Bribery And The But-For World

Settlement amounts in FCPA enforcement actions have grown over the past decade. This much you already knew.

A significant contributing factor is the increased use of disgorgement in FCPA enforcement actions. For instance, as highlighted in this prior post, 96% of SEC FCPA enforcement settlement amounts in 2010 consisted of disgorgement and prejudgment interest.

The theory seems to be this, if Company A made an improper payment in violation of the FCPA to obtain Contract A, all of the Company A's net profits associated with Contract A are subject to disgorgement.

In my opening remarks at the World Bribery and Corruption Compliance Forum in London in September 2010 (see here) I observed as follows.

"Another issue in need of deeper analysis is the commonly held enforcement view that the contract (and thus net profits of the contract) at issue was secured solely because of the alleged improper payments made by the corporate. This ignores the fact that most of the companies settling enforcement actions are otherwise viewed as industry leaders presumably because they offer the best product or service for the best price. With such companies, can it truly be said that the alleged improper payments were the sole reason the company secured the contract at issue, thus justifying the company being forced to disgorge all of its net profits associated with the contract? Does a but for analysis have a place in bribery laws – in other words should the enforcement agency have to prove that but for the improper payment, the company would not have secured the contract at issue?"

In a recent piece titled "Economic Analysis of Damages under the Foreign Corrupt Practices Act," (here) Dr. Patrick Conroy (here) and Dr. Graeme Hunter (here) - both of Nera Economic Consulting - spend some time in the "but-for" world.

The authors note that "to date there has been little consideration of the true benefit of the bribe" but "with fines in the hundreds of millions of dollars and increasing enforcement, it is necessary to clearly understand what effect a bribe had on profits and to carefully establish what the but-for profits would have been without the bribe."

The authors note that "while a bribe may have led to very high gains, the but-for profits could have been high (and the gain from the bribe low) if the bribe would have little effect on the probability of winning the work or if alternative projects were similarly profitable."

The authors state as follows. "If a company pays a bribe to secure a project, what is the gain to the company from the bribe? While one answer might be the profits earned by the project, we outline [in the article] a number of considerations based on the incremental probability of winning generated by the bribe and the opportunity cost of the project won that will lead to a more realistic, and sometimes lower, calculation of the true economic profits from the bribe."

The authors conclude as follows. "International bribery has become a regulatory enforcement priority based on the FCPA in the US and the soon-to-be-implemented Anti-Bribery Act in the UK. Applying greater precision to the financial benefits of bribery is necessary given increasing enforcement."

A thought-provoking read and time well spent in the "but-for" world.

Something To Think About

The holiday weekend is upon us and perhaps you have already left the office.

Here is something to think about over the long weekend.

India's Chief Economic Adviser, the economist Kaushik Basu, recently posted a paper titled "Why, for a Class of Bribes, the Act of Giving a Bribe Should be Treated as Legal" (here).

The abstract is as follows.

"The paper puts forward a small but novel idea of how we can cut down the incidence of bribery. There are different kinds of bribes and what this paper is concerned with are bribes that people often have to give to get what they are legally entitled to. I shall call these harassment bribes. Suppose an income tax refund is held back from a taxpayer till he pays some cash to the officer. Suppose government allots subsidized land to a person but when the person goes to get her paperwork done and receive documents for this land, she is asked to pay a hefty bribe. These are all illustrations of harassment bribes. Harassment bribery is widespread in India and it plays a large role in breeding inefficiency and has a corrosive effect on civil society. The central message of this paper is that we should declare the act of giving a bribe in all such cases as legitimate activity. In other words the giver of a harassment bribe should have full immunity from any punitive action by the state.

It is argued that this will cause a sharp decline in the incidence of bribery. The reasoning is that once the law is altered in this manner, after the act of bribery is committed, the interests of the bribe giver and the bribe taker will be at divergence. The bribe giver will be willing to cooperate in getting the bribe taker caught. Knowing that this will happen, the bribe taker will be deterred from taking a bribe.

It should be emphasized that what is being argued in this paper is not a retrospective pardon for bribe-giving. Retrospective pardons are like amnesties. They encourage rather than discourage corrupt behavior by rewarding the corrupt. And, in the process, they corrode society‘s morals."

See here for the recent CNN segment "What in the World" for more on Basu's proposal as well as other innovative ideas to reduce bribery and corruption.

The solution Basu addresses would seem most applicable to domestic bribery where a prosecuting agency has jurisdiction over both the bribe payor and bribe recipient. That is not the case in a typical FCPA scenario, but Basu's paper and proposal is indeed interesting, thought provoking material.

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Finally, a previous post (here) discussed customer rewards programs and the SEC's interest in RAE Systems.

Turns out there is an interest in this general issue on the other side of the Atlantic as well.

The office of Richard Alderman (Director of the U.K. Serious Fraud Office) alerted me to a recent speech he gave (here) at the 2011 International Medical Device Industry Compliance Conference. In the speech, Alderman talked about the soon-to-go live Bribery Act, self reporting, and the SFO's relationship with the DOJ.

Alderman also talked about "incentive payments" and stated as follows.

"What I am also seeing is corporates having a hard look at some of the arrangements that are in fact justifiable for commercial reasons but which have not been scrutinized before with a view to seeing whether or not there are risks of bribery. Let me give you an example. Incentive payments. These are a common feature of many industries and I suspect of your own as well. I know that a number of companies and a number of industry organisations have been looking at this issue in order to see whether there are risks when the Bribery Act comes into force. We have had a number of meetings in the SFO with corporates and industry bodies about this issue. We have been able to talk through the issues and offer reassurance.

Clearly, these incentive payments are normally designed for commercial reasons and are commercially justifiable. There are risks though. What we have been talking about with corporates is the need for transparency and, in particular, the need to know where the money goes and the fact that it is justifiable. We also talk about the need for a senior person at the corporate's head office to have visibility of what is happening and to be satisfied that what is happening is justifiable.

This may well be a feature of your own industry (and indeed I imagine that it probably is) and it may be that this is something that you want to discuss."

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A good weekend to all.

The Final Act In The BAE Circus?

Last week, the State Department announced (here) that "BAE Systems plc of the United Kingdom (BAES), including its businesses, units, subsidiaries, and operating divisions and their assignees and successors, except BAE Systems, Inc. and its subsidiaries, entered into a civil settlement with the Department of State for alleged violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR)." The release states that "under the four-year term of the Consent Agreement, BAES will pay in fines and in remedial compliance measures an aggregate civil penalty of $79 million, the largest civil penalty in Department history."

The State Department action follows the March 1, 2010 guilty plea of BAE Systems plc. (see here for the prior post). BAE pleaded guilty to "conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its FCPA compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations." In that DOJ enforcement action, BAE Systems plc agreed to pay a $400 million criminal fine.

I previously called (here) the BAE "bribery, yet no bribery" enforcement action one that contributes to the "facade of FCPA enforcement" (see here) and was asked several questions about the enforcement action by former Senator Arlen Specter (see here).

Like the DOJ enforcement action, the State Department action specifically notes that BAE Systems, Inc. was not involved in the conduct giving rise to the enforcement actions. BAE Systems Inc. is "the U.S.-based segment of BAE Systems plc" and "is responsible for relationships with the U.S. Government...". (See here).

The State Department action involved BAE Systems plc entering into a consent decree (see here for the relevant documents) "to settle 2,591 violations of the AECA and ITAR in connection with the unauthorized brokering of U.S. defense articles and services, failure to register as a broker, failure to file annual broker reports, causing unauthorized brokering, failure to report the payment of fees or commissions, and failure to maintain records involving ITAR-controlled transactions."

Certain of the improper conduct identified in the State Department documents relate to the lease and lease/sale of Gripen aircraft to the Ministries of Defence in the Czech Republic and Hungary - conduct also at issue in the DOJ's prosecution of BAE (see here for the criminal information).

The State Department documents also relate to BAE's use of advisers for defense transactions and proposed defense transactions involving U.S. defense articles and services without obtaining authorization from the State Department.

One of the advisors identified is Alfons Mensdorff-Pouilly. As noted in this previous post, the U.K. Serious Fraud Office ("SFO") originally charged Alfons Mensdorff-Pouilly with "conspiracy to corrupt" and for "conspiring with others to give or agree to give corrupt payments [...] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc." Within days, the SFO dropped the charges. As noted in this previous post, the SFO explained that BAE would not agree to the SFO plea (watered down as it was) without the SFO agreeing to drop the charges against Count Mensdorff.

As to debarment, the State Department consent agreement states (at page 20) that the State "Department has determined to impose a statutory debarment of BAE Systems plc pursuant to section 127 of the ITAR [see here], based on the criminal charges [in the previous DOJ enforcement action].

Yet, the next sentence of the consent decree states as follows. "However, based on the foregoing and additional information provided by Respondent, and request for reinstatement by BAE Systems plc, the Assistant Secretary of State for Political-Military Affairs has determined under Section 38(g)(4) of the AECA [see here] that Respondent has taken appropriate steps to address the causes of the violations and to mitigate law enforcement concerns. Accordingly, BAE Systems plc shall be reinstated."

The consent decree did however "place under a policy of denial" BAE Systems CS&S International, Red Diamond Trading Ltd. and Poseidon Trading Investments Ltd. Per the consent decree, this means that there will be "an initial presumption of denial during the case-by-case review of all licenses and other authorizations" involving these subsidiaries even though the consent decree states that "Transaction Exceptions" may be granted by the State Department. Furthermore, the consent decree states that all licenses, agreements, and other authorizations involving these subsidiaries previously issued "are not affected and are not revoked."

The most recent annual report on BAE's website states as follows regarding CS&S International. "The operating group’s CS&S International business predominantly acts as prime contractor for the UK government-to government defence agreement with Saudi Arabia and has a major in-country presence. Its main activities include operational capability support to both the Royal Saudi Air Force and Royal Saudi Naval Force and, more recently, the commencement of supply of 72 Typhoon aircraft." Neither Red Diamond Trading Ltd. nor Poseidon Trading Investments Ltd. are mentioned in the 190 page annual report.

According to this U.K. Guardian article "BAE's Secret Money Machine," "in February 1998 Red Diamond Trading Ltd was anonymously incorporated in the British Virgin Islands and was used to channel payments all over the world, via Red Diamond accounts in London, Switzerland and New York." As to Poseidon Trading, the same article states as follows. "BAE set up a second front company, purely to handle the Saudi commission payments for al-Yamamah. Poseidon Trading Investments Ltd was incorporated in the British Virgin Islands on June 25 1999."

The DOJ's criminal information contains various allegations regarding Saudi Arabia - without specifically mentioning the al-Yamamah contract. For more on the al-Yamamah contract see here -a PBS Frontline documentary titled Black Money.

The State Department's recent $79 million enforcement action against BAE is in addition to the DOJ's $400 million enforcement action against BAE from 2010. However, as Dru Stevenson (Professor of Law, South Texas College of Law) and Nick Wagoner (a law student at South Texas College of Law) explored in this recent post, in the 365 days that followed the 2010 DOJ enforcement action, BAE was awarded U.S. contracts in excess of $58 billion dollars.

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Speaking of debarment (or lack thereof) Senator Al Franken continues to lead on this issue. Earlier this month, during a Senate Judiciary Committee hearing, Franken questioned Attorney General Eric Holder why, over the past three years, hundreds of billions of dollars have been awarded to defense contractors who have previously been convicted of fraud. See here for the video. Senator Franken similarly questioned Assistant Attorney General Lanny Breuer during a January Senate Judiciary Committee hearing. See here for the video.

In connection with the Senate's November 2010 hearing "Examining Enforcement of the Foreign Corrupt Practices Act" the DOJ was asked whether it favored "mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery." See here for the prior post including the DOJ's response.

Is ICE A Victim? And An Open Question!

“Bribery is not a victimless crime."

It is a common sentence in DOJ FCPA talking points (see here for instance).

If bribery is not a victimless crime, then why do FCPA fines and penalties simply go directly into the U.S. Treasury? Why are there no efforts to identify the victims of FCPA violations and to compensate those victims? Bigger picture, who are the victims when FCPA violations occur?

Alexandra Wrage, President of Trace, observed in this piece that "compensating the victims of corruption is a hot new topic" and that "restitution to victims is hard not to like." However, as Wrage noted, "the U.S. Department of Justice does not attempt to compensate victims of bribery."

The topic has never been hotter.

Instituto Constarricense de Electricidad ("ICE") of Costa Rica recently petitioned a Court (see here and here) "for protection of its rights as a victim" of Alcatel-Lucent's bribey scheme.

In December 2010, it was announced that Alcatel-Lucent and certain subsidiaries agreed to resolve a wide-ranging FCPA enforcement action involving both a DOJ and SEC component. Total settlement amount was approximately $137.4 million ($92 million criminal fine via DOJ plea agreements and a deferred prosecution agreement; $45.4 million in disgorgement via a SEC settled complaint). (See here for the prior post). In addition to Costa Rica, the conduct at issue also involved conduct in at least eight other countries.

ICE also objected to the plea agreements and deferred prosecution agreement agreed to between the DOJ and Alcatel-Lucent to resolve the enforcement action. Among other things, ICE argued that the agreements "are inconsistent with the interests of justice, with the public's interests, and with public policy."

This post summarizes ICE's arguments, as well as the arguments of the DOJ and Alcatel-Lucent in opposition filings earlier this week.

Finally, this post identifies an open question (as least as to the Costa Rica conduct at issue in the enforcement action) that ought to give Judge Marcia Cooke (Southern District of Florida) pause during the June 1st hearing.

ICE is petitioning the Court "for protection of its rights as a victim of the Alcatel-Lucent Defendants and for appropriate sanctions resulting from the [DOJ's] failure to protect those rights...".

Even though ICE acknowledges that "three disloyal and corrupt Directors and two disloyal and corrupt employees" were the recipients of Alcatel-Lucent's bribe payments, ICE nevertheless claims it is a victim because the "corrupt activities" of Alcatel-Lucent has caused the company "massive losses" and caused "ICE catastrophic harm."

ICE argued that "it is universally recognized, in a scheme for bribery, that an entity whose employees accept improper benefits to affect corporate decisions is a victim." ICE states that "the notion that acceptance of bribes by five of ICE's more than 16,500 employees, managers, and directors necessarily renders ICE an active participant in Alcatel's admitted bribery scheme is nonsense."

As noted in this media report, Judge Cooke allowed ICE to argue that it should be considered a corruption victim and thus receive restitution. However, Judge Cooke reportedly stated that ICE "would not be at the top of the hit parade."

Earlier this week, both the DOJ and Alcatel filed opposition briefs to ICE's request for victim status and restitution.

In its response (here), the DOJ argued that "under the facts and circumstances in the instant matter, which reflect profound and pervasive corruption at the highest levels of ICE, the government does not believe it is appropriate to consider ICE a victim in these cases."

Elsewhere, the DOJ stated that "it does not follow tht the state-owned entity at which corruption was so pervasive in the tender process should now be permitted status as a victim or awarded restitution under the facts and circumstances in these cases."

The DOJ then reviewed "facts and circumstances" that has "led the government to conclude that not just the corrupt ICE officials are to blame for the corruption that existed at ICE, but ICE itself as an organization is also responsible." (emphasis in original).

The DOJ stated as follows. "In short, ICE as an organization appears to have had a deeply ingrained culture of corruption. First, it appears clear that corruption at ICE existed for many years - if not decades - according to [a DOJ cooperator who previously plead guilty]. Second, this corrupt conduct did not just involve some low-level employees. Here, nearly half of the Board of Directors of ICE received bribes in just this case alone. It is hard to conceive of a component of a business organization more in control of and responsible for an organization than the board of directors, which in this case appears to have been profoundly corrupt. Third, the corruption at ICE as an organization was pervasive in the tender process." (emphasis in original).

In a separate section of its brief, the DOJ argued that "while the government does not believe ICE is a victim under the facts and circumstances present here, the Court need not decide this issue to dispose of this matter" because "regardless of whether ICE is a victim, this Court, the U.S. Probation Office, and the government have afforded ICE the rights of a crime victim contained in the Crime Victims' Rights Act."

The DOJ's brief was authored by Charles Duross (DOJ FCPA Unit Chief) and Andrew Gentin (Fraud Section Trial Attorney from D.C.).

In a separate DOJ brief (here) filed in support of the proposed plea agreements and DPA, the DOJ argued that the resolutions "reflect the seriousness of the conduct, promotes respect for the law, and provides for just punishment for the offenses committed." The DOJ argued that even if ICE is considered a victim, it does not have "veto power over prosecutorial decisions, strategies, or tactics" and that "it is unclear what standing, if any, ICE has to object to the DPA."

In its response brief (here) the Alcatel entities [represented by Martin Weinstein and Robert Meyer of Willkie Farr & Gallagher - see here and here - and Jon Sale of Sale & Weintraub] argued as follows. "ICE's Motion for restitution should be denied for two independent reasons. First, ICE is not entitled to restitution because it was a participant in the conduct underlying the offense to which Defendants will be pleading guilty. [...] Second, the Court should reject ICE's Motion because a determination of restitution would unduly complicate and prolong the sentencing process. [Note - although not separately highlighted above, a similar argument was made by the DOJ in its brief]. Alcatel argued that "just as Alcatel is responsible, ICE itself is responsible for the ICE-Alcatel bribery scheme because its top management, including several members of its board of directors and senior officers, actively participated in the bribery."

Compensating the victims of bribery is a valid and legitimate issue, even if the ICE petition presents an unusual situation in that bribe recipients were officers, directors, or employees of the entity claiming victim status. I am not sure where criminal fines should go when a French company bribes Costa Rican "foreign officials," but I am pretty sure than the answer should not be 100% to the U.S. Treasury.

Judge Cooke will hold a hearing on the issue on June 1st.

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But wait, were those even Costa Rican "foreign officials" Alcatel-Lucent bribed?
And now to the open question and an issue Judge Cooke ought to probe closely during the June 1st hearing.

According to the applicable DOJ plea agreement (here) "Instituto Costarricense de Electricidad S.A. ("ICE") was a wholly state-owned telecommunications authority in Costa Rica responsible for awarding and administering public tenders for telecommunications contracts. ICE was governed by a seven-member board of directors that evaluated and approved, on behalf of the government of Costa Rica, all bid proposals submitted by telecommunications companies. The Board of Directors was led by an Executive President, who was appointed by the President of Costa Rica. The other members of the Board of Directors were appointed by the President of Costa Rica and the Costa Rican governing cabinet. Accordingly, officers, directors and employees of ICE were 'foreign officials' within the meaning of the FCPA ...".

Nonsense says ICE.

In its brief, under a heading titled "ICE is an autonomous entity with an independent board of directors and management", ICE stated as follows. "ICE is an autonomous legal entity responsible for providing electrical power and telecommunications services in Costa Rica. The organizational statute and subsequent decrees provides for the absolute autonomy of ICE. This includes a seven-member, independent Board of Directors appointed by the Costa Rican Government who serve six-year terms. They cannot be removed absent malfeasance. These Directors include engineers, accountants, and lawyers with distinct areas of expertise. None of the Directors are affiliated with the Costa Rican Government. The Board of Directors appoints and oversees the management and operation of ICE in a manner similar to other large corporations."

Based on ICE's self-description, it would not seem to be a FCPA victim because a crime never took place because the elements of an FCPA violation - namely the existence of a "foreign official" was absent. [Note - Alcatel-Lucent was not charged with FCPA anti-bribery violations, yet the relevant subsidiary was charged with conspiracy to violate the FCPA's anti-bribery provisions and a conspiracy charge requires the existence of a "foreign official"].

As the DOJ has stated in the recent "foreign official" challenges, "for a court to accept a plea of guilty a district court must have a basis to believe that a crime has been committed."

Judge Cooke ought to do just that on June 1st given that stark differences in DOJ's description of ICE and ICE's description of itself.

A Q&A With Homer Moyer

In running a site called "FCPA Professor" it is only appropriate to touch base with a "Dean" on occasion.

I do so in this post with Homer Moyer, a "dean" of the FCPA bar. Moyer, a partner with Miller & Chevalier (see here) addresses a variety of topics in this Q&A - from evolution of the FCPA and FCPA enforcement to voluntary disclosure and investigative fees. Moyer closes out the Q&A with a few FCPA reform proposals of his own.

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Your government experience prior to law practice was with the Commerce Department, not the DOJ or SEC as is typical of many FCPA enforcement lawyers. How has your Commerce Department experience informed your FCPA practice?

I was at the Commerce Department when the FCPA was enacted, and I chaired an inter-agency group on FCPA issues. Of greater value to my later FCPA practice, however, was having served as general counsel of the Department that deals most directly with corporate issues and that both promotes and regulates American businesses. Also of great value were the experiences of having litigated cases as both a prosecutor and defense counsel. Perhaps most important, however, is having now seen hundreds of different FCPA issues for dozens of different clients.

Working on FCPA cases at the SEC or DOJ provides prosecutors with unique experience, but not the opportunity to counsel and represent corporate clients, manage complex legal issues for them, or help them devise and implement innovative compliance programs.

Describe your first FCPA matter or case? What were the issues? What were your client's concerns?

One of my early cases, some 20 years ago, presented a host of issues that had not yet become commonplace. The case I have in mind involved potential vicarious liability for the acts of a third party, a third party who claimed that the work it did for a U.S. company created a “constructive partnership” that entitled it to share the company’s profits, questions of whether to consult voluntarily with DOJ, an industry with which DOJ was not yet well-acquainted, innovative compliance enhancements, related civil litigation, and forged evidence presented to a court.

That matter ended well, but it presented issues of first impression and foreshadowed how complicated FCPA cases could be.

The FCPA has evolved much since your first case. From your perspective, has this evolution been positive? Any negative aspects of this evolution? How has this evolution affected your practice and your clients?

The evolution of FCPA enforcement has unquestionably brought more and more attention to the issue of official corruption and has had an indisputable impact on corporate behavior, or the “supply side” of the bribery equation. In addition, it has done something that unilateral U.S. laws rarely do, namely, led to a far-reaching change and consensus in the international legal landscape, as now reflected in international anti-corruption conventions to which more than 150 countries have become signatories.

Despite two sets of amendments, the FCPA itself has changed relatively little since it was adopted in 1977. Its “evolution” has primarily been through a steady escalation in enforcement -- the number and variety of enforcement actions, expansive interpretations of key provisions, the size and variety of penalties, the frequency of voluntary disclosures, and a steady rise in the levels of sophistication the government looks for in independent investigations, due diligence processes, and compliance programs.

Has this evolution been positive or negative? Few people would now dispute that corruption and bribery of foreign officials imposes staggering economic and social costs, frequently on countries that can afford it least. The question then becomes whether FCPA enforcement has made a positive difference in reducing or eliminating corruption. It probably has, but more relevant today is the continuing pervasiveness of official corruption and the daunting challenges to controlling it on a global basis.

With respect to the FCPA itself, complaints that it has created an “uneven playing field” have been somewhat undercut by aggressive FCPA enforcement against non-U.S. companies, by new international anti-corruption conventions, and by the beginnings of genuine enforcement in some other countries. And the lament that few FCPA cases are adjudicated in court does not distinguish FCPA enforcement from the enforcement patterns of many other regulatory laws. The infrequency of judicial review may occasionally embolden the government to overreach, but it has rarely resulted in abusive prosecutions.

In terms of our own practice, the increase in enforcement has plainly caused clients to be far more focused on anti-corruption issues than was once the case. This has certainly caused Miller & Chevalier’s long-standing FCPA practice to grow dramatically. It also appears to have created something of a traffic jam of newly minted “FCPA lawyers.”

Your point “that few FCPA cases are adjudicated in court does not distinguish FCPA enforcement from the enforcement patterns of many other regulatory laws” is a very valid point. However, isn’t a key difference though that other laws have benefited from several dozen circuit court opinions and perhaps a few Supreme Court decisions, such that the parameters of the law are at least set by someone other than the enforcement agencies? [Granted, 2011 will likely see several trial court decisions as to certain FCPA elements, but the FCPA is still a law that is lacking much meaningful precedential case law.]

One has to take the view -- and I certainly do -- that independent judicial review is a good thing -- a critical part of our legal system and important to preserving the rule of law. Judicial review, or the prospect of judicial review, can help prevent regulatory or enforcement excesses. In some regulatory programs -- environmental statutes come to mind -- the level of judicial review is robust. And we are beginning to see more judicial review in FCPA cases involving individual defendants.

At the same time, some regulatory areas have been subject to as little, or even less, judicial scrutiny than the FCPA. Statutory restrictions on judicial review and judicial deference to agency interpretations of regulations having “national security” ramifications effectively reduce judicial oversight. One can look long and hard for good case law on the regulations enforced by the Office of Foreign Assets Controls (“OFAC”) or on export controls rules under the ITAR (International Traffic in Arms Regulations), each of which has seen regulatory overreaching and little accountability. One recent Federal Circuit Court opinion referred to the discretion reserved by the Executive Branch combined with the lack of clarity in the ITAR as something that would be expected of a totalitarian regime, not the United States Government.

In the end, however, the amount of judicial review is determined by the private sector. Clients are, of course, free to challenge FCPA enforcement actions, although historically corporate clients have tended to favor settlement as a preferable route. Moreover, recent FCPA court decisions reflect that courts will not necessarily interpret laws differently from enforcement agencies. Nonetheless, both corporate and individual defendants are free to challenge agency interpretations of the laws they enforce, and I and many other counsel would undoubtedly be available to help.

When President Obama, high-ranking DOJ officials and others in government talk about corruption and bribery, they talk about the bridge that crumbles because the contractor was selected based on a bribe payment or other similar scenarios. However, very few FCPA enforcement actions fit this scenario, rather the alleged violator is generally viewed as an industry leader that sells the best products for the best prices. Do you agree that a divide exists between such government or civil society statements and typical FCPA enforcement action scenarios? If so, how do we bridge this divide?

Bribery of foreign officials is, in the first instance, typically designed to overcome market forces and to distort competition, not to ensure the purchase of the best products at the best price. Whether or not a bridge is the best metaphor, FCPA violations reflect illicit payments that are made to enrich corrupt officials and that shift that cost to consumers and taxpayers. The consistent scenario in FCPA enforcement actions is that an alleged violator, or someone acting on its behalf, did, in fact, pay bribes, often egregious ones.

The most significant “divide” today is the uneven enforcement among signatories to anti-corruption conventions. Whereas the 1980s saw an industry push to repeal or relax the FCPA on the grounds that it was creating a competitive disadvantage for American companies, the more common complaint today is that other countries must consistently and meaningfully enforce their own anti-corruption laws to assure that the proverbial playing field is level.

Many calls to roll back the FCPA are now anomalous, as they would put the United States out of compliance with international conventions that the FCPA inspired and that the United States fought hard to achieve. They also run counter to the anti-corruption momentum of the last 20 years and would effectively legalize some practices that are coming to be universally condemned, if not yet universally punished.

I find that most U.S. multinational corporations would be delighted to compete on the merits. Indeed, some companies are affirmatively using integrity in the marketplace to gain a competitive advantage. Many have voluntarily prohibited “facilitating payments,” even though they are permissible under the FCPA. It is also interesting to note that Siemens, after paying record-shattering FCPA fines and taking aggressive steps to transform its entire corporate culture, has been posting record profits.

What is your reaction to this statement from a recent high-ranking DOJ official - "“the government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.” Do you believe that FCPA enforcement has become a government cash cow? FCPA enforcement fines and penalties simply go into the U.S. Treasury. Are there better places for this money accepting the notion that bribery results in victims?

FCPA fines probably don’t rise to the level of a governmental “cash cow.” In fiscal terms, they are of no real moment. The government unfortunately needs some much bigger revenue cows.

I do believe, however, that law enforcement penalties should be a consequence of, not a reason for, enforcing criminal laws. And although penalties have risen, I do not have the sense that revenue production has been a driver of FCPA enforcement.

Your interesting question about whether penalties might be used to compensate the “victims” of corruption is a favorite in developing countries. It highlights the difficulties of tracing, seizing, and repatriating funds that corrupt officials have stolen from their countries. Even where recovery of funds is possible, assuring that they are then used to benefit the citizens who were cheated by official corruption is a challenge. That is, however, the right use of repatriated funds.

Because countries that have been cheated by their own rulers have rarely been able to recover the stolen funds, some have asked whether they should be compensated with funds collected as penalties in anti-corruption enforcement actions. This would be a break from past law enforcement patterns, and the idea appears not to have gained significant traction. The strongest case for making that break probably relates to funds collected as disgorgement of profits rather than pure fines. Indeed, one could argue that it would be more just for the bounties that whistleblowers can now earn under the Dodd-Frank law to go not to whistleblowers, but rather to the countries affected for the benefit of the victims of corruption.

Your response speaks of corrupt “officials,” “official corruption” and “rulers.” Yet, the vast majority of FCPA enforcement actions involve no such individual – rather the alleged recipient of the bribe is an employee of an alleged state-owned or state-controlled enterprise. In these cases, would not the most direct victim be the competitor who lost the contract or did not have the opportunity to bid. Are you in favor of an FCPA private right of action?

In most FCPA violations, there is more than one victim. Competitors can certainly be victims. So can government agencies or instrumentalities that are procuring goods or services. Even where there is an admitted bribe, however, determining which competitors may have been “victims” would undoubtedly be a messy and imperfect process. And allegations of improper payments are far more common than proof of improper payments, as any practitioner knows, and the complications of trying to identify victims and allocate compensation among everyone claiming status as a victim might make us long for the days when the principal issues were simply the ones you have asked about here.

What percentage of internal investigations you have worked on in the past 3-5 years that ended with a conclusion that the company violated the FCPA resulted in a voluntary disclosure? Same question for investigations you worked on during the time period 1995-2005? Why the difference?

Although we have clients who, after weighing all the relevant factors, have elected not to disclose, the percentage of matters that result in voluntary disclosures has plainly been rising. The reasons include changes in the sentencing guidelines, the enactment of Sarbanes-Oxley, greater Audit Committee oversight of investigations, the campaign by enforcement agencies to assure companies that voluntary disclosure and cooperation will result in “tangible benefits,” and the gradually spreading view that this is true, if not numerically predictable.

With Avon's recent disclosure that it has spent over $100 million in professional fees and expenses in connection with an FCPA inquiry and other similar disclosures (albeit perhaps not as dramatic) have professional fees and expenses (law firm, accounting firm, etc.) associated with FCPA internal investigations gotten out of control?

I have to confess to being stunned at some of the reported costs of investigations. To be sure, the costs of investigations have risen with increased emphasis on electronic documents and the insistence that investigations must be independent, thorough, and knowledgeable.

Accepting those requirements, the cost-effectiveness of an investigation can be significantly improved by developing a careful work plan, utilizing a firm with experienced FCPA lawyers at all levels of seniority, tailoring the type of investigation to the type of issue, and making informed and reasonable judgments about when to stop an investigation and focus on remediation. In my experience, it is often possible to have a reasoned and productive dialogue with enforcement agencies about the scope and extent of investigations.

FCPA reform proposals are floating around and are reportedly being considered by certain members of Congress. In your view what reform proposals have merit and what issues are at the top of Homer Moyer's FCPA reform list?

I find some of the calls for statutory reform less than compelling. Proposals to change the statute in ways that would be inconsistent with international conventions to which the U.S. is committed are unlikely to be successful, in my view, and could well open the door to other “reforms” that advocates for change might dislike, such as eliminating the exception for facilitating payments.

To be sure, in enforcing the FCPA, the government tries to overreach from time to time -- exercising anti-bribery jurisdiction over foreign subsidiaries and aggressive applications of dd-3 jurisdictional on the grounds that some step in the process took place “in the territory of the United States” come to mind as occasional examples. When enforcement agencies overreach, they should be challenged.

My dream list of “reforms” might read something like the following:

• Internal DOJ guidance that voluntarily disclosed matters must normally be resolved by the Department within 90 days after completion of an internal investigation; that agencies should make public their calculations of credit for voluntary disclosure and coordination; and that the Department will publish sanitized summaries of its declinations.

• An amendment to tweak the whistle-blower provision of Dodd-Frank to relieve the SEC of the conundrum of implementing the statute consistent with its terms but in a manner that does not undercut effective corporate compliance programs;

• An agreement among prosecutors that in the case of parallel investigations by more than one country, private parties may request state-to-state consultations (as called for by the OECD convention), and the consulting states should assure that investigations are coordinated and penalties made complementary so that companies do not face redundant penalties or unnecessarily overlapping investigations.

• Insistence by the OECD that OECD membership for China, Russia, and India must include accession to the Anti-Corruption Convention, accelerated peer review, and possible reconsideration of OECD membership if implementation and enforcement of anti-corruption laws prove to be insufficient.

• Multilateral reform measures designed to minimize current legal impediments to identifying and seizing funds stolen by corrupt officials and to facilitate repatriation of such funds.

Uneven Justice: A Critical Look at FCPA Enforcement

The week starts with a guest post from Michael Volkov.

Volkov (here) is a partner at Mayer Brown LLP. His practice focuses on white collar defenses, FCPA enforcement and compliance, and litigation. The views expressed in this article are his own and do not represent those of his law firm, Mayer Brown LLP. He can be reached at mvolkov@mayerbrown.com.

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UNEVEN JUSTICE: A CRITICAL LOOK AT FCPA ENFORCEMENT

By Michael Volkov

The United States is a nation of laws: badly written and randomly enforced. ~Frank Zappa

Much has been written about the overall fairness of the Justice Department’s and the Securities and Exchange Commission’s aggressive FCPA enforcement program. Some have argued that DOJ and SEC have engaged in uneven justice: corporations plead to non-FCPA offenses, pay big fines, and continue business as usual. Others argue that DOJ has failed to prosecute individual executives and officers, or to ensure that corporations are debarred or suspended from continuing to sell to the federal government.

As a former federal prosecutor with nearly 20 years experience in the criminal justice system, I can assure you that some of the criticisms are accurate but some completely miss the mark. Last year, the Senate Judiciary Committee examined the controversy surrounding FCPA enforcement, and this year the House Judiciary Committee is planning to look at the issue.

DOJ is proud of its enforcement program. And rightly so – they have resuscitated a program which was dormant for years which now collects over one half of all criminal fines imposed each year in the United States. That is an impressive record.

Aside from the fundamental deficiencies inherent in DOJ’s voluntary disclosure process, DOJ claims that it gives adequate credit for corporate compliance programs, early cooperation and full disclosure. In response some suggest that plea agreements which are designed to protect companies from debarment and include pleas to non-FCPA charges are unfair. Part of that point is correct; the other part is flat out wrong.

Our criminal justice system operates day-to-day based on plea agreements. In the federal system, over 90 percent of federal cases are resolved through plea agreements. As part of that process, charge-bargaining is a critical component. DOJ’s decision to permit corporations, or typically country-specific subsidiaries to plead guilty to a non-FCPA offense, is in keeping with this long tradition. The underlying conduct as described in the plea agreement is known to all – the company engaged in systematic and widespread bribery. Nothing more, nothing less. To extrapolate from such a plea that DOJ is not enforcing the law is misguided and ignores the realities of the plea bargaining process.

On the other hand, DOJ’s willingness to forego debarment and/or suspension is certainly an issue that needs to be examined. As Professor Koehler testified at the Senate Judiciary Committee, BAE was awarded a government contract on the same day it plead guilty to a non-FCPA offense but paid a criminal fine over $400 million. That is certainly uneven justice, and Senators and policymakers should have taken note of this ironic enforcement twist.

Senator Specter and others have criticized the Justice Department for failing to include individual corporate executives and officers in its enforcement actions. The Justice Department’s Antitrust Division has a much better record on this score – corporations and individuals are prosecuted in criminal antitrust cases with equal vigor and results. Why has DOJ shied away from linking corporate cooperation to requiring cooperation against individual executives and officers at the offending company?

If the goal of DOJ’s enforcement program is corporate compliance, then the enforcement program needs to be recalibrated. Deterrence is an admirable objective and will certainly increase compliance, but DOJ has more tools available to it to encourage and promote cooperation. DOJ’s antitrust amnesty/leniency is an example of a program which has been incredibly successful on the enforcement and the compliance ends. While there are certainly problems with the application of a cartel-focused (multi-actor) model to FCPA cases, there are lessons which can be learned from the amnesty/leniency program.

We all aspire to equal justice and we all admire the image of justice that is blind as the hallmark of our judicial system. But right now what is needed is for justice to listen so that it operates with fairness and equal justice for all.

Customer Reward Programs

At this moment, it is likely that some company operating in China has a customer rewards program whereby customers are awarded points based on the level of purchases.

At this moment, it is likely that some person employed by an entity with some level of state-ownership or control just received an iPad or camera because the individual redeemed points under the program based on the purchase the individual previously authorized.

The SEC is concerned about the customer rewards program and whether it complies with the FCPA and the company is spending hundreds of dollars an hour investigating the program so that it can present its conclusions to the SEC and the DOJ.

Your first response upon reading the above paragraph might be - are you serious or is this paragraph from the Onion (see here), a satire news organization that parodies just about everything.

Nothing make believe about the first paragraph, it is derived from RAE Systems May 12th proxy statement filed with the SEC.

In the filing (here), RAE Systems stated as follows.

"In the course of telephonic discussions between April 15 and 19, 2011, outside counsel for [RAE] was asked by the SEC whether RAE China had adopted a sales program whereby customers are awarded points based on the level of their purchases of RAE products and are then eligible to redeem those points at year-end for gifts such as iPads or cameras, and whether such a program complies with the Foreign Corrupt Practices Act (“FCPA”). We do not believe that any RAE China personnel have been engaging in such a practice. We are conducting a review in response to the SEC’s inquiry, and intend to provide our conclusions to the SEC and Department of Justice."

In December 2010, RAE Systems resolved a DOJ/SEC enforcement action concerning the acts of its subsidiaries' joint venture partners in China. See here for the prior post. RAE Systems agreed to pay approximately $2.95million in fines and disgorgement and agreed to a three-year DOJ non-prosecution agreement (here).

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The clock is now ticking to see who will publish (presumably) the first client alert or host the first webinar on "The FCPA Compliance Risks of Customer Rewards Programs."

In the meantime, there is likely a "foreign official" somewhere with his eye on the six piece stoneware gourmet mixing bowl set (here) available for 2000 points under Coke's rewards program.

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Interested in reading more about the Harris Corporation enforcement action? As highlighted earlier this week (see here) the recent Lindsey Manufacturing case was not the first instance of a company putting the DOJ to its burden of proof in an FCPA trial. Harris Corporation (and certain of its executives) did just that and prevailed in an FCPA trial. As described in the post, U.S. District Judge Charles A. Legge (N.D. Cal.) directed a verdict of acquittal after the DOJ's case.

Michael H. Huneke (Hughes Hubbard & Reed - see here) was kind to send the Defendants' motion for acquittal, the DOJ's response, and the transcript of oral arguments and Judge Legge's ruling.

If old FCPA enforcement actions are your thing - here you go! If others have interesting FCPA enforcement documents from ... say 1978 - 1995 - send them my way.

A good weekend to all.

Judge Selna Concludes "The Question of Whether State-Owned Companies Qualify as Instrumentalities Under the FCPA is a Question of Fact"

Yesterday, U.S. District Court Judge James Selna denied the Carson "foreign official" challenge. See here for his written decision.

Judge Selna concluded that "the question of whether state-owned companies qualify as instrumentalties under the FCPA is a question of fact."

Judge Selna stated that "several factors bear on the question of whether a business entity constitutes a government instrumentality" including the following.

• The foreign state’s characterization of the entity and its employees;

• The foreign state’s degree of control over the entity;

• The purpose of the entity’s activities;

• The entity’s obligations and privileges under the foreign state’s law,
including whether the entity exercises exclusive or controlling power to
administer its designated functions;

• The circumstances surrounding the entity’s creation; and

• The foreign state’s extent of ownership of the entity, including the level of
financial support by the state (e.g., subsidies, special tax treatment, and
loans).

[In April, Judge Howard Matz (C.D. of Cal.), in denying the Lindsey "foreign official" challenge (see here for the prior post) identified the following "non-exclusive list" of "various characteristics of government agencies and departments" that fall within the description of instrumentality:

• The entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction.

• The key officers and directors of the entity are, or are appointed by, government officials.

• The entity is financed, at least in large measure, through governmental
appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.

• The entity is vested with and exercises exclusive or controlling power to administer its designated functions.

• The entity is widely perceived and understood to be performing official (i.e., governmental) functions]

Judge Selna stated that his above-listed "factors are not exclusive, and no single factor is dispositive." "As applicable here, their chief utility is simply to point out that several types of evidence are relevant when determining whether a state-owned company constitutes an 'instrumentality' under the FCPA - with state ownership being only one of several considerations. Accordingly, for these reasons and those discussed in more detail below, Defendants' Motion is not entirely segregable from the evidence to be presented at trial, and therefore must be denied."

Later in the opinion, Judge Selna stated as follows. "Admittedly, a mere monetary investment in a business entity by the government may not be sufficient to transform that entity into a governmental instrumentality. But when a monetary investment is combined with additional factors that objectively indicate the entity is being used as an instrument to carry out governmental objectives, that business would qualify as a governmental instrumentality."

Judge Selna found that the "meaning of the statutory text is clear," "that the meaning of instrumentality should be considered both within the context of the preceding terms of the FCPA [departments and agencies] and in view of the FCPA as a whole," and that the "use of the term instrumentality in the FCPA produces no such crisp exclusion of a state-owned entity." Judge Selna stated: "to the contrary, a state-owned entity - just like an agency or department - is a modality through which a government may conduct its business."

Judge Selna then noted that "the fact that corporations have long been used in this country to carry out governmental objectives supports the conclusion that state-owned companies could be considered an instrumentality." He stated that "given this country's long history of using corporations to carry out governmental objectives, the Court rejects the idea that governmental and commercial actions are necessarily incompatible."

Judge Selna also noted as follows. "The fact that Congress passed FSIA a year before the FCPA, and defined instrumentality to include state-owned companies, ultimately supports the Court's conclusions that an instrumentality could include such entities under the FCPA."

Judge Selna found "that the statutory language of the FCPA is clear, that the statutory scheme is coherent and consistent, and that resort to the legislative history of the FCPA is unnecessary."

Under the heading "Conclusion for Statutory Construction," Judge Selna stated as follows. "The Court concludes that some business entities may be considered an instrumentality but this is a fact-specific question that depends on the nature and characteristics of the business entity." Elsewhere, Judge Selna similarly stated as follows. "state-owned companies may be considered instrumentalities under the FCPA, but whether such companies qualify as instrumentalities is a question of fact."

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Earlier this week, Judge Selna issued an "Order Regarding Briefing Schedule and Hearing Date."

Among other things, Judge Selna ordered that "the parties shall submit their proposed jury instructions and legal support for the “instrumentality” and scienter instructions on June 30, 2011. Objections to disputed instructions shall be filed no later than July 25, 2011." "The hearing to address the “instrumentality” and scienter jury instructions, Defendants’ motion to dismiss the Travel Act charges, and Defendants’ Grand Jury motions, shall be scheduled for August 12, 2011 at 1:30 p.m."

Tenaris Resolves FCPA Enforcement - SEC Uses a DPA For the First Time

Once upon a time there was a law enforcement system in this country where companies that committed crimes or engaged in other wrongdoing were prosecuted criminally and/or civilly and where companies that did not commit crimes or did not engage in other wrongdoing were not prosecuted. That system has to a large extent been abandoned by the DOJ years ago – particularly in the FCPA context – and now that system appears to be crumbling at the SEC as well.

In December 2010, the SEC entered into its first non-prosecution agreement - albeit not in the FCPA context (see here for the prior post) and yesterday the SEC announced its first deferred prosecution agreement - of any kind - against Tenaris to resolve an FCPA enforcement action.

As has generally happened with the DOJ’s enforcement of the FCPA, the SEC’s enforcement of the FCPA will now be even further removed from judicial scrutiny and resolutions will now more frequently be negotiated over private conference room tables.

This is a troubling development on many fronts and it gives the public little confidence that our laws are enforced in a consistent and transparent manner or that regulators and companies are being held accountable.

With that introduction, let's take a look at the Tenaris enforcement action.

Tenaris (here) "is a leading supplier of tubes and related services for the world’s energy industry and certain other industrial applications." Tenaris is headquartered in Luxembourg and its American Depository Receipts ("ADRs") are listed on the New York Stock Exchange. In FCPA-speak, that makes Tenaris an "issuer."

The enforcement action involved both a DOJ and SEC component. Total settlement amount was $8.9 million ($3.5 million criminal penalty via a DOJ non prosecution agreement; $5.4 million in disgorgement and prejudgment interest via a SEC deferred prosecution agreement ... its feels odd just writing that).

Both enforcement actions involve commission payments to an Uzbekistan agent to receive confidential bidding documents in connection with tenders conducted by alleged Uzbekistan state-owned or state-controlled companies. The enforcement actions state that Tenaris employees "were aware or substantially certain that all or a portion" of the commission payments would be offered by the Agent to employees at the SOEs and that certain of the payments were paid via a wire transfer through a New York bank account.

DOJ

The NPA (here - dated March 14, 2011) begins as follows.

The DOJ "will not criminally prosecute" Tenaris and its subsidiaries and affiliates for any crimes "related to Tenaris's knowing violations of the anti-bribery and books and records provisions of the FCPA ... arising from and related to the making of improper payments by employees and agents of Tenaris to officials of OJSC O'ztashqineftgaz ("OAO"), an Uzbekistan state-controlled oil and gas production company, and the accounting and record-keeping associated with these improper payments."

The NPA has a term of two years and Tenaris admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Tenaris agreed "not to make any public statement contradicting" the described conduct.

According to the NPA, Tenaris has more than 24,000 employees around the world and it conducts operations in 12 countries and its customers include the world's leading oil and gas companies. The NPA states that Tenaris's operations included supplying steel pipe and related servics in the Caspian Sea region, including Uzbekistan. This region accounted for approximately 1% of Tenaris's total global sales and services from 2003 to 2008. Tenaris's Caspian Sea business was run from offices in Azerbaijan and Kazakhstan.

According to the NPA, "Tenaris obtained oilfeld services business in the Caspian Sea region in part by bidding on contracts solicited by state-owned companies or governmental agencies to provide pipeline used in the development and production of oil and natural gas. Tenaris often used agents to assist in biddig on government contracts in the Caspian Sea region."

The conduct at issue focused on OAO contracts between 2006 and 2007. According to the NPA, OAO "was a wholly owned subsidiary of Uzbekneftegaz, the state holding company of Uzbekistan's oil and gas industry" and during the relevant time period "Uzbekneftegaz and OAO were wholly owned by the Government Uzbekistan." The NPA then states, "OAO was an agency and instrumentality of the Government of Uzbekistan and its employees were foreign officials within the meaning of the FCPA."

According to its website (here) the current ownership of OAO is as follows: "government’s share – 51%; foreign investors’ share – 37.27%; free market trade share – 11.73%."

According to the NPA, in December 2006, Tenaris "was introduced to a potential agent ("OAO Agent") to help Tenaris bid on additional contracts with OAO" and "as an incentive to retain the OAO Agent, the OAO Agent offered Tenaris access to confidential bidding information of competitors obtained from officials in OAO's tender department, who would allow Tenaris to submit revised bids after reviewing the confidential information." The NPA states that "Tenaris would use the confidential competitor bid information to submit revised bids in order to increase the likelihood of Tenaris being awarded the underlying contract."

According to the NPA, Tenaris "agreed to pay the OAO Agent a fee of 3.5% for these services" and that Employees A, B, C, and D (non-U.S. citizens but "employees and agents" of Tenaris) "were aware or substantially certain that all or a portion of such money would be offered by the OAO Agent to one or more OAO employees."

The NPA then lists approximately $19.4 million in contracts Tenaris obtained using this system and states that certain of the commission payments to the OAO Agent were paid via wire transfer through a New York bank account.

Under the heading "Additional Improper Conduct to Avoid Detection," the NPA states that in November 2007 the above referenced employees learned of complaints from company competitors as to the bidding process on certain of the contracts and that an investigation by Uzbekekspertiza JSC (a Uzbekistani government agency) might commence. According to the NPA, "in an effort to avert the potential investigation of the bidding process, the OAO Agent recommended to Tenaris that the OAO Agent make an improper payment to Uzbekekspertiza officials to refrain from recommending the investigation against Tenaris or re-opening the bidding process to Tenaris's competitors" and that the employees "agreed to pay the recommended payment" to the officials to avert the investigation. However, the NPA states as follows: "the investigation did not uncover evidence that any such payment was made."

As to books and records, the NPA states that "the books, records and accounts reflecting Tenaris's transactions ... were incorporated into Tenaris's consolidated year-end financial statements" and that "Tenaris knowingly failed to make and keep books, records, and accounts that accurately and fairly reflected Tenaris's transactions ... and the payments to the OAO Agent."

Based on the above conduct, Tenaris agreed to pay a $3.5 million criminal penalty. The NPA states as follows. "This substantially reduced monetary penalty reflects the DOJ's determination to meaningfully credit Tenaris for its extraordinary cooperation with the Department, including its timely and voluntary disclosure, its subsequent investigation, and the effective manner in which Tenaris conveyed information to the [DOJ and the SEC]."

Inquiring minds want to know - how much was the penalty "substantially reduced?"

According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors.

(a) Tenaris's timely, voluntary, and complete disclosure of the conduct at issue;

(b) Tenaris's extensive, thorough, real-time cooperation with the DOJ and the SEC;

(c) subsequent to its voluntary disclosure of certain conduct unrelated to Uzbekistan, but prior to discovery of the unlawful conduct related to Uzbekistan, Tenaris's voluntary investigation of the Company's business operations throughout the world, specifically including the thorough and effective manner in which this investigation was carried out and information was disclosed to the DOJ and SEC;

(d) Tenaris's remedial efforts already undertaken and to be undertaken, including voluntary enhancements to its compliance program; and

(e) Tenaris's commitment to implement enchanced compliance measures described in the NPA.

Based on (c) above, inquiring minds want to know - what did Tenaris originally voluntarily disclose?

Under the heading, "Disclosure and Investigation of Improper Activity," the NPA states as follows.

"In or about March 2009, a third party disclosed to Tenaris information indicating that certain sales agency payments were made by Tenaris in relation to business in a country other than Uzbekistan. These payments appeared to be for an improper purpose. In response to this information, Tenaris's Audit Committee retained outside counsel to investigate the allegations. Thereafter, in a Form 20-F filed with the SEC on or about June 30, 2009, Tenaris disclosed information related to these allegations. Tenaris also made a prompt, full disclosure of the information to the [DOJ] and the [SEC] concerning the allegations. In or around July 2009, counsel for Tenaris met with the [DOJ and SEC] and disclosed preliminary findings of the internal investigation. Such disclosure was related to facts known to Tenaris at the time but was not related to transactions in Uzbekistan. Tenaris's counsel also informed the [DOJ and the SEC] that it would conduct a thorough, world-wide investigation of its business operations and internal controls and would report the findings to the [DOJ and SEC]. Tenaris's investigation plan included significant collection and review of a substantial quantity of electronic and paper records from the company and third parties from multiple locations around the world, translation of all relevant materials into English, subsequent interviews of relevant personnel including senior executives and third parties, and review and testing of internal controls and compliance procedures. In or around June 2010, Tenaris disclosed the factual findings from its internal investigation in a thorough, complete and useful manner to the [DOJ and SEC]. As a result of its internal investigation, Tenaris discovered facts and transactions in Uzbekistan that constitute the violations set forth above. Tenaris voluntaly engaged in certain remediation efforts to include termination and disciplinary measures of the persons involved. Tenaris also thoroughly reviewed its pre-existing compliance program and applicable internal controls, and undertook voluntary, affirmative steps to update and improve its compliance program and to implement enhanced compliance measures and controls. Tenaris also agreed to provide real and meaningful cooperation with the [DOJ and SEC] and any law enforcement agency in connection with this matter."

Again, inquiring minds want to know - what did Tenaris originally voluntarily disclose?

See here for the DOJ's release announcing the enforcement action.

SEC

The SEC DPA (here) is based on the same core conduct described above.

As to internal controls, the SEC DPA states as follows.

"... Tenaris's system of internal controls failed to detect or prevent payments to OAO officials in an effort to obtain and retain business in Uzbekistan, including a failure to ensure that proper and effective due diligence was conducted on the Agent for the OAO contracts, and that the review process for authorization or approval of payments to the Agent failed to detect or prevent the illegal payments to OAO officials. Tenaris's policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act ("FCPA") compliance in place at that time warranted further strengthening to ensure effective compliance with the related laws."

One of the undertakings Tenaris agreed to in the DPA was the following.

"To conduct effective training regarding anticorruption and compliance with the FCPA for (1) all current officers and managers, (2) all employees working in Finance, Accounting, Internal Audit, Sales, and Government Relations, (3) all other employees working in positions Tenaris deems to involve activities implicated by Tenaris's policies regarding anticorruption and compliance with the FCPA, on or before December 31, 2011, and (4) all such future employees within 90 days oftheir affiliation with Tenaris."

Under the terms of the two-year DPA, Tenaris, without admitting or denying the SEC's allegations (the same way defendants are ordinarly allowed to resolve SEC enforcement actions), agreed to pay $5.4 million in disgorgement and prejudgment interest.

Pursuant to the DPA, Tenaris agreed "not to contest or contradict the factual statements" supporting the Statement of Facts. As noted in this prior post when the SEC announced its intention to make use of NPAs and DPAs, "[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses" is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.

Like the SEC's prior NPA, the Tenaris DPA is very similar to DOJ DPAs and NPAs.

In a release (here) the SEC touted its first use of a DPA.

Robert Khuzami (Director of the SEC's Division of Enforcement) stated as follows. “The Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation. The company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement. Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigations and who display an exemplary commitment to compliance, cooperation, and remediation.”‬

Cheryl Scarboro (Chief of the SEC's FCPA Unit) stated as follows. “Tenaris’s conduct was clearly in violation of the FCPA. The company’s employees bribed government officials in Uzbekistan to obtain government contracts. But when Tenaris discovered the illegal conduct, it took noteworthy steps to address the violations and significantly enhance its anti-corruption policies and practices to remediate weaknesses in its internal controls.”

Robert Giuffra, Jr. of Sullivan & Cromwell (here) represented Tenaris.

"Foreign Official" - What Others Are Saying

What mattered most from the Lindsey matter was not so much the jury verdict (see here for the prior post), but Judge Matz's pre-trial decision on the "foreign official" issue. This is from a jurisprudence standpoint because obviously the jury verdict very much mattered to the defendants, their friends and family, and other employees of Lindsey Manufacturing and I am not trying to diminish or make light of the very human element of the jury verdict.

While we await final rulings in the Carson and O'Shea "foreign official" challenges, let's revisit Judge Matz's April 20th ruling (see here for the previous post) and see what others are saying.

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In this client alert, King & Spalding stated as follows. "In his decision, Judge Matz provided a helpful but non-exclusive list of illustrative criteria for determining whether a state-owned entity is sufficiently similar to a government agency or department to consider it a government 'instrumentality.' [...] Importantly, although in this case the court found that CFE may be an instrumentality of the Mexican government, the court’s opinion leaves ample room for argument in future cases that other state-owned corporations – such as those that do not share many characteristics with government departments and agencies, and those that are only
partially owned by a foreign government – may not fall within the FCPA’s reach."

Luce Forward, in this eUpdate, stated as follows. "The Court, however, nimbly sidestepped Lindsey’s legislative history argument. It simply cited the Mexican government’s descriptions of the role of CFE in the government hierarchy and noted that in CFE’s own (English language) website it identified itself as a government agency (and by implication, therefore, a government instrumentality). The Court said its ruling was based on “simple statutory construction” and that its finding on the status of CFE was an issue of law, not of fact, and wouldn’t be subject to further evidence on that question during trial."

This FCPA Update by Debevoise & Plimpton provides a lengthy summary of the recent "foreign official" challenges as well as an overview of Judge Matz's ruling.

In this write-up, Fulbright & Jaworski stated as follows. "The Lindsey Manufacturing ruling is significant as it represents a victory for the DOJ that will, at least for the present time, likely strengthen and embolden the government’s efforts to bring enforcement actions against companies and individuals based on its expansive interpretation of the term “foreign official.” Additionally, while it is not certain to what degree the Lindsey Manufacturing ruling will affect the Carson and O’Shea courts’ decisions, it is probable that the decision will be weighed as both courts consider whether to narrow the current government view of who is a “foreign official” for purposes of FCPA enforcement under the respective facts of each of those cases. The next two decisions will be highly anticipated. Certainty regarding who will be considered a “foreign official” under the FCPA and, thus, who should be considered a potential recipient of an improper payment under the Act, is critical as companies determine how best to formulate an effective compliance program in the current FCPA enforcement environment."

In this memorandum, Simpson & Thacher stated as follows. "The ruling is not a whole-hearted endorsement of DOJ’s broad interpretation of the FCPA’s definition of “foreign official.” The judge did not rule that employees of state-owned entities necessarily fall within the definition of “foreign official.” Rather, he merely left open the possibility that employees of state-owned entities – depending on the specific facts in play – will be “foreign officials.” Indeed, while the judge ultimately ruled that the CFE officers in question may be “foreign officials,” he did so only after a close analysis of factual circumstances that many practitioners might agree presented an easy case for this conclusion. For instance, unlike other types of state owned businesses, CFE provides a service that is constitutionally mandated as an exclusive state function; and CFE even describes itself as a government “agency” on its own website. It remains an open question as to whether employees of other state-owned enterprises that do not share these features – such as a state-owned steel company – would be found to fall within the definition of foreign official. Nonetheless, the judge provided some new guidance for FCPA practitioners seeking to determine whether an entity might be an instrumentality of a foreign government. In the end, the decision leaves ample room for litigants in other situations to dispute whether state-owned enterprises are covered by the FCPA."

In this summary, WilmerHale stated as follows. "Notably, the Court's ruling is a very narrow one. First, the Court clearly rejected the Defendants' argument that no corporation could qualify as an "instrumentality." Second, the Court left open the question of whether all corporations that perform some public function qualify as "instrumentalit[ies]." Finally, the Court's ruling about CFE was based on unusual facts which were unique to the entity. These key aspects of the Court's ruling appear to leave the door open to future challenges."

In this summary, Haynes & Boone stated as follows. "The DOJ and the SEC have been aggressively pushing an expansive interpretation of “foreign official” for years. In the past, the Government’s targets have chosen to settle rather than press the issue and face a jury. That has kept the Government’s analysis from judicial scrutiny. Noriega is the first of several ongoing cases that bucks this trend, puts the Government to its proof, and tests its interpretation of the statute. The result should be a clearer understanding of who is a foreign official for FCPA purposes. The decision released last week is a strong affirmation of the Government’s more forward-leaning stance on the question. The decision’s five-factor test to determine whether a state-owned corporation is an instrumentality of the state offers clarity on a narrow but important question facing global companies doing business overseas. If the foreign company is created by statute, overseen by government officials or appointees, financed through taxes, exercises exclusive control over its designated functions, and is widely understood to be performing government functions, then that company is likely an instrumentality of a government and the FCPA applies. The potential game-changer in the opinion is the Court’s willingness to accept the Government’s contention that “foreign official” should be construed in light of the OECD Convention. The Convention definition of “public enterprise” includes “any enterprise” over which a government “may, directly or indirectly, exercise a dominant influence.” In certain jurisdictions where governments play a more active role in the economy, the Government may have many different ways to directly or indirectly exercise dominant influence. This could potentially expand the scope of covered foreign officials under the FCPA in many jurisdictions."

One Win, One Loss

The conviction last week of Lindsey Manufacturing Inc. (see here for the prior post) was indeed the first instance of a company being tried and convicted on FCPA violations - as noted in the DOJ's release (here).

However, contrary to numerous media reports, it was not the first instance of a company putting the DOJ to its burden of proof in an FCPA trial.

That first occurred in 1990-1991 when Harris Corporation (and certain of its executives) prevailed in an FCPA trial.

Thus, the DOJ's record in corporate FCPA trials is one win, one loss.

This post summarizes the Harris Corporation enforcement action and includes information gleaned from original source newspaper accounts.

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In 1990, Harris Corporation ("Harris"), John D. Iacobucci, and Ronald L. Schultz were charged in a criminal indictment (here) filed in U.S. District Court - Northern District of California.

As alleged in the indictment, Harris was a Delaware publicly-traded corporation headquartered in Melbourne, Florida and through its Digital Telephone Systems ("DTS") division it manufactured telephone switching systems. Iacobucci was the Vice President and General Manager of DTS and Schultz was, at various times, Director of Human Relations and Facilities at DTS, Director of Administration at DTS and responsible for Contracts Administration.

Robert O'Hara (an unindicted co-conspirator - more on O'Hara below) was the President and sole stock-holder of Polo Associations Corporation, Inc. - a Delaware corporation created by O'Hara "to engage in the business of advising telecommunications companies of ways to obtain business in Latin American countries, particularly Colombia."

The conduct at issue involved "The Empress Nacional de Telecomunicaciones or Telecom" an alleged "instrumentality of the Government of Colombia responsible for the operation of telex services, maritime communications, and long distance and international telephone and telegraph services within the country of Colombia." According to the indictment, "Telecom was an instrumentality of the Government of Colombia within the meaning of the FCPA." However, as detailed below, none of the improper payments at issue were alleged to have been paid to Telecom officials.

The indictment charged that Harris, Iacobucci, Schultz and O'Hara conspired to violate the FCPA by paying and authorizing the payment of money to O'Hara "while knowing that a portion of such money" would be offered or given, directly or indirectly, to "foreign officials, that is, officials of the Government of Colombia" in order to influence the officials to award government telecommunications contracts to Harris in violation of the FCPA. The indictment further charged a conspiracy to violate the FCPA's books and records provisions.

According to the indictment, part of the conspiracy was that Harris retained O'Hara "as a consultant based upon the representation of O'Hara that he had connections with officials of the Government of Colombia that he would use to assist" Harris in obtaining telecommunications contracts. According to the indictment, Harris agreed to pay O'Hara a 10% commission of the value of any telecommunications contracts entered into between Harris and Telecom.

The indictment does not allege that any payments went to officials of Telecom, but rather that payments went to a "member of the Camara de Representates (CDR), the national legislative of Colombia;" a local Colombian company "that was owned in part by a foreign official, that is, a member of the CDR;" and "various officials of the Government of Colombia."

The indictment alleged specific meetings and documents that set into motion the bribery scheme.

In addition to the conspiracy charge, the indictment also charged substantive FCPA anti-bribery and FCPA books and records offenses.

Original source newspaper reports from the time detail as follows.

Theodore S. Greenberg, deputy chief of the Fraud Section of the Criminal Division, stated upon issuance of the indictment - "The department continues to view violations of the Foreign Corrupt Practices Act as serious matters and will pursue them accordingly."

A statement from John Hartley, Chairman and Chief Executive of Harris, stated as follows. "We believe that these charges are based upon a distorted view of the facts, and they represent a radical departure from existing enforcement policies. We have cooperated fully with the Justice Department in its investigation of the allegations, providing clear evidence refuting the charges."

At the time of the indictment, Harris Corp. was ranked 57th among Department of Defense contractors in terms of total dollar volume of contracts awarded.

Harris, Iacobucci, and Schultz put the DOJ to its burden of proof and the criminal trial began on March 4, 1991. The San Francisco Examiner stated that "the trial is significant because the Justice Department prosecutes only a few such foreign bribery cases a year."

The same article contained the following background on the case. "The government's case is based on the testimony of a whistle-blower who handed over company documents to the FBI and a consultant who has pleaded guilty to helping Harris Corp. falsify its records. [...] The defendants insist that they authorized only legitimate consulting payments to secure Colombia's business and claim that the government's case rests on trumped-up charges by a disgruntled employee. [...] At a pretrial hearing, U.S. District Judge Charles A. Legge rejected a request by defense attorneys to exclude dozens of Harris Corp. documents from the trial. They claim that [the whistleblower] stole the documents on behalf of the FBI. [...] A key prosecution witness is Robert O'Hara, a consultant who is based in New York. He pleaded guilty in August to a charge of aiding Harris Corp. with falsifying its financial records."

On March 19, 1991, Judge Legge, "after hearing the prosecution's case ... granted a verdict of acquittal ... the defense was not called upon to present its case." The San Francisco Chronicle stated as follows. "Shortly after the government rested its case, U.S. District Judge Charles Legge of San Francisco ruled from the bench that 'no reasonable jury' could convict the company nor its executives on any of the five bribery-related counts for which they were indicted. Citing insufficient evidence, Legge said the government had failed to show any intent by the defendants to enter into a criminal conspiracy. Legge also said it was the first time in his six years on the federal bench that he had dismissed a criminal case at mid-trial for lack of evidence." The Chronicle called the dismissal a "stunning defeat for the Justice Department" after a 12-member jury heard two weeks of testimony by prosecution witnesses.

The Chronicle further stated as follows. "The acquittal also reinforced the Justice Department's poor track record of prosecutions in overseas bribery cases. Federal prosecutors have won only two dozen convictions under the Foreign Corrupt Practices Act of 1977 since the law was adopted more than a decade ago."

Hartley (the above referenced Chairman and Chief Executive of Harris) stated as follows. "We're very pleased that our Digital Telephone Systems Division and its employees have been vindicated, but we believe the charges should never have been brought in the first place. The Justice Department's case was based upon a distorted view of the facts and represented a radical departure from existing enforcement policies. As a result, American taxpayers have been burdened with unnecessary litigation costs, and Harris has incurred more than $3 million in legal fees, spent many hundreds of hours of our people's time, and suffered a substantial disruption of the corporation's business to prove an absence of wrongdoing that should have been apparent from the beginning. The case has also placed a heavy strain on our two employees named in the indictment."

Michael Fayad, a lawyer for Harris, stated as follows. "[Judge Legge] decided to dismiss the case for all of the same reasons we had pointed out to the Department of Justice early on, prior to indictment ... that there was no bribe, no contract, no agreement to pay a bribe, no corrupt intent."

Charles Bryer, Schultz's lawyer, stated as follows. "The case was paper-thin, built on a con man's story and a disgruntled employee's vengeance. We were conned to pay some money that we thought was going to be used for a legitimate purpose."

According to newspaper accounts, DOJ prosecutor Scott MacKay said the government brought the case in good faith - "We're disappointed with the judge's ruling. We feel that we presented a good case, but we accept the judge's ruling."

Today, Harris Corporation is alive and well. See here for its webpage.

As to O'Hara, as suggested above, he pleaded guilty to related charges in the Eastern District of N.Y. before the Harris et. al trial. However, after the California directed verdict of acquittal, but before his sentencing, O'Hara sought to withdraw his guilty plea. The trial court judge denied his motion and concluded that the acquittal of O'Hara's alleged co-conspirators was not a "fair and just reason" sufficient to allow O'Hara to withdraw his guilty plea. O'Hara appealed and the Second Circuit affirmed (See 960 F.2d 11).

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If non-prosecution and deferred prosecution agreements existed in 1990, would Harris have resolved the enforcement action via such a resolution vehicle? Likely yes. Yet Harris and the individual defendants all prevailed at trial.

Was there anything wrong with this prior era when NPAs and DPAs were not an option in an FCPA enforcement action? I submit no and believe that abolishing NPAs and DPAs in the FCPA context should be subject to serious debate and discussion. For more on this issue (see here).

A Double Standard? Part IV

A company learns of potential legislation that will negatively affect its business. A company representative reportedly begs a government official (who heads a key committee that will decide the fate of the legislation) to vote in a way that serves the company's interest and the company otherwise spends millions to seek to influence the legislative body. The government official reverses his prior position and votes in a way that serves the company's interest. One month later, the company's CEO and the government official appear at a event in which the company announces it is making a $30 million charitable donation, $11 million of which will benefit schools in the government official's district, the largest gift ever to the city's schools.

Businesses are prohibited from making campaign contributions to a government official. So businesses give money to a foundation set up by the government official's wife months after the official took office. Even though the charity is named and led by the official's wife, the government official is pictured alongside his wife on the corporate solicitation page of the charity's web site and the official's chief fundraiser is listed as the charity's treasurer.

A prudent FCPA practitioner would immediately see the “red flags;” counsel the companies at issue to conduct a lengthy and expensive internal investigation as to the conduct at issue and related conduct; and – mindful of the enforcement agencies guidance and cognizant of the carrots and sticks they posses – likely suggest voluntarily disclosure of the investigative findings.

But wait.

The government officials in the above real-life scenarios were not “foreign officials” – they were U.S. government officials!

See here for the New York Times story on General Electric's tax exposure and its interactions with Representative Charles Rangel.

See here for the New York Times story on Louisiana governor Bobby Jindal and his wife's charity.

Scrap those internal investigation plans, forget about voluntary disclosure, and slim chance there will be an enforcement action. Nobody said our system was perfect, but that is just how the system works some will say.

But why should corporate interaction with a “foreign official” be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official? After all, there is a U.S. domestic bribery statute (18 USC 201) with elements very similar to the FCPA.

Why do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet generally turn a blind eye when it happens here at home?

Is the FCPA enforced too aggressively or is enforcement of the U.S. domestic bribery statute too lax?

Ought not there be some consistency between these two statutes?

For prior posts on the FCPA's double standard see here, here and here.