18 U.S.C. § 1346 defines a “scheme or artifice to defraud” to include a scheme to deprive another of the intangible right to honest services. It applies to federal mail and wire fraud statutes, including 18 U.S.C. §§ 1341 and 1343, rather than creating a standalone offense.
In Skilling v. United States, the Supreme Court limited § 1346 to fraudulent schemes involving bribery or kickbacks, rejecting prosecution based only on an undisclosed conflict of interest or self-dealing.
A corporate executive, officer, employee, consultant, or other fiduciary facing an honest services fraud investigation therefore should not assume that an allegation of divided loyalty, undisclosed compensation, or breach of company policy establishes a federal crime.
The government must fit the alleged conduct within the bribery-or-kickback framework recognized by the Supreme Court and prove the elements of the underlying mail or wire fraud offense.
Why Do Skilling and Subsequent Case Law Matter in a Corporate Honest Services Fraud Prosecution?
Before Skilling, prosecutors sometimes used the federal honest services fraud law to prosecute people for undisclosed conflicts of interest, self-dealing, or other conduct that appeared disloyal.
The Supreme Court limited that approach. In Skilling v. United States, the Court held that the honest services fraud statute, 18 U.S.C. § 1346, applies to cases involving bribes or kickbacks, rather than every situation in which someone may have acted dishonestly or failed to disclose a personal financial interest.
This distinction is important in a corporate criminal case. An executive may have a hidden:
- Financial interest in a transaction,
- Receive improperly disclosed compensation, or
- Violate company policies.
Those facts may raise serious questions for the company, but they do not automatically amount to federal honest services fraud.
Under Skilling, prosecutors generally must show that the alleged scheme involved a bribe or kickback and that the defendant participated in that scheme to deprive someone of honest services.
Overview of Percoco v. United States
While Skilling restricted § 1346 strictly to bribery and kickback schemes, the Supreme Court further narrowed the statute's scope in Percoco v. United States by limiting who can owe a fiduciary duty of honest services.
In Percoco, federal prosecutors charged a former government official who had temporarily left public service to manage a political campaign.
The government argued that because the defendant retained informal political influence and "dominated and controlled" government decision-making, he owed a fiduciary duty to the public as a de facto official.
The Supreme Court unanimously rejected this theory, holding that:
- Informal Influence Is Not Enough: Mere political influence, close ties to decision-makers, or informal dominance over government business do not create a legal fiduciary duty under § 1346.
- Vagueness Protections: Prosecuting private citizens based on ambiguous concepts like "special relationships" or "functional authority" violates due process by failing to provide clear notice of prohibited conduct.
For corporate executives, Percoco confirms that private-sector consultants, former executives, lobbyists, or outside advisors cannot be swept into § 1346 prosecutions based solely on their informal authority or influence within a company or government entity.
Unless a formal fiduciary relationship or actual agency status exists, prosecutors cannot establish the foundational duty required for honest services fraud.
What Must the Government Prove?
An honest services fraud prosecution ordinarily combines § 1346 with § 1341 or § 1343.
Mail fraud under 18 U.S.C. § 1341 requires use of the mail or a private interstate carrier in furtherance of the fraudulent scheme, while wire fraud under 18 U.S.C. § 1343 concerns interstate wire communications—section 1346 supplies the honest-services theory when the alleged deprivation involves intangible services rather than money or property.
For a corporate defendant or executive, the government may focus on:
- A fiduciary or comparable duty of loyalty, trust, and confidence
- A scheme to deprive the principal of honest services
- A bribe or kickback supplied by a third party
- Knowing participation and specific intent to defraud
- Material misrepresentations or concealment where required by the governing theory
- Use of the mail or interstate wires to execute or further the scheme
The government cannot substitute generalized dishonesty for these requirements.
Does an Undisclosed Conflict of Interest Constitute Honest Services Fraud?
Standing alone, no. This is one of the most important limits Skilling imposed.
The Supreme Court rejected an interpretation of § 1346 that would criminalize undisclosed self-dealing without the bribery-or-kickback component.
An indictment therefore cannot rely solely on an executive's secret benefit from a transaction and alleged breach of fiduciary duty. The government must establish a qualifying bribery or kickback scheme.
Prosecutors may use terms such as “improper payments,” “undisclosed compensation,” “personal benefit,” or “conflict of interest.”
Those descriptions do not answer the statutory question. The analysis must identify who provided the thing of value, what was expected in return, what fiduciary relationship was affected, and how the arrangement furthered the scheme.
How Do Prosecutors Characterize Corporate Kickbacks?
Corporate kickback allegations can arise in procurement, healthcare, investment, consulting, real estate, construction, and other industries.
The government may allege that an employee or executive directed business to a third party in exchange for:
- Payments,
- Commissions,
- Gifts,
- Contracts,
- Employment opportunities, or
- Other benefits.
The legal question is not simply whether money changed hands. A legitimate commission, referral fee, bonus, consulting payment, or business expense does not become a criminal kickback merely because prosecutors question it.
The prosecution must establish a corrupt arrangement and the required intent.
In the Ninth Circuit, United States v. Solakyan is an important example of private-sector honest services fraud. The Court upheld convictions arising from a medical-imaging scheme in which physicians received bribes and kickbacks connected to referrals.
The Court held that § 1346 reaches private-sector bribery and kickback schemes and that tangible harm is not an additional element.
That decision also demonstrates the importance of identifying the fiduciary relationship and the third-party benefit. The prosecution must establish the relationship in which honest services were owed and the corrupt payment or benefit that allegedly distorted that relationship.
Related Federal Laws
Understanding related federal statutes is critical because prosecutors frequently pair honest services fraud charges with underlying fraud, corruption, and financial crimes to build broader, multi-count indictments against corporate executives.
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Mail Fraud (18 U.S.C. § 1341): Prohibits using the U.S. Postal Service or any private interstate carrier to execute or further a fraudulent scheme.
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Wire Fraud (18 U.S.C. § 1343): Criminalizes using interstate wire, radio, or television communications—including emails, phone calls, and electronic funds transfers—to carry out a scheme to defraud.
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Federal Program Bribery (18 U.S.C. § 666): Targets bribery and kickbacks involving agents of state, local, or tribal governments and organizations that receive significant federal funds.
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Travel Act (18 U.S.C. § 1952): Makes it a federal crime to travel in interstate commerce or use interstate facilities to promote, manage, or carry on unlawful activity, including commercial bribery under state law.
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Money Laundering (18 U.S.C. § 1956 & § 1957): Criminalizes conducting financial transactions involving the proceeds of unlawful activity to conceal their source or moving large sums of criminally derived property through financial institutions.
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Racketeer Influenced and Corrupt Organizations Act (RICO) (18 U.S.C. § 1961 et seq.): Allows prosecutors to target ongoing criminal enterprises by treating predicate acts, such as mail and wire fraud, as part of a broader pattern of racketeering activity.
Hypothetical Case Study: Challenging an Executive Kickback Theory Built Around Legitimate Corporate Payments
A chief operating officer of a national manufacturing company is indicted for honest services wire fraud after federal prosecutors allege that he directed approximately $18 million in contracts to a logistics company.
The indictment alleges that the COO secretly received $420,000 through a consulting company owned by a longtime business associate.
Prosecutors point to emails discussing the consulting arrangement, payments made after major contracts were awarded, and the COO's failure to disclose the relationship to the company's board.
The payments are real, the executive had vendor-selection authority, and the company paid the logistics company more than some competitors proposed. Prosecutors characterize the consulting payments as kickbacks and the nondisclosure as evidence of corrupt intent.
The consulting company had performed documented market research for several divisions before the company awarded the logistics contracts.
The COO's employment agreement also permitted outside consulting work, subject to disclosure. Payment records show that the consulting company received fixed monthly fees under a written agreement rather than a percentage of contracts awarded.
A former procurement employee believes the COO favored the logistics company but cannot identify an agreement exchanging contracts for payments.
Board members testify that they knew of the relationship and approved the logistics strategy. Higher prices can be explained by the logistics company's ability to provide services in markets where lower bidders could not meet delivery requirements.
Challenging the Government's Case
Our white-collar defense team at Eisner Gorin LLP would challenge the government's effort to convert an undisclosed corporate relationship into a § 1346 offense without proof of a qualifying bribe or kickback.
Our attorneys stress that payments and a fiduciary relationship alone do not establish the corrupt exchange required by Skilling. The evidence must support the government's specific theory, including the defendant's intent to participate in the alleged scheme.
After reviewing the financial records, consulting agreement, procurement evidence, and witness testimony, our attorneys established that the government could not identify an agreement tying the consulting payments to the award of contracts. The evidence instead showed that:
- The consulting company performed documented services,
- Received fixed payments, and
- Had been approved under the company's existing policies.
The government ultimately dismissed the honest services fraud charges rather than proceed without evidence of the corrupt exchange required under Skilling.
Frequently Asked Questions (FAQs)
Reviewing these frequently asked questions helps corporate executives, officers, and legal advisors quickly understand the legal boundaries, defense strategies, and evidentiary requirements surrounding federal honest services fraud allegations.
What is honest services fraud under 18 U.S.C. § 1346?
It is a federal statutory provision that defines a "scheme or artifice to defraud" to include depriving another person or entity of the intangible right of honest services, and it is primarily applied alongside federal mail and wire fraud statutes.
Does an undisclosed conflict of interest automatically constitute honest services fraud?
No, following the Supreme Court's ruling in Skilling v. United States, an undisclosed conflict of interest or breach of corporate policy alone is not a federal crime without evidence of a qualifying bribe or kickback scheme.
How did the Supreme Court limit honest services fraud in Skilling v. United States?
The Supreme Court narrowed § 1346 strictly to schemes involving bribery or kickbacks, rejecting prosecution theories based solely on self-dealing, disloyalty, or failure to disclose personal financial interests.
How does Percoco v. United States affect who can be charged under § 1346?
Percoco established that informal influence or close ties to decision-makers do not create a fiduciary duty of honest services, protecting private-sector consultants, lobbyists, and advisors from § 1346 charges without a formal fiduciary or agency status.
What must federal prosecutors prove to secure a conviction for honest services fraud?
Prosecutors must establish a recognized fiduciary duty, a scheme involving a bribe or kickback from a third party, specific intent to defraud, and the use of interstate mail or wire communications to execute the scheme.
How can a corporate executive defend against honest services kickback allegations?
A defense team can challenge the prosecution by showing that alleged kickbacks were legitimate corporate payments for documented services, that no corrupt exchange occurred, or that the board approved the transactions under existing corporate policies.
The federal criminal defense lawyers at Eisner Gorin LLP are available to assist you. To schedule a consultation, please call (818) 781-1570 or complete the contact form. Our law firm is based in Los Angeles.
