Selling to the Government).

Vendors in some countries in South East Asia will be surprised to learn that they are apparently paid in 30 days or less by their governments.  But that is because the index does not tell the whole story: partly because it excludes government-owned or-linked companies.  Additionally, governmental targets for payments to suppliers, even if met, tend to start measuring from receipt of an agreed invoice.  Quibbles can arise over anything from requests for only tangentially related documentation, such as workers’ visas, to documented approvals of variation orders – which are often never provided, with contractors being encouraged to press on in the expectation that formal approvals will eventually follow.  These can add months, and in extreme cases years, before the clock starts ticking.

Companies faced with recalcitrant government or government-linked clients in the region have a limited range of unappealing options.

The most common is simply to chase in the hope that their counterparty will ultimately relent and pay.  Needless to say, this is not always effective.  A client recently recounted that his company had been asked by a financial controller at a government-owned natural resources company, “Why would I pay you when you haven’t even sent a lawyer’s letter?”  It is unlikely that the financial controller wanted his company to be sued; but his default approach is apparently to pay invoices only once under real pressure from a contractor.

Another unappealing option is actually to commence such proceedings.  This is problematic for three reasons.  First, while suing clients is obviously a last resort, suing a government may lose a client representing the major portion of a company’s business, if not all of it.  Second, there is genuine scepticism about the effectiveness of litigating where one party is the government in some jurisdictions; given that some governments in the region have expressed reservations about the concept of judicial independence, such scepticism is perhaps understandable.  Third, there is the fear – justified or not – of consequences unrelated to the transaction in question, whether commercial or otherwise.

The last of the (legal) frequently used options is to work through networks, such as local contacts or business forums, to try to unblock payment by escalating the delay to a higher authority.  Whether this is feasible is dependent on the country and the relationships open to the supplier; it will almost certainly be a challenge for companies that are not well-established in a market.  Worse, if not handled very carefully, such intervention can in itself leave a company open to solicitations for or accusations of corruption.

Yet one of the counter-intuitive results of the current focus on corruption is that government officials are often reluctant to release payments, especially penalty payments for breaches of contract or tax refunds, for fear of falling under suspicion of having been corruptly induced to do so.  Similarly, it is not uncommon for government departments and government-linked companies to avoid releasing final progress payments for as long as possible because unwelcome scrutiny may result should a problem arise with the project in the future.

This can lead to the peculiar situation where legal proceedings are, far from being genuinely adversarial, used to enable payment by the government department in question.  For example, we have previously been approached to provide expert evidence on quantum in an arbitration where the amount owed as a penalty was agreed but the government department wanted an arbitral award to give them the requisite cover to pay.

Companies finding themselves unpaid have delivered goods and services; they have incurred the costs of buying raw materials, hiring subcontractors and incidental expenses.  Not least, they have staff salaries to pay and suppliers that depend, in turn, upon being paid for their own financial survival.  It is this that drives some companies to take the least appealing option of all: pay a bribe to secure something to which they are already entitled.  In fact, many governments have legislated obligations to pay within a particular timeline (such as the Prompt Payment Act in the US).  In which case, the company is not just entitled to payment, it is entitled to expeditious payment.

Ultimately, bribes offered or given for payment can range from an outright bribe to approve payments that are unearned on the one hand to a shakedown by the official responsible for approving payment on the other.  Companies facing the latter situation are faced with a dilemma: do they exercise patience and hope their cash flow does not dry up while they chase, do they sue, or do they pay the bribe?

If companies do pay, they can expect officials to fish for a repeat favour next time they deal with them.  In addition, while the FCPA may provide a defence for payments “to expedite or to secure the performance of a routine government action by a foreign official”, local anti-corruption legislation may provide no such exception.

It is often suggested that there has historically been too much focus on the “demand side” of bribery and that this focus should be shifted to the “supply side.”  In reality, there is a need for both private and public sectors to play their part.  Professor Koehler’s post highlights an under-addressed area where the demand side’s role is vital in reducing both the incentives to bribe for suppliers who have secured and delivered their contracts legitimately and the opportunities for officials and employees to seek bribes.

SOURCE: http://fcpaprofessor.com/case-keeps-giving-doj-announces-additional-charges-pdvsa-bribery-action/

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