Friday, July 30, 2010

Friday Roundup

A company in jeopardy of violating an existing SEC injunction, a leading supplier of communication devices to the federal government in the midst of an FCPA inquiry, an FCPA enforcement action nearing the finish line, Attorney General Eric Holder's announcement of the Kleptocracy Asset Recovery Initiative, more on multilateral development banks, and the U.K. Serious Fraud Office's annual report ... it's all here in the Friday roundup.

Diebold's Disclosure

Last month, Diebold, Inc., a Ohio based security services company, settled an SEC accounting fraud enforcement action by paying a $25 million civil penalty (see here). The SEC charged Diebold with, among other charges, violations of the FCPA's books and records and internal control provisions (i.e. Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934). However, you likely never heard about this because the enforcement action was what I call "a non-FCPA, FCPA enforcement action." In other words, the FCPA's books and records and internal control provisions are generic and are not just implicated by overseas business conduct. As part of the settlement, Diebold, as in common, consented to a final judgment permanently enjoining the company from future violations.

Diebold appears to be in jeopardy of violating that injunction.


Yesterday in an 8-K filing (see here) Diebold disclosed as follows:

Voluntary disclosure related to Foreign Corrupt Practices Act

"While conducting due diligence in connection with a potential acquisition in Russia, Diebold identified certain transactions and payments by its subsidiary in Russia (primarily during 2005 to 2008) that potentially implicate the Foreign Corrupt Practices Act (FCPA), particularly the books and records provisions of the FCPA. While the company's current assessment indicates that the transactions and payments in question do not materially impact or alter the company's financial statements, the company continues to collect information and is conducting an internal review of its global FCPA compliance. At this time, Diebold cannot predict the outcome or impact of this global review. In addition, the company has voluntarily self-reported its findings to the U.S. Department of Justice and the Securities and Exchange Commission and intends to fully cooperate with these agencies in their review."

The day of the disclosure, the company's shares lost approximately 5%.

Here is what Diebold had to say about the FCPA in its most recent 10-Q filing in May:

"We are subject to compliance with various laws and regulations, including the FCPA and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these laws, we operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our commitment to legal compliance and corporate ethics, we cannot assure you that our internal control policies and procedures always will protect us from reckless or negligent acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our business and operations." (emphasis added).

The Latest on Digi International

According to its website (here), Digi International Inc. is "the leading supplier of multifunction communication devices to the U.S. Federal Government."

It is also in the midst of an FCPA investigation, one which implicates its Chief Financial Officer who is no longer with the company.

Here is what the company disclosed in a recent 8-K filing (see here):

"As previously reported, after receiving allegations regarding possible violations of our gifts, travel and entertainment policy for activities in the Asia Pacific region by a few employees, we initiated an investigation of these policy and corresponding internal control issues, and any possible related violations of applicable law, including the Foreign Corrupt Practices Act (FCPA). We voluntarily disclosed the allegations to the United States Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC). The investigation has been under the direction of the Audit Committee, comprised solely of independent directors, utilizing outside counsel, and focused on the APAC region. For completeness purposes, the investigation reviewed certain other foreign regions where no allegations have been made. We believe the investigation is substantially complete, pending the input from the DOJ and SEC. We have been providing the DOJ and SEC with updates and our proposed remediation plan. We will continue to cooperate fully with the SEC and DOJ process, which could include additional investigative procedures. This investigation found violations of company policy and internal controls that primarily involved three individuals in Hong Kong and our Chief Financial Officer. All four individuals have either been terminated or resigned from the company. The investigation also identified certain books and records and related internal controls issues under the FCPA. The ultimate impact and outcome of the DOJ and SEC process is unknown at this time. The Company is unable to estimate the potential costs relating to this matter, including any penalties that might be assessed for any FCPA violations, and accordingly, no provision has been made in our consolidated financial statements other than with respect to expenses incurred prior to June 30, 2010. In the Digi International Reports Third Fiscal Quarter 2010 Results quarter and nine months ended June 30, 2010, we incurred additional general and administrative expense of $1.0 million related to the cost of the investigation. Based upon what we have learned from the investigation, we are strengthening our monitoring controls over foreign locations and other operational and regulatory compliance procedures, including third party assistance in implementation of our remediation plan. Based on the results of our investigation to date, we are not aware of any material impacts to our reported consolidated financial statements that would require restatement, and no issues were detected outside of the Asia Pacific region. We are also evaluating any impact of this matter on our Internal Controls over Financial Reporting. The timing and final outcome of the DOJ and SEC process cannot be predicted, and it may have a materially adverse impact on our business prospects and our consolidated financial condition, results of operations or cash flow."

I've noted in a prior post (see here) that one factor companies need to be mindful of when analyzing the important voluntary disclosure decision is the high likelihood of the enforcement agencies asking the "where else" question (i.e. if conduct occurred in country x, convince us that the conduct also did not occur in countries y and z). Digi's disclosure highlights this issue when it states: "[f]or completeness purposes, the investigation reviewed certain other foreign regions where no allegations have been made."

Maxwell Technologies Inc. Nears Settlement

In a 8-K filing yesterday, Maxwell Technologies (here), a manufacturer of energy storage and power delivery products, stated as follows:

"As previously disclosed in its public filings, the company has engaged in settlement discussions with the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) with regard to the ongoing FCPA investigations involving Maxwell’s Swiss subsidiary, Maxwell S.A. The company has negotiated an agreement in principle with the SEC to resolve the ongoing FCPA investigation for a payment of approximately $6.35 million, with half to be paid upon signing and the remaining half on the one year anniversary of signing, as well as certain other non-financial settlement terms. The settlement with the SEC remains subject to final approval of the Commission. Settlement discussions with the DOJ are ongoing, and the company is awaiting a response to its offer to the DOJ to settle the ongoing investigation for $6.35 million. Prior discussions with the DOJ have indicated that they would accept a settlement offer of $8.0 million, but as indicated earlier, we are continuing our discussions with the DOJ and are awaiting a response to our most recent offer. The DOJ has also previously indicated that settlement terms could include a payment plan over a period of up to three years. The company anticipates that it will have to pay interest on any deferred amounts due in both the SEC and DOJ settlement agreements. In Q409, the company accrued $9.3 million for a potential settlement, and has accrued an additional $3.4 million in Q210 to reflect the full amount of its pending settlement offers to the SEC and DOJ. However, there can be no assurance that the settlement with the SEC will be approved or that the company will be able to settle with the DOJ for $6.35 million."

The day of the disclosure, the company's shares lost approximately 4%.

Kleptocracy Asset Recovery Initiative

In a recent speech (see here) before the African Union Summit in Uganda, Attorney General Eric Holder announced a new Kleptocracy Asset Recovery Initiative.

In the speech Holder said that "the United States will act in partnership and in common cause to help the African Union achieve its goals and fulfill its mission."

Among other things, Holder said that the U.S. "will strengthen current efforts to promote good governance and to combat and prevent the costs and consequences of public corruption."

He stated as follows:

"Today, when the World Bank estimates that more than one trillion dollars in bribes are paid each year out of a world economy of 30 trillion dollars, this problem cannot be ignored. And this practice must never be condoned. As many here have learned – often in painful and devastating ways – corruption imperils development, stability, competition, and economic investment. It also undermines the promise of democracy.

As my nation’s Attorney General, I have made combating corruption, generally and in the United States, a top priority. And, today, I’m pleased to announce that the U.S. Department of Justice is launching a new Kleptocracy Asset Recovery Initiative aimed at combating large-scale foreign official corruption and recovering public funds for their intended – and proper – use: for the people of our nations. We’re assembling a team of prosecutors who will focus exclusively on this work and build upon efforts already underway to deter corruption, hold offenders accountable, and protect public resources.

And although I look forward to everything this new initiative will accomplish, I also know that prosecution is not the only effective way to curb global corruption. We will continue to work with your governments to strengthen the entire judicial sector, a powerful institution in our democracy which depends on the integrity of our laws, our courts, and our judges. We must also work with business leaders to encourage, ensure, and enforce sound corporate governance. We should not, and must not settle for anything less."

For other speeches by Holder on this subject, see here.

More On Multilateral Development Banks

A prior post (see here) discussed how five multilateral development banks (MDB's) - the World Bank, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank Group - signed an agreement to cross-debar firms and individuals found to have engaged in wrongdoing in MDB-financed development projects.

To learn more about sanctions investigations by the World Bank and other MDB's see this piece from Freshfields Bruckhaus Deringer LLP.

The SFO Annual Report

The U.K. Serious Fraud Office recently issued its annual report (see here).

Among the highlights noted by SFO Director Richard Alderman:

"In the first prosecution brought in the UK against a company for breaching UN sanctions, Mabey and Johnson Ltd admitted offences of overseas corruption and breaching UN sanctions. The company was ordered to pay a fine of £3.5 million and restitution of £3.1 million.

Currently one third of our work concerns overseas corruption. This will continue to be an important part of our work, with the introduction of the new law on bribery which we believe will place a greater emphasis on UK companies to maintain high levels of business ethics and integrity. It is also notable that the Act allows me as Director of the SFO to prosecute non-UK companies that carry on business in the UK if they use bribes in any country as a way of doing business."

Thursday, July 29, 2010

Mounties Lay Corruption Charges

The U.S. is not the only country with an anti-bribery law on its books.

In this guest post, Mark Morrison (here) and Michael Dixon (here) of Blake, Cassels & Graydon LLP discuss a recent enforcement action brought under Canada's Corruption of Foreign Public Officials Act.


The Royal Canadian Mounted Police (“RCMP”) recently announced that they have laid charges under the Canadian equivalent of the FCPA, the Corruption of Foreign Public Officials Act (“CFPOA”), against a former employee of an Ottawa based technology company in relation to alleged overseas bribery. Few details have been released at this time, but it appears that the charges relate to alleged bribes paid to a foreign government official in an effort to secure a multi-million dollar contract. At this point in time, no charges have been laid against the company or other individuals, but comments by the RCMP suggest that further charges may be pending.

This is the second charge laid to date under CFPOA. The first related to the conduct of a United States Immigration Officer who was hired as a consultant by a Canadian corporation. In 2005, that corporation pled guilty and was sentenced to a fine of $25,000. A number of other bribery cases in Canada have also dealt with the corruption of domestic officials, but these have proceeded under the provisions of the Canadian Criminal Code.

What is interesting about this case to those of us who practice in the area is that we have been expecting something of this nature for some time as Canada has been under significant pressure from the OECD to meet its international anti-corruption enforcement obligations. In response to this pressure, the RCMP has established a special unit solely dedicated to investigating international bribery. The unit, with divisions in Ottawa and Calgary, has been actively engaged in several investigations, however, this is the first charge they have laid. Further charges are anticipated as other investigations progress.

Another interesting point raised by this case is the extent to which the Canadian courts are willing to apply the CFPOA to the extraterritorial actions of Canadian citizens. While the Canadian government previously introduced a Bill to amend the CFPOA to clarify its application to Canadians acting outside Canada, this Bill was not passed into law. In the absence of this Bill, the Canadian test for jurisdiction, as determined by the case law, is different than that employed in the US. Historically, only cases with a “real and substantial” link to Canada will be considered as falling within the jurisdiction of the Canadian courts. Accordingly, the Canadian test requires that a portion of the illegal activity occur within Canada or a real connection to Canada. While we do not know to what extent the alleged corrupt activity occurred in Canada, this case appears to represent the first opportunity for the Canadian courts to clarify the reach of the CFPOA to Canadian citizens acting abroad.

Wednesday, July 28, 2010

DOJ, SEC Receive FCPA Training

The Department of Justice and the Securities and Exchange Commission enforce the Foreign Corrupt Practices Act.

It is thus a bit strange that the DOJ and SEC are receiving FCPA training.

Yet, piecing together information from two prominent law firm event calendars (see here and here) that is exactly what is occuring today in Washington D.C. at the SEC headquarters.

Described as a "joint FCPA training program" for the DOJ, SEC, and FBI and the "SEC's FCPA Boot Camp" the speakers appear to include a who's who of the FCPA defense bar.

What prompted this training session? What is the full agenda of topics? What type of questions will DOJ and SEC personnel ask?

Inquiring minds want to know.

Inquiring minds may also wonder - is it proper for the DOJ and SEC to receive training from lawyers and law firms that are frequent "adversaries" in FCPA enforcement actions?

The event is not included on the SEC's event calendar (see here), but DC readers may want to show up at the SEC's headquarters today and say "I'm here for the FCPA training" to see what happens.

If anyone has information or insight as to this event, please leave a comment.

A few other DOJ / SEC items of interest to pass along.

Make Your Voice Heard

According to this release, the SEC is seeking public comment on various sections of the recently enacted Dodd-Frank financial reform package. The SEC will post all submissions on SEC's Internet Web site. As noted in the release, "members of the public who wish to submit official comments on particular rulemaking initiatives should submit comments during the official comment period that starts with the notice of the initiative published in the Federal Register." (emphasis added).

To learn more about Section 922's whistleblower provisons, see here and here. To learn more about Section 1504's Resource Extraction Issuer Disclosure provisions see here.

The Revolving Door Continues to Revolve

Some of you, I know, think it is no big deal when a DOJ prosector enforces a law one day and then the next day defends clients against enforcement of that same law.

Others of you, I know, think that this is an important public policy issue worthy of discussion.

Whatever your persuasion, it should be noted that yet another DOJ attorney with FCPA responsibilties has left government service for a private law firm to engage in an FCPA practice.

According to this Main Justice story, Steven Fagell, Assistant Attorney General Lanny Breuer's deputy chief of staff, is leaving the DOJ to return to Covington & Burling LLP (Breuer's previous employer), the firm he worked at prior to joining the DOJ in January 2009. Main Justice reports that "as a member of the Criminal Division’s senior leadership team, Fagell served as a counselor to Breuer and worked on a broad range of issues including the Financial Fraud Enforcement Task Force and the Foreign Corrupt Practices Act." According to Tim Hester, Covington's managing partner, Fagell is expected to work on FCPA matters at the firm (see here).

For other recent movement betweent the DOJ and the FCPA bar see here, here and here.

Tuesday, July 27, 2010

General Electric Settles Iraqi Oil For Food Matter

Just when you think Iraqi Oil for Food Program FCPA-related enforcement actions have run their course, along comes another.

The SEC announced this morning (see here) that General Electric Company (GE) agreed to resolve an FCPA books and records and internal controls enforcement action based on allegations that "two GE subsidiaries - along with two other subsidiaries of public companies that have seen been acquired by GE - made illegal kickback payments in the form of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Iraqi Oil Ministry in order to obtain valuable contracts under the U.N. Oil for Food Program."

As noted in the SEC release, "the SEC has now taken 15 FCPA enforcement actions against companies involved in the Oil for Food-related kickback schemes with Iraq, recovering more than $204 million."

The GE enforcement action, like other Iraqi Oil for Food enforcement actions with a few exceptions, does not allege FCPA anti-bribery violations presumably because the alleged payments were made directly to the Iraqi government or government ministries - not to specific "foreign officials" as prohibited by the FCPA's anti-bribery provisions.

The GE enforcement action is also an outlier of sorts in that it is merely a SEC enforcement action with no parallel DOJ enforcement action - a fact mentioned in GE's press release detailed below.

For instance, the March 2010 enforcement action against Innospec (which was part Iraqi Oil For Food) involved a DOJ criminal information as to those allegations (see here); the September 2009 enforcement action against AGCO Corporation involved a DOJ criminal information and deferred prosecution agreement (see here); and the May 2009 enforcement action against Novo Nordisk A/S involved a DOJ criminal information and deferred prosecution agreement (see here).

So much for substantively similar conduct being resolved in a similar fashion.

Without admitting or denying the SEC's allegations (detailed below), GE, GE Ionics Inc. and GE Healthcare Ltd. consented to a court order permanently enjoining future violations of the FCPA books and records and internal control provisions. GE agreed to pay $23.4 million to settle the matter - including approximately $18.4 million in disgorgement of profits on the alleged contracts at issue.

The SEC complaint (see here) alleges as follows:

"From approximately 2000 to 2003, two subsidiaries of the General Electric Company ("GE") -- Marquette-Hellige ("Marquette") and OEC-Medical Systems (Europa) AG ("OEC-Medical") -- made approximately $2.04 million in kickback payments in the form of computer equipment, medical supplies, and services to the Iraqi Health Ministry under the Program. Prior to GE's acquisition of their parent companies, two other current GE subsidiaries --Ionics Italba. S.r.L. ("Ionics Italba"), and Nycomed Imaging AS, currently GE Healthcare AS (''Nycomed'') - made approximately $1.55 million in cash kickback payments under the Program. Nycomed was a subsidiary of publicly-registered Amersham plc, which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Healthcare Ltd. Ionics Italba was a subsidiary of publicly-registered Ionics, Inc., which was acquired by GE after the conduct at issue in this Complaint and is currently known as GE Ionics, Inc."

According to the complaint:

"Marquette, OEC-Medical, Ionics Italba, and Nycomed each authorized and paid kickbacks to Iraqi government ministries through agents in the form of 'aftersales service fees' (ASSF) on sales of products to Iraq. All four subsidiaries knew that such kickbacks were prohibited by the Oil for Food Program and U.S. and international trade sanctions on Iraq."

According to the complaint, the above subsidaries, "only two of which were GE subsidiaries during the relevant time period," "working through third-party agents, made ASSF kickback payments of approximately $3,584,842. The four subsidiaries earned profits of approximately $18,397,949 as a result oftheir illegal kickbacks."

As to the acquired subsidiaries, the SEC simply alleges, without any elaboration, that GE acquired the liabilities of Amersham and Ionic, along with assets, in the acquisitions and that "GE Ionics, Inc. and GE Healthcare Ltd., both subsidiaries of GE, are the respective successors to the liability of Ionics and Amersham."

Cheryl Scarboro, the Chief of the SEC's newly formed FCPA Unit, stated as follows:

"GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win Oil for Food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved."

In a press release (see here) GE stated that the enforcement action "concludes the SEC’s investigation and related Department of Justice review of GE regarding the Oil-for-Food Program." The release notes that the company "has received confirmation from the U.S. Department of Justice that the Department has closed its investigation and will take no action relating to these matters."

As to the merits of the SEC's allegations, the company stated as follows:

“In this case, the SEC has identified 18 contracts under the Oil-for-Food Program that it alleges were not accounted for or controlled properly. Fourteen of these transactions involve businesses that were not owned by GE at the time of the transactions. The SEC alleges that, in acquiring these companies, GE acquired their liabilities as well as their assets. The other four transactions relate to GE Healthcare units in Europe. These units declined to make cash payments to the Iraqi Ministry of Health, but they acquiesced when their agent offered instead to make in-kind payments of computer equipment, medical supplies, and services to the Iraqi Health Ministry, and then failed to reflect the transactions accurately in their books and records. This conduct did not meet our standards, and we believe that it is in the best interests of GE and its shareholders to resolve this matter now, without admitting or denying the allegations, and put the matter behind us."

No matter how flimsy the SEC's legal theory of liability, the agency continues to extract multi-million dollar FCPA settlements from the companies it oversees. These companies view settlement as easier and more cost efficient than engaging in a protracted legal dispute with a principal government regulator.

The end result, in such cases, is a continuation of the facade of FCPA enforcement.

A Results Based Opinion Procedure Release?

The Department of Justice recently issued (see here) an FCPA opinion procedure release - a meaningful event in the FCPA arena given the general lack of substantive FCPA case law. [To read more about the detailed requirements of the Foreign Corrupt Practices Act Opinion Procedure process (see here and here)]

Reading Opinion Procedure Release 10-02, in which a "non-profit, U.S. based microfinance institution" was the Requestor, I found myself returning to the same question - is this a results-based DOJ opinion?

The big-picture facts are as follows: to get a government-issued license, an entity subject to the FCPA is directed by a government agency to provide something of value to an institution whose board members include a sitting government official and a former government official.

According to the DOJ's analysis, an analysis that mentions the word "humanitarian" more than once, the contemplated conduct would not cause the DOJ to take any enforcement action.

As explained below, a relevant factor in the DOJ's opinion is the due diligence the Requestor undertook. Yet, if ... say an oil and gas company ... undertook similar due diligence steps would such due diligence be viewed as perfuctory or superficial?

Was the humanitarian, non-profit microfinance institution viewed a bit differently than a similarily situated for-profit company?

Was the DOJ's mindset as to the red flags involving the non-profit along the following lines - this must be legitimate until it is proven that it isn't?

Conversely, is the DOJ's mindset as to red flags involving for profit companies, particularly those in high-risk industries, along the following lines - this must be illegal until it is proven that it is legal?

I don't know the answers to these questions and by posing them I am not drawing any conclusions myself.

Merely interesting questions to ponder while reviewing the facts of Opinion Procedure Release 10-02.

The facts are as follows.

The Requestor is "in the process of converting all of its local operations to commercial entities that are licensed as financial institutions, in order to permit them to attract capital and expand their services to include offerings such as savings accounts, microinsurance and remittances."

"One of those operations is a wholly-owned subsidiary in a country in Eurasia" which is "currently organized as a limited liability company under the laws of the Eurasian country and operates under a special non-banking financial institution license from the Central Bank of that country" and whose activities are "currently overseen by an agency of the Eurasian country (the 'Regulating Agency')."

"As part of its oversight of the Eurasian Subsidiary and [its] proposed transition to commercial status, the Regulating Agency has pressed the Eurasian Subsidiary to take steps to 'localize' its grant capital to ensure that it remains in the Eurasian country."

"Among other things, the Regulating Agency has insisted that the European Subsidiary make a grant to a local microfinance institution [Local MFI] in an amount equal to approximately 33 percent of the Eurasian Subsidiary's original grant capital."

"The Regulating Agency has provided a list of Local MFI's in the Eurasian country and has stated that the Eurasian Subsidiary could not fulfill its localization obligation unless it provided grant funding to one or more of them."

According to the release, the Requestor "is concerned that compelled grants to an institution on a short list of institutions - without appropriate safeguards - raise red flags under the FCPA." (emphasis added).

According to the relase, the Regulating Agency rejected the Requestor's alternative proposals and insisted on the above described arrangement.

The thing of value demanded by the Regulating Agency is not exactly spare change.

According to the release:

"To meet the Regulating Agency’s requirements, the Eurasian Subsidiary proposes to contribute a total of $1.42 million to expand the loan and technical capacity of a Local MFI which previously has received grant funding from the foreign aid community. Of the $1.42 million, $1.07 million would be used to increase the Local MFI’s loan capital – to more than triple its current loan capital. The remaining $350,000 would be used in support of the grant: (a) $50,000 to pay for loan tracking and reporting management system software; (b) $120,000 for capacity-building services and support, including hiring six additional staff members and retaining vendors to provide training and other technical assistance; and (c) $180,000 for the engagement of two independent organizations to monitor and audit the use of the proposed grant (the “Proposed Grant”)."

As referenced above, the Requestor conducted certain due diligence in connection with the "compelled grant."

According to the release:

"The Eurasian Subsidiary undertook a three-stage due diligence process to vet the potential grant recipients and select the proposed grantee. First, it conducted an initial screening of six potential grant recipients by obtaining publicly available information and information from third-party sources. Based on this review, it ruled out three of the six MFI candidates as generally unqualified to receive the grant funds and put them to effective use. Second, the Eurasian Subsidiary undertook further due diligence on the remaining three potential grant recipients. This due diligence was designed to learn about each organization’s ownership, management structure and operations; it involved requesting and reviewing key operating and assessment documents for each organization, as well as conducting interviews with representatives of each MFI to ask questions about each organization’s relationships with the government and to elicit information about potential corruption risk. Based on the information obtained during this second-stage review, the Eurasian Subsidiary ruled out two of the three remaining potential grant recipients: one for conflict of interest concerns, the other after the discovery of a previously undisclosed ownership change in the entity. As a third round of due diligence, the Eurasian Subsidiary undertook targeted due diligence on the remaining potential grant recipient, the Local MFI. This diligence was designed to identify any ties to specific government officials, determine whether the organization had faced any criminal prosecutions or investigations, and assess the organization’s reputation for integrity."

The release notes that this "final round of due diligence did not identify information of potential corruption in connection with the Proposed Grant."

However, it did "uncover that one of the board members of both the Local MFI and the Local MFI's Parent Organization is a sitting government official in the Eurasian country and that other board members are former government officials."

According to the release:

"The sitting government official, however, serves in a capacity that is completely unrelated to the microfinancing industry. In addition, under the law of the Eurasian country, sitting government officials may not be compensated for this type of board service, and the Local MFI confirmed that neither its own board members nor the board members of the Local MFI’s Parent Organization receive compensation for their board service. The proposed grant agreement would expressly prohibit the Local MFI from transferring any of the grant funds to the Local MFI’s Parent Organization or otherwise using the grant funds to compensate board members of either the Local MFI or the Local MFI’s Parent Organization."

The release then mentions several "significant controls" proposed by the Requestor as to the Proposed Grant, including "the grant agreement would expressly prohibit the Local MFI from transferring any of the grant funds to the Local MFI’s Parent Organization or otherwise using the grant funds to compensate board members of either the Local MFI or the Local MFI’s Parent Organization."

Based on these core facts, the DOJ's analysis is:

"the Department does not intend to take any enforcement action with regard to the proposed transaction..."

The DOJ first stated that the Requestor was subject to the FCPA's anti-bribery provisions and that the Proposed Grant to the Local MFI was indeed "for the purpose of obtaining or retaining business."

The DOJ framed the question as follows:

"The issue presented is whether the Proposed Grant would amount to the corrupt giving of anything of value to any officials of that country in return for obtaining or retaining business. Based on the due diligence that has been done and with the benefit of the controls that will be put into place, it appears unlikely that the payment will result in the corrupt giving of anything of value to such officials."

The DOJ stated:

"As an initial matter, it is important to note that the expressed motivation of the Regulating Agency here is to ensure that grant money given to the Eurasian Subsidiary for humanitarian purposes in the Eurasian country continues to be used for humanitarian purposes in that country. The Requestor was concerned, nevertheless, that without due diligence and appropriate controls, such a grant could carry a significant risk that the result might be the transfer of things of value to officials of the Eurasian country."

The DOJ continued:

"The Department is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations. As noted above, the Requestor conducted three rounds of due diligence. The controls that the Requestor proposes would ensure with reasonable certainty that the grant money from the Eurasian Subsidiary would not be transferred to officials of the Eurasian country. As noted, these controls include the following: the staggered payment of grant funds; ongoing monitoring and auditing; the earmarking of funds for capacity-building; a prohibition on the compensation of board members; and the institution of an anti-corruption compliance program."

The DOJ then lists three other opinion releases that deal with charitable-type grants or donations and ultimately states that the Proposed Grant "is consistent with the Department's past approach to grant-related requests."

This is the curious aspect of the DOJ's analysis because the Requestor's Proposed Grant was not charity or a donation, rather it was a "compelled grant" (a term DOJ used earlier in the release) specifically requested by the Regulating Agency as a condition to the Requestor obtaining the desired license.

Results-based opinion?

You be the judge.

For other coverage of Opinion Procedure Release 10-2, see here, here and here.

Monday, July 26, 2010

Whistleblower Provisions ... What Others Are Saying

The FCPA bar is an active group of writers.

And quick.

Below is a sample of other views on the whistleblower provisions of the Dodd-Frank financial reform bill signed by President Obama last week.

As noted in this prior post, the whistleblower provisions apply to all securities laws violations and the FCPA is part of the Securities Exchange Act. In the post, I set forth my reasons for why I believe the new whistleblower provisions will have a negligible impact on FCPA enforcement. As demonstrated by the below snippets, I am clearly an outlier, which is not surprising to me.

So if you have an unexplained fascination for law firm client alerts (as I often do) this post is for you.

Foley & Lardner (see here)

"The Act's broad whistleblower provisions significantly increase the compliance risks companies doing business internationally face. Coupled with the fact that numerous recent FCPA enforcement actions have resulted in companies paying record fines — in many cases in the tens or even hundreds of millions of dollars — to settle enforcement actions, the Act will create enormous financial incentives for individual whistleblowers to report FCPA violations (or even speculative claims of a violation) to the SEC. Given this important legislative development, there is no better time for companies to evaluate their FCPA compliance programs to ensure they are in line with current best practices. An effective FCPA compliance program both minimizes a company's risk of violations and provides protection to companies by maintaining the components of an effective compliance and ethics program set forth in the U.S. Sentencing Guidelines."

Morrison & Foerster (see here)

"Although the new provisions apply to all violations of the securities laws, they are likely to have particularly significant impact on enforcement of the Foreign Corrupt Practices Act (“FCPA”), an area in which criminal and civil penalties and enforcement activity have increased sharply in recent years."

"Although Dodd-Frank’s whistleblower provisions apply to any of the securities laws under which the SEC can bring enforcement actions, the Act will likely have an immediate and outsized impact on FCPA enforcement."

"Given the large size of recent FCPA settlements and enforcement actions, the ability to aggregate the recoveries from “related judicial and administrative actions” when determining the whistleblower’s award, and the government’s continued focus on and increased resources devoted to FCPA enforcement, the Dodd-Frank whistleblower provisions are likely to result in even more FCPA investigations and enforcement actions."

"The new whistleblower provisions could lead to more and/or earlier voluntary disclosures of potential securities law violations, as companies hoping to obtain the benefits of voluntary disclosure must move quickly, before the whistleblower makes his or her disclosure. They could also lead to more reports of minor violations previously deemed not significant enough to report."

Proskauer Rose (see here)

"While the whistleblower bounty exists for all securities violations, the risk companies face is particularly great relative to the Foreign Corrupt Practices Act (“FCPA”), which broadly proscribes corruptly influencing foreign public officials. The remarkable monetary sanctions in FCPA enforcement actions, where SEC settlements in the tens or even hundreds of millions of dollars have become increasingly common, provide a compelling incentive for individuals to contact the SEC about suspected FCPA violations."

"The dramatic increase in FCPA enforcement efforts, along with the comprehensive press coverage surrounding such efforts and the expected cottage industry of lawyers and others, will ensure that potential whistleblowers are aware of, and take full advantage of, this enticing incentive."

"The increased possibility that FCPA violators will face substantial sanctions (for violations that may have been “under the radar” previously) also suggests that companies have even greater reason to inhibit bribery and fraud from occurring in the first place. The importance of effective internal controls and compliance programs to detect and prevent FCPA and other securities violations has intensified. With the new bounty, companies will need to adapt to this defining change in the legal landscape."

Fulbright & Jaworski (see here)

"In light of the current aggressive FCPA enforcement environment, Section[] 922 [...] stand to further increase the number of FCPA-related investigations initiated by corporate counsel and U.S. enforcement authorities, as well as the number of civil and criminal enforcement actions brought by the SEC and U.S. Department of Justice (“DOJ”). Before the Act is signed into law, companies doing business overseas—particularly publicly traded companies in the oil, natural gas, or minerals industries—should take the time to review their compliance policies and procedures and determine what, if any, changes must be made to account for the changing enforcement landscape as a result of the Dodd-Frank Act."

"In light of Section 922 and the financial incentives it provides, companies should expect an increase in whistleblower allegations and associated investigations—particularly in the context of the FCPA, where several recent civil and criminal recoveries have been $100 million or more. This expectation will also affect companies’ determinations regarding self-reporting, should allegations arise, both in terms of whether to self-report the allegations and how quickly to do so (e.g., before an internal investigation has been conducted). At the very least, companies should reassess internal compliance policies and procedures to ensure their adequacy in anticipation of such increased enforcement activity."

McDermott Will & Emery (see here)

"When combined with recent efforts to step up enforcement, these new provisions significantly alter the incentives for potential whistleblowers, making it more likely that those on the fence will race to government, rather than report to their employer. Take the Foreign Corrupt Practices Act as an example. In the past few years, both the SEC and the U.S. Department of Justice (DOJ) have dramatically increased their enforcement of this statute, resulting in a recent number of groundbreaking settlements, including an $800 million payment by Siemens; a more than $575 million sanction and disgorgement against Kellogg Brown & Root and a $185 million payment by Daimler. With recoveries like this, a potential 30 percent share is akin to winning the lottery for a whistleblower. Under such circumstances, even a loyal employee may find it difficult to turn down such a potential jackpot."

Holland & Knight (see here)

"The Wall Street Reform and Consumer Protection Act approved by Congress and set to be signed into law by President Obama next week contains a whistleblower provision that will have a significant impact on Securities and Exchange Commission (SEC) enforcement of the Foreign Corrupt Practices Act (FCPA)."

"This new provision increases the likelihood that information regarding improper payments will come to the attention of the SEC. Moreover, when combined with recent enforcement actions by the SEC that have held U.S. parent companies strictly liable for the improper conduct of their foreign subsidiaries, the compliance and enforcement risks for U.S. public companies engaged in overseas business activities cannot be overstated.

We strongly urge U.S. companies to take immediate steps to strengthen their FCPA compliance programs and undertake training of their employees and third parties, including agents and distributors. U.S. companies should also be proactive in conducting compliance audits of their overseas operations."

Mark Mendelsohn, Paul, Weiss, Rifkind, Wharton & Garrison (former DOJ FCPA top cop) in the American Lawyer

"[Mendelsohn] offered the usual cautionary caveat about it being too soon to know, but he did say the new provisions may create a regulatory backlog because employees now have an incentive to go to the SEC with matters that previously would have been handled internally. 'As a company, you want to have mechanisms for people to report things up the chain internally,' Mendelsohn said. 'The whistleblower legislation cuts against that by incentivizing people to go outside the company with information.'"

It is just not law firms with FCPA practices that have put pen to paper. Below is a sample of what some "whistleblower" law firms are saying.

Finch McCranie (see here)

"Bribery of foreign government officials in international business transactions, and false entries in books and records of those companies within the statute, are the targets of the FCPA. Whistleblowers whose information helps the SEC recover monetary sanctions from those corrupt entities in FCPA cases now have an enforceable right to a monetary award of 10-30%. Based on the increasing number and size of these FCPA cases, the rewards to whistleblowers can be meaningful--as they must be to cause whistleblowers to come forward. Over the past decade, the government has pursued more and more FCPA cases, and some recover hundreds of millions of dollars."

Pietragallo Gordon Alfano Bosick & Raspanti (see here)

"Some believe that this new provision will have significant impact in the context of the Foreign Corrupt Practices Act, which prohibits companies from engaging in certain practices, including bribery, in foreign countries. Recent settlements by the SEC with international corporations have demonstrated the possibility of FCPA settlements in the hundreds of millions of dollars. Whistleblowers contemplating the new SEC whistleblower provisions of the Wall Street Reform Act will have a huge new financial incentive to come forward with allegations of wrongdoing, in both domestic markets and abroad."


Staying on the whistleblower topic, last week the SEC announced (see here) the award of $1 million to Glen and Mary Kaiser "who provided information and documents leading to the imposition and collection of civil penalties" in an insider trading case. As noted in the SEC release, "this is the largest award paid by the SEC for information provided in connection with an insider trading case." The release notes that the award was pursuant to the old insider trading whistleblower program and further notes that this program "has since been repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added new Section 21F to the Securities Exchange Act, authorizing the Commission to award bounties to parties who provide information leading to recovery of monetary sanctions in a broader range of cases, not limited as before to civil penalties recovered in insider trading cases."

If indeed the SEC does award whistleblower payments in connection with an FCPA enforcement action, let's hope that the SEC makes such an award known as in the above example.

Friday, July 23, 2010

Year Two ... Plus The Friday Roundup

I missed my own anniversary, the anniversary of FCPA Professor that is.

On July 17, 2009, I formally launched FCPA Professor with this Mission Statement.

Approximately 220 posts later, year two has arrived and the mission remains the same.

It is a pleasure to make frequent deliveries to the marketplace of ideas. FCPA Professor is read worldwide by a diverse group of readers and I thank you for making this space a part of your day.

Now for the Friday roundup.

BAE U.K. Settlement Still Pending

BAE's bribery, yet no bribery U.S. settlement has long been signed, sealed and delivered. See here and here for more. Yet things are taking a bit longer on the other side of the Atlantic according to this report from a U.K. financial website.

According to the report, Serious Fraud Office director Richard Alderman has admitted "that legal challenges by anti-arms campaigners, and the need to get the case's extensive documentation in order, have seen the conclusion of the bribery investigation put off until autumn at the earliest."

With the lashing the SFO took in the Innospec enforcement action (see here), the SFO understandably wants to get this one right.

The BAE U.K. settlement is not the only event that has been delayed. As highlighted in this post from earlier week so too is the new U.K. Bribery Act.

Business is Booming

Furthering the notion that anti-bribery and compliance work is an industry in and of itself, the San Jose Business Journal reports in this recent piece that business is booming - and not just among law firms - as the article profiles Deloitte and KPMG.

The article touches upon certain topics highlighted by others, including Nathan Vardi in this Forbes piece, and Steve Pearlstein in this Washington Post piece.

Noble and Nigeria

A recent post (see here) described Nigeria as a challenging market and highlighted a recent report that found that one in three companies reported paying a bribe to Nigerian public officials in undertaking administrative tasks. The post talked about facilitation payments, which are allowed by the FCPA - at least as written, yet highlighted the many FCPA enforcement actions seemingly based on facilitating payments.

Throw a pending enforcement action against Noble Corporation into that mix.

Here is what the company said in its recent 8-K filing:

"In 2007, we began, and voluntarily contacted the SEC and the U.S. Department of Justice (“DOJ”) to advise them of, an internal investigation of the legality under the FCPA and local laws of certain reimbursement payments made by our Nigerian affiliate to customs agents in Nigeria. The SEC and the DOJ have indicated that they believe that violations of the FCPA occurred and will seek civil and/or criminal sanctions against us, including monetary penalties, and may include additional sanctions against us and/or certain of our employees, as well as additional changes to our business practices and compliance programs. We could also face fines or sanctions in relevant foreign jurisdictions.

We consider the matter relating to the Nigeria investigation to be ongoing and cannot predict (a) when it will conclude, (b) whether either the SEC or the DOJ will open its own proceeding to investigate this matter, or (c) if a proceeding is opened, what potential sanctions, penalties or other remedies these agencies may seek. Based on information obtained to date, we believe it is probable that we will pay an amount to settle this matter with the DOJ and SEC. Given that the matter is not finally resolved, we cannot predict with certainty what amount we will pay in civil and criminal fines and penalties; however, as of June 30, 2010, we accrued approximately $5.1 million relating to this ongoing matter. Any of the sanctions as a result of the Nigerian investigation or any other future violation of the FCPA or similar law could have a material adverse effect on our business or financial condition and could damage our reputation and ability to do business, to attract and retain employees and to access capital markets.

Frontier identified certain payments totaling approximately $35,000 made by one of its former agents to Nigeria immigration officials in 2009 and reported this matter to the DOJ as a possible violation of the FCPA. We reviewed this matter as part of our diligence investigation of Frontier. The DOJ has not indicated what, if any, action it may take with respect to such payments, although the DOJ could seek civil and/or criminal sanctions against Frontier. Upon closing the Frontier acquisition, we would be responsible for such sanctions as well as any other sanctions relating to violations of applicable laws by Frontier, except to the extent that they may be covered by indemnities contained in the merger agreement with Frontier. Any such sanctions could have a material adverse effect on our business or financial condition."

Thursday, July 22, 2010

Schumer Calls For BP Investigation

Senator Charles Schumer (D-NY) has requested a Department of Justice investigation of BP.

It has nothing to do with the Gulf of Mexico, but rather the Foreign Corrupt Practices Act.

BP is British company, but its ADR shares trade on the New York Stock Exchange and BP is thus subject to the FCPA.

In a letter to Attorney General Eric Holder (see here) Schumer requests that the DOJ investigate whether BP violated any of the provisions of the Foreign Corrupt Practices Act (“FCPA”) in connection with the August 2009 release of Abdel Baset al-Megrahi, the Libyan terrorist convicted of the 1988 bombing of Pan-Am flight 103 that killed 270 people, including 189 Americans. [This post is limited to a discussion of the FCPA, and not the above referenced release.]

Why does Schumer think BP may have violated the FCPA?

Because, according to Schumer's letter - "BP has admitted that it lobbied United Kingdom government officials to wrap up a proposed prisoner transfer agreement (PTA) with the Libyan government amid concerns that a delay in reaching this agreement would harm a deal BP had signed with Libya’s National Oil Company to explore for oil and gas in the Gulf of Sidra and in parts of Libya’s western desert—an agreement which BP estimated could lead to eventual earnings of up to $20 billion."

Hold the phone and stop the presses ... a large corporation has admitted that it lobbied its own government in connection with a business purpose.

This would seem to be yet another example of the FCPA's double standard in that what is routinely done at home suddenly becomes a potential criminal matter when done in connection with international business. For other examples of the double standard see here and here.

Unless there is a finding that something of value went to a foreign official, the FCPA is not implicated because the law does not apply to giving things of value to a foreign government itself. Strange you say, but that is how the FCPA is written - a fact even the DOJ recognizes. See here for DOJ Opinion Procedure Release 09-01 in which the DOJ states that the proposed course of conduct "fall[s] outside the scope of the FCPA in that the [thing of value] will be provided to the foreign government, as opposed to individual government officials ..."

Schumer's letter also states:

"If BP, or its officials, promised the Libyan Government that it would secure al-Megrahi’s release from detention in exchange for oil exploration rights—or even that it would provide lobbying services for such a release on the Libyan Government’s behalf—BP may have been unlawfully authorizing performance of valuable services to the Libyan Government in exchange for profitable oil exploration rights in express violation of the FCPA. Similarly, if BP promised anything of value to United Kingdom government officials to secure al-Megrahi’s release, this would also violate the FCPA."

According to Schumer's press release, he and "Senators Gillibrand, Menendez, and Lautenberg last week requested the British government investigate the circumstances surrounding al-Megrahi’s release and requested that BP and the British government turn over all documents related to the oil companies’ efforts lobbying for a prison-release agreement with Libya. They also called for the US State Department to press the British to investigate BP’s involvement in the incident."

It is unusual for a U.S. politician to call upon DOJ to investigate a foreign-based company (or any company for that matter) for FCPA violations - particularly when the conduct at issue largely centers on conduct between the company and its own government officials.

Although the U.K. Bribery Act is not yet law (see yesterday's post here), when enacted, it is expected to have a broad jurisdictional scope and apply to certain U.S. companies, just as the FCPA applies to certain U.K. companies.

Following Schumer's lead will a British politician request that the U.K. Serious Fraud Office investigate a U.S. company because it lobbied its own government officials in connection with a business purpose? As John Gapper, the associate editor and chief business commentator of the U.K. based Financial Times, stated in an editorial on the subject, "the US has been no stranger to dubious deals with foreign governments that benefit both its strategic interests and US companies."

For more, see here for Christopher Matthew's Main Justice story on the topic.

Wednesday, July 21, 2010

U.K. Bribery Act Delayed

The U.K. Ministry of Justice announced yesterday (see here) that implementation of the Bribery Act will be delayed until April 2011. Among other things, the release states as follows:

"In September the Government will launch a short consultation exercise on the guidance about procedures which commercial organisations can put in place to prevent bribery on their behalf.

This will be published early in the New Year to allow businesses an adequate familiarisation period before the Act commences.

The consultation will be followed by a series of awareness-raising events to ensure everyone is aware of the changes the Bribery Act makes to the current law."

The Bribery Act (see here) is generally viewed as being more broad in scope than the Foreign Corrupt Practices Act. Originally planned to "go live" in Fall 2010, the Bribery Act was creating much angst among the business community as to how to comply with many of its vague provisions.

The Financial Times reports that Kenneth Clarke, recently appointed as the U.K. international anti-corruption champion (see here), "bowed to pressure from business by delaying implementation of the long-awaited Bribery Act by six months, a move anti-corruption activists claimed could lead to it being watered down."

The Financial Times article quotes Chandrashekhar Krishnan, the executive director of Transparency International - UK, as saying that the delay is “extremely disappointing” and that the “danger is that under the guise of consultation attempts" attempts may be made to "water down the Act."

Whatever the reason or motivation for the delay, it is always a good idea to have clear laws which put all on notice of what is prohibited. If that is the end result of the additional consultations, that is a result all can cheeer.

For more on the U.K.'s enforcement of anti-corruption laws, including how the U.K. Serious Fraud Office is adopting DOJ-like enforcement strategies see here and here.

Tuesday, July 20, 2010

The Financial Reform Bill's Whistleblower Provisions And The FCPA

Section 1504 (see here for the prior post) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is not the only provision of the "financial reform package" that may impact Foreign Corrupt Practices Act compliance and enforcement.

Sections 922-924 of the Act President Obama is expected to sign soon also has the potential to impact FCPA enforcement.


Because it creates new whistleblower provisions applicable to all securities laws violations and the FCPA is part of the Securities and Exchange Act of 1934.

This post will cover three topics: an overview of the new whistleblower provisions; some thoughts on whether whistleblower provisions applicable to FCPA enforcement is wise policy; and some thoughts on whether the new whistleblower provisions will impact FCPA enforcement, and if so, to what extent.


Section 922 amends the Exchange Act by including a new section, 21F, titled "Securities Whistleblower Incentives and Protection."

Pursuant to the new section:

* any whistleblower (meaning "any individual who provides, or 2 more more individuals acting jointly who provide, information relating to a violation of the securities laws" to the SEC)

* who voluntarily provides original information (meaning information that: (a) "is derived from the independent knowledge or analysis of a whistleblower;" (b) "is not known to the [SEC] from any other source, unless the whistleblower is the original source of the information;" and (c) "is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information")

* to the SEC that leads "to the successful enforcement" of a "covered judicial or administrative action" (meaning "any judicial or administrative action brought by the [SEC] under the securities laws that results in monetary sanctions exceeding $1,000,000")

* shall be entitled to an award equal to "not less than 10%" and "not more than 30%" "of what has been collected of the monetary sanctions imposed" in the underlying SEC enforcement action.

Monetary sanctions include "any monies, including penalties, disgorgement, and interest ordered to be paid" by the SEC.

In determining the amount of the award the whistleblower shall receive, the SEC "shall take into consideration: (i) the significance of the information provided by the whisteblower to the success [of the enforcement action]; (ii) the degree of assistance provided by the whistleblower [or the whistleblower's legal representative] [in the enforcement action]; (iii) "the programmatic interest of the [SEC] in deterring violations of the securities laws by making awards to whistleblowers who provide information that lead to the successful enforcement of such laws; and (iv) such additional relevant factors as the [SEC] may establish by rule or regulation."

Pursuant to the new whistleblower provisions, a whistleblower may be represented by counsel.

The provisions allow a whistleblower to submit information to the SEC anonymously, however in such a case, the whistleblower "shall be represented by counsel" and the whistleblower's identity must be disclosed to the SEC before an award is made to such a whistleblower.

Section 922 specifically authorizes a whisteblower to receive an award "regardless of whether any violation of a provision of the securities laws, or a rule or regulation thereunder" underlying the SEC enforcement action "occurred prior to the date of enactment" of the provisions.

As with many whistleblower provisions, Section 922 prohibits employers from directly or indirectly discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower.

Section 922 also authorizes the SEC to share whistleblower provided information with other U.S. government agencies, including the Attorney General, as well as foreign securities authorities and foreign law enforcement.

In addition to the "original information" limitation discussed above, Section 922 also precludes the following categories of persons from receiving whistleblower awards: (a) various government and law enforcement agency employees; (b) "any whistleblower who is convicted of a criminal violation related to the [enforcement action];" and (c) "any whistleblower who gains the information through the performance of an audit of financial statements required under the securities laws and for whom such submission would be contrary to the requirements of section 10A of the Exchange Act."

Pursuant to Section 922, the SEC "shall have the authority to issue such rules and regulations as may be necessary or appropriate" to implement the above-described provisions.

Wise Policy As Applied to FCPA Enforcement?

As indicated above, the new whistleblower provisions are applicable to all securities laws violations - not just the FCPA.

While the new provisions may or may not represent needed legislation as applied to non-FCPA securities law violations, I do not believe that the whistleblower provisions represent wise policy as applied to FCPA enforcement.


Quite simply the FCPA is enforced like no other securities law (at least that I am aware of).

Against the backdrop of little substantive FCPA case law, the FCPA is enforced based largely on government enforcement agency interpretations that have never been accepted by a court. For every FCPA enforcement action alleging conduct that all reasonable minds would agree violates the FCPA, there is seemingly three FCPA enforcement actions alleging conduct that many reasonable minds question whether the conduct even violates the FCPA. Yet, these latter FCPA enforcement actions, notwithstanding the dubious and untested legal theories they are based on, are routinely settled by companies via a resolution vehicle that does not require the company to admit or deny the SEC's allegations. Quite simply, a settled SEC FCPA enforcement action does not necessarily represent the triumph of the SEC's legal position over the company's, but rather reflects a risk-based decision primarily grounded in issues other than facts and the law. It is simply easier and more cost-efficient for a company to settle an SEC FCPA enforcement (notwithstanding whatever dubious and untested legal theory it is based on) than to participate in long, protracted litigation with its principal government regulator. Ask any seasoned FCPA practitioner and, in a candid moment, they will tell you the same thing.

Against this backdrop, is it wise to award a whistleblower 10-30% of the fines, penalties and disgorgement the SEC recovers in an FCPA enforcement action? Is it wise to award a whistleblower in connection with an FCPA enforcement action when the contours of the FCPA largely remain undefined by the courts? It is wise to award a whistleblower when the company, for reasons other than law or fact, does not even mount a legal defense?

I submit that the answer to each of these questions is no.

Impact on FCPA Enforcement?

Much has been written about the whistleblower provisions and the impact on FCPA enforcement - beginning when the provisions were first included in Congressional financial reform bill drafts.

Among other law firms with an FCPA practice or FCPA practitioners writing about the subject, Morgan Lewis stated that the "new law is likely to greatly increase the number of FCPA matters under government investigation" (see here); Fried Frank predicted that the "new whistleblower program may end up playing a key role in identifying and prosecuting violations of the FCPA" (see here); and Richard Cassin on the FCPA Blog guessed that the "bounty program will result in more FCPA cases against corporations" (see here).

I am not so sure and my guess is that the new whistleblower provisions will have a negligible impact on FCPA enforcement.

My reasons?

For starters, the SEC has long had a similar whistleblower program for insider trading. The results? According to a Senate report accompanying the financial reform package, less than $160,000 paid out to five whistleblowers.

In addition, the new whistleblower provisions will only be triggered when a public company issuer is the subject of an FCPA enforcement action. No public company issuer, means no SEC jurisdiction, means no whistleblower awards. There are many more private companies subject to the FCPA than public company issuers and the new whistleblower provisions should not impact this prong of FCPA enforcement which is indeed large. For instance, with a few exceptions, the vast majority of companies indirectly implicated (at least at this point) in the Africa Sting case are all private companies.

Furthermore, and perhaps most important, most FCPA enforcement actions already result from voluntary disclosures. Is the universe of FCPA enforcement actions really going to expand when public company issuers are already largely voluntarily disclosing conduct to the SEC - presumably the same conduct that a whistleblower would disclose?

On this issue, one thing the new whistleblower provisions may do is pit the whistleblower vs. the company in a strange, yet competitive, high-stakes game of "who has the fastest car" to Washington to disclose the conduct. Simply put, if the whistleblower loses, the information he or she discloses will no longer be "original information" and thus no award. If the company loses, the disclosure will no longer be "voluntary" and the hoped for credit under the DOJ's Principles of Prosecution of Business Organizations and the Sentencing Guidelines will disappear. Against this backdrop, it may be that more conduct will be disclosed that may not even violate the FCPA because the risks of having the "slower car" are to great to pass up. But then again (as detailed in this post) a company voluntarily disclosing conduct that may not even violate the FCPA seems to a norm these days.

If the new whistleblower provisions do indeed have an appreciable impact on FCPA enforcement, the following questions, among others, come to my mind.

Will a law firm with an established FCPA practice start representing whistleblowers on the theory that a contingent fee on a 10-30% cut of an FCPA settlement is more profitable than hourly fee investigations or compliance?

Will a go-to FCPA plaintiffs firm emerge? Which firm/lawyer will it be?

Will the new whistleblower provisions trigger more substantive FCPA case law? How many enforcement actions based on whistleblower information that a company paid for a bottle of wine and opera tickets for an employee of a Chinese state-owned enterprise (ignoring the fact that the company did the same thing for other customers) will it take before a company says - enough of this silliness - will someone please litigate the enforcement agencies "foreign official" interpretation?

Will a "sophisticated" whistleblower with knowledge of the enforcement agencies many dubious and untested legal interpretations use this "gray space" as a point of entry into a much larger potential award on the theory that the "sophisticated" whistleblower is well aware that the enforcement agencies will ask the "where else" question before agreeing to resolve an enforcement action even if the whistleblower is unaware of anything else besides the provided information (which may not even violate the statute) guessing that there is some books or records or internal control issue somewhere in the company that will crop up and raise the award level? (For more on this "where else" question see this prior post).

The new whistleblower provisions provide much to think about and raise the above (and no doubt numerous other) questions.

The best part of the new whistleblower provisions would seem to be that its impact on FCPA enforcement can be monitored and analyzed as Section 922 requires the SEC to submit annual reports to Congress on its whistleblower award program including "the type of cases in which awards were granted." Section 922 also requires the SEC to "establish a separate office within the [SEC] to administer and enforce" the new whistleblower provisions and requires the SEC Inspector General to conduct a study of the whistleblower provisions.

Monday, July 19, 2010

Giffen Update

When your case has slogged along for over seven years, a two week delay is a minor occurence.

In any event, James Giffen's court hearing scheduled for last week has been delayed until July 29th reports Bloomberg's David Glovin in this interesting piece. For more on the Giffen case (see here).

As Glovin notes, the long delay in the Giffen case has spawned "conspiracy theories" and open guessing "whether the U.S. remains committed" to this case.

For starters, Giffen is accused of funneling payments to foreign officials in Kazahstan, including its current President Nursultan Nazarbayev, a U.S. ally who met with President Bush in 2006 "to discuss ways to expand U.S. access to Kazakh oil," according to Glovin.

Adding to the intrigue, Giffen has claimed, as Glovin notes, that "U.S. intelligence services, including the Central Intelligence Agency, authorized him to pay off Kazakh leaders." Giffen's public authority defense has caused most of the delays in the trial as the government has fought to withhold or redact many classified documents.

Over at Harper's Magazine (see here) Scott Horton asks the question - "why is this case languishing?"

Horton states:

"Over the past decade, I discussed the case many times with Kazakhstani officials and businessmen. They were uniformly intrigued by it and keen to learn the details of their government’s darker practices—details that have steadily emerged from the case. They were also all of the same view: this case would ultimately go nowhere because it was not in the interest of the United States to expose damaging information about President Nazarbayev. Moreover, several offered that the Kazakhstani government fully understood how to 'spin' the American system by hiring prominent lobbyists and consultants and engaging the right political figures. It would be able to forestall the case, they assured me. I would reply that the American system didn’t work that way—that our Justice Department was independent and that prosecutorial decisions were insulated from such lobbying. Truth is, I was never myself absolutely convinced of that, and I always felt a bit na├»ve saying it."

Horton concludes with this statement:

"Today, Justice Department spokesmen tell Congress that battling corruption in foreign business dealings is a high priority. They argue that corruption is undermining the war on terror, costing taxpayers billions of dollars in Iraq and Afghanistan. But the handling of the Giffen case provides skeptics with plenty of reason to doubt the sincerity of the Justice Department’s claims. Within the government there are no shortage of career personnel who believe that a properly delivered bribe to a foreign government official is a necessary sort of compromise. A government that winks at corruption in the supposed name of national security may have a hard time prosecuting it in a commercial setting."

Friday, July 16, 2010

Financial Reform Bill Contains Major Compliance Headache

News coverage today will be extensive as to the Dodd-Frank Wall Street Reform and Consumer Protection Act - the financial reform bill - that is expected to be signed by President Obama next week.

But you probably will not see much coverage as to a key "miscellaneous provision" tacked onto the end of the massive bill.

However, to many readers of this blog, this key "miscellaneous provision" is sure to cause much angst - as well it should. And no, I am not talking about the whistleblower provisions included in the financial reform bill that can reward a whistleblower who reports securities laws violations, a provision some are calling the FCPA Whistleblower Bounty Program (see here), even though the provisions are not specific to the FCPA. I will cover these provisions in a future post.

The "miscellaneous provision" is Section 1504.

It is titled "Disclosure of Payments by Resource Extraction Issuers" and it is substantively similar to S.1700, a bad bill that was introduced in the Senate in September 2009. I covered this bill, and its many problems, in this prior post.

As I noted in the prior post, bribery and corruption are bad, but that does not mean that every attempt to curtail bribery and corruption is good.

Case in point is Section 1504 of the financial reform bill.

In short, Section 1504 will substantially increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments. Section 1504 is akin to “swatting a fly with a bazooka" and it attempts to legislate an issue that was sensibly put to rest in the mid-1970's when Congress held extensive hearings on what would become the FCPA.

Section 1504 amends Section 13 of the Securities Exchange Act of 1934 (15 USC 78m) (“Periodical and Other Reports”) by adding a new section “Disclosure of Payments by Resource Extraction Issuers.”

Under this section, "no later than 270 days after enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the [SEC] shall issue final rules that would require:

• a “Resource Extraction Issuer” (a defined term which means an issuer that:(i) is required to file an annual report with the Commission; and (ii) engages in the commercial development of oil, natural gas, or minerals”)

• to include in its annual report

• “information relating to any payment”

• made by the issuer, “a subsidiary” of the issuer, “or any entity under the control of the issuer”

• to a “foreign government” (a defined term which means a “foreign government, a department, agency, or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission”) or the "Federal Government"

• for “the purpose of the commercial development of oil, natural gas, or minerals.”

Although it is possible that the final SEC rules may shed more light on the above provisions, at this point not much about Section 1504 is clear.

Therein lies the problem.

Not sure, if your company is a “Resource Extraction Issuer” because you are unclear what “commercial development of oil, natural gas, or minerals” means?

No problem, Section 1504 provides this crystal clear definition – “the term ‘commercial development of oil, natural gas, or minerals’ includes exploration, extraction, processing, export and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity, as determined by the [SEC]. “

In other words, if you are an issuer, and you engage in “significant actions relating to oil, natural gas, or minerals” you just may have some huge, new reporting / disclosure requirements imposed on you!

Still confused? Join the club.

Is selling equipment to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?” Is selling exploration software to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?”

What is a payment?

That’s an easy one and Section 1504 provides this crystal clear definition – the term payment means:

(i) a payment that is (I) made to further commercial development of oil, natural gas, or minerals; and (II) not de minimis; and

(ii) includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the Commission [...] determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals."

Ignoring for the moment the imperfect and imprecise definition of “Resource Extraction Issuer,” it is one thing to require such issuers to disclose royalties paid to a foreign government, and if that is viewed as providing transparency and eliminating bribery and corruption (however dubious that view may be), well then perhaps Section 1504 is a good piece of legislation.

But Section 1504 seeks disclosure and reporting of much, much more and could conceivably require disclosure of every single dollar a “Resource Extraction Issuer” makes to a "foreign government, a department, agency, or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission" for the "purpose of the commercial development of oil, natural gas, or minerals."

Here is the real kicker though.

Section 1504 requires all payments (meeting the above definitions – if indeed you can figure out what those definitions are) to be disclosed, including perfectly legitimate and legal payments.

To those who supported Section 1504, I've got this to say - "we’ve been down this road before."

It is called the FCPA (and the various versions of the statute before it was enacted). Years of congressional hearings were had as to this very same disclosure issue and we don’t need to repeat this exercise.

Here is some background.

The FCPA as enacted in 1977 contained (and still contains) an outright prohibition on improper payments to "foreign officials" to obtain or retain business (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.

The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.

As to these disclosure provisions, many people, including, most notably Senator Proxmire (D-WI - a Congressional leader on what would become the FCPA), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate.

Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”

The final House Report (see here) on what would become the FCPA is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected):

"Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements."

The words of the late Senator Proxmire and the sensible conclusion reflected in the House Report are equally applicable to Section 1504.

Section 1504 (while however noble its intended purpose) is akin to “swatting a fly with a bazooka.”

The FCPA already criminalizes improper payments made to the “foreign government” recipients targeted in Section 1504 to the extent those payments are made to “obtain or retain business.”

Do we really now need a law that requires “Resource Extraction Issuers” to disclose all such payments, even perfectly legitimate and legal payments?

In passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress apparently said yes to this question. However, with any bill of this magnitude, it is likely that certain members of Congress did not even know what they were voting for or, if they did, were willing to accept undesirable "miscellaneous provisions" to ensure overall passage. In fact, what is now Section 1504 never made it "out of committee" since being introduced in September 2009. A similar bill was also introduced in 2008, but likewise went nowhere.

That is all water under the bridge as they say, because Section 1504 is likely soon to become law.

Thursday, July 15, 2010

China, China and More China


It is a country often talked about on these pages.

Not surprising given the extent to which companies subject to the FCPA have flocked to this growth market in recent years.

Not surprising given that most companies operating in China do so through joint ventures or third parties. Even if a company does business in China through a subsidiary, oversight and control of the subsidiary's employees and agents is often difficult.

Not surprising given the number of Chinese "foreign officials" because the enforcement agencies deem all employees of state-owned or state-controlled enterprises to be "foreign officials." [On this issue, an in-house attorney recently shared with me that during training sessions the attorney tells company employees that there are 1.3 billion "foreign officials" that could be the recipient of a bribe in China. A bit of an exaggeration, but no doubt you get the point.]

I've written about China specific issues, including this guest post for the China Law Blog and more extensively here "The Unique Foreign Corrupt Practices Act Challenges of Doing Business in China."

With many FCPA enforcement inquiries focused on China and with no expected slowdown in China business activity, China issues remain at the forefront of much of what is covered on these pages.

Against this backdrop, two recent practitioner pieces caught my eye.

The first piece (here) is titled "FCPA Compliance in China and the Gifts and Hospitality Challenge" and is authored by Gibson, Dunn & Crutcher attorneys Joseph Warin, Michael Diamant and Jill M. Pfenning.

Below is a short summary of the article.

"This Article discusses the anti-corruption enforcement trends confronting business practices in China, addresses the legal risks posed by the Chinese gift and hospitality culture, and presents suggestions for structuring corporate anti-corruption compliance programs to mitigate these risks. To contextualize law enforcement’s current focus on bribery and other economic crime in China, Part I provides an introduction to the country’s pervasive corruption climate, with a brief summary of recent enforcement actions by both Chinese and U.S. authorities. Turning to the problem of business courtesies, Part II provides background on the unique Chinese gift-giving culture and briefly discusses the FCPA, exploring within the statute’s anti-bribery framework the issue of business courtesy expenditures. Finally, Part III gives advice on how to tailor the gifts and hospitality component of an organization’s compliance program to address this risk in China."

The second piece (here) is titled "The Chinese Puzzle Box: the Conundrum of
Distinguishing a Permissible Gift from an Illegal Bribe" and is authored by Paul, Hastings, Janofsky & Walker attorneys Leslie Ligorner and Barbara Tsai.

Of particular interest is the section on Chinese state-owned entities and China corruption laws. Among other things, the article notes that many SOE employees "behave like private players in commercial playing fields and not in the manner traditionally associated with the behavior of government officials" and that China law "does not specifically include employees of SOEs within the definition of public officials."

Also catching my eye was this recent Businessweek piece by Dexter Roberts titled "The Higher Costs of Bribery in China."

Some China reading material to keep you occupied until the next China-related post.

Wednesday, July 14, 2010

Former SEC FCPA Enforcement Attorney Critical of SEC's Recent Veraz Networks Inc. Enforcement Action

Richard Grime is a former high-ranking SEC FCPA enforcement attorney. While at the SEC, Grime "played a prominent role in the Commission’s FCPA program, spoke at FCPA conferences, and participated or supervised many of the Commission’s FCPA cases. He also worked closely with the Department of Justice on countless parallel investigations." (See here).

Grime is currently a partner at O'Melveny & Myers LLP and is listed as the lead author of this recent release regarding the SEC's recent enforcement action against Veraz Networks Inc.

The Veraz enforcement action was discussed in this prior post. Among other things, I noted in the post that the Veraz enforcement action contributes to several pillars of what I have been calling the facade of FCPA enforcement. In short, one pillar is the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones, and legal conclusory statements of facts or allegations. Check as to the Veraz enforcement action, I stated. Another pillar discussed is the increasing and alarming trend of FCPA enforcement actions being resolved based on tenuous, dubious and untested legal theories. Check as to the Veraz enforcement action, I stated given that the enforcement action (like so many) is based on the SEC's theory, never accepted by a court, that employees of state-owned or state-controlled enterprises are "foreign officials" under the FCPA.

Grime and his co-authors strike the same themes in the release.

Among other things, Grime and his co-authors state that the SEC "complaint discloses little information about the specifics of the alleged misconduct" and "the complaint is remarkably ambiguous about the substance of the alleged violations."

According to Grime and his co-authors:

"The complaint refers to 'gifts,' 'illicit payments,' and 'questionable expenses,' but provides little useful insight as to the surrounding circumstances or even the value of some of the alleged gifts and payments. Similarly, the complaint does not state how the company recorded the payments or how the records were inaccurate."

Why does this matter?

As Grime and his co-authors note: "given that there are few FCPA court opinions, the SEC should seek through these settled complaints to fully explain the facts underlying its actions and how those facts violate the law."

As to the enforcement agencies' interpretation of the key "foreign official" element, Grime and his co-authors state as follows:

"Like numerous prior cases, the SEC alleges that employees of foreign government-controlled companies are foreign 'government officials.' Until a court decides otherwise, the SEC and the Department of Justice will continue to broadly interpret the FCPA and companies will need to diligence the ownership and control of commercial organizations across the world to avoid running afoul of the FCPA."

Grime and his co-authors also dish up this criticism of the Veraz enforcement action:

"By punishing Veraz for such conduct, the SEC provides little incentive for a company to voluntarily disclose misconduct, cooperate, and thereby seek leniency. It is unstated whether Veraz cooperated with the SEC investigation, but the company did disclose that it spent $3 million on the investigation. For that sum, the company presumably assisted the SEC’s investigation, but no credit (or explanation for a lack of credit) is given. The specter that even small payments will be prosecuted may drive companies to conclude that remediation without the government’s involvement is the wiser approach."