Thursday, August 5, 2010

The Other Leaf Drops

The other tobacco leaf dropped for Bobby Jay Elkin Jr. this week.

In April (see here), the SEC charged Elkin, and others, with civil FCPA anti-bribery violations for authorizing, directing and making improper payments to various Kyrgyzstan officials in connection with tobacco business in that country.

This week, Elkin pleaded guilty to a one count criminal information charging him with conspiracy to violate the FCPA. The allegations in the information largely mirror the SEC's allegations in the April enforcement action. See here for the DOJ release, here for the criminal information, and here for the plea agreement.

Elkin was Country Manager for Dimon International Kyrgyzstan (DIK), a wholly-owned subsidiary of Dimon Inc. Dimon and Standard Commercial Corporation merged to form Alliance One International in 2005. Dimon, Standard Commercial and Alliance One are referred to as Companies A, B, and C in the criminal information and DIK is referred to as the Kyrgyz Subsidiary.

According to the information, Elkin conspired and agreed with Dimon, DIK, and others to pay and authorize payment of bribes to "officials of state-owned enterprises and other public officials in Kyrgyzstan in order to secure business for" Dimon and DIK.

The officials included "Kyrgyz Official A," "the Akims" and the "Kyrgyz Tax Inspection Police."

According to the information, Kyrgyz Official A served as the "General Director of the Tamekisi" "an agency and instrumentality of the [Kyrgyz] government [established] to manage and control the government-controlled shares of the tobacco processing facilities throughout Kyrgyzstan." According to the information, the Tamekisi agreed to issue a license to Dimon to process and export tobacco and that from October 1996 through at least February 2004 Elkin and others personally delivered $2.6 million in cash payments on behalf of Dimon and DIK to the official. The information charges that these payments were intended by Elkin and others to "influence acts or decisions" of the official in his official capacity and to secure Dimon's "continued access to the tobacco processing facilities controlled by the Tamekisi."

According to the information, an Akim is a head of Kyrgyz local government with "authority over the sale of tobacco by the growers" within a specific municipality or geographic area. The information charges that beginning in 1996 "it became necessary for [DIK and Elkin] to obtain approval from local Akims to purchase tobacco from the growers in each area. According to the information, several of the Akims demanded payment of a "commission" from Elkin "in order to secure the relevant Akim's approval" for DIK to purchase tobacco from local growers. The information charges that from January 1996 to at least March 2004 Elkin and others personally delivered "numerous cash payments" on behalf of Dimon and DIK "to the Akims of five different municipalities totaling approximately $254,262." According to the information, "the payments to the Akims were bribes, intended to influence the acts and decisions of the Akims and to secure [DIK's] continued ability to purchase tobacco from growers in the muncipalities controlled by the Akims."

As to the Kyrgyz Tax Inspection Police, the information charges that "during periodic audits" of DIK, the police assessed penalties and threatened to shut down DIK. According to the information, from March 2000 to March 2003, Elkin and others "made approximately nine cash payments to officers of the Kyrgyz Tax Inspection Police totaling approximately $82,850 in order to influence the acts and decisions" of the police and to secure DIK's "continued ability to conduct its business in Kyrgyzstan."

What about Alliance One?

The company stated in its recent annual report (here) that it has reached an agreement in principle with the DOJ and the SEC and that its estimated "probable loss" in an enforcement action will be $19.45 million in disgorgement, fines and penalties.

The tobacco industry is proving to be fertile ground for FCPA enforcement.

See here for what Universal Corporation, a Richmond, Virgina based tobacco producer, had to say about its discussions with the DOJ and SEC as to its previously disclosed FCPA matters.


*****

As portrayed in the DOJ's criminal information and the SEC's prior enforcement action, carrying on a tobacco business in Kyrgyzstan appears to have a wild-west component to it.

Extortionate payments, facilitating payments, and payments made to obtain or retain business. These are all points on the same continuum. The first two do not violate the FCPA, payments made to obtain or retain business do.

What does the FCPA's "obtain or retain business" element mean?

The only circuit court decision on this key FCPA element is U.S. v. Kay, 359 F.3d 738, 740 (5th Cir. 2004). The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” language was ambiguous and it thus analyzed the FCPA’s legislative history.

After reviewing the legislative history, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than only those that directly influence the acquisition or retention of government contracts. The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.

However, the Fifth court emphatically 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 court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

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.”

Did the payments at issue in the Elkin enforcement action "merely increase the profitability of an existing profitable company."?

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