BAE ... Inside the SFO

Several prior posts (here) have been devoted to the BAE case, both the U.K. - Serious Fraud Office component (and challenges to the plea agreement) and the DOJ's bribery, yet no bribery allegations and charges.

This post returns to the SFO component of the BAE matter.

Widespread allegations that BAE was involved in bribery and corruption on a grand and global scale are detailed in Black Money - a PBS Frontline documentary from April 2009 (here).

In 2004 the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward.

However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its investigation of BAE, at least as to non-Saudi issues, including whether the company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case.

The SFO Director stated in late January 2010 that “BAE is clearly a very important case” and that “it is very important that we get it right.”

In late January 2010, the SFO issued a release (here) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc."

Then, in early February 2010, the SFO announced (here) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicated a few days earlier in connection with bribe payments in “certain Eastern and Central European government” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.” The SFO release notes that BAE will pay a £30 million penalty "comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania."

Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also notes that "[t]his decision brings to an end the SFO's investigations into BAE's defense contracts."

In the face of widespread criticism, the SFO defended its handling of the BAE matter and noted that "the public interest lay in drawing a line under the whole investigation."

Documents filed in connection with the SFO-BAE plea agreement challenge shed additional light on the SFO's abrupt end to the BAE investigation.

In the SFO's "Grounds for Contesting the Claim" (here) the SFO details the history of its investigation.

Highlights include:

"From the beginning of March 2009, the SFO had been involved in plea discussions with BAE. The position of the SFO was that it would be satisfied with pleas to charges in respect to some, but not necessarily all, the strands of its investigation."

By September 30, 2009 ("the SFO imposed deadline") no agreement had been reached and "discussions in England were discontinued." "By that time, it was known that plea discussions between the DOJ and BAE in the U.S. had also failed to produce any agreement."

"In late January - early February 2010 there was a material change in circumstances. First on January 29, the DOJ contacted the SFO and indicated that a plea agreement with BAE was imminent. The agreement involved BAE entering pleas of guilty with respect of offenses in connection to the investigations concerning Eastern Europe and Saudi Arabia and a payment of $400 million."

The SFO "received advice from counsel that the Eastern Europe aspect of the proposed U.S. agreement was highly likely to have the effect of preventing prosecution for the offenses under consideration in respect of the Eastern European investigation in England, on the basis of the application of the principle of double jeopardy. This represented an additional, potentially serious difficulty in respect of the evidential test. Additionally, the [SFO] re-assessed the effect of the agreement on public interest considerations. He concluded that it was not in the public interest to pursue BAE in England in respect of matters to which the company was to plead guilty in the U.S."

[Note - BAE pleaded guilty in the U.S. to "conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its Foreign Corrupt Practices Act compliance program, and to violate the Arms Export Control Act, and International Traffic in Arms Regulations." It is difficult to see how this plea would raise double jeopardy issues for a corruption / bribery offense.]

"On February 4, 2010 [...] BAE indicated that it was prepared to plead guilty [...] in respect of the Tanzanian transaction, and pay a sum of £30 million. The [SFO] concluded than an agreement on such a basis was in the public interest."

"...a serious evidential difficulty had been identified in respect of potential corruption charges, namely the difficulty of proving the involvement of a 'controlling mind' in the offending. In the absence of a plea agreement, this raised the prospect that the [SFO], having gained no admission of criminal liability or any financial payment, would (a) nevertheless be forced to conclude that there was no realistic prospect of conviction in respect of corruption offenses or (b) end up prosecuting a weak and vulnerable case."

[Note - the above assertion would seem to differ significantly from the assertions of former SFO prosecutors Robert Wardle and Helen Garlick made in the above referenced Black Money documentary]

"By virtue of Article 45 of the European Union Public Sector Procurement Directive 2004, a conviction for an offense of corruption would have had the effect of debarring BAE for tendering for public contracts in the EU. This could have been a disproportionate outcome, having regard to the fact that the relevant conduct took place many years ago and the company had taken substantial steps to transform itself as an organization since then."

"The plea agreements in England and the US were entered into on February 5, 2010 and brought to an end the investigation of BAE."

Thus, over the course of six days, the multi-year investigation of BAE was swiftly resolved and, as in the U.S., a driving force behind the ultimate charges was to avoid application of the European Union debarment provisions.

So why did the SFO abruptly drop the criminal charges against Count Mensdorff?

The short answer is that BAE would not agree to the SFO plea (as watered down as it was) without the SFO agreeing to drop the charges against Count Mensdorff.

The SFO notes that a "particular problem arose in Count Mensdorff's case which led to him being charged sooner than had initially evisaged."

"Count Mendsdorff is an Austrian citizen. As of January 2010, he was in the United Kingdom on police bail. In discussions with the SFO, the Austrian authorities made clear that, as a matter of Austrian law, if he returned to Austria there would be no jurisdiction to extradite Count Mensdorff in respect of the offense which the SFO was considering charging, namely conspiracy to corrupt."

The "SFO concluded that, in the absence of effective extradition arrangements, there was a strong likelihood that, if not charged on January 29th, Count Mensdorff would go to Austria and not re-enter the jurisdiction to face criminal proceedings."

The SFO "decided that the appropriate course of action was to charge Count Mensdorff on January 29th, ensuring that he then became subject to court bail conditions sufficient to ensure he remained within, or came back to, the jurisdiction. Count Mensdorff was duly charged."

"As it transpired, on February 4th, during plea discussions, BAE requested an undertaking from the SFO that in any future prosecutions (to which BAE was not a party) the prosecution could not allege that the company was guilty of corruption. The [SFO] concluded that without such an undertaking, a plea agreement could not be achieved. The [SFO] received advice from counsel to the effect that in a prosecution of Count Mensdorff, or any of the individuals under investigation in connection with the Eastern European transactions, it would not be possible to proceed without making an allegation of corruption against BAE. In short, the SFO concluded that Count Mensdorff could not be prosecuted consistent with the terms of the undertaking sought. In the circumstances, the [SFO] took the view that it was in the public interest to give the undertaking to BAE, thereby enabling the plea agreement to be achieved, and, consequently, to withdraw the charge against Count Mensdroff."

In a recent April 20th Financial Times article, the SFO said "we do not accept that we acted hastily - these were considered negotiations and were not rushed decisions."

The same article noted that because the SFO dropped the charges against Count Mensdroff, he is able to "claim his legal costs from taxpayer funds." According to the article, Mensdorff, who assets include a castle, has made such a claim.

Kyrgyzstan, Thailand, Tobacco, and Piranha Fishing

The SEC announced today (see here) an FCPA enforcement action involving "multiple payments of bribes to foreign officials in Kyrgyzstan and Thailand by senior executives and employees of Dimon, Inc. ("Dimon") and Standard Commercial Corporation ("Standard"), predecessor companies of Alliance One International, Inc. ("Alliance One"), during the period from 1996 through 2004 in violation of the Foreign Corrupt Practices Act..."

In 2005, Dimon and Standard merged to form Alliance One (see here) and its stock is listed on the New York Stock Exchange.

Kyrgyzstan

According to the SEC complaint (see here), "from 1996 through 2004, Dimon International Kyrgyzstan ("DIK"), a wholly-owned subsidiary of Dimon, paid more than $3 million in bribes to Kyrgyzstan government officials in order to purchase Kyrgyz tobacco for resale to Dimon's largest customers."

The complaint alleges that "these payments were made to various government officials, including officials of the JSC GAK Kyrgyztamekisi ("Tamekisi") [an entity established by the Kyrgyz government that had authority to issue and control licenses for the fermentation and export of tobacco] and local public official ("Akims")" and "DIK also made improper payments to Kyrgyzstan tax officials."

According to the compliant: (i) defendant Bobby Elkin Jr., Dimon's country manager, "authorized, directed, and made these bribes in Kyrgyzstan through a DIK bank account under his name (the "Special Account);" (ii) defendant Baxter Myers, Dimon's Regional Financial Director, "authorized all fund transfers from a Dimon subsidiary's bank account to the Special Account;" and (iii) defendant Thomas Reynolds, Dimon's International Controller, "formalized the accounting methodology used to record the payments made from the Special Account for purposes of internal reporting by Dimon."

The complaint alleges that in September 1996 "the Kyrgyzstan government imposed a requirement that all exporters of fermented tobacco have an export license," and that "Tamekisi acted as the issuing authorize and controlled the issuance of export licenses, thus effectively controlling all tobacco purchases in Kyrgyzstan."

According to the complaint, Elkin "periodically delivered bags filled with $100 bills to a high-ranking Tamekisi official" and that from 1996 to 2004, Elkin, on behalf of Dimon, "paid more than $2.6 million to a high-ranking Tamekisi official..." The complaint also alleges that Elkin "also paid bribes to local government officials in Kyrgyzstan known as the Akims, who controlled the tobacco regions." The complaint says that "DIK needed the support and consent from each local Akim in order to continue to purchase tobacco from local growers or agricultural collectives" and that "as governors, Akims had the power and influence to prevent the purchase of tobacco in the region, even if a company had an export license." The complaint also states that "Akims could also send the police to block the entrance to buying stations or install a lock box to prevent the transfer of tobacco." According to the complaint, "Elkin authorized and paid more than $260,000 to the Akims..."

Finally (at least as to Kyrgyzstan), the complaint details how DIK was "frequently subjected to audits by Kyrgyz tax officials" and that "during one audit, the tax officials determined that DIK failed to submit two reports to the tax office." Accordingly, the complaint states that the tax officials imposed an approximate $172,000 fine against DIK and the "tax authorities also threatened to seize DIK's bank accounts and tobacco inventory for tax violations." However, according to the complaint, "the tax authorities later offered to reduce the tax penalties levied against DIK in exchange for a cash payment." The complaint then alleges that Elkin "made a cash payment to the tax authorities" and that from 1996 through 2004 Elkin, on behalf of Dimon, "paid approximately $82,850 to Kyrgyz tax officials."

According to the complaint, although the Special Account used to make the above-described payments "was funded by a Dimon subsidiary in the United Kingdom, the financial reporting on the Special Account by that subsidiary, and all other consolidated subsidiaries, went directly to Dimon's corporate headquarters in the United States..."

Thailand

The complaint also alleges that "from 2000 to 2003, Dimon paid bribes of approximately $542,590 to government officials of the Thailand Tobacco Monopoly ("TPM") in exchange for obtaining approximately $9.4 million in sales contracts." According to the complaint, defendant Tommy Williams, Dimon's Senior Vice President of Sales, "directed the sales of tobacco from Brazil and Malawi to the TTM through Dimon's agent in Thailand" and that he "authorized the payment of bribes to TTM officials and characterized the payments as commissions paid to Dimon's agent in Thailand."

The complaint alleges that a "portion of Dimon's selling price to the TTM" included "kickbacks paid as commissions through Dimon's agent to certain members of the TTM in exchange for the sales contracts." The complaint alleges that these bribes to the TTM were authorized "by Dimon's U.S. and Brazilian personnel," in particular Williams.

The complaint also alleges that "Williams also knew about a purported business trip to Brazil that actually was a sightseeing trip arranged by Dimon and others for TTM officials." According to the complaint, the "sightseeing trip occurred in May 2000 and included, among other things, trekking in the Amazon jungle, piranha fishing, and visits to Argentina and various Brazilian waterfalls." The complaint also alleges that in 2002 Williams arranged a trip for a TTM delegation to travel from Bangkok to Brazil "purportedly to look at tobacco blends and samples." According to the complaint, "the return portion of the TTM delegation's trip included a one-week stay in Madrid and Rome that was unrelated to the inspection and purchase of tobacco by the TTM."

Based on the above conduct, the SEC charged Elkin, Myers, Reynolds, and Williams for violating the SEC's antibribery provisions and for aiding and abetting violations of the FCPA's internal controls and books and records provisions.

According to the SEC release, "without admitting or denying the allegations" in the complaint, Elkin, Myers, Reynolds, and Williams consented to the entry of final judgments permanently enjoining violations of the FCPA. Myers and Reynolds also agreed to pay a civil monetary penalty of $40,000 each.

The SEC release notes that the settlement with Elkin "takes into account his cooperation" with the SEC's investigation and "acknowledges of the assistance" of the DOJ and the FBI.

*****

This is the second SEC FCPA enforcement action of the year which seems, according to the facts, to be based, in whole or in part, on extortion or something close to it. For a previous post on the NATCO enforcement action (see here). In addition, earlier this week I had a post "Facilitating Payments or Bribes" (see here). The Kyrgyzstan facts would seem relevant to that issue.

The FCPA, as part of the securities laws, has a statute of limitations of five years. The conduct at issue occured between 1996 and 2004. Perhaps there was a tolling agreement in place or perhaps this is another example where it is difficult to square black-letter law concepts with an FCPA enforcement action.

Daimler Under Investigation in Russia

Earlier this month, Damiler AG and certain of its subsidiaries resolved DOJ and SEC FCPA enforcement actions (see here for prior posts).

While Daimler escaped FCPA antibribery charges and did not have to plead guilty to anything (it was offered a deferred prosecution agreement), DaimlerChrysler Automotive Russia SAO ("DCAR")(now known as Mercedes-Benz Russia SAO) pleaded guilty to a criminal information charging conspiracy and FCPA antibribery violations.

The charged conduct focused on Daimler's and DCAR's relationships with: "the Russian Ministry of Internal Affairs ("MVD") a department and agency of the Russian government principally responsible for police, militia, immigration and other functions" including supervising the "Russian traffic police; "the Special Purpose Garage ("SPG") an 'instrumenality' of the Russian government"; "Machinoimport a Russian government-owned and controlled purchasing agent for the City of Moscow," an "instrumentality of the Russian government"; and "Dorinvest a Russian government-owned and controlled purchasing agent for the City of Moscow," an "instrumentality of the Russian government."

It used to be that companies could largely put the issues to bed after resolving DOJ and/or SEC enforcement actions. However, "tag-a-long" FCPA-like enforcement actions or inquiries in other countries are becoming a new norm.

Case in point - Daimler.

And we're not talking Germany here.

We're talking Russia.

Earlier this month, The Moscow Times (here) noted that the Daimler case, because of the Russia conduct at issue, presented a test for President Dmitry Medvedev to see "just how determined he is to fight corruption."

Yesterday, The Moscow Times (here) reported that Russia's Interior Ministry opened an internal investigation "after a personal order" from President Medvedev. According to the article, Russia's Prosecutor General has "sent a request to the U.S. Justice Department for information on bribes given by carmaker Daimler." For additional information (see here).

Daimler is not the only company under scrutiny in Russia.

As previously posted (here) H-P's Moscow headquarters were recently raided by Russian authorities in connection with a bribery investigation.

Hiring a "Foreign Official"

Hiring a "foreign official" can be risky. Particularly when the "foreign official" is recommended by a foreign government. These are certain FCPA "red flags."

However, "red flags" don't always turn out red and in this case the "red flags" turn a pleasant shade of pink because the "foreign official" recommended by a foreign government is being hired in connection with a U.S. government contract.

That at least appears to be one take-away from FCPA Opinion Procedure Release No. 10-01 (see here).

According to the Release, a U.S. company (the "Requestor") "entered into a contract with an agency of the U.S. government to perform work in a foreign country." "Pursuant to that contract, the Requestor is obligated to hire and compensate individuals in connection with that work" and "at least one individual to be hired, and perhaps more, is a foreign official within the meaning of the FCPA."

Among other things, the Requestor represented that: (i) the foreign country selected the "foreign official" to be hired based upon the individual's qualifications for the position; (ii) the U.S. government directed the Requestor to hire the "foreign official"; (iii) the "foreign official" will be compensated $5,000 per month to provide services as directed by the foreign country; (iv) the foreign official currently serves as a paid officer for an agency of the foreign country, but the individual's position does not relate to the work at issue and the services that the individual will perform are separate and apart from those performed by the individual as a "foreign official"; and (v) the "foreign official" will not perform any services on behalf of, or make any decision affecting the Requestor including any procurement or contracting decisions.

Based on this information, the DOJ stated that it "does not presently intend to take any enforcement action with respect to the proposed service contract described in this request."

According to the DOJ, "[w]hile the Individual is a “foreign official” within the meaning of the FCPA, and will receive compensation as Facility Director, through a subcontractor, from the Requestor, the Individual is being hired pursuant to an agreement between the U.S. Government Agency and the Foreign Country, and will not be in a position to influence any act or decision affecting the Requestor."

The DOJ further stated:

"The Requestor is contractually bound to hire and compensate the Individual as directed by the U.S. Government Agency. The Requestor did not play any role in selecting the Individual, who was appointed by the Foreign Country based upon the Individual’s qualifications. Moreover, the Individual’s position is separate and apart from the Individual’s position as a Foreign Officer. In neither position will the Individual perform any services on behalf of, or receive any direction from, the Requestor. Accordingly, the Individual will have no decision-making authority over matters affecting the Requestor, including procurement and contracting decisions."

To read more about the detailed requirements of the Foreign Corrupt Practices Act Opinion Procedure process (see here and here).

For additional FCPA Opinion Procedure Releases on the topic of hiring a "foreign official" or otherwise doing business with a "foreign official" see 80-4 (here), 82-03 (here), 86-01 (here), 93-01 (here), 93-02 (here), 94-01 (here), 96-02 (here), 00-01 (here), 01-02 (here), 08-01 (here)

Facilitating Payments or Bribes?

In Greece, it's the "little envelopes" that affect everyone from "hospital patients to fishmongers." (see here for the Wall Street Journal story).

In India, it's needing to "string up some wire and get licenses from the government" to start a "tiny business delivering telephone and Internet service" but "getting those things done without hassles require[s] a bribe." (see here for the story from National Public Radio).

In July 2009, Nature's Sunshine Products found out that it's about payments to Brazilian customs agents to import certain unregistered products into Brazil (see here).

Also in July 2009, Helmerich & Payne found out that it's about payments to various officials and representatives of the Argentine and Venezuelan customs services in connection with importation and exportation of goods and equipment (see here).

Numerous other examples abound.

Facilitating payments or bribes?

The FCPA has a specific exception for "facilitating or expediting payment[s] to a foreign official ... the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official."

Where a facilitating payment ends and where a payment to "obtain or retain business" begins is a difficult question.

U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) is commonly viewed as answering that question.

However, Kay merely holds that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, directly or indirectly, in obtaining or retaining business and that payments to a “foreign official” to reduce custom and tax liabilities can, under appropriate circumstances, fall within the statute. The Kay court empathically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The key question, according to Kay, is whether the payments at issue were intended to lower the company's costs of doing business enough to assist the company in obtaining or retaining business. The Kay court recognized that “there are bound to be circumstances” in which such attenuated payments merely increase the profitability of an existing profitable company and thus, presumably, do not assist the payer in obtaining or retaining business. In fact, the court specifically 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 or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

Post-Kay none of the above seems to matter much.

Because the Nature's Sunshine Products and Helmerich & Payne enforcement actions (as well as numerous other similar enforcement actions) were not challenged, it remains an open question whether the payments at issue in these cases, if subjected to judicial scrutiny, would satisfy the “obtain or retain business” element as interpreted in Kay or would be excepted as facilitating payments.

Many of these payments would appear attenuated to any specific cause-and-effect business nexus or otherwise would appear to have merely increased the profitability of an existing profitable business and, per the Kay holding, would presumably not satisfy this key FCPA antibribery element.

While some find facilitating payments to be a corrupt payment under a different name, the fact remains that the FCPA passed by Congress and signed by the President contains an express exception for facilitating payments.

It is this statute that the enforcement agencies are obligated to enforce and this express exception would certainly appear relevant to the above-described actions. Because these enforcement actions were not challenged, this obviously relevant defense was not explored in these cases and these post-Kay cases stand as de facto FCPA case law, notwithstanding the fact that the alleged conduct in these cases may have been excused because of the FCPA’s facilitating payment exception.

It's a complex world.

Congress recognized that when it passed the FCPA, including the facilitating payment exception.

The Kay court recognized that when concluding that not all such attenuated payments violate the FCPA.

Bourke's Appeal

As previously noted (here), the Frederic Bourke case is arguably the most complex and convoluted case in the history of the FCPA.

The trial court portion of the case ended in November 2009 when Judge Scheindin sentenced Bourke to 366 days for, among other things, conspiracy to violate the FCPA. At sentencing Judge Scheindin stated - “After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”

Bourke has appealed his conviction to the Second Circuit.

An FCPA trial like Bourke's is rare. An FCPA appeal is even more rare. An FCPA appeal to the influential Second Circuit is even more rare.

Thus, with good reason, this case is of great interest to those who follow the FCPA in that it is hoped to shed some light on the FCPA's knowledge element, and perhaps other issues as well.

First step in the appeal is Bourke's brief (see here) filed April 1st. The brief principally focuses on the FCPA's knowledge element, including the trial court's conscious avoidance jury instruction (a portion of the brief is redacted and a portion deals with Bourke's false statement conviction).

This post summarizes the FCPA related issues in Bourke's brief.

*****

According to the brief, the "trial focused on two related issues: whether Bourke knew that Kozeny was bribing the Azeris, and whether he willfully and corruptly joined the bribery conspiracy."

The brief argues that the district court "committed a series of errors that crippled Bourke's mens rea defense."

The brief then discusses three such errors.

"First, the court instructed on conscious avoidance, despite the absence of evidence that Bourke deliberately avoided knowledge of Kozeny's bribes." According to the brief, this instruction was error "because there was no evidence that Bourke deliberately avoided learning about Kozeny's bribery." The brief states that the conscious avoidance instruction "was particularly damaging because the government presented evidence and argued that Bourke failed to exercise adequate due diligence, thus exacerbating the risk inherent in the conscious avoidance instruction that the jury would convict for negligence or recklessness." The brief cites Second Circuit case law which emphasizes that "essential to the concept of conscious avoidance is the requirement that the defendant be shown to have decided not to learn the key fact, not merely to have failed to learn it through negligence" and argues that "the trial record contains no evidence that Bourke decided not to learn about Kozeny's bribery."

Bourke also argues that the court erred in admitting testimony about the due diligence performed by Texas Pacific Group ("TPG"), an investment fund that did not make the same investment as Bourke, because its lawyers advised of the FCPA risk. The brief states, "[b]ecause Bourke knew nothing about their work, their testimony was irrelevant to his state of mind" particularly since the results were never shared or communicated with Bourke. According to the brief, "the government offered the testimony [...] solely as a contrast with the comparatively skimpy inquiry that Bourke and his lawyers performed." "That testimony" according to the brief, "increased the risk, created by the conscious avoidance instruction and heightened by the government's closing, that the jury would convict Bourke based on his negligence or recklessness -- what he should have known, rather than what he actually knew." The brief argues that the "government's tactic had its intended effect on the jury" and it cites the foreman of the of jury telling the press, "It was Kozeny, it was Azerbaijan, it was a foreign country .... We thought he knew and definitely could have known. He's an investor. It's his job to know."

The brief further argues that, having admitted the above testimony relating to TPG, "the district court should at least have permitted Bourke to present the contrasting testimony" of the head of investments for Columbia University that would have established that "Columbia invested $15 million with Kozeny in Azeri privatization after due diligence comparable to Bourke's." According to the brief, this excluded testimony "would have rebutted the government's claim that Bourke's lack of due diligence compared to TPG established his culpability." The brief argues that "once the district court permitted the government to present TPG's due diligence as a benchmark for measuring Bourke's inquiry, fairness demanded that Bourke be allowed to present the contrasting picture of Columbia's due diligence, which resembled his own."

Second, the brief states - "the court refused to instruct that conviction for conspiracy requires the same mens rea as the underlying FCPA offense -- meaning (among other things) a bad purpose to disobey or disregard the law." According to the brief, "the district court compounded its error in giving the conscious avoidance instruction by rejecting Bourke's requested instruction [as to the conspiracy charge] that the government had to prove that he acted corruptly and willfully." The brief argues that "when the district court turned to the mens rea required for the conspiracy offense, rather than for a substantive FCPA offense, it omitted the requirement that the defendant act corruptly" and that this "watering-down of the mens rea requirement for the conspiracy charged [...] undermined Bourke's defense, which rested on his state of mind."

"Third, the court rejected Bourke's proposed good faith instructions, even though Bourke produced ample evidence to warrant the instructions and no other instruction covered the point." The brief argues that Bourke's proposed instruction "accurately reflected the principle that a defendant's good faith belief that he acted lawfully negates the mens rea for specific intent offenses." While the brief concedes that Bourke's efforts to investigate the investment "were not as extensive" as others, his efforts "suffice for a good faith instruction." Because the case turned on Bourke's state of mind, the brief states "there is no doubt that the good faith defense, if accepted by the jury, would have produced an acquittal."

The brief argues that "any one of the errors concerning Bourke's knowledge of Kozeny's bribes and his specific criminal intent, standing alone, warrants reversal" and if any one error is harmless in isolation, then their "cumulative effect profoundly damaged Bourke's defense."

Next up ... the DOJ which has until July 29th to file its response brief.

FCPA Goes Main Street

Growing up in a village of 1,054 in central Wisconsin, I was not exposed to oil and gas companies, defense contractors, or other companies that tend to have a high FCPA risk profile.

Yet one person I did have contact with on a near daily basis, because she lived around the corner, was the "Avon Lady."

Thus, a bit of my youthful innocence was taken away upon learning last week that Avon Products Inc. (here) of all companies "suspended four executives amid an internal investigation into alleged bribery that began with the company's China operation" and "now involves a dozen or more countries" according to the Wall Street Journal. According to the WSJ, the executives suspended include the president, chief financial officer and top government affairs executive of Avon's China unit as well as a senior executive in New York who was Avon's head of internal audit until the middle of last year.

According to the WSJ, Avon's chief exectuive, Andrea Jung is a "corporate celebrity" in China and she has met frequently with "senior government officials."

The conduct at issue involves alleged "purchase of trips to France, New York, Canada, and Hawaii for Chinese government officials with ties to Avon's business." However, according to the WSJ, "the scope of the investigation has since widened to regions including Latin America, where the company garners the bulk of its sales and profits."

According to the WSJ, what sparked the investigation was "an employee who wrote a letter to Ms. Jung alleging improper spending related to travel with Chinese government officials."

Here is what the company had to say in its 2009 Annual Report (filed in March 2010):

"As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the FCPA and related U.S. and foreign laws in China and additional countries. The internal investigation and compliance reviews, which are being conducted under the oversight of our Audit Committee, began in June 2008. We voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation and compliance reviews and we are, as we have done from the beginning of the internal investigation, continuing to cooperate with both agencies and have signed tolling agreements with them.

The internal investigation and compliance reviews, which started in China, are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly,
with foreign governments and their employees. The internal investigation and compliance reviews of these matters are ongoing. At this point we are unable to predict the duration, scope or results of the internal investigation and compliance reviews."

Based on information that is publicly available, this potential FCPA enforcement action fits the mold of Lucent Technologies and UTStarcom (here), in that it appears focused on excessive travel and entertainment benefits to Chinese "foreign officials."

However, looking to the prior "on-point" Lucent and UTStarcom enforcement actions may not provide much useful guidance. But you probably already knew that, this is FCPA enforcement after all, where predictabilty and transparency are not distinguishing features.

If ever two FCPA enforcement actions were carbon-copies of each other, it would be the December 2007 enforcement action against Lucent and the December 2009 enforcement action against UTStarcom ("UTS") Both enforcement actions involved telecommunications companies, both enforcement actions principally concerned business conduct in China, both enforcement actions involved payment of excessive travel and entertainment expenses, and both enforcement actions were resolved through a DOJ NPA and an SEC settled civil complaint and consent decree. Despite these similarities the end results were significantly different.

UTS settled its matter by agreeing to pay $3 million in total fines and penalties for FCPA antibribery, books and records and internal control violations. However, Lucent settled its matter by agreeing to pay $2.5 million in total fines and penalties for merely FCPA books and records and internal controls violations – in other words no antibribery violations. This despite the fact that, per the government’s statement of facts and allegations, Lucent sponsored more trips than UTS (315 compared to 225) and spent more money on the problematic trips than UTS ($10 million compared to $7 million) to influence more foreign officials in the hopes of winning billion dollar and multi-million contracts. Also relevant is that UTS was charged with antibribery violations and paid a higher combined fine/penalty amount compared to Lucent (based on less severe allegations) despite the fact that UTS, per the DOJ’s release, voluntarily disclosed the conduct at issue – a factor noticeably absent in the DOJ’s Lucent release.

Quiz Time Answer

In a prior post (here), I noted that in 2009 there were three FCPA trials - Frederic Bourke, William Jefferson, and Gerald and Patricia Green.

I then posted the question - what is the common thread in these three FCPA enforcement actions - a fact which speaks to the great difficulty individual FCPA defendants generally have in mounting a legal defense?

Before the answer, the background.

Individual FCPA defendants tend to work for companies. Under respondeat superior theories of liability, the company is going to have a very difficult time "distancing" itself from its employees conduct.

Thus, all corporate FCPA enforcement actions tend to be resolved through a non-prosecution agreement, a deferred prosecution agreement, or a plea. Entering into one of these resolution vehicles is often easier, more cost efficient, and more certain than actually mounting a legal defense based on the FCPA's statutory elements. Further, because these resolution vehicles are subject to little or no judicial scrutiny and are entered into the context of the DOJ possessing certain "carrots" and "sticks" they do not necessarily reflect the triumph of one party's legal position over the other.

While these resolution vehicles may indeed avert "another Arthur Anderson" here is the problem.

A key feature of each resolution vehicle is a statement along the following lines:

"[company] admits, accepts, and acknowledges responsibility for the conduct set forth in [the statement of facts] and agrees not to make any public statement contradicting [the statement of facts]" (see UTStarcom NPA here);

"[company] admits, accepts and acknowledges that it is responsible for the acts of its officers, employees and agents as set forth in the Statement of Facts [...] and that the facts described [...] are true and accurate [...] and that should the DOJ initiate prosecution that is deferred by this agreement [company] agrees that it will neither contest the admissibility of, nor contradict, in any such proceeding, the Statement of Facts" (see AGA Medical DPA here); or

"Defendant admits,agrees and stipulates that the factual allegations set forth in the Statement of Facts [...] are true and correct, that it is responsible for the acts of its former officers and employees described in the Statement of Facts, and that the Statement of Facts accurately reflects CCI’s criminal conduct" (see Control Components Inc. Plea Agreement here).

So what can you do if you are the targeted employee of such a company?

More likely than not, your employee has already terminated you (even before all the facts may be known) to demonstrate to the DOJ that it is implementing "prompt remedial actions" - a factor DOJ will consider when making its charging decision (see here).

Then, because of the resolution vehicle your employer entered into to make the DOJ go away, you are stuck with your employer admitting and accepting responsibility for your misconduct, even though there has been no finding that your conduct was even misconduct.

Against this backdrop, it is no surprise that nearly all FCPA individual defendants plead. What choice do they really have?

So that brings us back to the quiz answer.

Perhaps it was pure coincidence, perhaps not, but the three individual FCPA trials all occurred in the context of there being no parallel NPA, DPA or plea with a corporate entity.

Africa Sting - Superseding Indictment, Additional Guilty Plea Expected

During a February hearing, Judge Richard Leon, the judge assigned to the Africa Sting cases, reportedly said he had "zero sense that there was an omnibus grand conspiracy" alleged in the 16 separate indictments charging 22 individuals with, among other things, conspiracy to violate the FCPA and substantive FCPA violations (see here). Judge Leon also reportedly told the DOJ that "what you think is so transparent is not" and he urged the DOJ to "take a step back" given that the DOJ may be so "close to trees that it can't see the forest." (see here).

The DOJ presumably took a step back, went back to the grand jury, and the grand jury returned a superseding indictment (see here) charging, among other things, all 22 individual defendants in one big conspiracy to violate the FCPA.

The superseding indictment, unlike the previously filed superseding indictment against Daniel Alvirez (see here), does not add much in terms of substance, although it does contain greater detail regarding certain e-mails, meetings, and telephone calls relevant to the conduct at issue compared to the original indictments. Further, this allegation in the superseding indictment was not apparent from the original indictments - "the defendants would agree that the products they would supply in connection with Phase One [of the deal] would be consolidated for shipment to Country A."

Judge Leon previously indicated that he would not try 22 individuals together in one case. In response, the DOJ has proposed a "reasonable division" of the defendants into four groups. (See here and here for more).

Also, Christopher Matthews of Main Justice, who attended today's court hearing, is reporting (here) that another defendant, Jonathan Spiller, is in plea agreement talks with the DOJ and is likely to plead guilty. Matthews reports that neither Spiller, nor his counsel, were present at today's hearing.

BHP Billiton Discloses

In a statement today (see here), BHP Billiton, announced:

"Following requests for information from the U.S. Securities and Exchange Commission as a part of an investigation relating primarily to certain terminated minerals exploration projects, the Company has disclosed to relevant authorities evidence that it has uncovered regarding possible violations of applicable anti-corruption laws involving interactions with government officials. Accordingly, the Company is cooperating with the relevant authorities including conducting an internal investigation, which is continuing. It is not possible at this time to predict the scope or duration of the investigation or its likely outcome."

According to the Wall Street Journal:

"The company said it was first contacted about the projects by the SEC last August. It declined to identify the projects other than to say they were small and had ended for "commercial grounds" prior to the SEC's inquiry. It said it has hired Davis Polk & Wardwell LLP to assist with its internal investigation."

BHP Billiton, a resource extraction company based in Australia and the United Kingdom, has ADR shares traded on the New York Stock Exchange.

Two-Tiered Justice?

Certain corporations (acting through employees and agents) in certain industries, most often selling certain things, to certain customers can seemingly violate the FCPA's anti-bribery provisions with very little consequence. In fact, with increasingly frequency, such companies are not even charged with FCPA antibribery violations and/or may not even have to plead guilty to anything. See here for the recent Daimler, here for the recent BAE, and here for the (somewhat) recent Siemens "bribery, yet no bribery" enforcement actions. Sure these companies coughed up hundreds of millions of dollars, in some cases offered up a few subsidiaries to take the fall, but yet were allowed to escape the full legal consequences of their action despite DOJ and SEC allegations that these companies paid hundreds of millions of dollars in bribes to obtain or retain hundreds of millions, and in some cases billions, of dollars of business. The deterrent message in these cases is so strong that the U.S. government continues to do business with these companies - see here for the recent $28 million dollar contract between the U.S. government and a BAE business unit - see here for a general overview of Siemens post-bribery scandal U.S. government contracts.

Charles Paul Edward Jumet of Fluvanna County, Virginia will probably not be getting U.S. government contracts in the near future.

In fact, he probably will not be doing much of anything (other than sitting around) in the near future.

Why?

Because yesterday he was sentenced to approximately 7.25 years in federal prison (see here for the DOJ release).

His crime?

Conspiring to violate the same law that Daimler, BAE, Siemens, its employees, and several other corporations, apparently are immune from violating ... the FCPA's anti-bribery provisions.

Surely, Jumet's conduct was more egregious than that of Daimler, BAE, Siemens, and others?

Well, not exactly.

Not to make light of his crime, but according to the DOJ, the total amount that Jumet and others paid to Panamanian government officials to receive a lighthouse and buoy contract was approximately $200,000 - an amount that pales in comparison to the hundreds of millions of bribe payments in the above referenced enforcement actions.

Even though Jumet's sentence is equal part FCPA and equal part making false statements to federal agents, it is not surprisingly being termed the "longest prison term imposed against an individual for violating the FCPA."

The DOJ release contains the usual get tough language (i.e. "foreign corruption carries with it very serious penalties," "bribery isn't just a cost of doing business overseas [... but] a serious crime that the U.S. government is intent on enforcing."

Serious penalties and intent on enforcing against whom is the question.

The issue is not whether the DOJ was too lenient in the Daimler, BAE, and Siemens case or whether the DOJ was too harsh in the Jumet case.

Rather, the issue is that there appears to be a two-tiered justice system when it comes to FCPA enforcement.

As noted in the DOJ's release, Jumet's co-defendant John Warwick, who also pleaded guilty, is scheduled to be sentenced by the same judge on May 14th. (See here for prior posts on this entire enforcement action).

Jefferson Jurors Speak

In August 2009, former Congressman William Jefferson (D-LA) was found guilty by a federal jury of a variety of charges (solicitation of bribes, honest services wire fraud, money laundering, racketeering, and conspiracy).

The jury found Jefferson not guilty of a substantive FCPA charge, a charge principally based on allegations that Jefferson attempted to bribe Nigerian officials (including the former Nigerian Vice President) to assist himself and others obtain or retain business for a Nigerian telecommunications joint venture. The famous "cash in the freezer" was allegedly part of the bribery scheme. (See here for prior post).

Just what conspiracy charge the jury found Jefferson guilty of was unclear.

The indictment charged conspiracy to solicit bribes, to commit honest services wire fraud, and to violate the FCPA.

Problem is, the jury was instructed, that to convict on this charge, it only needed to find Jefferson guilty on two out of three of those counts.

In announcing the jury verdict, the court did not specify which counts the jury agreed on (see here and here).

A recent article in the New Orleans Times-Picayune (here) contains statements by "three jurors who spoke to The Times-Picayune on the condition they remain anonymous to avoid angering federal Judge T.S. Ellis III, who advised against talking to the news media."

These anonymous juror statements, while clearly not official in any sense, may shed some light on Jefferson's FCPA verdict.

For instance, why didn't the jury convict Jefferson of the substantive FCPA offense?

According to the article, "because two members of the 12-member panel believed that the congressman planned to keep the money for himself rather than to bribe the vice president of Nigeria as alleged by federal prosecutors."

The article states: "Two of the jurors explained the jury's decision to return an innocent verdict on a single charge of violating the Foreign Corrupt Practices Act. Jefferson was the first elected official ever charged with violating the law, which is intended to block payments of bribes by U.S. citizens to foreign officials. According to the interviews, two jurors expressed doubts that Jefferson actually intended to use the $100,000 in cash given to him by Mody to bribe Atiku Abubakar, then the vice president of Nigeria, as he said he would in the taped conversations. 'I think there was some thought he intended to keep the money himself, and that's not the crime he was accused of,' said one juror who added that the remaining 10 jurors eventually went along with the sentiments of their two colleagues."

What about the conspiracy conviction - did that conviction include conspiracy to violate the FCPA?

According to the jurors comments - yes.

The article states: "But jurors decided that his discussion about wanting to keep Abubakar happy was enough to support a charge of conspiracy to violate the Foreign Corrupt Practices Act."

As the article notes: "The question about whether the jury found Jefferson guilty of conspiracy to solicit bribes domestically or internationally is important because, as part of Jefferson's appeal, his attorneys contend that influencing foreign officials isn't part of a congressional member's official duties and therefore can't be prosecuted under federal bribery laws."

In November 2009, Jefferson was sentenced to 13 years in federal prison. He remains free on bail while his appeal is pending.

What Others Are Saying About Mendelsohn's Departure

Earlier this week (see here), it was reported that Mark Mendelsohn (DOJ Deputy Chief - Fraud Section responsible for overseeing FCPA prosecutions) is headed to the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP.

Earlier today, Paul Weiss released this statement. Among other things, the Paul Weiss release says that Mendelsohn "is internationally acknowledged and respected as the architect and key enforcement official of the DOJ’s Foreign Corrupt Practices Act (FCPA) enforcement program." The release notes that Mendelsohn "built the DOJ’s modern FCPA program," "designed and implemented the DOJ’s current FCPA enforcement program," and "was responsible for overseeing all investigations and prosecutions under the FCPA." According to the release, Mendelsohn's "background and experience will be an enormous asset to our clients, which are facing increased scrutiny on FCPA and other cross-border criminal and regulatory issues."

For other coverage of Mendelsohn's departure see below.

The FCPA Blog (here) notes, among other things, that "Mark Mendelsohn transformed the FCPA from a legal backwater to a headline practice" and that during his "term, no corporations mounted a courtroom defense against FCPA charges; instead all made deals with the DOJ to settle their cases." According to the FCPA Blog, "[t]hat gave Mendelsohn extraordinary power -- in the FCPA realm, he and the DOJ became prosecutor, judge, and jury."

Compliance Week (here) notes, among other things, that Mendelsohn "led a revival of FCPA enforcement when the law had lain largely dormant for more than 20 years" and that Mendelsohn "spoke at just about any public event he could find [...] to preach the gospel of FCPA compliance." The Compliance Week post contains unattributed comments calling Mendelsohn “the Moses of FCPA,” and “a veritable Oracle of Delphi … if he spoke at a conference, the high priests of the compliance world would work feverishly to decipher the meaning of his words.”

Main Justice (here) notes that Mendelsohn, "the face of the Justice Department’s aggressive crack down on Foreign Corrupt Practices Act violations" ... "now stands to make millions in the private sector, where the business of offering advice to companies and individuals about complying with anti-bribery laws or dealing with investigations is a hot and burgeoning area of the law."

H-P Under Scrutiny

A few weeks ago the U.S. wrapped up an FCPA enforcement action against a German company for improper conduct in, among other places, Russia (see here).

This week, it is German and Russian authorities investigating a U.S. company for improper conduct in Russia.

It's an ironic world we live in.

Tit for tat or merely a coincidence?

Likely the later.

As widely reported, German and Russian authorities are investigating whether Hewlett-Packard Co. (H-P) executives paid millions of dollars in bribes to win a contract in Russia with ... get this ... the office of the prosecutor general of the Russian Federation - the office that handles criminal prosecutions in Russia, including corruption cases.

According to "investigation-related documents submitted to a German court and reviewed by the Wall Street Journal," the payments, approximately $11 million, were reportedly funneled through a "network of shell companies and accounts in places including Britian, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, Latvia, Lithuania, Delaware and Wyoming."

According to the Wall Street Journal, "H-P learned details of the probe in December when police in Germany and Switzerland presented search warrants detailing allegations against 10 suspects."

Media reports indicate that earlier this week Russian investigators raided H-P's Moscow headquarters in connection with the investigation.

According to the Wall Street Journal, both the DOJ and SEC have joined the probe.

According to the Wall Street Journal, "the investigation was started in 2007 when a tax auditor discovered bank records showing that between 2004 and 2006, the H-P subsidiary paid €22 million into the account of ProSoft Krippner GmbH, a small computer-hardware company in Leipzig" and that "the size of the payment to ProSoft Krippner caught the tax auditor's attention, and that he flagged the transfer to a special prosecution team in Dresden that handles major corruption cases." The Wall Street Journal reports that ProSoft Krippner's Chief Executive, Ralf Krippner, is also a member of the local parliament in the German district of North Saxony."

According to the WSJ, "an H-P spokeswoman said the company had discussions Thursday with the SEC regarding the German probe 'and is fully cooperating with U.S. and German authorities on this matter.'"

A U.K. First

History was made in the U.K. today when Robert John Dougall, a former DePuy executive, pleaded guilty to conspiring with other "to make corrupt payments and/or give other inducements" to "medical professionals within the Greek state health care system" contrary to Section 1 of the UK Prevention of Corruption Act of 1906 (see here).

According to the SFO release (here) and media reports (here and here), Dougall, a former Director of Marketing with responsibility for business development in Greece, blew the whistle on others within the company thus becoming the "first 'co-operating defendant' in a major SFO corruption investigation."

According to the SFO release, DePuy made commission payments to a distributor "to induce or reward surgeons to use" DePuy products.

A SFO spokesperson said that Dougall's seniors "were clearly consenting and driving the [improper] activity" and Dougall reportedly told investigators that he considered the payments "distasteful" but that he didn't feel like he had any other choice.

Dougall was sentenced to 12 months imprisonment. In sentencing Dougall, the judge rejected a joint suggestion by the SFO and the defense that he should be given a suspended sentence.

According to the SFO, Dougall is cooperating and providing substantial assistance in connection with the ongoing investigation. The case commenced following a referral to the SFO by the DOJ in October 2007.

Even though the charge Dougall pleaded guilty to does not contain a "foreign official" or "foreign public official" element, it is clear that the SFO is taking an expansive view as the recipients in this case were Greek surgeons. This is not surprising given that the SFO has stated its intention to model its enforcement on the DOJ's enforcement of the FCPA.

In November 2009, Assistant Attorney General Breuer, speaking before a pharma audience (see here), provided an expansive interpretation of the "foreign official" element in the context of the health care industry.

Dougall may be thinking, "what if I worked for BAE" or what if my name was "Count Alfons Mensdorff-Pouilly"?

Why? (see here)

But then again, the "I was speeding just like the rest of traffic" has never been a good legal defense.

Mendelsohn To Paul Weiss

The Wall Street Journal is reporting (see here) that Mark Mendelsohn (DOJ Deputy Chief - Fraud Section responsible for overseeing FCPA prosecutions) is headed to the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP.

According to a source, Mendelsohn "stands to earn $2.5 million annually." The WSJ notes that this is a significant sum "particularly for a lawyer arriving at firm without a ready list of clients."

The WSJ notes that "Mr. Mendelsohn has overseen a hot field in prosecution in recent years" and that "it has been up to the Justice Department - and specifically to Mr. Mendelsohn - to interpret the law."

The WSJ notes that "corporations are likely to be eager for his inside views on how the Justice Department goes about deciding which cases to investigate and prosecute among the many that it comes across every year."

According to the WSJ, Mendelsohn was courted by several other firms.

Clarifying Comments

When I launched this blog in July 2009, part of my mission was to "explore the more analytical 'why' questions increasingly present in this current era of aggressive FCPA enforcement" and to "foster a forum for critical analysis and discussion of the FCPA (and related topics) among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons (see here for the complete mission statement).

From time to time, I am in contact with journalists who are interested in learning more about the FCPA, FCPA enforcement, and the issues explored in this blog.

I enjoy these exchanges, including the public service component of assisting (mostly non-lawyer) journalists better understand the FCPA and FCPA enforcement issues.

It is also gratifying to have one's ideas and scholarship covered by various outlets.

However, from time to time, one's ideas and opinions can be taken a bit out of context and that is, I believe, what occurred in the Corporate Crime Reporter's ("CCR") recent piece (see here).

Thus, the purpose of this post is to provide important clarifying comments - some of which appear in the more "complete" version of the interview in the print edition of CCR.

The CCR piece suggests that I am "constantly butting heads with FCPA Inc." I don't believe this is accurate. I have friends working at law firms who have an FCPA practice and through this blog, I have come to know many other FCPA practitioners, some of whom have accepted my invitation to guest post in this space. Other FCPA practitioners have told me "thanks for the very helpful blog ... [it] goes a long way toward knitting together the FCPA and anti-corruption bar."

In speaking of "FCPA, Inc." I am speaking of an issue previously covered by other news outlets, including the Washington Post (see here). Among other things, the Post pieces notes that "FCPA business is booming, a welcome growth area for Washington law offices just as work on mergers and securities offerings has begun to wane." The Post piece note as well that also "sharing in the bonanza [are] accounting firms, forensic computer specialists and a growing army of compliance consultants." The Post piece concludes with this "... don't think law firms aren't playing off those fears by aggressively marketing their services as investigators, risk mitigators and compliance counselors" and the article notes that "the result is [a] sudden flood of labor-intensive legal work for both partners and associates, particularly in the local offices of big international firms."

To suggest, as the CCR piece does, that my position is that the DOJ's enforcement of the FCPA "is all a facade" is not true. The author of the CCR piece has a copy of my draft article titled "The Facade of FCPA Enforcement" which clearly states on page 1 that "This article does not argue, or even suggest, that every FCPA enforcement action is unwarranted or that no company or individual has never violated the FCPA. Rather, this article demonstrates that a significant majority of recent FCPA enforcement actions are a façade and argues that addressing the façade and subjecting FCPA enforcement actions to judicial scrutiny is in the public interest and of vital importance to those subject to the FCPA as well as the broader marketplace." When presenting my paper at Georgetown Law School on March 22nd, I also made these clarifying remarks.

The CCR article discusses my contrarian position regarding Mark Mendelsohn's defense of the Siemens matter and my follow up "point-counterpoint" exchange with Billy Jacobson that I included on my blog with his written permission (see here and here). What was a respectful exchange and critique has been recast in a way that may leave the appearance that I was questioning the integrity of these individuals. Do I disagree with the legal and policy positions of these current and former DOJ officials - often times yes. Am I accusing them of any actual improper conduct - most assuredly no.

Last week the Wall Street Journal ran a piece titled "SEC Lawyer One Day, Opponent the Next" (see here). Among other things, this article noted that "Iowa Sen. Charles Grassley, a Republican who has criticized the SEC's revolving door, says the commission could include more-stringent limitations than the law requires in employees' contacts, but more disclosure would help, too."

In talking about the undeniable fact that most DOJ FCPA enforcement officials have big law firm FCPA experience and that most leading FCPA practitioners have DOJ or SEC FCPA enforcement experience, I am merely extending the WSJ's SEC piece to the DOJ in the FCPA context.

I continue to believe, like many others, that such dynamics can raise red flags and have the potential for conflicts of interest. In a similar vein, my December 2009 post titled "Voluntary Disclosures and Role of FCPA Counsel" talks about potential conflicts of interest present in representing corporate clients in an FCPA enforcement investigation or action. (That post bolds the word potential at least 15 times).

Finally, I was clear in my more complete comments to CCR that I was raising issues of potential conflicts of interest and potential red flags. Left out of the CCR web article are my significant clarifying comments that I am not accusing anyone of anything, but rather raising, as others have, significant public policy concerns that, as evidenced by the WSJ article, are being raised and debated at the highest levels of government as well.

Quiz Time

With two weeks left in the semester and final exams thereafter, hypotheticals are dancing in my head.

But this question is no hypothetical.

In 2009, there were three FCPA trials - Frederic Bourke, William Jefferson, and Gerald and Patricia Green.

So here is the question.

What is the common thread in these three FCPA enforcement actions - a fact which speaks to the great difficulty individual FCPA defendants generally have in mounting a legal defense?

Please feel free to comment on this blog or otherwise send me your answer (perhaps there is more than one correct answer).

I am a quick grader, so stay tuned for the answer tomorrow.

BAE Plea Agreement Challenge Dropped

Yesterday, the Campaign Against Arms Trade ("CAAT") and The Corner House, two British non-profits, announced (see here) "with regret that they are witdrawing their application for a judicial review of the 5 February 2010 decision by the Serious Fraud Office (SFO) to enter into a controversial plea bargain settlement with BAE Systems and to drop 'conspiracy to corrupt' charges against a BAE former agent, Count Alfons Mensdorff-Pouilly."

For more on this challenge and the BAE bribery, yet no bribery case see here and here.

While CAAT and The Corner House have withdrawn their application for judicial review, the groups do intend to "ask questions inside BAE's AGM on May 5th" and otherwise voice "the people's judgment" on BAE's corporate ethics.

Should you want to make your voice heard on this issue, see here.

Africa Sting Updates

It's been a while since the last post on the Africa Sting cases.

Below is a summary of recent activity.

Last week, the DOJ filed a routine discovery notice (see here) that perhaps hints at a much broader case.

In relevant part, the DOJ stated:

"The government has produced to each defendant and his or her co-defendant documents regarding the defendant’s participation in the Country A deal charged in the indictments and historic deals, including emails, invoices and quotes. Documents related to other co-conspirators’ participation in the Country A deal and historic deals have been made available to the defendants upon request." (emphasis added).

Time will tell what is meant by "historic deals."

However this case is already wider than the case charged in January (see here). In March, the DOJ filed a superseding indictment (see here) against Daniel Alvirez, the President of ALS Technologies, Inc. The superseding indictment contains charges against Alvirez not found in the original indictment, specifically charges related to the Republic of Georgia. Alvirez is expected to plead guilty to charges of conspiracy to violate the FCPA as set forth in the superseding indictment and cooperate in the government's investigation.

For more on the DOJ's discovery filing (see here) from Christopher Matthews at Main Justice.

*****

When the Africa Sting case was first announced, I raised the issue (see here) of whether the defendants could even be found guilty of violating the FCPA's antibribery provisions given that the "foreign official" was not real.

At the time, it was yet known whether the "foreign official" was purely fictitious or an actual, yet non-participating person.

I suspected the later and Main Justice (see here) recently reported that the FBI agents involved in the sting operation were posing as representatives of Ali Ben Bongo - the current president of Gabon and the Minister of Defense of that country from 1999 to 2009.

Because the FCPA's relevant provisions include terms such as influence and induce, it remains an open question whether one can seek to induce or influence an actual, yet non-participating "foreign official."

*****

Finally, during a status hearing yesterday, Judge Leon indicated (see here) that it was highly unlikely that the cases would go to trial in 2010.

Also at the status conference, defense lawyers continued to argue that the DOJ has not produced sufficient information concerning Richard Bistrong - a key participant in the government undercover sting operation - yet a person who was also recently criminally charged in connection with a separate bribery scheme (see here for the prior post).

Judge Leon reportedly said that the FBI's relationship with Bistrong is "likely relevant to the case" and that DOJ is going to have produce documents and information concerning this issue.

The next status hearing is April 21st.

Lord Justice Thomas's Innospec Sentencing Remarks

Given the frequency in which U.S. judges seem to be rubber-stamping FCPA settlements - including plea deals agreed to by the DOJ under circumstances which arguably violate the DOJ's own policy as set forth in the US Attorneys' Manual (see here for a prior post), it is refreshing to read Lord Justice Thomas's stern rebuke of the DOJ-SFO's joint settlement in the Innospec matter (see here for more on the Innospec matter).

Lord Justice Thomas (Britain's second most senior criminal judge) concluded that the Director of the SFO "had no power to enter into the arrangements made" to settle the matter and he warned that "no such arrangements should be made again." (See here for Lord Justice Thomas's sentencing remarks).

With the SFO publicly stating on numerous occasions that it seeks to adopt DOJ-like enforcement strategies and procedures and given that the SFO's conduct in the Innospec mater was very "DOJ-like", Lord Justice Thomas's remarks, while heavy on English law, should be more broadly viewed as an indictment of DOJ enforcement strategies as well.

The sentencing remarks begin by providing an interesting glimpse into the "negotiations" between the DOJ and SFO in the Innospec matter - the "first case where a 'global settlement' had been sought in respect of concurrent criminal proceedings in the UK and the US."

The conduct at issue largely centered on Indonesia and Iraq. The sentencing remarks note that "both the SFO and DOJ agreed that the fines and other penalties which might be imposed in the US and the UK might exceed $400m in the US and $150m in the UK."

However because any such amount "would exceed by many times the ability of Innospec to pay" "both the SFO and the DOJ agreed that, in light of Innospec's full admission and full co-operation, they should not seek to impose a penalty which would drive the company out of business."

The sentencing remarks then state:

"In September 2009, when it was anticipated that an acceptable settlement would be reached, discussions began between the SFO and the DOJ about the manner in which the authorities in the US and the SFO should proceed to implement any settlement and divide up the monetary amount to be paid. The discussions took place against the background that it had been agreed that the SFO would have primacy in respect to the Indonesian corruption and the DOJ in respect of the Iraq corruption."

The sentencing remarks note that "the SFO began by suggesting a 50:50 split based upon the fact that the criminality had been orchestrated and arranged from the UK in respect of the corruption in both Iraq and Indonesia."

However, the "DOJ would not accept this," but rather proposed a "methodology that in the result produced a split which was approximately one third to the DOJ, one third to the SFO and one third to the SEC and the OFAC."

As noted in the sentencing remarks, "after much further discussion on 28 January 2010 the SFO agreed to a split that was approximately one third to the DOJ, one third to the SEC and OFAC and one third to the SFO. It was agreed that the DOJ would ask the court to approve a fine of $14.1m with the balance of the US proportion going to the SEC ($11.2m) and OFAC ($2.2m); $12.7m would be the SFO's share."

Lord Justice Thomas next turns to the Innospec-SFO plea (see here) and states that "it became quickly apparent ... that a number of difficult issues was raised by the process adopted."

In his remarks, Lord Justice Thomas cites a paper delivered by Nicholas Purnell QC "The Risk of Abusing A Dominant Position" delivered to the International Bar Association at its New York Conference in June 2009 (see here) which notes, among other things, that newly enacted SFO guidance on "alternative methods to the disposal of criminal investigations by way of negotiated pleas or other resolutions by corporate defendants" may "introduce some unintended risks of abuse."

Lord Justice Thomas next touches upon such issues.

Among other things, he notes that the "question has arisen as to the extent of [the SFO's Director's] powers and duties in the light of the constitutional position of a prosecutor, the role of the courts in the UK and the rules relating to plea agreements in the U.K." Lord Justice Thomas specifically notes that "it is clear" that the "SFO cannot enter into an agreement ... with an offender as to the penalty in respect of the offence charged," but that a reading of the papers submitted in connection with Innospec-SFO plea "suggests that a penalty had in fact been agreed."

In language that all U.S. judges who have rubber-stamped DOJ FCPA settlements (without inquiring into the factual and legal basis for the settlement including whether other charges more accurately fit the crime - see here) should read, Lord Justice Thomas states:

"Principles of transparent and open justice require a court sitting in public itself first to determine by a hearing in open court the extent of the criminal conduct on which the offender has entered the plea and then, on the basis of its determination as to the conduct, the appropriate sentence. It is in the public interest, particularly in relation to the crime of corruption, that ... there may be discussion and agreement as to the basis of plea" and that a court "must rigorously scrutinise in open court in the interests of transparency and good governance the basis of that plea and to see whether it reflects the public interest."

Lord Justice Thomas then states that "those who commit such serious crimes as corruption of senior government officials must not be viewed or treated in any different way to other criminals." (See here, here and here for my prior posts on the increasing and alarming trend of bribery, yet no bribery FCPA prosecutions).

Lord Justice Thomas states that the $12.7m SFO fine is "wholly inadequate as a fine to reflect the criminality displayed by Innospec" and that if it were up to him the fine would have measured in the "tens of millions." Nevertheless, because of Innospec's apparent inability to pay a larger fine, he "reluctantly concluded that, on this occasion, it would neither be just nor fair in the unusual circumstances of this case for this court to impose a penalty greater than the amount allocated to the UK."

Even so, Lord Justice Thomas is stinging in his final remarks.

He notes:

"The court was faced with an agreement made between the DOJ, the SEC, the OFAC and SFO as to the division of the sum these bodies had considered Innospec was able to pay. This was not a matter that received judicial determination in either the UK or the US (save that inherent in the Federal District Court's approval of the plea agreement). As it is the position in both the US and the UK that it is for the court ultimately to determine the sanction to be imposed for the criminal conduct, an agreement between prosecutors as to the division, even if it had been within the power of the Director of the SFO (which as I have explained it was not), cannot be accordance with basic constitutional principles."

Lord Justice Thomas concludes that "the Director of the SFO had no power to enter into the arrangements made and no such arrangements should be made again."

He notes that "it is essential for the future that, unless any change is made to the rule of procedure or to the practice direction, it is appreciated this court must and will sentence in the way set out in the law, as that is what the rule of law requires" and that "this applies as much to companies as to individual defendants."

A couple of other interesting tidbits from Lord Justice Thomas's sentencing remarks.

With cross-border investigations and global corruption settlements seemingly becoming a new norm, Lord Justice Thomas's comments on uniform financial penalties also bear mention. He states, "there is every reason for states to adopt a uniform approach to financial penalties for corruption of foreign government officials so that the penalties in each country do not discriminate either favourably or unfavourably against a company in a particular state." He notes that "if the penalties in one state are lower than in another, business in the state with lower penalties will not be deterred so effectively from engaging in corruption in foreign states, whilst businesses in states where the penalties are higher may complain that they are disadvantaged in foreign states."

Lord Justice Thomas concludes his sentencing remarks with one final dig, a dig aimed at a common feature in all DOJ FCPA pleas, non-prosecution agreements and deferred prosecution agreements - and that is the "don't issue a press release about this unless you first approve it with us" clause.

Lord Justice Thomas notes: "It would be inconceivable for a prosecutor to approve a press statement to be made by a person convicted of burglary or rape; companies who are guilty of corruption should be treated no differently to others who commit serious crimes."

*****

A couple of final notes about the SFO's enforcement action against Innospec. Unlike a typical DOJ FCPA charging document, the SFO "names names." In its previous Mabey & Johnson prosecution (see here for a prior post), the SFO specifically named the foreign official recipients of the bribe payments. That trend continues in the SFO's charging documents against Innospec (see here).

Finally, in many cases, FCPA fines and penalties are just one "cost" to a company. While I disagree with the notion that the "costs of getting caught" should somehow factor into the final penalty amount (see here for a prior post), this is a cost that can not be ignored by companies. On this issue, para. 32 of the SFO charging document notes that "at this stage ... Innospec's internal investigation and cooperation with the SFO, DOJ, and SEC globally has cost the Company in excess of US$32 million in costs ..."

A Happy Ending

It's a happy morning on a happy campus!

Playing in the national championship game, as the Butler Bulldogs will be doing tonight, tends to make people happy. I put myself in that category. As a former college basketball player, I certainly never made it to the "big game" so "getting there" as a faculty member of a participating school ... well, let's just say it puts an extra spring in my step.

So, it's with much institutional pride that I say "Go Butler."

Let's stick with the theme, but return "on topic."

From time to time, the DOJ comments that some voluntary disclosure cases never lead to an actual enforcement action. Analyzing the extent to which this may or may not be true is difficult, particularly as to non-public companies.

Nevertheless, a recent "no action" disclosure caught my eye.

It involves Global Industries Ltd., a publicly-traded provider of "offshore construction, engineering, project management and support services..." (see here).

"In June 2007, the Company announced that it was conducting an internal investigation of its West Africa operations, focusing on the legality, under the U.S. Foreign Corrupt Practices Act (FCPA) and local laws, of one of its subsidiary’s reimbursement of certain expenses incurred by a customs agent in connection with shipments of materials and the temporary importation of vessels into West African waters." (see here). As noted in this linked filing, the Global Industries investigation was not a pure voluntary disclosure in that the investigation was motivated, at least in part, on "the settlement of the FCPA proceedings involving certain Vetco Gray entities" and the fact that "Company’s management and the Audit Committee were aware of press releases by three other companies disclosing that they are conducting internal investigations into the FCPA implications of certain actions by a customs agent in connection with the temporary importation of their vessels into Nigeria." As noted in the filing, against this backdrop, the "Company’s management considered it prudent to review the Company’s operations since it uses customs agents and the Company’s vessels that have operated in Nigeria do so under temporary importation permits."

Fast forward to February 2010 when the company disclosed in this press release as follows:

"We are pleased to also announce that our and the Government’s investigation of our activities in West Africa have concluded without any fines or penalties being imposed upon the Company. Both the DOJ and SEC have concluded their investigations and are not recommending any enforcement actions against the Company."

In other words, a happy ending to an FCPA investigation and disclosure.

Daimler - "That's All Folks"

Growing up, I was fond of the Looney Tunes cartoons. These episodes ended with a character saying, "that's all folks" (see here).

Today, April Fools Day, marked the end of the Daimler enforcement action as Judge Richard Leon concluded that the settlement between the DOJ and Daimler AG and certain of its subsidiaries (described in more detail in this post) "is an appropriate and just resolution" of the matter. See here for Christopher Matthews first-hand account at Main Justice.

In other words, "that's all folks."

The DOJ release (here) states that Daimler (and three of its subsidiaries) "brazenly offered bribes in exchange for business around the world" and that Daimler "saw foreign bribery as a way of doing business."

Yet, despite such statements, the DOJ (as described in more detail in the above linked post) did not charge Daimler with violating the FCPA's antibribery provisions. Thus, yet another bribery, yet no bribery case.

In fact, by resolving the case via a deferred prosecution agreement, Daimler will not have to plead guilty to anything.

The message sent by DOJ in this case, and the other recent bribery, yet no bribery cases (i.e. BAE and Siemens) is that corporate criminals (per the DOJ's own evidence) can simply escape the most severe consequences of criminal conduct (see here for what that would have been in the Daimler case) by cooperating with the DOJ, paying several millions into the U.S. treasury, and offering up a few indirect, insignificant subsidiaries as sacrificial corporate lambs.

This is troubling and it is an alarming feature of FCPA enforcement in an increasing number of cases. It also smacks of hypocrisy from a DOJ that extols the virtues of the rule of law at every available opportunity.

The final tally, as noted in the DOJ release, is $93.6 million in criminal fines and penalties, a deferred prosecution agreement against Dailmer (but not as to FCPA antibribery charges), criminal pleas by a finance division (Export and Trade Finance GmbH) and a spare parts subsidiary (DaimlerChrysler Automotive Russia), and another deferred prosecution agreement against a Chinese subsidiary.

Before turning to the SEC component of the case, a settlement Judge Leon also blessed today, a bit more about the "independent corporate monitor" appointed in this matter.

As discussed in this post, that monitor is Louis Freeh.

The deferred prosecution agreement (here) states, at Appendix D, that the monitor should have "sufficient independence from Daimler to ensure effective and impartial performance."

Approximately two years ago, in the wake of much criticism over the selection and role of monitors in DOJ enforcement actions, the DOJ released the so-called Morford Memo (see here). Among other things, the memo states that "the Government should decline to accept a monitor if he or she has an interest in, or relationship with, the corporation or its employees, officers or directors that would cause a reasonable person to question the monitor's impartiality."

As confirmed in this Daimler release, Freeh has been associated with Daimler since 2006.

SEC

Today, the SEC announced (here) the filing of a civil complaint (here) against Daimler charging violations of the FCPA antibribery, books and records and internal control provisions.

The SEC's charges add little to the picture already painted in the DOJ's various charging and resolution documents. Further, because a company in an SEC enforcement action of this nature, is allowed to settle the SEC's allegations "without admitting or denying" the allegations, the SEC's charges do not change the above described dynamics and troubling features of this enforcement action.

For the the record, Daimler agreed to settle the SEC matter by, among other things, paying $91.4 million in disgorgement.

The SEC's Director of the Division of Enforcement stated, "it is no exaggeration to describe corruption and bribe-paying at Daimler as a standard business practice."