Friday, October 29, 2010

Friday Roundup

It has been a few weeks since my last Friday Roundup.

As a result this is a souped-up edition.

Is paying an FCPA fine merely a cost of business, are FCPA internal investigations getting just a bit out-of-hand, have you heard that a new cottage industry of FCPA experts has emerged, quit picking on Canada, will Julian Messent (or others) be prosecuted for FCPA violations, Assistant Attorney General Breuer on the Kleptocracy Asset Recovery Initiative, Proclamation 7750 news, and a son who wants to keep the New York condo ... it's all here in the Friday roundup.

Is Paying an FCPA Fine Merely a Cost of Business?

One may wonder, and legitimately so, whether getting caught for violating the FCPA is simply a cost of doing business whereby the company pays a fine and then continues to do business, including with, in many cases, the U.S. government. See here for my post on Siemens - The Year After, here for my post on BAE's recent $40 million contract with the FBI (note because of the facade of FCPA enforcement, BAE was not charged with violating the FCPA - see here).

Denis McInerney, Chief of the DOJ's Fraud Section, rejected such an assertion during an October 21st speech before the American Bar Association.

According to Inside U.S. Trade, McInerney "sought to rebut charges that FCPA enforcement relies too heavily on settlement agreements and that it is therefore like a licensing regime under which 'companies are allowed to bribe, but if caught they have to pay a fee.'" According to Inside U.S. Trade, McInerney said that in the past two years, DOJ has imposed fines of $59 million, $19 million, $365 million, $338 million, $400 million, $376 million, $579 million and $800 million and he "emphasized that the companies paying these penalties are subject to monitoring which can lead to criminal prosecution if new offenses occur." According to Inside U.S. Trade, McInerney said "I guarantee you that these firms do not view these are mere licensing fees."

Is This Getting a Bit Out of Hand?

Avon previously disclosed the existence of an internal investigation focused on potential FCPA issues (see here for the prior post).

Here is what the company said in its 10-Q filing (here) yesterday:

"As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act (“FCPA”) and related U.S. and foreign laws in China and additional countries. The internal investigation, which is being conducted under the oversight of our Audit Committee, began in June 2008. As we reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation. We are continuing to cooperate with both agencies and inquiries by them, including but not limited to, signing tolling agreements, translating and producing documents and assisting with interviews.

As previously reported in July 2009, in connection with the internal investigation, we commenced compliance reviews regarding the FCPA and related U.S. and foreign laws in additional countries in order to evaluate our compliance efforts. We are conducting these compliance reviews in a number of other countries selected to represent each of the Company’s four other international geographic segments. The internal investigation and compliance reviews are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third−party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and compliance reviews of these matters are ongoing, and we continue to cooperate with both agencies with respect to these matters. At this point we are unable to predict the duration, scope, developments in, results of, or consequences of the internal investigation and compliance reviews."

Here is what Avon had to say in the fling about its net global expenses:

"The increase in Net Global expenses for both the three and nine months ended September 30, 2010, was primarily attributable to significant professional and related fees associated with the FCPA investigation and compliance reviews described in Note 5 to the consolidated financial statements included herein of approximately $24 (up approximately $17 from the three months ended September 30, 2009) and approximately $72 (up approximately $49 from the nine months ended September 30, 2009), respectively. The increase in Net Global expenses for the nine months ended September 30, 2010 was also due to higher costs associated with global initiatives and costs associated with business acquisitions. Professional and related fees associated with the FCPA investigation and compliance reviews, while difficult to predict, are expected to continue during the course of this investigation."

Those figures are not mere dollars, but millions of dollars. And, as noted in the disclosure, the expenses are expected to increase.

On a much smaller (yet still meaningful) scale, on August 31st, Orthofix disclosed (here) the existence of an internal investigation relating to FCPA issues focused on its Mexican subsidiaries, an entity that accounts "for approximately one percent of the Company’s consolidated net sales and consolidated total assets."

Recently, Orthofix provided this update in an 8-K filing (here):

"Operating income in the third quarter of 2010 included the impact of $3.7 million in legal expenses associated with the DOJ investigation of the bone growth stimulation industry and the Company’s internal investigation into its compliance with the Foreign Corrupt Practices Act in its subsidiary in Mexico."

Newsweek Notices FCPA Inc.

Newsweek recently carried a short blurb (here) titled "Going After Graft." Among other things, the piece states:

"With prosecutions likely to continue—the FBI has doubled the number of agents tasked to FCPA cases—business is responding in kind. Law firms are competing for top FCPA talent, banks financing international deals are insisting on anti-bribery stipulations in contracts, and a new cottage industry of experts has emerged, offering country-by-country advice on gifts and local laws. In the words of an FBI spokesperson, FCPA are 'four letters you need to be aware of if you’re doing business in the international marketplace.'"

Quit Picking On Canada

What if, in the U.S., there was no fallback FCPA books and records and internal control charges, there was no voluntary disclosure culture, there were no "overzealous prosecutions," and there were no prosecutions undertaken as "publicity stunts."

According to Cyndee Todgham Cherniak (here), FCPA enforcement would likely resemble the sparse enforcement of Canada's Corruption of Foreign Public Officials Act.

At least that is my take-away from her recent post (here) on the Trade Lawyers Blog.

For more on Canada's Corruption of Foreign Public Officials Act (see here and here).

Will Julian Messent (Or Others) Be Prosecuted For FCPA Violations?

Earlier this week, the U.K. Serious Fraud Office (SFO) announced (here) that Julian Messent was sentenced to 21 months in prison "after admitting making or authorizing corrupt payments of almost US $2 million to Costan Rican officials in the state insurance company, Instituto Nacional de Seguros (INS) and the national electricity provider Instituto Costarricense de Electricidad."

Messent, a former director of London-based insurance business PWS International Ltd. (PWS), was the head of the Property (Americas) Divison at PWS in which role "he was responsible for securing and maintaining contracts for reinsurance in the Central and South America regions."

According to the SFO release, "Messent authorized 41 corrupt payments" "to be paid to Costa Rican officials, their wives and associated companies, as inducements or rewards for assisting in the appointment or retention of PWS as broker of the lucrative reinsurance policy for INS."

The SFO release also indicates that Messent was ordered to pay £100,000 in compensation to the Republic of Costa Rica. (In the U.S., FCPA fines flow solely into the U.S. Treasury).

Messent was charged under the U.K.'s Prevention of Corruption Act 1906 (see here).

According to this report in the Guardian, "the SFO decided not to prosecute PWS because the firm, which has been sold, had a substantial deficit in its pension fund."

According to the Guardian, "the covert payments were routed through bank accounts in the names of the wives of the Costa Rican officials and through accounts in Panama and the US, and a travel agency in Florida."

Under the 78dd-3 prong of the Foreign Corrupt Practices Act, persons other than an issuer or domestic concern (i.e. in this case foreign nationals) can be subject to the FCPA if the improper payments have a U.S. nexus.

Will FCPA prosecutions of Messent (and perhaps others) follow?

Breuer on the Kleptocracy Asset Recovery Initiative

As highlighted in this prior post, in November 2009, Attorney General Eric Holder called asset recovery from corrupt officials a "global imperative" and he announced a "redoubled commitment on behalf of the United States Department of Justice to recover" funds obtained by foreign officials through bribery.

In July 2010, Holder announced (here) the 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." Holder announced that the DOJ is "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."

In a recent keynote address at the Money Laundering Enforcement Conference (here), Assistant Attoney General Lanny Breuer had this to say about the initaitive:

"This Initiative represents a concrete step toward fulfilling that commitment. The Kleptocracy Initiative will involve three key sections in the Criminal Division: the Asset Forfeiture and Money Laundering Section, which will lead it, and the Office of International Affairs and the Fraud Section, which will provide critical support. Once fully implemented, this Initiative will allow the Department to recover assets on behalf of countries victimized by high-level corruption, building on the Justice Department’s already robust enforcement of the Foreign Corrupt Practices Act. Through the Kleptocracy Initiative, the Department will ensure that corrupt leaders cannot seek safe haven in the United States for their stolen wealth. And, if we uncover such wealth, the Justice Department will forfeit and return this stolen money to its rightful owners – the people and governments from whom it was taken."

In his speech, Breuer also discussed (in a non-FCPA context) how the DOJ wants "companies that uncover illegal conduct to come forward voluntarily."

Proclamation 7750 News

In 2004, President Bush signed Proclamation 7750 "To Suspend Entry As Immigrants or Nonimmigrants of Persons Engaged In or Benefiting From Corruption" (see here).

Proclamation 7750 basically says the U.S. can suspend entry into the country "of certain persons who have committed, participated in, or are beneficiaries of corruption in the performance of public functions where that corruption has serious adverse effects on international activity" subject to an exception where denying such entry would be "contrary to the interests" of the U.S.

Last year, the New York Times (here) ran an article quoting a former State Department official as saying the State Department(which is responsible for enforcing the proclamation) "seem[s] to lack the backbone to use this prohibition."

Earlier this month, David Johnson (Assistant Secretary, Bureau International Narcotics and Law Enforcement Affairs, U.S. Department of State) stated at the Third Committee of the 65th Session of the UN General Assembly (see here) as follows:

"The United States continues to broaden its efforts to deny entry into our own country of public officials who receive bribes as well as those who supply them. Corrupt officials are not welcome in the United States."

Joe Palazzolo (Wall Street Journal - Corruption Currents) followed up with Johnson and noted in a recent article that the "State Department is stepping up its game" in seeking to enforce Proclamation 7750. As Palazzolo reports, it is not hard to "step up the game" when "for a long time, one part-official [...] handled 7750 matters."

Palazzolo reports that the State Department recently hired two new employees and is "processing paperwork for two additional hires, who will focus the majority of their time on 7750 issues." The article quotes a State Department official as saying, "it is our hope and intention that the new hires will result in greater capacity."

Son Fights to Keep New York Condo

This prior post discussed the DOJ's civil forfeiture complaint filed in July against certain U.S. properties "that represent a portion of illegal bribes paid to the former president of Taiwan and his wife."

Joe Palazzolo (Wall Street Journal - Corruption Currents) recently reported that "the son of former Taiwanese President Chen Shui-bian has quietly hired legal counsel to prevent a Manhattan condominium, which prosecutors say was purchased with bribes, from falling into the hands of the government."

According to Palazzolo, the son, Chen Chih-chung, has retained Jonathan Harris (see here) to defend against the forfeiture action and Harris is quoted as saying he will be filing a motion to dismiss "shortly."


A good weekend to all.

Thursday, October 28, 2010

The TI Report

[Before turning to the TI Report, I am pleased to share that FCPA Professor has been named a "Top 25 Business Law Blog" by LexisNexis. Voting is open for the top blog, which will be announced on November 3rd. Here is the link to vote. Thank you for your support]

Earlier this week, Transparency International a "global civil society organization leading the fight against corruption" released its annual Corruption Perceptions Index ("CPI") (see here).

As TI's report explains, the CPI "draws on different assessments and business opinion surveys" to compile an index "relating to bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public sector anti-corruption efforts."

In a release TI noted that the "2010 CPI shows that nearly three quarters of the 178 countries in the index score below five, on a scale from 0 (perceived to be highly corrupt) to 10 (perceived to have low levels of corruption), indicating a serious problem.

The United States scored a 7.1 in the CPI index - 22nd out of 178 countries and below several European countries, New Zealand, Australia, Japan, Qatar, the United Kingdom, and others. As others have reported (here) "this was the lowest score awarded to the United States in the index's 15-year history and also the first time it had fallen out of the top 20."

In a video release (here) TI's Chair, Hugette Labelle, stated that "corruption remains a serious obstacle and cause for concern" and that a "vital issue remains enforcement without which all the laws in the world will be of little value."

While the CPI may just seem like a bunch of numbers, the index has real-world application as many companies and FCPA compliance professionals calibrate FCPA risk assessment to the CPI.

Wednesday, October 27, 2010

An Immaterial Disclosure?

The securities laws generally require issuers to disclose material facts and events to investors.

What is material?

Technically, there is SEC guidance on the issue (see here).

The issue basically boils down to whether the information would affect the judgment of a reasonable investor in making an investment decision.

As Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC) explained at the recent World Bribery and Corruption Compliance Forum (here) the concept of materiality itself has two "sub-concepts": (i) quantitative materiality (something that impacts a company's financial statements) - Desmet conceded that very few bribes are quantitatively material; and (ii) qualitative materiality a "complicated gray area" to use Desmet's words. He said that all bribes can be considered qualitatively material because they may "automatically trigger a books and records violation." Because of this, Desmet said that it is "prudent" for any issuer to approach the SEC with any "suspicion" of bribes "as soon as" the company learns of the improper payment.

It is against this backdrop that issuers frequently disclose immaterial payments which may implicate the FCPA.

Case in point, Sensata Technologies Holding N.V. ("Sensata") (here), a global industrial technology company that began trading on the New York Exchange in March 2010 (see here).

The company had this to say in its October 22nd 10-Q filing (here):

"An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether
any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was
immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The
Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions, and other remedies. The Company is unable to estimate the potential penalties, if any, that might be assessed and, accordingly, no provision has been made in the accompanying condensed consolidated financial statements."

Since the disclosure, Sensata's shares have climbed approximately 1.5%.

However, this has not stopped the new breed "FCPA" plaintiff lawyers from acting.

Yesterday, the Shareholders Foundation announced (here) an investigation on behalf of investors of Sensata concerning "whether certain officer and directors of Sensata [...] breached their fiduciary duties and are liable for possibly violating the U.S. Foreign Corrupt Practices Act (“FCPA”)."

Tuesday, October 26, 2010

Congressmen Dingell Bungles the FCPA

Politicians often make curious comments. Including when an election is near.

Case in point, Congressman John Dingell who finds himself in a closer than expected election (See yesterday's Wall Street Journal "Veteran Congressman Feels Heat.")

Yesterday, Dingell released a letter (here) to John Krafcik, President and CEO of Hyundai Motor America Corporation challenging statements Krafcik recently made in which Krafcik "implied Hyundai is more American than U.S. based automobile companies."

Dingell's letter states "[a]s a member of Congress who represents thousands of American workers in the U.S. automobile industry, I find this implication curious and, quite frankly, misleading."

Want to know what I find curious, and quite frankly, misleading?

How Dingell (a lawyer) seems to understand very little about the Foreign Corrupt Practices Act.

In his letter Dingell asks Krafcik two FCPA related questions.

The first - "[g]iven your comments about Hyundai’s being more American than U.S.-based automakers [...] will Hyundai publicly commit to complying with all applicable parts of U.S. statute, including the Foreign Corrupt Practices Act (FCPA)?"

Newsflash - Hyundai Motor America Corporation, a subsidiary of Hyundai Motor Co. of Korea, is a Florida corporation (see here) headquartered in Fountain Valley, California. In other words, it is a "domestic concern" under the FCPA and subject to the FCPA. Given this, I don't see why Hyundai would be the least bit hesitant to publicly commit to complying with a law it is subject to.

The second - "[w]ith respect to compliance with the FCPA, will Hyundai publicly commit to halting sales or the manufacture of its vehicles in Iran?"

Newsflash - the FCPA is silent as to doing business in any particular country or doing business with a foreign government directly. The FCPA's anti-bribery provisions generally prohibit the offering or payment of "anything of value" to a "foreign official" to "obtain or retain business." In sum, Dingell's second question may perhaps raise a valid concern, and the question, as he phrased it, may perhaps raise issues under other U.S. laws - just not the FCPA.

Monday, October 25, 2010

Judge (Again) Significantly Rejects DOJ's Recommendation In Sentencing Bobby Elkins

If the above title sounds familiar, it is.

Last month, the title read "Judge (Again) Significantly Rejects DOJ's Recommendations in Sentencing Nexus Defendants" (see here). As noted in the prior post, the DOJ sought a 14-17 year sentence for lead defendant Nam Nguyen, but the judge sentenced him to 16 months (plus 2 years of supervised release). Further, the DOJ sought multi-year sentences for two defendants, but the judge sentenced them to probation.

Last week, the DOJ sought another multi-year sentence and again the sentencing judge rejected the recommendation and sentenced the defendant to probation.

There is a clear trend developing.

The DOJ may be charging more individuals with FCPA violations, and those individuals may be pleading guilty (perhaps because of the "carrots" and "sticks" the DOJ possesses), but when it comes time to sentencing, judges are viewing these cases much differently than the DOJ.

In August, Bobby Jay Elkin Jr. pleaded guilty to a one count criminal information charging him with conspiracy to violate the FCPA. (See here for the prior post). 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). 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.

Although the sentencing memoranda were filed under seal, this report from the Roanoke Times indicates that the DOJ was seeking a 38 month sentence for Elkin.

Time out said Judge Jackson Kiser.

According to the Roanoke Times, Judge Kiser noted, that in making the improper payments, "Elkin faced a choice of either you do this or lose your job."

Plus, Judge Kiser said, the CIA routinly bribes Afghan warlords, but the CIA's conduct is not illegal. According to the Roanoke Time, Judge Kiser said that this parallel "sort of goes to the morality of the situation."

It appears that these two factors, plus Elkin's cooperation, motivated Judge Kiser to sentence Elkins to three year's probation (plus a $5,000 fine).

Moreover, Judge Kiser "said he would waive the usual travel restrictions of probation to allow Elkin to return to Kyrgyzstan and resume his job" for a Turkish tobacco company.


In April, Elkin was also charged by the SEC (see here).

For more on the related Alliance One enforcement action (see here).

Friday, October 22, 2010

What Will Happen To Lindsey Manufacturing Co.?

The common way for a company to resolve an FCPA enforcement action is via a non-prosecution or deferred prosecution agreement. If the conduct is egregious, yet the company is cooperating, the company will generally plead guilty via a criminal information.

A criminal indictment of a company is rare. According to my records, it has not happened since September 2008.

It happened yesterday.

As noted in this DOJ release, "Lindsey Manufacturing Company (here), an Azusa, Calif., company and two of its executives (Keith E. Lindsey, 65 and Steve Lee, 60) were indicted today for their alleged roles in a conspiracy to pay bribes to Mexican government officials at the ComisiĆ³n Federal de Electricidad (CFE), a state-owned utility company ...". Lindsey Manufacturing Co., Lindsey, and Lee each were charged in an eight-count superseding indictment with conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and FCPA violations

Given the allegations in the recent Enrique Faustino Aguilar Noriega and Angela Maria Gomez Aguilar indictments (see here for the prior post) this is hardly a surprising development.

What is surprising is that Lindsey Manufacturing was criminally indicted. Previous media reports indicated that Lindsey Manufacturing was "cooperating with authorities and wasn't aware that its contracts were being used for bribes" according Lindsey attorney Jan Handzlik (here). According to this report, "attorneys for Lindsey and Lee said their clients had no knowledge of improper payments."

What will happen to Lindsey Manufacturing, a company that has previously secured U.S. Department of Energy contracts?

The conventional wisdom is this post-Arthur Anderson world is that NPAs and DPAs are necessary because a company will fail when it is criminally indicted.

The last company criminally indicted for violating the FCPA was Nexus Technologies Inc. (see here).

It does not exist today (see here).

Thursday, October 21, 2010

The OECD Report - Initial Observations

Yesterday, the OECD released its much anticipated "Phase 3" report (here) on the U.S. implementation and enforcement of the "Convention of Combating Bribery of Foreign Public Officials in International Business Transactions." In other words, the OECD Report ("Report") comments on U.S. enforcement of the FCPA, a statute which (at least in theory) is supposed to model the OECD Convention.

As noted in this OECD release:

"The Working Group commended the United States for its engagement with the private sector, substantial enforcement, and commitment from the highest levels of the U.S. Government. In addition to the recommendation on facilitation payments, it also made recommendations that include the following on ways to improve U.S. enforcement:

- Consolidating publicly available information on the application of the FCPA, including the affirmative defence for reasonable and bona fide expenses;

- To increase transparency, making public, where appropriate, more information on the use of Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs) in specific cases; and

- Ensure that the overall limitation period applicable to the foreign bribery offence is sufficient to allow adequate investigation and prosecution.

The Working Group also highlighted good practices developed within the U.S. legal and policy framework that helped it achieve such a high level of enforcement, including the creation of specialised enforcement units dedicated to foreign bribery, and the use of plea agreements, DPAs and NPAs and the appointment of corporate monitors. These efforts have also encouraged the establishment of robust compliance programmes and measures among companies subject to U.S. anti-bribery law. The Working Group also welcomed the United States’ efforts to encourage close co-operation between the United States and foreign authorities."

The Report is perhaps the single largest collection of FCPA related information and statistics ever in one document. This post will be the first of several posts in the coming days on the information and views contained in the Report.

This post highlights the "Executive Summary," "Introduction" and "Recent Trends in Investigation and Prosecuting FCPA Violations" sections of Report. In addition, this post discusses specific sections of the Report dealing with the FCPA's "obtain or retain business" and "foreign official" elements as well as the use of NPAs or DPAs to resolve FCPA matters.

Before turning to the Report's Executive Summary, let me provide one of my own. [For ease of reading, my observations in this post are in italics].

There is no question that the U.S. is a world leader in enforcing its domestic foreign bribery statute (the FCPA) and the Report rightfully commends the U.S. for this. However, quantity does not always mean quality and U.S. enforcement of the FCPA is not without criticism and questions, including in the Report. One would hardly realize this if all one did was read this joint statement of the Departments of Justice, Commerce and State, and the Securities and Exchange Commission issued yesterday in connection with the Report's release.

But the criticisms and questions are in the Report and the Report contains this contradiction: while loudly praising the U.S. for its "high level" of enforcement, the Report quitely criticizes and questions many of the policies and enforcement theories which yield the "high level" of enforcement. For instance, the Report notes that the FCPA's language "does not specifically convey" that cases concerning "an operating license or permit to operate a business, or a reduction in tax or import duty" are in violation of the statute. Yet, many FCPA enforcement actions are based on this theory. Further, the Report notes that "due to an absence of explicit language in the definition of foreign official" it is an open question whether employees of so-called state-owned or state controlled enterprises are "foreign officials" under the FCPA. Yet, numerous FCPA enforcement actions are based on this theory. The Report notes that the increase in NPAs and DPAs "are one of the reasons for the impressive FCPA enforcement record in the U.S." yet also notes that these agreements are subject to little or no judicial scrutiny.

Perhaps the message for other OECD member nations reading the Report is this - enforce your domestic bribery law in questionable ways, seemingly inconsistent with the intent of the legislature in passing the law, and figure out a way to resolve the enforcement actions without judicial scrutiny. If so, perhaps your nation will one day be praised in an OECD Report for its "high level" of enforcement activity.

The "Executive Summary" of the Report states, among things:

That, since Phase 2 (see here and here) "U.S. enforcement has increased steadily and resulted in increasingly significant prison sentences, monetary penalties and disgorgement. Increased enforcement was enabled by the good practices developed within the U.S. legal and policy framework, including the dedication of resources to specialised units in the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI) and the Securities and Exchange Commission (SEC)."


"The U.S. has investigated and prosecuted cases involving various business sectors and various modes of bribing foreign public officials. In addition, it has been conducting proactive investigations, using information from a variety of sources and innovative methods like plea agreements (PAs), Deferred Prosecution Agreements (DPAs), Non-Prosecution Agreements (NPAs), and the appointment of corporate monitors. Vigorous enforcement and record penalties, alongside increased private sector engagement, has encouraged the establishment of robust compliance programmes and measures, particularly in large companies, which are verified by the accounting and auditing profession and monitored by senior management. Less is known of the effect increased FCPA enforcement has had on small- to medium-sized enterprises (SMEs), which is an issue shared by all Parties to the Convention."

"Ways in which implementation of the Convention could be made more effective have also been identified. For instance, the Working Group recommends that the U.S., in its periodic review of its policies and approach on facilitation payments, consider the views of the private sector and civil society... The evaluation also recommended the consolidation and summarisation of publicly available information on the application of the FCPA, including information regarding the affirmative defence for reasonable and bona fide expenses. This could be especially useful for SMEs. Similarly, given that the U.S. authorities are increasingly enforcing the FCPA by using DPAs and NPAs, the Working Group believes that transparency and public awareness of these measures could be enhanced if the U.S. made public, where appropriate, more detailed reasons on issues such as why a particular type of agreement is used, the choice of an agreement‘s terms and duration, and how a company has met the agreement‘s terms. The Working Group also recommends that the U.S. ensure that the overall limitation period applicable to the foreign bribery offence is sufficient to allow adequate investigation and prosecution."

The Introduction to the Report, under the heading "Cases involving the bribery of foreign public officials," states:

"The United States has investigated and prosecuted the most foreign bribery cases among the Parties to the Anti-Bribery Convention. From 1998 to 16 September 2010, 50 individuals and 28 companies have been criminally convicted of foreign bribery, while 69 individuals and companies have been held civilly liable for foreign bribery. In addition, 26 companies have been sanctioned (without being convicted) for foreign bribery under non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs). Sanctions have also been imposed for accounting misconduct and money laundering related to foreign bribery."

"These cases have resulted in increasingly significant penalties. From 1998 to 2003, the maximum monetary sanctions levelled against a company in an FCPA case were USD 2.5 million. Since then, 23 companies have received monetary sanctions in excess of USD 10 million. In one case, monetary sanctions totalling USD 800 million were ordered against a single company. In 2010, an 87-month sentence was imposed against an individual in an FCPA case. Since 2004, over USD 1 billion in foreign bribery proceeds have been recovered through disgorgement actions. The SEC also obtains civil penalties in addition to DOJ criminal fines. In the first 9 months of 2010 alone, the SEC obtained over USD 404 million in disgorgement, interest and civil penalties from thirteen companies and eight individuals. Representatives of the private sector told the evaluators that these increasingly heavy sanctions combined with the increased number of prosecutions against companies and individuals have significantly raised the FCPA‘s profile. They are also felt to be the main reason why many companies have taken steps to improve their anti-bribery measures, internal controls, books and records, and compliance systems."

[Note - the above referenced 87-month sentence of Charles Jumet is misleading. Elsewhere in the Report it states: "In a recent case, a defendant was sentenced to 87 months in prison for FCPA violations." Fact check - Jumet pleaded guilty to two counts - conspiracy to violate the FCPA and making false statements to federal agents. The false statements portion of his sentence was 20 months. Thus, Jumet's "FCPA" sentence was 60 months - not 87 months]

"These cases come to the authorities‘ attention through a myriad of means. A significant number (but not the majority) of investigations result from voluntary self-reporting by companies. Other sources include corporate securities filings; suspicious activity reports from financial institutions; the media, including keyword searches of the Internet; whistleblowers, employees, customers, competitors, and agents; qui tam and civil complaints; referral from other U.S. government agencies, including overseas embassies; international financial institutions such as the World Bank; reports through a "hotline" email address and website; and information from foreign states, including requests for mutual legal assistance (MLA). A recent case resulted from an undercover sting operation. Investigations also originate from research and traditional law enforcement operations to determine where corruption may exist. The U.S. utilizes statistics that it compiles and information obtained in prior and current FCPA cases to identify trends and patterns of behaviour that warrant investigation. The U.S. also conducts industry sweeps, which are targeted investigations focusing on a particular industry or market. The U.S. believes that the use of such proactive tools keeps its regulators ahead of trends and allows them to combat corruption in a timely fashion. The U.S. did not provide statistics on the sources of investigations, due to the need to protect investigative sources and methods, but confirms that no one source accounted for a majority."

"These FCPA enforcement figures are expected to increase in the near future. Presently, the United States has more than 150 criminal and 80 civil ongoing FCPA investigations. [a footnote states "many are parallel criminal and civil investigations of the same alleged conduct"] The U.S. authorities recently announced new initiatives including investigations of specific industries ("targeted sweeps" or "industry-wide sweeps") and an increased emphasis of prosecuting natural persons in addition to companies. These efforts will likely lead to more prosecutions and convictions."

Under the heading "Recent trends in investigating and prosecuting FCPA violations," the Report states, among other things, as follows:

"Allegations of FCPA violations come from a variety of sources. This part of the report canvasses a few of the most important sources. According to the DOJ, voluntary disclosures are the source of a significant proportion of investigations, although not the majority."


"... companies consider it in their interest to be co-operative, and seem willing to settle more often than not when they have voluntarily disclosed. While some companies self-report violations of the FCPA, some companies do not. Representatives of companies in the extractive industry explained that it is very common for a company to uncover one discrete violation of the FCPA and voluntarily disclose it, following which the DOJ or SEC asks the company to look further to see if the conduct is pervasive and occurring in other places. In some cases, the conduct is pervasive and is fully investigated by the DOJ and SEC. In other cases, the conduct is limited in scope and no additional violations are uncovered. Some companies may find this very cumbersome and expensive, and try to settle the case without a full investigation. However, the DOJ and SEC advise that they require companies to complete their investigations before finalising settlement discussions."


"Proactive investigative steps by the DOJ and SEC, such as industry-wide sweeps, can also produce information that leads to enforcement actions. In November 2009, an industry-wide investigation into the pharmaceutical industry was announced by Assistant Attorney General, Lanny Breuer. An investigation into the medical device industry has also been discussed publicly. The Oil-for-Food cases involved a sweep of companies that paid kickbacks to the Iraqi Government during the United Nations Oil-for-Food Programme. The sweep was very effective and more than fifteen companies have been charged to date."

"Such investigations may be commenced by sending "sweep letters" requesting co-operation from industry members on a voluntary basis. If a company chooses to not respond to such a letter, the DOJ and SEC consider whether a subpoena should be issued to compel the production of relevant documents and the testimony of individuals. Recently, the SEC announced that it will be conducting more industry-wide sweeps. Investigations of this kind enable the DOJ and SEC to develop specialised expertise identifying illegal conduct and conducting prosecutions involving various industries. In addition, due to the cross-connections between various members of the same industry, an investigation into one company can produce leads about other companies, including those in the supply-chain."

"More traditional sources of allegations also continue to be useful, such as anonymous whistleblower reports. Such reports are often received from current and former employees, competitors, and others, and are analysed by the FBI to ensure their veracity. The DOJ provides a "hotline" to report anonymously directly to the FCPA Unit. The SEC also has a hotline and a detailed process for analysing tips, complaints and reports of FCPA violations."


"[Mutual Legal Assistance] requests from foreign jurisdictions also provide a basis for allegations, although to a lesser extent than other sources."

"United States embassy staff are also important sources of information about FCPA violations. The DOJ cited examples of full-blown investigations that were launched due to information provided by an embassy and referrals from State Department and Commercial Services branches. In one of these investigations, the embassy stayed involved throughout."

As to Dodd-Frank's whistleblower provisions, the Report states:

"The U.S. authorities believe that in light of this new legislation, reporting violations of the FCPA is likely to increase."

FCPA Elements

Among other elements, the Report discusses the "obtain or retain business" and "foreign official" elements of the FCPA.

"Obtain or Retain Business"

The Report states:

"One important aspect of the foreign bribery offence in the FCPA is different from the description of the offence in Article 1 of the Convention. Under the FCPA, the bribery of a foreign public official must be committed in order to assist the briber "in obtaining or retaining business for or with, or directing business to, any person‘ (known as the "business nexus test‘). In Article 1 of the Convention, the corresponding formulation is: "in order to obtain or retain business or other improper advantage in the conduct of international business."

"Thus, unlike Article 1 of the Convention, the FCPA language does not specifically convey that the case is covered where the purpose of the bribe is to obtain or retain other improper advantage in the conduct of international business, such as obtaining an operating license or permit to operate a business, or a reduction in tax or import duty. In other words, the FCPA language might be read to only address bribes for the purpose of obtaining or retaining business per se. Reference is made to "improper advantage" elsewhere in the FCPA, but in a different context – i.e., the offences in the FCPA inter alia cover the case where the purpose of a bribe to a foreign public official is to secure "any improper advantage…in order to assist such [person/issuer/domestic concern] in obtaining or retaining business for or with, or directing business to, any person‘."

"However, it has been the position of the United States Government throughout that the FCPA formulation is very broadly interpreted and covers in practice the kinds of advantages required to be covered by the Convention. The evaluation team notes that this position has been largely confirmed by jurisprudence, in the 2007 decision of the United States Court of Appeals in United States v. Kay."

"In U.S. v. Kay, the Court of Appeals held that a payment to customs officials to reduce import duties on rice falls within the parameters of the "business nexus" test because when Congress enacted the FCPA it was concerned about: (1.) Bribery that leads to discrete business contract arrangements; and (2.) Payments that even indirectly assist in obtaining business or maintaining existing business operations in a foreign country. The Court of Appeals also stated that:

…bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA‘s proscription. We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It must be shown that the bribery was intended to produce an effect – here through tax savings – that would "assist in obtaining or retaining business"."

"The decision of the Court of Appeals in U.S. v. Kay is therefore helpful, in that it clarifies that payments to, for instance, reduce import duty "could" satisfy the "business nexus test". The United States has also successfully enforced the FCPA in cases involving similar advantages, such as payments to customs officials to import goods and materials (Helmerich & Payne; and Natures Sunshine), and payments to tax officials to reduce tax obligations, and to judicial officials for favourable treatment in pending litigation (Willbros Group). On the other hand, the clarification by the Court of Appeals leaves open the possibility that there might be cases where a bribe to a foreign public official to facilitate international business does not violate the FCPA, although it does meet the test of "other improper advantage in the conduct of international business" in Article 1 of the Convention."

For more on U.S. v. Kay (see here and here).

The Report's discussion of the "obtain or retain business" is noteworthy.


Because on the one hand, the Report praises the U.S.'s high level of FCPA enforcement, yet on the other hand, the Report candidly acknowledges that "the FCPA language might be read to only address bribes for the purpose of obtaining or retaining business per se." Connecting the dots, the Report seems to suggest that the numerous FCPA enforcement actions premised on improper payments to secure foreign licenses, permits, etc. may not even be FCPA violations.

In my forthcoming article "The Facade of FCPA Enforcement" to be published soon in the Georgetown Journal of International Law, I highlight the increase in FCPA enforcement actions where the improper payments are alleged not to obtain or retain any particular business, but rather, involve customs duties and tax payments, or payments alleged to have assisted the payer in securing foreign government licenses, permits, and certifications.

I must also take issue with the sentence in the Report that suggests when the DOJ enters into a NPA (such as in Helmerich & Payne) or DPA that this is evidence of the U.S. "successfully enforcing the FCPA." This is one of the many reasons why the "facade of FCPA enforcement" matters - because it fosters the absurd notion that privately negotiated settlements, subject to little or no judicial scrutiny, entered into in the context of the enforcement agencies possessing substantial “carrots” and “sticks" should serve as de facto case law or otherwise represent "successful" enforcement of the FCPA.

"Foreign Official"

As to the definition of "foreign official," the Report states:

"Due to an absence of explicit language in the definition of "foreign official" in the FCPA, two questions arise concerning the scope of the definition: (1.) Whether, in compliance with the Convention, it covers a person holding a judicial office of a foreign country‘; and (2.) Whether it covers a person exercising a public function for a foreign country, including for a…public enterprise‘ (i.e. a state-owned or controlled enterprise)."

Readers know that this second question is a frequent topic on these pages and deservingly so. It is no small matter. As I highlight in this recent article in the Indiana Law Review (here), this dubious interpretation of the "foreign official" element was at the core of 66% of 2009 FCPA enforcement actions against business entities as well as numerous individuals. And that was just in 2009. Several pre-2009 enforcement actions as well were based on the theory that employees of state-owned or state-controlled enterprises are "foreign officials" under the FCPA.

So again, on the one hand the Report praises the U.S.'s high level of FCPA enforcement, yet on the other hand, the Report openly questions the definition of "foreign official" that was used in a significant percentage of recent FCPA enforcement actions.

The Report then contains a discussion of the Nexus Technologies case and advances the DOJ's curious assertion that resolution of this matter (see here) validates its interpretation that employees of so-called state-owned or state-controlled enterprises are "foreign officials" under the FCPA.

The Report states:

"Since Phase 2, there have been positive legal developments regarding the second question on the bribery of employees of state-owned or controlled enterprises, in U.S. v. Nam Quoc Nguyen, et al. (E.D. Pa., September 4, 2008), in which the District Court recently held in favour of the United States Government in a case involving allegations that the defendants bribed employees of a foreign state-owned company. The defendants argued that the definition of "foreign official" in the FCPA does not include employees of state-owned enterprises, because in order for an organisation to be considered an "agency or instrumentality" of a foreign government, it must serve a "purely public purpose". The United States Government, citing the legislative history of the FCPA, responded by arguing that "public purpose" is only one of the many factors in determining that an organisation is an "agency or instrumentality" of a foreign government, and that Congress expressly intended to include employees of state-owned enterprises in the definition of "foreign official"."

As I highlighted in this prior post, in its briefing in the Nexus case the DOJ specifically urged the judge, on a number of occassions, not to consider the defendant's substantive "foreign official" argument because they were premature. The following are snippets from the DOJ's brief: (i) "the Court need not address any of these faulty arguments at this time:" (ii) "although styled as a motion to dismiss, Defendants’ submission is instead a premature request for a ruling on the sufficiency of the Government’s evidence before any of that evidence has been presented. These arguments, which are premature at best, will be moot after presentation of the Government’s case." (iii) "because Defendants’ arguments turn entirely on issues of fact, they are premature."

Continuing on this issue, the Report states:

"Although the Court ruled in favour of the United States, it did not issue a written opinion, and the defendants did not file an appeal. In addition, District Court opinions are not binding on higher courts or courts of other U.S. jurisdictions. The DOJ informed the evaluators that this means the Government interpretation could be disputed again. However, the DOJ believes the argument would fail again given the FCPA‘s legislative history, and because numerous cases have been brought by the DOJ and SEC in which the definition of "foreign official" has been broadly interpreted." This last sentence has a footnote which states: "For instance Willbros Group involved the bribery of foreign judicial officials, Siemens AG involved payments to various persons from state-owned companies, and Diagnostic Products, involved payments to doctors of state-owned hospitals. The United States explains that in each of these cases, pursuant to Federal Rule of Criminal Procedure 11, a court had to determine whether all the elements of the offence have been proven including that the receiving individual was a foreign public official."

On this issue, the Report concludes with this "commentary"

"The evaluators welcome positive legal developments concerning the application of the definition of ‘foreign official’ in the FCPA to members of the judiciary and employees of state-owned or controlled enterprises."

In the "Recommendations" section, the Report notes that the "Working Group will follow up the issues below, as the case-law continues to develop, to examine: [...] whether amendments are required to the FCPA to supplement or clarify the existing language defining the elements of the offense of foreign bribery with regard to [...] (ii) the scope of the definition of a 'foreign public official,' in particular with respect to [...] the directors, officers, and employees of state-controlled enterprises or instrumentalties."


The Report states:

"Due to their increasing importance in law enforcement actions by the DOJ, the evaluators sought information about the deterrent effect of DPAs and NPAs. The evaluators were also conscious that the SEC intends to also begin using DPAs and NPAs to encourage companies and individuals to co-operate with SEC investigators."

"It seems quite clear that the use of these agreements is one of the reasons for the impressive FCPA enforcement record in the U.S. However, their actual deterrent effect has not been quantified; although the DOJ hears anecdotally from companies that their use has made FCPA compliance high priority."

The Report states:

"DPAs are technically subject to judicial review and approval, but most judges do not appear to scrutinise DPAs. Unlike a DPA, an NPA does not involve the court."

"Although DPAs and NPAs have existed since 1993, their use has grown dramatically in recent years. Since 2004, the annual average number of DPAs and NPAs entered into by the DOJ has grown from less than 5 to over 20 and a high of 38 in 2007. In FCPA cases, DPAs and NPAs were not used until 2004. Since then, they have been used in 30 out of 39 concluded criminal enforcement actions against companies."

"Explanations for this phenomenon vary. The dramatic increase occurred shortly after the prosecution and collapse of the accounting firm Arthur Andersen which led to thousands of jobs lost. Avoiding such collateral consequences of prosecution is generally cited as why DPAs and NPAs are used. In FCPA cases, factors such as the protection of employees and shareholders also play a role, according to U.S authorities. The U.S. authorities also believe that companies often prefer to resolve matters through DPAs and NPAs in lieu of going to court and undergoing a potentially lengthy process and resulting press scrutiny. As well, the DPAs and NPAs in FCPA cases generally cite factors such as the defendants‘ co-operation and self-reporting of the crime as the reasons for the agreement. These agreements are thus used as an incentive for voluntary disclosure and co-operation. The U.S. authorities also use DPAs and NPAs to resolve cases quickly. Finally, FCPA cases usually involve obtaining evidence from foreign countries, which can be time-consuming and unsuccessful. DPAs and NPAs can be used to secure a company‘s co-operation and obtain overseas evidence where the MLA process is cumbersome or unavailable."

"In January 2010, the SEC announced that it would begin using co-operation agreements, DPAs and NPAs in FCPA cases. A co-operation agreement is similar to a plea agreement in criminal proceedings. An individual or company must provide substantial assistance to an SEC investigation and co-operate fully and truthfully. In return, the SEC Enforcement Division agrees to make certain recommendations to the Commission, such as the individual or company should receive credit for co-operating. DPAs and NPAs require the company or individual to co-operate fully and truthfully, and to agree to comply with prohibitions and/or undertakings. DPAs also require the company or individual to admit to or not contest certain alleged facts. NPAs are available only in "limited and appropriate circumstances". All three types of agreements require the company or individual to agree to toll the statute of limitations. The SEC has not yet used one of these agreements, given that the policy to use them was adopted only recently."

In the "commentary section" the Report states:

"The evaluators note that PAs, DPAs, NPAs and the appointment of corporate monitors are an innovative method for resolving cases, and has evolved into an important feature of the U.S. criminal justice system, which has helped to enable a high level of enforcement activity. These measures have been used extensively in FCPA cases, especially in recent years. Guidance exists on the use of these agreements. Some private sector representatives would like more guidance but the U.S authorities disagree."

"A useful compromise may be for the DOJ and the SEC, where appropriate, to make public in each case in which a DPA or NPA is used, more detailed reasons on the choice of a particular type of agreement, and the choice of the agreement’s terms and duration; and the basis for imposing monitors. The DOJ already does so for PAs through sentencing memoranda. Greater transparency on these issues would add accountability and enhance public confidence in the DOJ’s and SEC’s enforcement of the FCPA. Making public this information would also raise awareness of how these agreements enhance foreign bribery enforcement efforts."

As to "recommendations" the Report states:

"Regarding the use of NPAs and DPAs, the Working Group recommends that the United States:

a. Make public any information about the impact of NPAs and DPAs on deterring the bribery of foreign public officials [..]; and

b. Where appropriate, make public in each case in which a DPA or NPA is used, more detailed reasons on the choice of a particular type of agreement; the choice of the agreement‘s terms and duration; and the basis for imposing monitors [...]".

As noted in the OECD release:

"The United States will make an oral follow-up report on its actions to implement certain key recommendations of the Working Group after one year. The United States will further submit a written report to the Working Group within two years, which will be the basis of a publicly available evaluation by the Working Group of the United States’ implementation of the recommendations."

Stay tuned for more.

Wednesday, October 20, 2010

Will Dodd-Frank's Whistleblower Provisions Be Exported?

Meet Markus Funk (here). He is a former DOJ attorney and now a partner at Perkins Coie.

He recently wrote a piece (here) that caught my eye.

It's about Dodd-Frank's whistleblower provisions.

You might ask, what isn't these days!

Funk's piece however is a bit different because it uses Dodd-Frank's whistleblower provisions to ask the question - will signatory nations of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (here) incorporate similar provisions into their domestic law to demonstrate commitment to combating bribery?

Interesting question - and more on this below.

First a quick summary of Funk's piece.

In it, Funk states that "the passage of [Dodd-Frank] signals a significant acceleration of the U.S. government's already intensified Foreign Corrupt Practices Act enforcement efforts." He states that by "unveiling" Dodd-Frank's whistleblower provisions "to the world" "the United States heralds a new phase in its increasingly global anti-bribery enforcement efforts."

Funk then writes, "as U.S.-led political pressures to enhance national anti-bribery efforts continue to grow, the Dodd-Frank Act's novel enforcement mechanisms have the potential to attract international imitators." He further states: "with mounting global pressure (not the least of which originates from the United States) on signatory states to comply with the Anti-Bribery Convention's requirements, currently under-performing countries will likely be looking for efficient and effective ways to demonstrate their earnest intent to live up to their commitments." "Given this backdrop," Funk writes, "the Dodd-Frank's Act's new whistleblower provisions may well stand out as an ideal template for others (who are not culturally or otherwise averse to such rewards) to emulate."

As noted in a prior post (here) Dodd-Frank's whistleblower provisions are buried deep in the 2,000+ pages of the Dodd-Frank Act. The provisions apply to all securities law violations. It is an open question whether anyone in Congress had the FCPA on their mind when voting for Dodd-Frank, including its whistleblower provisions.

Yet, perhaps because the FCPA bar is such an active group of writers, Dodd-Frank's whistleblower provisions have come to be reported in some circles as the FCPA whistleblower provisions. After all, the FCPA is indeed part of the Securities and Exchange Act of 1934 so the generic whistleblower provisions are indeed FCPA relevant.

In any event, I wondered why Funk wrote that "the passage of [Dodd-Frank] signals a significant acceleration of the U.S. government's already intensified Foreign Corrupt Practices Act enforcement efforts" and why he wrote that Dodd-Frank's generic whistleblower provisions "symbolize the government's accelerating fight against foreign corruption."

So I went to the source and posed Funk the following question.

"Why do you believe that a generic securities law provision in a 2,000+ page financial regulatory reform bill is going to prompt other countries to adopt bribery/corruption specific whistleblower provisions?"

Below is Funk's response, posted with his express permission.


'My answer to your question comes in parts.

Let me start out with an observation directed towards your question's basic premise. I do not see why the raw page-count of the Dodd-Frank Act should have any meaningful bearing on whether its whistle blower provisions are (1) generally known and understood, or (2) likely to generate domestic success or foreign imitators.

Pundits, the media, and legal observers have certainly succeeded in swiftly digging through the bill's 2,000+ pages of text and zeroing in on the tip-generating provisions we are talking about. Their very public analysis, moreover, strips away from the whistleblower bounty provisions any obscurity they may at one point have enjoyed (and, as the widespread attention to the Act signals, most observers do not categorize the novel provisions as unexceptionally "generic").

Evidence of the recently-enacted whistleblower provisions' emergent renown is, indeed, plentiful. Do a simple Google search for "Dodd-Frank" and "whistleblower," and watch the thousands of hits come pouring in. Most foreign-based white collar websites, whether run by governments or lawyers, moreover, contain extensive and nuanced analysis of the Act's whistleblower provisions. Hardly the reception accorded to an enactment that got lost in the shuffle.

And the whistleblower provisions' renown is not the only thing that has confounded critics' expectations; within a few short months, the Act has begun to yield actual real-world results. As recently reported by the Wall Street Journal, the new whistleblower incentives have generated an average of one tip a day (though the quality of the tips, and the country of origin of the tipsters, is admittedly still unknown).

These newly-generated/motivated tipsters, as well as the steady drumbeat of domestic and international corporate clients expressing concern about, and wanting more information on, this particular aspect of the Dodd-Frank Act, at a minimum place significant doubt on the position that the Act's whistleblower provisions are so deeply buried within the rest of the Act that their effectiveness is nil because nobody knows about them.

Having addressed your foundational criticism of the Dodd-Frank whistleblower provisions, we can now move on to a companion challenge facing our ramped-up transnational anti-bribery efforts (and, for that matter, facing transnational law enforcement efforts generally).

Skeptics of global anti-bribery efforts now point to the much-cited International Bar Association's recent survey of 642 legal professionals in 95 jurisdictions for proof that even lawyers don't know about the world's leading anti-bribery conventions and instruments. The IBA survey revealed that roughly half of the world's lawyers have never heard of the FCPA. Some 70 percent of those questioned, moreover, knew nothing about the U.K. Bribery Act, and 40 percent are entirely unfamiliar with the Organization for Economic Cooperation and Development ("OECD") and United Nations anti-corruption conventions. Four in 10 respondents in developed countries such as Denmark, Germany, Canada, and Japan likewise knew of none of these anti-bribery instruments; the result was bumped up to 7 in 10 for New Zealand and Hong Kong lawyers.

Observers hold these results up as conclusive, damning proof that few in the world's legal community know, or much care, about these internationally celebrated/hyped anti-bribery enactments.

It would be pointless for me to argue against the existence of an unfortunate, long-standing dissonance between international diplomatic proclamations, on the one hand, and tangible results on the ground, on the other. Indeed, I have personally experienced this frustrating phenomenon while working in post-conflict countries for the U.S. State Department, and have also written a book on the International Criminal Court which takes aim at the international community's "much talk, little action" habit.

But, in the present context, I remain unmoved by the IBA's headline-grabbing findings. For one, these survey results smack of a high-minded variant of Jay Leno's "Jaywalking," in which Leno probes the proverbial "man on the street's" basic knowledge of topics such as history, politics, and world affairs. The hapless respondents are inevitably revealed to be, or at least portrayed as being, ignorant dolts.

Similarly, the IBA's survey results stand for little more than the rather unremarkable proposition that the "average" attorney (the survey omits any indication of specialization or areas of the survey-takers' expertise) is not particularly well-versed on the topic of international anti-bribery instruments. Wish it weren't so, but does it really matter?

Surveys of similar type could undoubtedly be constructed to reveal lawyers worldwide as wholly unfamiliar with wide swaths of accumulated substantive legal knowledge (anyone interested in taking a pop quiz surveying the examinee's understanding of patent, human rights, or regulatory law?).

Are the IBA survey takers' low scores to be read as meaning that global anti-bribery efforts are under-appreciated by lawyers to such an extent that they are rendered irrelevant? Hardly. What actually matters, of course, is whether the key decision-makers active in the anti-bribery fight know about these provisions. They clearly do.

But even if these survey results are meaningful, the "so what?" question remains: do the low scores represent (1) a call to action, or (2) a call to throw in the towel? Even assuming purely for the purpose of argument that throwing in the towel is the more sensible course, this clearly is not what the U.S. Government has in mind. Quite to the contrary.

In one public pronouncement after another, high-ranking Department of Justice, State Department, and Administration officials reaffirm the U.S. Government's commitment to remain fully engaged in – and, indeed, to significantly ramp up – the global fight against public corruption.

During his May 31, 2010, address to the Organization for Economic Cooperation and Development (OECD) in Paris, for example, Attorney General Eric Holder publicly announced the U.S. Government's continued support for the Anti-Bribery Convention: "As Attorney General, I have made combating [global] corruption one of the highest priorities of the Department of Justice." Holder additionally announced the Government’s intent to strengthen global anti-bribery efforts through enhanced transnational collaboration and the sharing of "best practices." Not coincidentally, in the month following the Attorney General's speech, the U.S. House passed the Dodd-Frank Act’s conference report of the bill.

Whether through high-minded moral leadership, innovative new initiatives, or more pedestrian, self-interested incentives connected with financial-based trade, aid, and protection, the U.S. has a way of ensuring that its message is heard – heard loud and clear, actually – and acted on. And there is no need to even walk down the increasingly lonely road of American exceptionalism to make this point. Realpolitik will suffice.

Few would dispute that, despite some recent setbacks, the U.S. Government continues on as the dominant force in world affairs. When the U.S. takes action, foreign governments and global businesses take notice.

Well-publicized, enormous fines/disgorgements of corporate wrongdoers collected not only in the U.S., but increasingly also abroad, only further raise awareness, underscoring that the "old way" of doing business is coming to an abrupt end. Even on the enforcement side, good news for corporate criminals is hard to come by.

The proliferation of Mutual Legal Assistance Treaties (MLATs) between the U.S. and other countries, moreover, make extradition and public trial a reality. As USDOJ Criminal Division Assistant Attorney General Lanny Breuer put it during a May 2010 speech: “We are actively working with our foreign counterparts in various areas to ensure that country borders won’t limit our ability to fight fraud . . . . As recently as February, new U.S.- E.U. agreements on mutual legal assistance and extradition went into effect. These agreements offer significant new tools that will streamline cross-border investigations and allow for even greater cooperation with our counterparts abroad.”

The world is clearly growing uncomfortably smaller for corporate criminals. Viewed from this perspective, we are currently experiencing a race to the top, not a race to the bottom.

Available international numbers in fact lend support for the argument that mounting U.S. diplomatic pressure aimed at increasing global anti-corruption efforts is, to some extent at least, achieving its desired result. Transparency International (TI) recently released its "July Progress Report 2010: Enforcement of the OECD Convention on Combating Bribery of Foreign Public Officials." TI notes that, between 2009 and 2010, the number of signatory countries actively enforcing the Anti-Bribery Convention increased from four to seven (those countries representing some 30 percent of world exports). Furthermore, since the mid-2000s, the number of moderately enforcing countries doubled from 8 to 16.

Although these statistics demonstrate that most signatory countries still have considerable room for improvement towards living up to their anti-bribery commitments, the recent uptick in enforcement signals that domestic and international pressures have not gone unnoticed. The Dodd-Frank Act's novel way of incentivizing individuals with knowledge to step forth and blow the whistle is readily-understood, and provides a simple way to increase OECD Anti-Bribery Convention compliance. Considering that the U.S. Government is giving every available signal that these pressures will, if anything, only increase, it is reasonable to expect global anti-corruption initiatives and cooperation to trend in the same direction.

To the extent that the innovative Dodd-Frank whistleblower bounty provisions continue to generate substantive tips, and that foreign whistleblowers are appropriately protected, there is no reason to think that other countries will not imitate the provisions in the same way as other effective U.S.-born legal provisions have found new second homes throughout the world."

Tuesday, October 19, 2010

The FCPA Mulligan Rule?

The FCPA Opinion Procedure regulations (here) state that issuers and domestic concerns subject to the FCPA may "obtain an opinion of the Attorney General as to whether certain specified, prospective -- not hypothetical -- conduct conforms with the Department's present enforcement policy regarding the antibribery provisions of the Foreign Corrupt Practices Act."

Since 1980, the DOJ has issued 55 FCPA opinion procedure releases (see here and here).

In nearly every instance the DOJ expresses an opinion that it does not intend to take any enforcement action as to the disclosed facts or conduct? If my figures are correct, in 54 of the 55 opinion procedure releases (98%) the DOJ expressed such an opinion. [The only exception would appear to be 98-01 (here)].

Perhaps you already knew this, but recently I learned something that may help explain this 98% no enforcement statistic.

What did I learn?

That often times, when the requestor senses that it will not receive a favorable DOJ opinion, it simply withdraws the request. I confirmed that this practice does indeed occur with a former high-ranking DOJ FCPA official and others.

Call it the FCPA mulligan rule.

Sec. 80.15 of the opinion procedure regulations specifically states that "a request submitted under the foregoing procedure may be withdrawn prior to the time the Attorney General issues an opinion to such request."

But here is the issue as I see it.

How does the requestor get the sense that it will receive an unfavorable DOJ opinion so that it can withdraw the request before the opinion procedure is publicly released?

After all, Sec. 80.09 of the regulations, titled "no oral opinion," states: "no oral clearance, release or other statement purporting to limit the enforcement discretion of the Department of Justice may be given."

This would seen to eliminate DOJ oral communications to the requestor as to DOJ's initial observations which may then motivate the requestor to withdraw the request.

Sec. 80.8 of the regulations requires that the Attorney General "respond to the request by issuing an opinion ...". So if the initial DOJ observation which then motivates the requestor to withdraw the request is communicated in writing, should the writing be made public in the same fashion as the opinions that are actually released? Would this not add to the mix of information available as to the FCPA?

As long as I am in question mode, let me throw out this question (see here for the prior post) - should DOJ's declination decisions be made public?

At a recent public event, I asked Charles Duross (DOJ FCPA chief) this question and he said (see here) that it was a "difficult issue." In a recent video (here - start at the 6 minute mark), William Stuckwisch (DOJ) wondered aloud whether DOJ declination decisions should be made public. Last, but not least, in this recent Q&A with Sue Reisinger of Corporate Counsel Billy Jacobson (a former high-ranking DOJ FCPA official) stated: "The Justice Department could publicize cases anonymously that it has not brought because of the company's actions."

Monday, October 18, 2010

Coming Soon, "Freight Forwarding" Starring Panalpina, Shell, and Others

For the second time over a one week span, the FCPA was front page news in the Wall Street Journal. This time, it was Panalpina and how it, and one of its customers, Royal Dutch Shell, are reportedly close to settling FCPA enforcement actions. [See here for the other recent WSJ story regarding Schlumberger.]

Last December, Panalpina announced that it had commenced settlement discussions with the DOJ. For more information on this, as well as background on the Panalpina matter see this prior post.

For background on the Shell matter, in its most recent Form 2O-F (March 2010) Shell stated (here) as follows:

"In July 2007, Shell’s US subsidiary, Shell Oil, was contacted by the US Department of Justice regarding Shell’s use of the freight forwarding firm Panalpina, Inc and potential violations of the US Foreign Corrupt Practices Act (FCPA) as a result of such use. Shell has an ongoing internal investigation and is co-operating with the US Department of Justice and the US Securities and Exchange Commission investigations. As a result of these investigations, Shell may face fines and additional costs."

According to the WSJ story by Kara Scannell and Thomas Catan, Panalpina is expected to pay around $85 million in fines to settle charges that it violated the FCPA and Shell is expected to pay around $30 million in penalties to settle charges stemming from its use of Panalpina as an agent in Nigeria."

As noted in the WSJ article, the Panalpina matter has spawned several related inquiries of Panalpina customers, including Shell, Nabor Industries Ltd., Schlumberger Ltd., Transocean Ltd., and Noble Corp. The WSJ reports that "several of those companies also are expected to reach settlements with U.S. authorities in coming weeks or months."

Freight forwarding, customs clearance, and logistics. It's rather mundane stuff.

It will be interesting to see the allegations in these upcoming enforcement actions as the public disclosures have suggested conduct and facts that would seem to implicate the FCPA's facilitating payments exception. However, because these FCPA enforcement actions (like most) will never be challenged or subjected to meaningful judicial scrutiny, this relevant exception will likely not be explored.

If you are scoring at home, this means that an additional $115 million will flow into the U.S. Treasury based on allegations that two foreign companies made "improper payments" to foreign officials. For more on this issue, see here for my recent comments (pg. 4) at the World Bribery and Corruption Compliance Forum and here for how the FCPA has become, in the eyes of some, a U.S. government cash cow.

Friday, October 15, 2010

The SFO Speaks

Today's post is devoted to the U.K. Serious Fraud Office (SFO), specificaly a recent speech by Richard Alderman (Director of the SFO) on the Bribery Act and a recent webcast delivered by Vivian Robinson QC (General Counsel for the SFO) on the Bribery Act.

Bribery Act 2010 - A New Beginning

Earlier this week, Alderman gave a speech "Bribery Act 2010 - A New Beginning" (see here).

[See here for my recent Q&A with Mr. Alderman on the Bribery Act and other topics].

Below are some excerpted highlights.

"Those corporates and individuals that ignore recent developments in this jurisdiction concerning bribery legislation and the enforcement of the law do so very much at their peril. The UK will soon have the toughest bribery legislation in the world and it will be vigorously enforced by the Serious Fraud Office. In the meanwhile, the work of the SFO in enforcing the current law has been widely praised. Indeed as a result of what we have been doing the OECD, Transparency International and TRACE International have put the UK very much in the lead after the US in enforcing anti-corruption legislation. I have been very pleased to see this. The UK is regarded as an active enforcer of bribery legislation. This is exactly where we need to be."

"We want to encourage corporates that identify a problem to come and talk to us at an early stage. The incentive for them is that a self report could potentially lead to a civil resolution through a Civil Recovery Order. We have done this in two cases that are in the public domain and we currently have some other cases that are being dealt with in this way." [Those two cases are Balfour Beatty Plc (here) and AMEC Plc (here)]

"The sentencing remarks by Lord Justice Thomas in the Innospec case [see here for a prior post] have been regarded as casting some doubt on this. In that case, Lord Justice Thomas stressed the importance of dealing with corruption and the need for very significant sentences when individuals and corporates are brought before the Criminal Courts. He also discussed civil recovery and said that the public would expect suitable cases of corruption to go to the Criminal Courts. I entirely accept this guidance. There will be cases where we shall decide, in accordance with the Code for Crown Prosecutors and the Guidance for Corporate Prosecutions, which because of the nature and seriousness of what is alleged we must prosecute. For example, it is likely that cases involving systemic failings at Board level would be prosecuted. However, there maybe cases where we are unable to prosecute and we consider that a civil recovery order is appropriate. This is a civil remedy. We have given detailed guidance on these issues in the context of corporate prosecutions. There is also Attorney General's guidance on the Use of Civil Recovery."

"While I am talking about guidance from the courts, let me also refer briefly to the comments in the Innospec and Dougall cases concerning documents agreed by the SFO and the corporate when a case comes to a criminal court. The Judge took the view that the SFO had gone too far in these cases in recommending or commenting on the sentence that the Judge should impose. I accept these criticisms. Plea negotiations of this nature are new and there is a lot for us all to learn. We have had other cases where the Judge has been satisfied with the agreed documentation as a basis for sentence. This is what we shall need to aspire to in all of these cases."

"Let me now turn to the subject of the Bribery Act because there are a number of issues here that I would like to talk you through. First of all, I very much welcome the Bribery Act. The SFO has been working with colleagues in Government on proposals for changes in the legislation for a number of years and I am delighted to see the Bribery Act. It is a very tough piece of legislation. It is tougher than the FCPA because it also deals with private sector bribery as well as bribery of public officials and it gives no exemption for small facilitation payments. So it is a tough piece of legislation."

"The offence at the corporate level that you will need to know all about is the provision that makes it an offence for a corporate if it fails to prevent bribery. There is a defence to this if the corporate had adequate procedures to prevent bribery."

"I have heard some people say that this offence is one of strict liability. I do not agree. No offence will have been committed if there were adequate procedures. I have also heard people say that the fact of bribery might mean that there were inadequate procedures by definition and so the defence can never be made out. Again, I do not agree. In the real world there may be occasional lapses despite adequate procedures rigorously enforced. The issue ultimately for the Judge and jury (and for the SFO in deciding on a prosecution) will be - were those procedures adequate?"

"I have mentioned the corporate offence but, of course, the Act goes wider that. There are offences of giving and receiving bribes and there is an offence of bribing a foreign public official. There is also an offence targeted at senior officers of a corporate who consent to, or connive at, bribery."

"The Act also looks at issues of jurisdiction. For the first time non UK corporates will be brought within the jurisdiction of the SFO if they have some business presence in the UK. What this will mean is that a foreign corporate that is involved in corruption anywhere in the world will be within the SFO's jurisdiction if it has a business presence here even if the corruption has no connection with that business presence. This is a very important provision for us. I believe that foreign corporates are waking up to the significance of this."

"Let me comment on two particular issues arising from the Bribery Act because I know that they have caused a lot of concern to the corporate sector. These issues concern promotional expenditure and small facilitation payments. It may be helpful if I comment on both of those issues. In doing this I shall follow an important speech given by the UK's Attorney General, The Rt Honourable Dominic Grieve QC MP, to the World Bribery Forum on 14 September. [See here for my coverage of these remarks]. This speech is available on the Attorney General's website and is particularly important."

"First of all promotional expenditure. There are some who have said that the effect of the Bribery Act is to outlaw all promotional expenditure. I do not agree. Sensible, proportionate expenditure is not unlawful under the Act. But, of course, once the expenditure starts to be on a more lavish scale and is intended to influence decision makers in awarding contracts, then we do get into the area of criminal offences. The Act seems to me to take a very sensible approach. And so the message from me is that sensible proportionate promotional expenditure remains perfectly lawful."

"The other issue that causes difficulty concerns small facilitation payments. I appreciate the difficulties because of the realities of doing business in many parts of the world. I also bear in mind that the US Foreign Corrupt Practices Act exempts these payments from criminal offences in certain circumstances."

"There is a lot of focus on small facilitation payments these days. Just before Christmas the OECD published a paper talking about the corrosive impact that these payments have on societies and calling on Governments to take more vigorous action in order to penalise them. This is an important message to all of us."

"Let us be clear. Small facilitation payments are bribes and they are unlawful under our current law. That will not change and they will be unlawful under the Bribery Act. Nevertheless, I have said in public that the chances of the SFO prosecuting a small (say $50) one off facilitation payment that is picked up and remedied by a corporate's internal processes are remote. That does not mean though that corporates can decide that it is acceptable to have a number of so called one off payments provided that in total they do not exceed shall we say $20 million a year. That is certainly a view that has been put to me. I said that I strongly disagreed. I also said that I could not understand how payments amounting to $20 million a year could be regarded as small one off facilitation payments. They are a course of business that is approved by the corporate. The chances of a criminal investigation and prosecution, where that is company policy, would be high."

"There are two other points I would like to make."

"First, do not under-estimate the scale of the co-operation between the SFO and law enforcement authorities in other countries. This is very extensive particularly with my colleagues in the US Department of Justice but also with other countries such as Australia. It is something that means a lot to us. We discuss cases, intelligence leads, policies and risks. There is a lot of discussion that goes on behind the scenes."

"Finally, there is an invitation from the SFO to approach us to discuss these issues, either directly or through professional advisers. We can discuss your company's policies and we can discuss the issues that you are finding in practice. We find this very beneficial ourselves and I know that corporates do as well. We are very ready to have these discussions with you."

Bribery Act - What Does it Mean?

In a 30 minute webcast (here) Robinson speaks on a variety of topics.

Among other things:

Robinson says that it is right to describe the Bribery Act as the most "draconian" anti-corruption measure in the world.

As to the adequate procedures defense, Robinson says that because of the defense "there is every reason to be optimistic that we won't get as a result of the Act and this particular section a huge expanse in the number of prosecutions of corporates."

As to self-reporting, Robinson says that the SFO will not sit back and wait for cases to come to it. He mentions that there is increased information sharing, greater cross-border cooperation, that the SFO's investigations have dramatically increased, and that more information is coming from whistleblowers. He stated that "companies are at greater risk than ever before that SFO will discover matters on its own." He stated that "self-reporting makes absolute sense [and that the SFO is] encouraging it as strongly as we possibly can."

As to small to medium size companies, Robinson says that smaller organizations are not absolved from liability under the Bribery Act. but that the SFO "would not expect the same from a small or medium size company that we would expect from one of the larger ones." He said that the SFO will take "into consideration the extent to which a small, medium size operation can put in place the same sort of procedures as a larger organiztion with much greater resources." As to due diligence, Robinson says that small to medium size companies "should carry out as much due dilignce as they reasonably can, but what they reasonably can do in that way may not be as much as a large corporate can reasonably be expected to do."


A good weekend to all.

Thursday, October 14, 2010

Statistics of Note

Fulbright & Jaworski's Annual Litigation Trends Survey Report is always an interesting read and this year's report (available for download here) is no exception.

The report compiles survey data from "senior corporate counsel on their experiences and opinions regarding various aspects of litigation and related matters." "There were 403 participants in the Litigation Trends Survey of 2010, including 275 in the U.S. and 128 in the U.K. (a record high)." Approximately 50% of the survey participants were employed by a company with gross revenues of over $1 billion.

Some statistics that caught my eye.

"Companies that have engaged outside counsel to assist with a corruption or bribery investigation in the past 12 months (including, but not limited to, FCPA in the U.S. and equivalent in U.K.)"

12% U.S., 26% U.K.

Surprising on both fronts. The spike in the U.K. rate 26% in 2010 vs. 12% in 2009 is not surprising given the increased attention to bribery and corruption issues in the U.K. as the Bribery Act nears implementation.

According to the survey, "a quarter of manufacturers have conducted bribery/corruption investigations" and this sector "continues to lead other industries, as it has for the past two years."

"Companies that have engaged in due diligence for bribery or corruption (including FCPA matters) relating to a merger, acquisition or other business transaction with a foreign country in the past 12 months."

17% U.S., 28% U.K.

Again surprising on both fronts. FCPA-specific due diligence in M&A and other cross-border transactions is frequently preached by the enforcement agencies, but apparently companies are not getting the message, or if they are, they don't view FCPA specific due diligence as a value added exercise.

This next statistic is also surprising, particulary given (what at least appears to be from media and other reports) high anxiety levels as to the upcoming U.K. Bribery Act. I like how Miller & Chevalier states it in its recent FCPA Autumn Review 2010 (see here) - the U.K. Bribery Act "about which so much is being said and written" an issue already the "subject of lively debate and ominous forebodings" and a topic "commanding considerable commentary and concern."

"Do you foresee changes in the way your company operates due to the new U.K. Bribery Act?"

89% no - U.S.

65% no - U.K.

The following non-FCPA statistic was also interesting.

"A quarter of the companies that have conducted an internal investigation reported the matter to a regulatory agency, as a result of the investigation." I suspect that if this topic was FCPA specific the percentage would have been higher than 25%.


As to FCPA, Inc. issue generally, this recent article in The Lawyer by Matt Byrne caught me eye. It discusses Shearman & Sterling's "radical strategy" to boost litigation related revenue. The article quotes N.Y. based partner Herb Washer as saying that, among other areas, FCPA-related matters are acting as a catalyst for Shearman’s litigation push. “FCPA enforcement has become an explicit priority of the Department of Justice,” says Washer. “There’s not only a greater number of cases but the fines are trending upwards. There’s very big money at risk and companies are spending big money to defend themselves against allegations. There’s no doubt this is a significant driver for the growth of our practice and many of our competitors.”