FCPA Professor

FCPA Professor Has Moved

2011-07-14T17:17:00.002-04:00

Thank you for visiting FCPA Professor. This will be the last post at this location.

I am pleased to announce the launch of a new and improved site - www.fcpaprofessor.com - where all future posts will be located.

Armor Holdings Resolves Enforcement Action / BAE Avoids Successor Liability

2011-07-14T00:05:00.008-04:00

In February 2009, Richard Bistrong a former employee of Armor Holdings Inc. (a former publicly-traded company, currently a subsidiary of BAE Systems) pleaded guilty to charges he conspired with others to, among other things, obtain United Nations body armor contracts valued at $6 million by causing his employer to pay $200,000 in commissions to an agent while knowing that the agent would pass along a portion of that money to a United Nations procurement officer (a "foreign official" under the FCPA) to cause the officer to award the contracts. (See here and here for the prior posts).

Bistrong then became an informant for the government and helped the FBI manufacture an entirely different case - the Africa Sting case - against, among others, Jonathan Spiller (the former CEO and President of Armor Holdings and Bistrong's boss) and Stephen Gerard Giordanella (formerly associated with Armor Holdings). Spiller, who testified at the first Africa Sting trial that resulted in a mistrial (see here for the prior post) is one of the Africa Sting defendants that has pleaded guilty. Giordanella is scheduled for a September trial.

Yesterday, in a related development, the DOJ and SEC announced an FCPA enforcement against Armor Holdings. Total fines and penalties are approximately $16 million ($10.3 million via a DOJ non-prosecution agreement and $5.7 million via a settled SEC civil complaint).

That the DOJ would resolve the matter solely against Armor Holdings without also holding BAE accountable stands in stark contrast to other recent FCPA enforcement actions where the DOJ has used successor liability theories against acquiring companies (see here for the 2010 enforcement action against Alliance One International for instance). But then again, in 2010 the DOJ resolved an enforcement action against BAE - one that per the DOJ's own allegations directly implicated the FCPA's anti-bribery provisions - without FCPA charges. See here for the prior post.

This post analyzes both the DOJ and SEC enforcement actions against Armor Holdings.

DOJ

The NPA (here) begins as follows.

The DOJ "will not criminally prosecute Armor Holdings, Inc., or any of its present or former parents, subsidiaries, or affiliates for any crimes ... related to the making of, and agreement to make, improper payments by Armor employees and agents to a procurement official of the United Nations in connection with efforts to obtain and retain body armor contracts for an Armor subsidiary from the U.N. in 2011 and 2003, and related accounting and record-keeping associated with these improper payments ...".

The NPA has a term of two years. As is typical in FCPA NPAs or DPAs, Armor agreed "not to make any public statement contradicting" the described conduct.

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

(a) Armor's complete disclosure of the facts at issue;

(b) Armor's self-investigation and cooperation with the DOJ and SEC;

(c) "the fact that all of the conduct [at issue] took place prior to the acquisition of Armor by BAE Systems; and

(d) "the extensive remedial efforts undertaken by Armor, before and after Armor's acquisition by BAE Systems, including but not limited to terminating the Armor employees who were involved in the misconduct; terminating approximately 1,700 international sales representatives and distributors of Armor Holdings Products LLC immediately after the acquisition closed; conducting extensive FCPA compliance training for over 1,000 Armor employees; implementing BAE Systems' due diligence protocols and review processes for any new Armor foreign sales representatives and distributors; and applying BAE Systems' compliance policies and internal controls to all Armor businesses."

According to the Statement of Facts in the NPA, "Armor manufactured security products, vehicle armor systems, protective equipment and other products for use, primarily, by military, law enforcement, security and corrections personnel." The conduct at issue focuses on Armor Holdings Products Group ("Products Group"), which was a wholly owned division of Armor, Bistrong (Product Group's Vice President for International Sales) and Armor Products International Ltd. ("API"), which was a wholly owned subsidiary of Armor that was a part of the Products Group and headquartered in the U.K.

Under the heading "Improper Conduct" the NPA states as follows. From 2001 to 2006, "API and its employees and agents made corrupt payments to a United Nations procurement official to induce that official to provide non-public, inside information to API, and to cause the U.N. to award body armor contracts to API." The NPA further states that "Armor employees falsely recorded the nature and purpose of these improper payments, as well as other payments, in Armor's books and records."

Under the heading "Books and Records" the NPA states as follows. From 2001 to 2006, "Bistrong, Products Employee A and others caused the Products Group to keep off Armor's books and records approximately $4.4 million in payments to agents and other third-party intermediaries used by the Products Group to assist it it obtaining business from foreign government customers."

Pursuant to the NPA, the DOJ agreed not to prosecute Armor based on the above described conduct if it complies with the compliance-related obligations set forth in the NPA. In an interesting sentence similar to the recent Tenaris DOJ NPA, the DOJ also agreed not to prosecute Armor for conduct "Armor specifically disclosed to the DOJ in meetings during its voluntary disclosure from March 2007 to December 2010." This sentence suggests that Armor disclosed other conduct to the DOJ in addition to the conduct described above.

See here for the DOJ's release announcing the enforcement action. Among other things, the release states as follows. "Due to Armor’s implementation of BAE’s due diligence protocols and review processes, its application of BAE’s compliance policies and internal controls to all Armor businesses, its extensive remediation and improvement of its compliance systems and internal controls, as well as the enhanced compliance undertakings included in the agreement, Armor is not required to retain a corporate monitor. Armor will be required to report to the department on implementation of its remediation and enhanced compliance efforts every six months for the duration of the agreement."

SEC

The SEC's settled civil complaint (here) is based on the same core conduct described above.

In summary, the complaint states as follows. "From 2001 through 2006, certain agents of Armor Holdings participated in a bribery scheme in which corrupt payments were authorized to be made to an official of the United Nations ("U.N."), for the purpose ofobtaining and retaining U.N. business. Armor Holdings generated more than $7.1 million in improper revenues, and realized over $1.5 million in improper profits, through the award of U.N. body armor contracts to its subsidiary during this period. From 2001 through June 2007, another Armor Holdings subsidiary employed an accounting practice that disguised in its books and records approximately $4,371,278 in commissions paid to intermediaries who brokered the sale of goods to foreign governments. By virtue of this conduct, Armor Holdings violated the anti-bribery, books and records, and internal controls provisions of the FCPA and the Exchange Act."

In an SEC release (here), Robert Khuzami (Director of the SEC’s Division of Enforcement) stated that "illicit payments to U.N. officials are no less reprehensible than bribes to foreign government officials." As noted in the SEC release, Armor, without admitting or denying the SEC's allegations, consented to the entry of a permanent injunction against further FCPA violations and agreed to pay $1,552,306 in disgorgement, $458,438 in prejudgment interest, and a civil monetary penalty of $3,680,000.

The SEC release also contains the following summary statistic. "Since 2010, the SEC has filed 32 FCPA cases, including the case against Armor Holdings, and obtained more than $600 million in penalties, disgorgement and interest."

Roger Witten and Kimberly Parker (here and here of Wilmer Cutler Pickering Hale and Dorr) represented Armor Holdings.

A Focus On The SEC

2011-07-13T05:00:00.024-04:00

From an FCPA reform perspective, most of the recent scrutiny has been on the DOJ and its enforcement policies and positions.

Yet, the FCPA is also enforced by the SEC.

As a civil enforcement agency only, the SEC's stick is less sharp the DOJ's. Nevertheless, the SEC's FCPA enforcement positions on issues such as "foreign official" and "obtain or retain business" are seemingly identical to the DOJ's.

Moreover, certain of the SEC's enforcement theories as to the FCPA's books and records and internal control provisions are subject to controversy. As I highlighted in "The Facade of FCPA Enforcement" (here at pgs. 976-984), with increasing frequency, the SEC has charged FCPA books and records and internal control violations based on untested and dubious legal theories, as well as theories seemingly in direct conflict with the FCPA’s statutory provisions.

For instance, the SEC routinely charges parent companies with FCPA books and records and internal control violations based solely on the conduct of indirect subsidiaries or affiliates in the absence of any allegation that the parent company participated in, or had knowledge of, the conduct at issue - even though the FCPA specifically states that issuers that demonstrate good faith efforts to cause indirect subsidiaries and affiliates to devise and maintain effective internal controls “shall be conclusively presumed to have complied with” the FCPA’s applicable requirements.

The SEC's FCPA enforcement theories and policies are now being questioned. See here for the June 30th letter from Senator Mike Crapo (R-ID) to SEC Chairman Mary Schapiro.

The letter begins with Senator Crapo stating that "Congress and the agencies that enforce the FCPA must work together to ensure that the statute's goals are being met without perverting the risk and reward calculus U.S. firms face when considering overseas business opportunities that would support domestic job growth."

In the letter, Senator Crapo says he is "concerned by the recent Congressional testimony about the increased compliance costs for businesses operating in good faith to abide by the FCPA's strictures and the deterrence of U.S. firms' entry into, or expansion of, overseas operations."

Senator Crapo then asks Chairman Schapiro for answers to the following questions.

1. Should the FCPA be amended to provide an affirmative defense, which may be raised where violations resulted from the conduct of individual employees or agents who circumvented compliance measures that were reasonably designed to identify and prevent such violations?

2. Does the Commission believe that regulations or guidance explaning factors it considers when determining whether an entity's officers or employees are "foreign officials" would be helpful to U.S. firms? Would the Commission support legislation that more clearly defines the term "foreign official" under the FCPA?

3. What are the mechanisms by which the Commission could or does provide guidance on FCPA related matters?

4. Is it the Commission's policy to hold firms strictly liable for foreign subsidiaries' actions in violation of the FCPA?

5. Under what circumstances, if any, is it appropriate for both the Commission and the Department to seek the recovery of penalties from the same entity for the same conduct?

Prior to responding to Senator Crapo's letter, Chairman Schapiro and others at the SEC's FCPA Unit would be well served by reviewing a 1981 speech by then Chairman of the SEC - Harold Williams - on the FCPA's books and records and internal control provisions.

To best understand (and place in context) current SEC FCPA enforcement positions and policies, it is useful to understand past SEC FCPA enforcement positions and policies. Statements made by the SEC Chairman in 1981 bear little resemblence to the SEC's current enforcement of the FCPA's books and records and internal control provisions.

*****

The year was 1981, the event was the American Institute of Certified Public Accountants, and the speaker was Harold Williams, the Chairman of the SEC. Williams focused his remarks (here) “solely to one major auditing development of recent years: the accounting provisions of the Foreign Corrupt Practices Act of 1977.”

Williams began has remarks as follows. “When viewed from an abstract perspective, the Act’s accounting provisions seem merely to codify a basic and uncontroversial management principle: no enterprise of any size can operate successfully without maintaining effective controls over its transactions and the disposition of its assets. Perhaps in part because these provisions were considered truisms, the Act was passed without Congressional dissent. However, practical experience with new legislation – even a law thought to be noncontroversial – often will reveal unanticipated problems. Newly enacted standards, for example, may be subject to differing constructions or raise compliance difficulties and ambiguities unforeseen by their draftsmen. And, until these problems are resolved by an agency, the courts or the Congress, those who are subject to these laws are often faced, unfortunately, with some disquieting circumstances. The anxieties created by the Foreign Corrupt Practices Act – among men and women of utmost good faith – have been, in my experience without equal."

Williams noted that “such uncertainty can have a debilitating effect on the activities of those who seek to comply with the law. My sense is that, as a consequence, many businesses have been very cautious – sometimes overly so – in assuring at least technical compliance with the Act. And, therefore, business resources may have been diverted from more productive uses to overly-burdensome compliance systems which extend beyond the requirements of sound management or the policies embodied in the Act. The public, of course, is not well served by such reactions.”

Unlike many SEC speeches that contain the usual – this is only my personal opinion disclaimer – Williams specifically noted that he “conferred” with his “colleagues before presenting these remarks, and they have authorized me to advise you that these remarks constitute a statement of the Commission’s policy.”

As to the FCPA’s books and records provisions, Williams stated as follows. “This provision is intimately related to the requirement for a system of internal accounting controls, and we believe that records which are not relevant to accomplishing the objectives specified in the statute for the system of internal controls are not within the purview of the recordkeeping provision. […] nor could a company be enjoined for a falsification of which its management, broadly defined, was not aware and reasonably should not have known.”

As to the FCPA’s internal control provisions, Williams stated as follows. “The Act does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s specified objectives. ‘Reasonableness,’ a familiar legal concept, depends on an evaluation of all the facts and circumstances.”

Under the heading “deference” Williams stated as follows. “Private sector decisions implementing these statutory objectives are business decisions. And, reasonable business decisions should be afforded deference. This means that the issuer need not always select the best or the most effective control measure. However, the one selected must be reasonable under all the circumstances.”

Under the heading “state of mind” Williams stated as follows. “The accounting provisions principal objective is to reaching knowing or reckless conduct.”

As to the “purposes of the Act,” Williams provided a brief review of the “events which led to the [FCPA].” He stated as follows. “Clearly, Congress went further than determining whether the payments which gave the new law its name were ethically and commercially justifiable. It also chose to consider the corporate accounting and control deficiencies which had been breeding grounds for these practices. And, by doing so, it addressed the far more serious issues raised by these disclosures. […] These payments and falsifications were not only previously unknown to public investors and independent auditors, but many were also unknown to the payor’s board and, in numerous examples, even to its senior management. In some of these instances, internal controls existed, but they were shown to be ineffective or easily subverted. Unauthorized payments and related falsifications of corporate records seemed to evidence – indeed, were fostered by – a lack of adequate accounting records and controls. Consequently, in the legislation which ultimately emerged from Congress, prohibiting questionable payments and mandating control and recordkeeping were inexorably interconnected.”

Williams stated as follows. “The primary thrust of the Act’s accounting provisions, in short, was to require those public companies which lacked effective internal controls or tolerated unreliable recordkeeping to comply with the standards of their better managed peers. That is the context in which these provisions should be construed.”

Williams then addressed “four of the most important” interpretative questions concerning the then-young FCPA: “first, the degree of exactitude in recordkeeping mandated by the Act; second, the deference it affords business decisions concerning internal controls; third, whether a particular state of mind is necessary for a violation to exist; and finally, liability for compliance by subsidiaries.”

As to the “degree of exactitude” Williams stated as follows. “I turn first to the question of whether the Act’s text or purpose mandates that business records and controls conform to a standard of absolute exactitude or that a company’s control system meet some absolute ideal. The answer is ‘no.’ Both of the Act’s accounting provisions, it should be noted are modified by the key term ‘reasonable.’ […] In essence, therefore, the Act does provide a de minimus exemption, though not in absolute quantitative terms.”

Williams noted that Congress specifically declined to adopt a materiality test and stated that “internal accounting controls are not only concerned with misconduct that is material to investors, but also with a great deal of misconduct which is not.” He noted that while materiality is “appropriate as a threshold standard to determine the necessity for disclosure to investors, [it] is totally inadequate as a standard for an internal control system.”

Williams stated that “procedures designed only to uncover deficiencies in amounts material for financial statement purposes would be useless for internal control purposes” and noted that “systems which tolerated omissions or errors of many thousands or even millions of dollars would not represent, by any accepted standard, adequate records and controls.” Indeed, Williams noted that many of the “questionable payments that alarmed the public and caused Congress to act” […] were in most instance of far lesser magnitude than that which would constitute financial statement materiality.”

“Reasonableness, rather than materiality, is the appropriate test,” Williams stated. He noted as follows. "Reasonableness, as a standard, allows flexibility in responding to particular facts and circumstances. Inherent in this concept is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the Act allows a range of reasonable judgments.”

As to the “specific recordkeeping requirement” in the FCPA, Williams stated as follows. “… [T]his provision is not an independent unrestrained mandate to the Commission to establish novel or unprecedented corporate recordkeeping standards; it is, rather, an integral part of Congress’ efforts to assure that the business community records transactions and assets in such a way as to maintain adequate control over them. And this leads to two important conclusions: First, the Act does not establish any absolute standard of exactitude for corporate records. And, second, records which are not related to internal or external audits or to the four internal control objectives set forth in the Act are not within the purview of the Act’s accounting provisions.”

As to “deference” with respect to “issuer liability for recordkeeping violations” Williams stated that the SEC “will look to the adequacy of the internal control system of the issuer, the involvement of top management in the violation, and the corrective actions taken once the violation was uncovered.”

In a sign of just how much FCPA enforcement has changed, Williams then stated as follows. “If a violation was committed by a low level employee, without the knowledge of top management, with an adequate system of internal control, and with appropriate corrective action taken by the issuer, we do not believe that any action against the company would be called for.”

Williams next turned to the “state of mind needed to violate the Act’s accounting provisions.” He reiterated that the “Act’s principal purpose is to reach knowing or reckless misconduct.”

In another sign of just how much FCPA enforcement has changed, William stated as follows. “… [D]epending on the circumstances, intentional circumventions of a company’s system of records and of accounting controls by a low-level employee would not always be considered violations of the Act by the issuer. No system of adequate records and controls – no matter how effectively devised or conscientiously applied – could be expected to prevent all mistaken and improper transactions and disposition of assets. Given human nature, regardless of the adequacy of the system, a bookkeeper may still erroneously post entries, an overzealous agent may make unauthorized payments, or an unscrupulous employee may falsify records for his own purposes. The Act recognizes each of these limitations. Neither its text and legislative history nor its purposes suggest that occasional, inadvertent errors were the kind of problem that Congress sought to remedy in passing the Act. No rational federal interest in punishing insignificant mistakes has been articulated. And, the Act’s accounting provisions do not require a company or its senior officials to be the guarantors of all conduct of company employees.”

In concluding this portion of his speech, Williams stated as follows. “The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”

As to subsidiaries, Williams stated as follows. “Where the issuer controls more than 50 percent of the voting securities of the subsidiary, compliance is expected. So, too, would it be expected if there is between 20 percent and 50 percent ownership, subject to some demonstration by the issuer that this does not amount to control. If there is less than 20 percent ownership, we will shoulder the burden to affirmatively demonstrate control.”

As to the SEC’s enforcement policy, Williams concluded his remarks as follows. “The genius – and challenge – of [the FCPA’s accounting provisions] , it should be remembered, is their reliance on private sector decisionmaking – rather than specific federal edicts – to address an area of public concern. The Act’s eventual success or failure will, therefore, depend primarily upon business’s response. The Commission’s obligation, in turn, is to provide a regulatory environment in which the private sector can address these issues meaningfully and creatively. In this regard, we must encourage public companies to develop innovative records and control systems, to modify and improve them as circumstances change, and to correct recordkeeping errors when they occur without a chilling fear of penalty or inference that a violation of the Act is involved.”

Latest FCPA Opinion Procedure Release Reflects High Level Of Anxiety

2011-07-12T05:29:00.008-04:00

During last month's House hearing on the FCPA (see here for the prior post) Representative James Sensenbrenner told Greg Andres (DOJ) that if Andres were the general counsel of a company advising the CEO and everyone else, he would likely be advising the company in the "most narrow way" and "exercising the greatest amount of caution."

Indeed, the current era of FCPA enforcement has led to a high level of anxiety and skittishness over things that should not, with the end result being overcompliance and inefficient use of resources.

Case in point, the latest FCPA Opinion Procedure Release.

Despite a statutory affirmative defense concerning reasonable and bona fide expenses concerning promotion, demonstration or explanation of products or services, and despite several past "on-point" Opinion Procedure Releases that a first-year associate would be capable of analyzing, the Requestor in Release 11-01 was still apparently skittish enough to go through the time (and no doubt expense) of obtaining a DOJ seal of approval as to conduct that would not raise an eyebrow if directed to a non-foreign official

On June 30th, the DOJ released (here) its first FCPA Opinion Procedure Release of the year - a release dealing with reasonable and bona fide travel expenses in connection with the promotion, demonstration or explanation of products or services - an affirmative defense under the FCPA's anti-bribery provisions.

The Requestor was a "U.S. adoption service provider" that "proposes to pay certain expenses for a trip to the United States by one official from each of two foreign government agencies to learn more about the services provided by the Requestor."

According to the Release, "the two officials will be selected by their agencies, without the involvement of the Requestor" and the Requestor "has no non-routine business pending before the foreign government agencies that employ these officials."

The Requestor "intends to pay for economy class air fare, domestic lodging, local transport, and meals" and it represented, among other things, that:

it "will host only the designated officials, and not their spouses or family members;"

it "intends to pay all cost directly to the providers [and] no cash will be provided directly to the officials;

any souvenirs to the officials "would reflect Requestor's business and/or logo and would be of nominal value;" and

it will not "fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money."

Based on the Requestor's representations and the above facts and circumstances, the DOJ stated that "the expenses contemplated are reasonable under the circumstances and directly relate to 'the promotion, demonstration, or explanation of [the Requestor's] products or services" and therefore the DOJ "does not presently intend to take any enforcement action with respect to the planned program and proposed payments described in the request."

For additional commentary on the Release 11-01, see here from Thomas Fox ("the question posed to the Department of Justice (DOJ) is so straight-forward, and has been previously asked and answered, that it is difficult to understand how any first year compliance practitioner did not know the answer to it"); here from Howard Sklar ("this is, simply put, not a situation that should have gone to the DOJ"); and here from the FCPA Blog ("in its first FCPA Opinion Procedure Release of 2011, the DOJ confirmed what should be obvious -- that the promotional expenses affirmative defense can be used to pay travel expenses of government officials who are being shown a company's products").

... But Nobody Was Charged

2011-07-11T05:27:00.009-04:00

James Stewart’s first Common Sense column for Business Day at the New York Times (here) profiles the February 2011 FCPA enforcement action against Tyson Foods involving Mexican veterinarians. (See here for the prior post).

The column is silent as to the relevant fact (as indicated in the DOJ's charging document) that Mexican law permitted certain of the veterinarians at issue to charge the facility in which they work a fee for their services in addition to their official salary.

But that is besides the point, because Stewart's column once again raises the valid issue that so many FCPA enforcement actions involve corporate resolutions only - with no related individual prosecutions.

Stewart writes as follows. "It would seem self-evident that if Tyson engaged in a conspiracy and violated the Foreign Corrupt Practices Act, then someone at Tyson did so as well." Stewart further noted as follows. "But surely bribery, not to mention other forms of corporate wrongdoing, would be more effectively deterred if someone was actually held accountable for it."

Spot on.

In my November 2010 prepared statement (here) to the Senate Judiciary Committee I stated as follows.

"Key to achieving deterrence in the FCPA context is prosecuting individuals, to the extent the individual’s conduct legitimately satisfies the elements of an FCPA anti-bribery violation. For a corporate employee with job duties that provide an opportunity to violate the FCPA, it is easy to dismiss corporate money being used to pay corporate FCPA fines and penalties. It is not easy to dismiss hearing of an individual with a similar background and job duties being criminally indicted and sent to federal prison for violating the FCPA."

I further observed that during this era of the FCPA’s resurgence, the DOJ has consistently stated that prosecuting individuals is a “cornerstone” of its FCPA enforcement strategy. Yet, I asked, why is DOJ’s FCPA enforcement program largely a corporate fine-only program devoid of individual prosecutions?

As highlighted in this prior post, 70% of DOJ FCPA enforcement actions in 2010 have not involved (at least thus far) DOJ prosecutions of company employees.

What do the numbers look like thus far at the mid-point of 2011?

So far this year there have been six DOJ FCPA enforcement actions against companies (Maxwell Technlogies, Tyson Foods, Johnson & Johnson, Comverse Technologies, JGC of Japan, and Tenaris).

None of these FCPA enforcement actions have resulted (at least thus far) in DOJ prosecutions of company employees. Nor has the SEC brought civil charges against any employees of these companies. Nor has the SEC charged any employees (at least thus far) in the three SEC only FCPA enforcement actions this year (IBM, Ball Corporation, and Rockwell Automation).

As I noted in my Senate testimony, the high percentage of corporate FCPA enforcement actions that do not result in related enforcement actions against individuals legitimately causes one to wonder whether the conduct given rise to the corporate enforcement action was engaged in by ghosts.

Yet, I submit, there is an equally plausible reason why no individuals have been charged in some of the above-mentioned enforcement actions (and others) and that involves the quality of the corporate enforcement action.

Given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies often agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense – even if the DOJ or SEC's theory of prosecution is questionable. [See here for a prior post detailing a former DOJ prosecutor's concern regarding NPAs and DPAs as to these issues].

Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ or SEC to satisfy its high burden of proof as to all FCPA elements.

Regardless of what you think about the possible reasons, the fact remains FCPA enforcement is, despite enforcement agency rhetoric, largely corporate enforcement only.

While on the topic of individual prosecutions, it must be noted that the bulk of such recent prosecutions are in the manufactured Africa Sting case where 22 individuals were criminally charged. Last week (see here for the prior post) Judge Richard Leon declared a mistrial in the trial of the first 4 defendants. The FCPA Blog had a stellar post yesterday (here) titled "Feds Should Forget Shot Show Defendants" and stated that instead of future sting operations to dig up FCPA individual defendants, the DOJ should focus "instead on the real bad apples [companies that have admitted to violating the FCPA and paid big fines] who paid real bribes to real foreign officials."

Spot on.

First Africa Sting Trial Results In Mistrial

2011-07-08T00:01:00.002-04:00

On January 19, 2010, the DOJ announced (here) a new type of FCPA enforcement action.

While not the first use of undercover techniques in an FCPA enforcement action (see here), the new type of case was certainly the largest and most dramatic use of pro-active, undercover investigative techniques in the FCPA's history.

Twenty-two executives and employees of companies in the military and law enforcement products industry were criminally indicted "for engaging in schemes to bribe foreign government officials to obtain and retain business." However, there was no real foreign official - just FBI agents posing as representatives of a Gabon foreign official - and the case was manufactured by the government with the assistance of Richard Bistrong (an individual who previously pleaded guilty to separate FCPA violations - see here).

In announcing the indictments, Assistant Attorney General Lanny Breuer called the action a "turning point."

The cases were assigned to Judge Richard Leon (U.S. District Court for the District of Columbia). Given the number of defendants indicted, the cases were segregated into smaller units for trial.

The first trial, which started in mid-May, involved Andrew Bigelow, Pankesh Patel, John Benson Weir, and Lee Allen Tolleson. As highlighted in this prior post, at the close of the DOJ's case, Judge Leon dismissed a substantive FCPA count as to Patel, a substantive FCPA count as to Tolleson, and dismissed a money laundering count as to all defendants.

Yesterday, Judge Leon declared a mistrial as to all remaining counts of the DOJ's "turning point" prosecution. For additional coverage see here from the FCPA Blog, here from Main Justice, here from Reuters, here from Law360, and here from the Wall Street Journal Corruption Currents.

Scott Fredericksen, a former DOJ prosecutor and current FCPA practitioner at Foley & Lardner (see here) offered the following analysis.

"A mistrial in the Africa Sting FCPA case represents a major disappointment for the DOJ. But for those who have followed the trial, it is no surprise. Many thought outright acquittal was a real possibility. A mistrial of course is most often declared by the court where the jury has steadfastly indicated that it is unable to reach a unanimous verdict, even after the court usually gives very strong instructions urging the jury to work harder to reach a verdict. There are other situations in which a mistrial may be declared, most often involving error in the way the case is tried or the improper admission of evidence or prejudicial information. In this case, it appears there was a failure to reach unanimity by the jury on a verdict. Often times in such situations the court may allow the counsel to interview jurors about the basis for being hung, including what the final vote was. Obviously, if the vote was heavily in favor of one side, or if, as often happens, there was a lone holdout, then counsel will be able to make informed decisions about a retrial and how the case should be tried in a retrial. It is in the discretion of the court whether to allow jurors to be interviewed. Jurors must also consent. Most judges will allow some limited amount of interviewing, including only allowing the interview to take place in court. Again, it is a discretionary decision. The mistrial puts the government between the proverbial rock and hard place. The DOJ has made this prosecution a marker in their ratcheting up of their enforcement of the FCPA. It is hard to imagine that they would not seek a retrial. Yet the case likely will only get more difficult for the prosecution. The trial exposed the weaknesses of the government's case, including their critical witnesses, the most important of which did not testify. Will DOJ change their strategy? But now defense counsel know the evidence and testimony and can cross examine with a transcript of the DOJ witnesses in hand. Waiting in the wings are another group of experienced defense counsel whose clients' trial has been severed but already scheduled. Finally, some observers of the trial think Judge Leon was surprised and disappointed by what he saw in the government's prosecution sting and the evidence. This looks to be only one chapter in a now much longer story."

Indeed, it would seem that yesterday's mistrial is merely one chapter in a much longer story. The DOJ has indicated that it intends to refile its case against all four defendants, but will a different jury make a difference? What impact will this mistrial have on the other Africa Sting cases scheduled for trial?

What You Need To Know From Q2

2011-07-07T04:55:00.008-04:00

This post provides a summary of FCPA enforcement actions and FCPA related events from the second quarter of 2011. For a similar post regarding the first quarter of 2011 - see here.

As to enforcement actions, this post covers DOJ and SEC enforcement separately and only covers enforcement actions initiated and resolved during the second quarter of 2011. For a summary of other indictments, guilty pleas and sentences during the second quarter see here - the FCPA Blog's Q2 Enforcement Report.

DOJ Enforcement

The DOJ resolved four FCPA enforcement actions in the second quarter. Total DOJ recovery in these enforcement actions was approximately $245 million. All of the enforcement actions were resolved via non-prosecution agreements (two) or deferred prosecution agreements (two). All of the enforcement actions were based on voluntary disclosures or (in the case of JGC of Japan) disclosure based on a previous foreign law enforcement investigation. No enforcement action has, at present, resulted in any individual prosecutions of company employees.

Year to date, the DOJ has resolved six FCPA enforcement actions. Total DOJ recovery year to date has been approximately $257 million. All of the enforcement actions have been resolved via non-prosecution agreements (two) or deferred prosecution agreements (four). All of the enforcement actions have been based on voluntary disclosures or (in the case of JGC of Japan) disclosure based on a previous foreign law enforcement investigation. No enforcement action has, at present, resulted in any individual prosecutions of company employees.

JGC of Japan (April 6th)

See here for the prior post.

Charges: Conspiracy to violate the FCPA's anti-bribery provisions and aiding and abetting FCPA anti-bribery violations.

Resolution Vehicle: Criminal charges resolved through a deferred-prosecution agreement - term two years.

Guidelines Range: $312.6 million to $625.2 million

Penalty: $218.8 million (30% below the minimum amount suggested by the guidelines).

Disclosure: Yes, based on a previous foreign law enforcement investigation.

Monitor: Yes.

Individuals Charged: No.

Comverse Technology (April 7th)

See here for the prior post.

Charges: None - although the non-prosecution agreement refers to a "knowing violation of the books and records provisions of the FCPA."

Resolution Vehicle: non-prosecution agreement - term two years.

Guidelines Range: Not set forth in the NPA.

Penalty: $1.2 million.

Disclosure: Yes, voluntary disclosure.

Monitor: No.

Individuals Charged: No.

Johnson & Johnson (April 8th)

See here for the prior post.

Charges: FCPA anti-bribery violations and conspiracy to violate the FCPA's anti-bribery and books and record provisions.

Resolution Vehicle: Criminal information resolved through a deferred prosecution agreement (three year term).

Guidelines Range: $28.5 million to $57 million.

Penalty: $21.4 million (25% below the minimum amount suggested by the guidelines).

Disclosure: Yes, voluntary disclosure (however Iraq Oil for Food conduct was not voluntarily disclosed).

Monitor: No.

Individuals Charged: None by U.S. authorities (Robert Dougall (a former DePuy executive) previously plead guilty to a U.K. SFO enforcement action - see here).

Tenaris (May 17th)

See here for the prior post.

Charges: None, although the non-prosecution agreement refers to "knowing violations of the FCPA's anti-bribery and books and records provisions."

Resolution Vehicle: NPA - term two years.

Guidelines Range: Not set forth in the NPA.

Penalty: $3.5 million.

Disclosure: Yes, voluntary disclosure.

Monitor: No.

Individuals Charged: No.

SEC Enforcement

The SEC resolved four FCPA enforcement actions in the second quarter. Total recovery in these enforcement actions was $58.3 million. Of the $58.3 million, $57.9 million (99%) has been disgorgement and prejudgment interest. All of the enforcement actions were based on voluntary disclosures.

Year to date, the SEC has resolved nine FCPA enforcement actions. Total recovery year to date has been $76.3 million. Of the $76.3 million, $73.8 million (97%) has been disgorgement and prejudgment interest. All of the corporate enforcement actions have been based on voluntary disclosures (one of the SEC's enforcement actions was against an individual - David Turner - see here).

Comverse Technologies (April 7th)

See here for the prior post.

Charges: Settled civil complaint charging FCPA books and records and internal control violations.

Settlement: Approximately $1.6 million (approximately $1.2 million in disgorgement and approximately $360,000 in prejudgment interest)

Disclosure: Yes, voluntary disclosure.

Individuals Charged: No.

Related DOJ Enforcement Action: Yes.

Johnson & Johnson (April 8th)

See here for the prior post.

Charges: Settled civil complaint charging FCPA anti-bribery violations and FCPA books and records and internal controls violations.

Settlement: Approximately $48.6 million (approximately $38.2 million in disgorgement and $10.4 million in prejudgment interest).

Disclosure: Yes, voluntary disclosure (however the Iraq Oil for Food conduct was not voluntarily disclosed).

Related DOJ Enforcement Action. Yes.

Rockwell Automation (April 7th)

See here for the prior post.

Charges: None. SEC administrative cease and desist order finding violations of the FCPA's books and records and internal control provisions.

Settlement: Approximately $2.7 million (approximately $1.7 million in disgorgement; approximately $590,000 in prejudgment interest; and a $400,000 civil penalty).

Disclosure: Yes, voluntary disclosure.

Individuals Charged: No.

Related DOJ Enforcement Action: No.

Tenaris (May. 17th)

See here for the prior post.

Charges: None - resolved via a deferred prosecution agreement - term two years.

Settlement: $5.4 million in disgorgement and prejudgment interest.

Disclosure: Yes, voluntary disclosure.

Individuals Charged: No.

Related DOJ Enforcement Action: Yes.

Other Events

"Foreign Official" Challenges and Related Developments

On April 20th, Judge Matz (C.D. of Calif.) issued a written decision in the Lindsey "foreign official" challenge. See here for the prior post. Judge Matz denied the challenge "because a state-owned corporation having the attributes of CFE [the Mexican utility at issue] may be an 'instrumentality' of a foreign government within the meaning of the FCPA, and officers of such a state-owned corporation ... may therefore be 'foreign officials' within the meaning of the FCPA." Judge Matz identified the following "non-exclusive list" of "various characteristics of government agencies and departments" that fall within the description of instrumentality: (i) the entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction; (ii) the key officers and directors of the entity are, or are appointed by, government officials; (iii) 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; (iv) the entity is vested with and exercises exclusive or controlling power to administer its designated functions; and (v) the entity is widely perceived and understood to be performing official (i.e., governmental functions). As to the FCPA's legislative history, Judge Matz stated as follows. "It is unnecessary to base this ruling upon the legislative history of the FCPA, given that the meaning of 'instrumentality' under Defendants' definition of the term clearly encompasses CFE. Nevertheless, Judge Matz stated in dicta as follows. "The Court finds that the legislative history of the FCPA is inconclusive. Although it does not demonstrate that Congress intended to include all state-owned corporations within the ambit of the FCPA, neither does it provide support for Defendants' insistence that Congress intended to exclude all such corporations from the ambit of the FCPA."

On May 18th, Judge Selna (also in the C.D. of Calif.) issued a written decision in the Carson "foreign official" challenge. See here for the prior post. Judge Selna concluded that "the question of whether state-owned companies qualify as instrumentalties under the FCPA is a question of fact." He then stated that "several factors bear on the question of whether a business entity constitutes a government instrumentality" including the following: (i) the foreign state’s characterization of the entity and its employees;
(ii) the foreign state’s degree of control over the entity; (iii) the purpose of the entity’s activities; (iv) 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; (v) the circumstances surrounding the entity’s creation; and (vi) 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). Recently (see here), defendants and the DOJ filed dueling "instrumentality" jury instructions in the case. Also relevant in the Carson matter during Q2 was the Travel Act challenge filed by the Defendants (see here for the prior post).

The O'Shea "foreign official" challenge (see here) remains pending in the S.D. of Texas. This challenge involves the same CFE entity at issue in the Lindsey matter.

As to "foreign official" in the Comverse Technology enforcement action, a new "foreign official" limbo low was reached (see here for the prior post). The conduct at issue focused on "individuals connected to" "Hellenic Telecommunications Organization S.A. ["OTE"] - a telecommunications provider controlled and partially owned by the Greek Government" During the time period relevant to the enforcement action, the Greek State owned between 33% - 38% of OTC's shares.

Lindsey Convictions

On May 10th, after a five week trial in the C.D. of California, a jury returned guilty verdicts against Lindsey Manufacturing and its executives Keith Lindsey and Steven Lee on charges of conspiracy to violate the FCPA and five counts of FCPA violations. See here for the prior post. 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, but it was the first DOJ jury trial victory against a company (see here for the prior post regarding the DOJ's loss in the Harris Corporation trial). However, as explored in yesterday's post (here) given what transpired in Judge Matz's courtroom on June 27th (in connection with defendants' prosecutorial misconduct motion) and based on his comments during the hearing, it appears that the DOJ's jury trial conviction may be hanging by a thread.

DD-3 Development

When listing reasons why FCPA enforcement has increased, the 78dd-3 prong of the FCPA's anti-bribery provisions should be on the list. The FCPA, since its inception in 1977, always applied to "issuers" and "domestic concerns", but the 1998 amendments added a third prong providing jurisdiction as to "persons other than issuers or domestic concerns." As to this class of persons, the FCPA provides the following jurisdictional requirement: "while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value ...". (emphasis added). Several recent FCPA enforcement actions have been based on the dd-3 prong of the statute, but the DOJ's enforcement theories have generally escaped judicial scrutiny. However, in the Africa Sting case, in what is believed to be the first judicial ruling on the jurisdictional prong of the dd-3 prong of the FCPA, Judge Leon granted defendant Pankesh Patel's Rule 29 acquittal motion at the end of the DOJ's case as to an FCPA substantive charge premised on his sending a DHL package - containing a purchase agreement in furtherance of the alleged corrupt scheme - from the U.K. to the U.S. See here for the prior post.

House Hearing

On June 14th, Representative James Sensenbrenner (R-WI) chaired a hearing of the House Judiciary Committee, Subcommittee on Crime, Terrorism, and Homeland Security titled "Foreign Corrupt Practices Act." See here for the prior post. The hearing focused on a wide range of issues and in many ways was similar to FCPA reform hearings in the 1980's in that a common theme explored during the hearing was whether the current state of FCPA enforcement harms U.S. business. There is clearly a push to introduce FCPA reform legislation and members of both parties appeared receptive (to at least certain) FCPA reform proposals most notably clarifying the FCPA's definition of "foreign official" / "instrumentality" and exploring an FCPA compliance defense. The DOJ supports neither of these (or other) FCPA reform proposals.

SEC's First Use Of An Alternative Resolution Vehicle In An FCPA Enforcement Action

On May 17th, the SEC announced the use of an alternative resolution vehicle (a deferred prosecution agreement) for the first time in the Tenaris FCPA enforcement action. See here for the prior post. In recent years, the DOJ's use of NPAs and DPAs in the FCPA context has increased and various of its enforcement theories as to corporate entities has thus escaped judicial scrutiny. With the SEC's first use of an alternative resolution vehicle in the FCPA context, 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. See this prior post for what others are saying.

ICE Victim Claim

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?

In May, Instituto Constarricense de Electricidad ("ICE") of Costa Rica petitioned a Court "for protection of its rights as a victim" of Alcatel-Lucent's bribey scheme. See here for the prior post. Even though ICE acknowledged that "three disloyal and corrupt Directors and two disloyal and corrupt employees" were the recipients of Alcatel-Lucent's bribe payments, ICE nevertheless claimed it was a victim because the "corrupt activities" of Alcatel-Lucent caused the company "massive losses" and caused "ICE catastrophic harm." ICE's petition was denied by the district court and its claim also received a chilly reception at the 11th Circuit - see here for the prior post. ICE's petition for victim status was factually difficult from the start and it is not surprising that ICE did not prevail. Yet, the ICE petition did succeed in raising the victim issue and causing those interested in bribery and corruption issues to ponder the valid and legitimate question of victims a bit more closely.

Are The Lindsey Convictions Hanging By A Thread?

2011-07-06T05:09:00.005-04:00

On May 10th, after a five week trial in the C.D. of California, a jury returned guilty verdicts against Lindsey Manufacturing and its executives Keith Lindsey and Steven Lee on charges of conspiracy to violate the FCPA and five counts of FCPA violations. See here for the prior post.

On June 27th, Judge Matz held a hearing on defendants' prosecutorial misconduct motion. This post summarizes the hearing and contains excerpts from the hearing transcript. Given what transpired in Judge Matz's courtroom and based on his comments during the hearing, it appears that the DOJ's only jury trial conviction of a corporate entity in FCPA history may be hanging by a thread.

For starters, the June 27th hearing on the post-trial motion to dismiss and vacate the guilty verdict due to prosecutorial misconduct was cut short.

Why?

Prior to the hearing the DOJ informed Judge Matz that it had discovered and disclosed to the defendants that morning grand jury testimony by FBI Case Agent Susan Guernsey even though Judge Matz had previously ordered the DOJ to produce Guernsey's grand jury testimony. During the hearing, the DOJ stated that it "was not anything done intentionally" and that it was not anything that "prejudiced the defendants."

Judge Matz said "I'm shocked" but then quickly said "I shouldn't be shocked because it's not the first time that [the DOJ has] come into court trailing all kinds of apologies and benign mea culpas for failures to disclose information, to produce information, to answer questions fully and responsively ...".

Judge Matz then cut short the hearing on the pending motion.

"Without disclosing where [he] was coming out on the pending motions" Judge Matz stated as follows.

"I think this question of whether or not the right of any or both or all three of the remaining defendants to due process was violated, and if so, what remedy has to be perceived -- not perceived but has to be briefed and addressed in a broader context." Judge Matz said that he had already read all of the briefs and that he had reached certain conclusions and he then proceeded to recite "just randomly and anecdotally" things that he found "troubling." He noted that his list was "by no means inclusive" concerning the "at best extraordinarily sloppy investigation and prosecution of this case."

In addition to the "astonishing" and "troubling" disclosure mentioned above, Judge Matz - "speaking off the top of [his] head" - provided a "brief anecdotal list" concerning the "tortured history of this prosecution." He listed the following: (i) "the government searched two buildings without a search warrants;" (ii) the government obtained certain e-mails that were unauthorized; (iii) the "government played games with the inclusion or absence" of an individual on the witness list; (iv) the "inept, evasive, self-serving and incomplete" trial testimony of Guernsey; and (v) "the game playing with the chain of custody testimony."

After this list, Judge Matz stated as follows. "I don't know if there was a stench that developed in this case, but there was a bad odor at times, and so the issue that I'm inviting both sides to address is [...] whether either through a finding of due process violations or in the exercise of my supervisory power, something akin -- and I'm not minimizing the significance of this by using this phrase, but something akin to the whole being greater than the sum of its parts justifies throwing out this conviction, because a lot of the parts that led up to this conviction are extremely troublesome."

Judge Matz then said as follows. "One could look back on the outcome and say there was enough evidence to warrant a conviction. I'm not addressing that question, but the lawyers on both sides, who are smart lawyers, know that that doesn't justify affirming a conviction if there are violations of constitutional rights or if something was such a travesty that it ought not to be permitted and a judge in trying to supervise justice and administer it properly has a right to say enough is enough or this was too much. And I don't have a final view on that, but that's what I wanted to be briefed."

The defendants' brief is due on July 18th, the DOJ's brief August 1st, and the reply brief on August 15th. The hearing is scheduled for September 8th.

Jan Handzlik (Greenberg Traurig - here) counsel for Lindsey Manufacturing and Keith Lindsey commented as follows. "We are deeply troubled by the government's conduct. The trial ended over a month ago and yet we are still uncovering materials that should clearly have been disclosed long before trial. This case continues to be an emotional roller coaster for the clients and the lawyers."

Carson "Foreign Official" Challenge Moves To Jury Instructions

2011-07-05T05:09:00.009-04:00

On May 18th, U.S. District Court Judge James Selna (C.D. Cal.) denied the Carson "foreign official" challenge and concluded that "the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact." (See here for the prior post).

In connection with his pre-trial ruling, Judge Selna ordered the parties to submit their proposed "instrumentality" jury instructions and legal support by June 30th.

Last Thursday, the Carson defendants and the DOJ filed such proposed jury instructions and legal support. See here and here. This post summarizes the dueling jury instructions.

Defendants

Before proposing jury instructions, defendants stated as follows.

"Defendants respectfully disagree with the Court’s May 18 Order denying their Motion to Dismiss (“the May 18 Order”) and continue to believe, as set forth in their Motion to Dismiss (the “Motion”) and the supporting Declaration of Professor Michael J. Koehler, that the FCPA does not criminalize payments made to employees of state-owned enterprises (“SOEs”). Defendants reserve all of their rights to challenge the May 18 Order, if necessary, on appeal. Were it not for the existence of the Court’s May 18 Order, Defendants would propose a jury instruction that states that “a state-owned enterprise is not a foreign government instrumentality within the meaning of the FCPA, and officers and employees of a state-owned enterprise therefore are not ‘foreign officials’ under the FCPA.” But given the existence of the Court’s May 18 Order, and without waiver of their right to challenge all aspects of that Order on appeal, Defendants herein propose a jury instruction that accepts the Court’s premise that “state-owned companies may be considered ‘instrumentalities’ under the FCPA, but whether such companies qualify as ‘instrumentalities’ is a question of fact.”

In preparing their proposed “instrumentality” jury instruction, defendants were "guided by three overarching principles."

"First, it will not be sufficient to merely provide the jury with a list of nonexclusive, unweighted factors – none of which is dispositive – and ask the jury to “figure it out,” as the government seems to suggest. That will provide the jury with no real standard for making an “instrumentality” determination and will be tantamount to giving the jury no instruction at all on the “instrumentality” issue."

"Second, in determining an appropriate jury instruction, the Court should not accept any invitation from the government to borrow wholesale from an “instrumentality” analysis used under another statute – such as the “organ” prong of the Foreign Sovereign Immunities Act (“FSIA”), a provision the government highlighted at the hearing on Defendants’ Motion. [...] The FSIA may provide some guidance (indeed, Defendants have had to consult FSIA case law, because the FCPA legislative history is devoid of any discussion of SOEs as “instrumentalities,” much less any discussion of which SOEs qualify and which do not qualify), but because it is a different statute than the FCPA – the FSIA is a civil statute aimed at determining, inter alia, when a foreign entity will be considered to be part of a foreign government for purposes of sovereign immunity – its applicability to interpreting the “instrumentality” provision of the FCPA, a criminal statute that by definition must be strictly construed, is necessarily limited."

"Third, in determining the correct “instrumentality” jury instruction, the goals and structure of the FCPA must be considered. The FCPA is aimed at combating foreign bribery, but it is not a general commercial anti-bribery statute. Rather, the FCPA is aimed at preventing the special harm caused by the bribery of foreign government officials. Accordingly, Congress criminalized payments only to a “foreign official,” a term expressly and narrowly defined in pertinent part as an “officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The Court should provide the jury with an “instrumentality” instruction that accurately reflects Congress’s desire to criminalize payments made to foreign government officials, not payments made to employees of a company that is not, in both form and substance, actually part of the foreign government."

The proposed jury instruction then states, in full, as follows.

"The FCPA does not criminalize all payments made to foreign nationals, but only corrupt payments made to a “foreign official.” Therefore, in order for a defendant to be found guilty of an FCPA violation, the government must, among other things, prove beyond a reasonable doubt that the intended recipient of the corrupt payment at issue was a “foreign official” at the time of the alleged payment.

The term “foreign official” means any officer or employee of a foreign government (or any department, agency, or instrumentality thereof), or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality.

A “state-owned” business enterprise may, under certain circumstances, qualify as an “instrumentality” of a foreign government. On the other hand, not all “state-owned” business enterprises qualify as “instrumentalities” of a foreign government. It is up to you to determine, weighing all of the evidence, whether a particular business enterprise is or is not an “instrumentality” of a foreign government, and whether the officers and employees of that enterprise therefore are – or are not –“foreign officials” under the statute.

To conclude that a business enterprise is an “instrumentality” of a foreign government, you must conclude beyond a reasonable doubt that the business enterprise is part of the foreign government itself. In order to conclude that a business enterprise is part of the foreign government itself, you must find that the government has established, beyond a reasonable doubt, each of the following four elements:

First, the foreign government itself directly owns at least a majority of the business enterprise’s shares.

Second, the foreign government itself controls the day-to-day operations of the business enterprise, including the appointment of key officers and directors (who themselves may be government officials); the hiring and firing of employees; the financing of the enterprise through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties; and the approval of contract specifications and the awarding of contracts.

Third, the business enterprise exists for the sole and exclusive purpose of performing a public function traditionally carried out by the government. A “public function” is a function that benefits only the foreign government (and its citizens), not private shareholders. A business enterprise that exists to maximize profits rather than pursue public objectives does not perform a public function and therefore is not a foreign government instrumentality.

Fourth, employees of the business enterprise are considered to be public employees or civil servants under the law of the foreign country.

If the government fails to prove each of these four elements beyond a reasonable doubt for the “state-owned” business enterprise at issue in a particular count, and therefore fails to prove that the intended recipient of the alleged corrupt payment was a “foreign official,” you must find the defendant “not guilty” on that count.

A business enterprise is not a foreign government instrumentality if it is a mere subsidiary of a state-owned company. To qualify as a foreign government instrumentality, the business enterprise must, as set forth above, be directly and majority owned by the foreign government itself. Therefore, an employee of a business enterprise that is merely a subsidiary of another entity that is majority owned by the foreign government is not an employee of a foreign government instrumentality and is not a “foreign official.”

A business enterprise that operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, is not a foreign government instrumentality, and its employees therefore are not “foreign officials.”

DOJ

The DOJ's proposed jury instruction states, in full, as follows.

"The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.

An “instrumentality” of a foreign government is any entity through which a foreign government achieves an end or purpose, and can include state-owned entities. In determining whether an entity is an instrumentality of a foreign government, you should consider the following:

(1) the circumstances surrounding the entity’s creation;

(2) the foreign government’s characterization of the entity and the entity’s employees, and whether the entity is widely perceived and understood to be performing official (i.e., governmental) functions;

(3) the foreign government’s control over the entity, including the foreign government’s power to appoint key directors or officers of the entity;

(4) the purpose of the entity’s activities, including whether the entity provides a service to the citizens of the jurisdiction;

(5) the entity’s obligations and privileges under the foreign country’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;

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

These factors are not exclusive, and no single factor is dispositive. In addition, in order to conclude that an entity is an instrumentality of a foreign government, you need not find that all of the factors listed above weigh in favor of such a determination."

The U.K. Bribery Act Goes Live

2011-07-01T05:18:00.013-04:00

At the time of this post, the U.K. Bribery Act has been live for about ten hours, yet there has not been an enforcement action. Given that the Act is not retrospective and applies only to bribes paid after July 1st, this is hardly surprising, but I hope you appreciate the Friday humor.

U.K. corporates and others subject to the Bribery Act are doing business around the world, including in high-risk jurisdictions, and a healthy dose of corporate hospitality is no doubt occurring at Wimbledon. In other words, the world has not changed.

Today, of course, is the day the U.K. Bribery Act finally goes live.

As explained is this U.K. Ministry of Justice circular, "the Bribery Act replaces the offences at common law and under the Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916 (known collectively as the Prevention of Corruption Acts 1889 to 1916) with a new consolidated scheme of bribery offences."

The FCPA-like provision of the Bribery Act is Section 6 described in the circular as follows. "Section 6 is designed to deal with the corruption of decision making in publicly funded business transactions through the personal enrichment of foreign public officials by those seeking business opportunities. The offence is committed where a person offers, promises or gives a financial or other advantage to a foreign public official with the intention of influencing the official in the performance of his or her official functions. There must also be an intention to obtain or retain business or a business advantage on the part of the perpetrator. However, the offence is not committed where the official is permitted or required by the applicable written law to be influenced by the advantage."

As to corporate liability, the circular states as follows. "The Bribery Act includes a new form of corporate criminal liability where there is a failure to prevent bribery perpetrated on behalf of a “relevant commercial organisation” (Section 7). This new corporate liability for bribery [...] does not in any way change the existing common law principle governing the liability of corporate bodies for criminal offences that require the prosecution to prove a fault element or ‘mens rea’ in addition to a conduct element. This common law principle, sometimes referred to as the “identification principle”, will therefore continue to operate so that where there is evidence to prove that a person who is properly regarded as representing the “directing mind” of the body in question possessed the necessary fault element required for the offence charged the corporate body may be proceeded against."

As to the Section 7 offense, the circular states as follows. "The offence at section 7 of the Act creates a new form of corporate criminal liability. The offence applies only to a “relevant commercial organisation” as defined at section 7(5) and focuses on a failure by such an organisation to prevent a person “associated with” it from committing a section 1 or 6 bribery offence in order to obtain or retain business or an advantage in the conduct of business for that organisation. It creates direct rather than vicarious liability and its commission does not amount to the commission of a substantive bribery offence under section 1 or 6. A commercial organisation will have a full defence if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place designed to prevent persons associated with it from bribing."

As Michael Volkov (here) nicely stated - "The longest pre-game show in history is drawing to a close. The new world will shortly be upon us. Will the UK Bribery Act be a game-changer or will it fizzle out like Y2K? Everyone has their predictions; everyone has their focus and emphasis."

Here is my two cents.

As with any new law, there is likely to be a learning phase for both the enforcement agencies and those subject to the law. That was certainly the case in the U.S. in the years following passage of the FCPA in 1977. Thus, it very well may be the case that there are no enforcement actions for some time (recognizing that it often takes a few years from beginning of an inquiry to resolution of an action). Thus the greatest immediate impact of the Bribery Act is sure to be the compliance ethic it inspires. I expect that the enforcement actions that may develop over time to focus on egregious instances of corporate conduct on which no reasonable minds would disagree. I do not get the sense, based on public comments of the Ministry of Justice and the Serious Fraud Office, that the envelope will be pushed too far in the early years of the Bribery Act.

*****

See here for the text of Richard Alderman's (Director of the U.K. Serious Fraud Office) recent speech on the Bribery Act.

In a signature departure from U.S. enforcement policy concerning merger and aquisition issues, Alderman stated as follows. "I know that there are many occasions when an acquiring company takes over a target company and discovers either before or after the event that there are serious problems about corrupt activities in the target company. My view is that when an ethical acquiring company identifies these issues, then it is in everyone's interest that that acquiring company gets on and sorts out the problems that it has inherited. I have difficulty in seeing that any SFO investigation at the corporate level would be justified although I would have to consider carefully the position of any individuals." (As highlighted in this recent post, several FCPA enforcement actions have been based on successor liability theories).

*****

In this speech, Alderman stated the following regarding the "foreign public official" term in the Bribery Act.

"Who then is a foreign public official? This is the subject of litigation at the moment in the US and I am following this with interest. The test I use is one that was set out by the OECD in the commentary on the OECD Convention. What we look at is whether or not the foreign State is in a position to influence the foreign company. We therefore look at the relationship between the company and the State to see whether effectively this commercial organisation is being run by the State. This can lead us into some tricky areas. We have received questions about banking officials in countries where the State has a very major interest in the Bank and exercises that interest very actively. Are those officials foreign public officials? Our view is that in those circumstances the individual is likely to be a foreign public official. On the other hand if the State has a major interest but does not control the operations of the Bank, then I think we could have a different situation."

*****

Keeping with today's U.K. theme, earlier this week Bloomberg reported (here) that the SFO is assisting the SEC "on inquiries involving financial institutions and whether bribes were paid in transactions with sovereign wealth funds."

As previously reported by the Wall Street Journal (see here) the SEC is "examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya's sovereign wealth fund." The SFO's inquiry appears to be related to HSBC Holdings Plc's interactions with Libya's sovereign wealth fund.

Other financial services firms that have reportedly received letters of inquiry from the SEC include Bank of America, Morgan Stanley, and Citigroup.

*****

A good holiday weekend to all.

Report Cards

2011-06-30T05:04:00.003-04:00

Imagine I give a test to the 37 students in my class. However, because of reasons uniquely relevant to many of the students, not all students are equally capable of passing the test.

I hope all would view this test to be a bit empty.

This post summarizes the OECD Working Group on Bribery Annual Report and Transparency International's Annual Progress Report of the OECD Anti-Bribery Convention.

For reasons discussed below, these two report cards suffer from the same dynamic described in the above hypothetical.

In many OECD member countries there is no such thing as corporate criminal liability - or even if there is - such corporate liability can only be based on the actions of high-ranking executives or officers. This of course is materially different than in the U.S. where, under respondeat superior principles, a business organization can face legal liability (civil and criminal) based on the actions of any employee to the extent the employee was acting within the scope of his or her duties and to the extent the conduct was intended to benefit, at least in part, the organization.

In most OECD member countries prosecuting authorities have two choices - to prosecute or not to prosecute - there is no such thing as non-prosecution or deferred prosecution agreements (NPAs/DPAs). Not so in the U.S. where the majority of these alternative resolution vehicles are used to resolve FCPA enforcement actions. As the OECD itself stated in its Phase 3 Report of U.S. enforcement of the FCPA - "it seems quite clear that the use of these agreements is one of the reasons for the impressive FCPA enforcement record in the U.S." (See here for the prior post). Former DOJ FCPA enforcement chief Mark Mendelsohn was asked directly – if the DOJ “did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year,” and he stated as follows: “if the Department only had the option of bringing a criminal case or declining to bring a case, you would certainly bring fewer cases.”

In certain other OECD member countries, there is a compliance defense relevant to the prosecution of bribery and corruption offenses. (See here for the prior post).

Given these differing dynamics (among others), it is fairly obvious why OECD member countries have varying degrees of enforcement of bribery and corruption offenses.

With that in mind, on to the report cards.

Transparency International Progress Report 2011 - Enforcement of the OECD Anti-Bribery Convention

On May 24th, Transparency International (TI) released (here) its seventh annual Progress Report on Enforcement of the OECD Convention.

The report "shows no improvement in the enforcement of the OECD Anti-Bribery Convention in the past year and warns that this could signal a dangerous loss of momentum in the fight against corruption."

The report covers 37 countries and "shows that there are still only seven countries with active enforcement, nine with moderate enforcement, and 21 with little or no enforcement." Huguette Labelle, Chair of TI, stated that "the collective commitment to stamp out foreign bribery made by all OECD parties is undermined when a large number of countries have inadequate enforcement."

The introduction of the report includes the following statement.

"Continued lack of enforcement in 21 countries a decade after the Convention entered into force, notwithstanding repeated OECD reviews, clearly indicates lack of political commitment by their governments. And in some of those with moderate enforcement, the level of commitment is also uncertain. This is a danger signal because the OECD Convention depends on the collective commitment of all parties to ending foreign bribery."

The reports "major conclusions" include the following: "risk of loss of momentum" and "lack of political commitment."

As to the former, the report states as follows. "The Convention has not yet reached the point at which the prohibition of foreign bribery is consistently enforced. With little or no enforcement by half of the signatory governments, backsliding by enforcing governments is a serious threat. This concern is aggravated in a troubled global economy in which companies are scrambling for business. Business organisations have increasingly criticised anti-bribery enforcement as a competitive obstacle. The present position of the Convention is unstable, and unless forward momentum is recovered, the progress made in the past decade could unravel."

As to the "lack of political commitment", the report states as follows. "Reviews conducted by TI experts indicate that the principal cause of lagging enforcement is lack of political commitment by government leaders. In countries where there is committed political leadership, the OECD’s rigorous monitoring programme has helped improve laws and enforcement programmes. However, in the absence of political will, even repeated OECD reviews have little effect."

Once again, Canada received a public lashing from TI.

Under the heading "lack of progress in Canada," the report states as follows. "Canada is the only G7 country in the little or no enforcement category, and has been in this category since the first edition of this report in 2005. It is also the only OECD member that does not provide nationality jurisdiction, which presents a serious obstacle to enforcement. [...] TI welcomes that the government of Canada has publicly reported the number of investigations for the first time. It is promising that 23 foreign bribery investigations are under way. If these investigations lead to prosecutions, Canada may finally move out of the little or no enforcement category." (A future post will summarize the recent Canadian enforcement action against Niko Resources).

TI's 2010 report (see here for the prior post) included reference to many big picture enforcement issues such as the use of negotiated settlements (NPAs and DPAs), judicial scrutiny of enforcement actions, and the proper amount of fines and penalties. However, TI's 2011 report was silent as to many big picture issues.

OECD Working Group on Bribery Annual Report

On April 20th, the OECD Working Group on Bribery released its annual report (here). The release (here) states as follows. "Most governments are not meeting their international commitments to clamp down on bribery and corruption in international business, with only five signatories to the OECD Anti-Bribery Convention having sanctioned individuals or companies in the past year."

The Compliance Defense Around The World

2011-06-28T05:00:00.033-04:00

As highlighted in this prior post, numerous FCPA reform bills in the 1980's included a specific defense which stated a company would not be held vicariously liable for a violation of the FCPA’s anti-bribery provisions by its employees or agents, who were not an officer or director, if the company established procedures reasonably designed to prevent and detect FCPA violations by employees and agents. An FCPA reform bill containing such a provision did pass the U.S. House, but was not enacted into law.

Amending the FCPA to include a compliance defense is one of the U.S. Chamber's FCPA reform proposals (see here). In November 2010, Andrew Weissman, on behalf of the Chamber, testified in favor of a compliance defense (and other reform proposals) during the Senate's FCPA hearing (see here for the prior post) and during the House hearing earlier this month (see here for the prior post), former Attorney General Michael Mukasey, on behalf of the Chamber, also testified in favor of a compliance defense (and other reform proposals).

During the House hearing, there appeared to be bi-partisan support for consideration of an FCPA compliance defense.

Even so, Greg Andres, testifying on behalf of the DOJ, stated that a potential FCPA compliance defense was "novel and risky" and that the "time is not right to consider it."

Public debate on a potential compliance defense has thus far focused, from a comparative standpoint, on the United Kingdom and Italy.

The purpose of this post is to further inform the public debate on a potential compliance defense by highlighting various compliance-like defenses around the world in other countries that are signatories (like the U.S.) to the OECD Anti-Bribery Convention.

This post is further to my work in progress - Revisiting an FCPA Compliance Defense - and represents hours of research analyzing 38 OECD Country Reports.

The post provides an overview of compliance-like defenses in the following OECD Convention signatory countries: Australia, Chile, Germany, Hungary, Italy, Japan, Korea, Poland, Portugal, Sweden, and Switzerland. [The U.K. Bribery Act, set to go live on July 1st, also contains a compliance-like defense in Section 7].

A first reaction might be - only 12 of the 38 OECD member countries have a compliance-like defense.

However, this number must be viewed against the backdrop of the following dynamics: (i) in many OECD Convention signatory countries, the concept of legal person criminal liability (as opposed to natural person criminal liability) is non-existent; and (ii) in many OECD Convention signatory countries that do have legal person criminal liability, such legal person liability can only result from the actions of high-level executive personnel or other so-called "controlling minds" of the legal person.

Obviously if a foreign country does not provide for legal person liability, there is no need for a compliance defense, and the rationale for a compliance defense is less compelling if legal exposure can result only from the conduct of high-level executive personnel or other "controlling minds."

When properly viewed against these dynamics, a compliance-like defense (whether specifically part of a foreign country's "FCPA-like" law or otherwise generally part of a foreign country's legal principles) is far from a "novel" idea, but rather common among OECD Anti-Bribery Convention signatory countries that - like the U.S. - have legal person criminal liability that can attach based on the conduct of non-executive officers or other "controlling minds."

[The below information is based strictly on OECD country reports and is subject to the qualification that in many instances the most recent information concerning a particular country may be several years old. If anyone has more recent information concerning any particular country, how the compliance defense in a particular country has worked in practice, or any other relevant information, please leave a comment on this site or contact me at mjkoehle@butler.edu]

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Australia

Australian law implementing the OECD Convention entered into force on December 18, 1999.

Thereafter, a section of the Criminal Code on corporate criminal liability came into full force establishing an organizational model for the liability of legal persons. “Bodies corporate” are liable for offences committed by “an employee, agent or officer of a body corporate acting within the actual or apparent scope of his or her employment, or within his or her actual or apparent authority” where the body corporate “expressly, tacitly, or impliedly authorised or permitted the commission of the offence”.

Pursuant to the Criminal Code, authorisation or permission by the body corporate may be established in the following ways: (1) the board of directors intentionally, knowingly or recklessly carried out the conduct, or expressly, tacitly or impliedly authorised or permitted it to occur; (2) a high managerial agent intentionally, knowingly or recklessly carried out the conduct, or expressly, tacitly or impliedly authorised or permitted it to occur; (3) a corporate culture existed that directed, encouraged, tolerated or led to the offence; or (4) the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision.

However, under the Criminal Code, “if a high managerial agent is directly or indirectly involved in the conduct, no offence is committed where the body corporate proves that it “exercised due diligence to prevent the conduct, or the authorisation or permission."

Chile

Chilean law implementing the OECD Convention entered into force on October 8, 2002.

In December 2009, a separate Chilean law entered into force establishing criminal responsibility of legal persons for a limited list of offences including bribery of foreign public officials.

In order for a legal person to be held responsible for a foreign bribery offence, the following “three cumulative requirements” must be satisfied: (1) the offence must be committed by a person acting as a representative, director or manager, a person exercising powers of administration or supervision, or a person under the “direction or supervision” of one of the aforementioned persons; (2) the offence must be committed for the direct and immediate benefit or interest of the legal entity. No offence is committed where the natural person commits the offence exclusively in his/her own interest or in the interest of a third party; and (3) the offence must have been made possible as a consequence of a failure of the legal entity to comply with its duties of management and supervision. An entity will have failed to comply with its duties if it violates the obligation to implement a model for the prevention of offences, or when having implemented the model, it was insufficient."

As to the final element, the OECD report states as follows. “The final cumulative requirement for responsibility stresses that the offence must have been made possible as a consequence of the failure of the legal person to comply with its duties of administration and supervision. The entity will have failed to comply with its duties if it violated the obligation to implement a model for the prevention of offences, or when having implemented the model, the latter was insufficient. It shall be considered that the functions of direction and supervision have been met if, before the commission of the offense, the legal person had adopted and implemented organization, administration and supervision models, pursuant to the following article, to prevent such offenses as the one committed.”

The minimum features of a prevention system under the law are as follows: identify the different activities or processes of the entity, whether habitual or sporadic, in whose context the risk of commission of the offences emerges or increases; establish protocols, rules and procedures that permit persons involved in above-mentioned activities or processes to program and implement their tasks or functions in a manner that prevents the commission of the indicated offences; identify procedures for the administration and auditing that allow the entity to impede their use in the listed offences; establish internal administrative sanctions, as well as procedures for reporting or pursuing pecuniary responsibility against persons who violate the prevention system; introduce the above-mentioned duties, prohibitions and sanctions into the internal regulations of the legal person, and ensure that they are known by all persons bound to apply it (workers, employees, and service providers).

The OECD report states - as to the minimum requirements as follows. “It also aims to introduce a system of self-regulation by companies. Having a code of conduct on paper will not be sufficient to avoid responsibility. If prosecutors can prove that the code does not meet the minimum requirements of or that it is not implemented, the company can be responsible for the offence.”

Under Chilean law, “the failure to comply with duties of management and supervision is an element of the offence rather than a defence. Therefore the burden of proof lies on prosecutors, i.e. it will be up to prosecutors to prove that the entity failed to comply with its duties of management and supervision.”

The OECD report notes as follows. “This will require prosecutors to prove that the company failed in the design and/or implementation of the offense prevention model including why, in the circumstances, the prevention model was insufficient. This would appear to also require the prosecutor to establish that this failure made perpetration of the offence possible.”

As noted in the OECD report, the Chilean “standard of liability is inspired from the Italian system of liability of legal persons" (discussed below).

Germany

German law implementing the OECD Convention entered into force on February 15, 1999.

German law establishes the liability of legal persons, including liability for the foreign bribery offence, under an administrative (i.e. non-criminal form) act.

Pursuant to the administrative act, “the liability of legal persons is triggered where any “responsible person” (which includes a broad range of senior managerial stakeholders and not only an authorised representative or manager), acting for the management of the entity commits i) a criminal offence including bribery; or ii) an administrative offence including a violation of supervisory duties which either violates duties of the legal entity, or by which the legal entity gained or was supposed to gain a “profit”.”

As noted in the OECD report, “in other words, Germany enables corporations to be imputed with offences i) by senior managers, and, somewhat indirectly, ii) with offences by lower level personnel which result from a failure by a senior corporate figure to faithfully discharge his/her duties of supervision.”

The OECD report states that the “standards for a violation of supervisory duties include consideration of factors such as whether the company has in place a monitoring system or in-house regulations for employees.”

Hungary

Hungarian law implementing the OECD Convention entered into force on March 1, 1999.

In 2004, a separate law was enacted specifying the individuals whose actions can trigger the liability of the legal person.

The OECD report states as follows. “The specific persons and additional conditions for liability are defined as follows: (i) the bribery is committed by one of the members or officers [of the legal entity] entitled to manage or represent it, or a supervisory board member and/or their representatives acting within the legal scope of activity of the legal person ; (ii) the bribery is committed by one of the members of the legal entity or an employee acting within the legal scope of activity of the legal person provided the bribery could have been prevented by the chief executive fulfilling his supervisory or control obligations; and (iii) the bribery is committed by a third party individual, provided that the legal entity’s member or officer entitled to manage or represent the it had knowledge of the facts.”

According to the OECD report, the relevant law does not provide any guidance as to the necessary degree of supervision to avoid liability for bribery.

Italy

Italian law implementing the OECD Convention entered into force on October 26, 2000.

Under Italian law, “criminal liability cannot be attributed to legal persons” however, “administrative liability may be attributed to legal persons for certain criminal offences (including foreign bribery) committed by a natural person.

The relevant administrative decree provides a “defence of organisational models” to a body which makes reasonable efforts to prevent the commission of an offence.

The OECD report states as follows. “… [A] body is not liable for offences committed by persons in senior positions if it proves the following. First, before the offence was committed, the body’s management had adopted and effectively implemented an appropriate organisational and management model to prevent offences of the kind that has occurred. Second, the body had set up an autonomous organ to supervise, enforce and update the model. Third, this autonomous organ had sufficiently supervised the operation of the model. Fourth, the perpetrator committed the offence by fraudulently evading the operation of the model.” The defence of organisation models operates as a full defence which completely exculpates a legal person.

The relevant administrative decree stipulates the essential elements of an acceptable organisational model described in the OECD report as follows. “First, the model must identify activities which may give rise to offences. Second, the model must define procedures through which the body makes and implements decisions relating to the offences to be prevented. It must also prescribe procedures for managing financial resources to prevent offences from being committed. Third, the model must oblige the internal organ responsible for supervision and enforcement to provide information to the body. Finally, the model must include a disciplinary system for non-compliance.”

Japan

Japanese law implementing the OECD Convention entered into force on February 15, 1999 .

“Under Japanese law, criminal responsibility of a legal person is based on the principle that the company did not exercise due care in the supervision, selection, etc. of an officer or employee to prevent the culpable act.

The burden rests on the legal person to prove that due care was exercised. Where a legal person raises the defence, a person must be identified as having exercised due care, etc., and the court must determine whether it was exercised properly having regard to the nature of the legal person and the circumstances of the case.”

Korea

Korean law implementing the OECD Convention entered into force on February 15, 1999.

Korean law establishes the criminal responsibility of legal persons for the bribery of a foreign public official, however, a legal person is exempt from liability where it has paid “due attention” or exercised “proper supervision” to prevent the offence.

The statute itself does not provide information about what constitutes “due attention” or “proper supervision.” A representative of the Supreme Public Prosecutor’s Office informed the OECD that “the exemption is triggered when a director or ‘superior person’ exercises due attention.” The Explanatory Manual published by the Ministry of Justice states that “it is difficult to standardize the extent of attention or supervision in deciding whether a legal person can be exempted from criminal punishment.” The Explanatory Manual further states that whether the exemption applies depends upon “general circumstances such as the motive and background that led to the bribery, intervention of exclusive members of the legal person, whether it was informed earlier, and how much effort was usually made by the corporation to prevent bribery, etc.” and that companies involved in international business must prevent violations of the law by all employees and executives of the company “through sufficient necessary management”.

Poland

Polish law implementing the OECD Convention entered into force on February 4, 2001.

Polish law provides “a noncriminal form of responsibility for collective entities.” Among the requirements for liability is the offence was committed “in the effect of at least absence of due diligence in electing the natural person [committing the act] or of at least the absence of due supervision over this person by an authority or a representative of the collective entity.”

According to the relevant Polish legislative history, “the perpetration of a prohibited act by a natural person will trigger liability of the
collective entity where the act occurred as a result of negligence on the part of the authority or representative of the collective entity.”

Portugal

Portuguese law implementing the OECD Convention entered into force on June 9, 2001.

Under Portuguese law relevant to corruption in international business transactions, legal persons can be liable for conduct committed “on their behalf and in the collective interest by natural persons occupying a leadership position within the legal person structure” or by “whoever acts under the authority” of such natural persons.

However, “[t]he liability of legal persons and equivalent entities is excluded when the actor has acted against the orders or express instructions of the person responsible.”

Sweden

Swedish law implementing the OECD Convention entered into force on July 1, 1999.

Under Swedish Law, only natural persons can commit crimes. However, pursuant to the Swedish Penal Code, a “kind of quasi-criminal liability is applied to an ‘entrepreneur’ (a general term meaning “any natural or legal person that professionally runs a business of an economic nature) for a ‘crime committed in the exercise of business activities.’”

However, one requirement under the Penal Code is that “the entrepreneur has not done what could reasonable be required of him for prevention of the crime.”

Switzerland

Swiss law implementing the OECD Convention entered into force on May 1, 2000.

Article 100quater of the Swiss Criminal Code requires “defective organisation as a condition for corporate criminal liability.”

In order to incur criminal liability, “the enterprise must not have taken all reasonable and necessary organisational measures to prevent the individual from committing the offence.”

Under Swiss law, the burden is on the prosecutor to furnish proof of defective organization and according to Swiss authorities contacted by the OECD “steps should be taken to assess whether employees have been sufficiently informed, supervised and controlled” and “the fact that an enterprise is organised in compliance with international management standards will not be sufficient to rule out all liability on its part; it will be one element to take into consideration among others …”. In the view of Swiss authorities, “ shifting the burden of proof in criminal cases would contravene Article 6 of the European Convention on Human Rights.”

Mission Creep At The SEC?

2011-06-27T05:29:00.006-04:00

Today's post is from Bruce W. Bean (Professor and Director, LLM Program at Michigan State University College of Law - here).

*****

Last week FCPA Professor had a post (see here) describing the SEC’s internal search for the new Head of the Division of Enforcement’s FCPA Unit.

As previously reported (see here), Cheryl Scarboro, Head of the Commission’s FCPA Unit, will shortly join the Washington, D.C. office of Simpson Thacher.

The internal SEC marketing materials for this position state that this “Unit seeks to expand the Commission's global reach in this area by executing targeted sweeps and sector-wide investigations, identifying systemic practices that give rise to potential FCPA violations and aggressively enforcing anti-bribery statutes.”

“[E]xpand the Commission’s global reach?” We do not find this concept in the FCPA. Nor is it in the original Securities Exchange Act that established the SEC. Has the Commission really run out of legitimate domestic prosecution targets? Does the Commission actually believe that, having long ignored stock manipulation by Wall Street traders (who can afford to mount a vigorous defense), it should declare victory in the domestic equities markets, shout “Mission Accomplished” and move on to police the rest of the world?

The most revealing aspect of this internal job posting for the new Head of the FCPA Enforcement Unit is this sentence, which encapsulates the SEC’s jurisdictional philosophy. "The Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA."

Certainly “unique legal, evidentiary and policy challenges” are presented each time we have the Commission stretch and distort the language of the FCPA as it “attempts to develop case law.” For example, there is no FCPA language supporting the determination that millions of Chinese employees at State-Owned Enterprises are “foreign officials.” Similarly, we search in vain for the statutory basis for FCPA liability for a foreign company whose foreign subsidiary committed an act which the prosecutor claims violates the FCPA.

This newly developed FCPA “case law,” of course, is largely created by the enforcement attorneys. (See here for a prior post on "prosecutorial common law"). It is seldom fully litigated before the Judicial Branch. After all, few defendants can afford to litigate against the Government, and those that could most often do not wish to risk “debarment” from doing further business with the Government until proven innocent.

FCPA enforcement has come to mean, “Let’s see just how far we can push the inherent ambiguities in the statute.” When that rare defendant does stand up and fight as in U.S. v. Giffen, we see a multi-year, multi-million dollar legal defense during which a Federal Court ultimately did not endorse the prosecutor’s attempt to “develop new case law."

Unquestionably, there is marvelous deterrent value when the SEC makes clear that it aggressively pursues FCPA violators. Prosecutors also find good value in high profile prosecutions, since this accelerates their passage through the SEC’s revolving door to much more lucrative private practice.

A closing note of warning. As outrageous as it may seem, the SEC’s jurisdictional and enforcement philosophy is comparatively good news. On Friday, July 1, the former Head of the Unit, Cheryl Scarboro, is likely to start at Simpson Thacher. That is also the date the U.K. Bribery Act comes into force. The Bribery Act actually does purport to give British prosecutors statutory authority to pursue bribery anywhere on the planet Earth. Stay tuned!

Breuer On The DOJ's "Comprehensive Approach To Fighting Corruption"

2011-06-24T05:00:00.010-04:00

Last month, Assistant Attorney General Lanny Breuer delivered the Franz-Hermann Brüner Memorial Lecture at the World Bank and focused his remarks on the DOJ Criminal Division's "comprehensive approach to fighting corruption." (See here for the transcript).

This post provides an overview of Breuer's remarks.

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"Corruption corrodes the public trust in countries rich and poor, and has particularly negative effects on emerging economies. When a developing country’s public officials routinely abuse their power for personal gain, its people suffer tremendously. At a concrete level, roads are not built, schools lie in ruin, and basic public services go unprovided. At a more abstract, but no less important, level, political institutions lose legitimacy, threatening democratic stability and the rule of law, and people begin to lose hope that they will ever be able to improve their lot. As the President put it last week, you cannot reach your potential when you “cannot start a business without paying a bribe.”"

"There are of course many ways in which the U.S. government addresses the problem of corruption abroad. As the head of Criminal Division, I want to focus on three: our criminal prosecution efforts; our work to build the prosecutorial and law enforcement capacity of foreign nations; and our emerging focus on recovering and repatriating the proceeds of foreign official corruption."

As to criminal prosecution efforts, after highlighting recent corruption cases involving federal, state, and local officials, Breuer talked about the FCPA. He stated as follows.

"The FCPA was the first effort of any nation to specifically criminalize the act of bribing foreign officials. The statute was enacted in the wake of the Watergate scandal, which led to the resignation of President Richard Nixon in 1974 and resulted in a dramatic plunge in Americans’ overall trust in government."

"In 1976, following certain prosecutions for illegal use of corporate funds arising out of Watergate, the U.S. Securities and Exchange Commission issued a report in which it determined that foreign bribery by U.S. corporations was “serious and sufficiently widespread to be a cause for deep concern.” S.E.C. investigations revealed that hundreds of U.S. companies had made corrupt foreign payments involving hundreds of millions of dollars. With this background, the Senate concluded that there was a strong need for anti-bribery legislation in the United States. “Corporate bribery is bad business,” the Senate Banking Committee said in its report on the legislation. “In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet.”"

"That was true then, and it’s true now. And over the two-plus years of this Administration, we have dramatically increased our enforcement of the FCPA. The numbers speak for themselves. In 2004, the Justice Department charged two individuals under the Act and collected around $11 million in criminal fines. In 2005, we charged five individuals and collected around $16½ million. By contrast, in 2009 and 2010 combined, we charged over 50 individuals and collected nearly $2 billion."

"And we are only moving forward. Earlier this month, we secured the first jury conviction ever against a corporation in an FCPA case. The case, which also resulted in trial verdicts against the company’s president and its CFO, involved a scheme to pay bribes to Mexican government officials at CFE, a state-owned utility company."

"Last week, the former CEO of a Miami-based telecommunications company pleaded guilty to conspiring to pay bribes to government officials in Honduras in connection with a scheme to secure contracts from Hondutel, the state-owned telecommunications authority. Last month, the former vice-president of sales for Europe, Africa, and the Middle East at the multi-national valve company Control Components Inc., or CCI, pleaded guilty to conspiring to bribe government officials in Saudi Arabia, Qatar, and other countries."

" ... [T]he point is this: FCPA enforcement matters. When U.S. businesspersons, foreign executives, and even foreign officials know that they risk liability under the FCPA and related statutes, behavior changes. In addition to motivating U.S. and foreign corporations to change the way they do business – something that I believe is already happening – the threat of liability can help corporations resist corrupt demands from foreign officials, which can lead the officials themselves to alter their practices. Beyond that, through our FCPA enforcement, we are also sending a signal to ordinary people – [...] across the globe – that we stand with you: we support you in your desire to have fair and transparent institutions, and to have the chance to compete in marketplaces large and small."

As to the DOJ's "emerging focus on recovering and repatriating the proceeds of foreign official corruption," Breuer talked about the DOJ's "new Kleptocracy Asset Recovery Initiative."

He stated as follows.

"The goal of the Kleptocracy Asset Recovery Initiative, which Attorney General Holder announced last July and which my team and I have been working to build over the past year, is to identify the proceeds of foreign official corruption, forfeit them, and repatriate the recouped funds for the benefit of the people harmed."

"In the context of a criminal prosecution, a court can order forfeiture, upon conviction, as part of the defendant’s sentence. Thus, for example, if we were to bring a criminal case against a kleptocrat in the United States, we would be able to seek criminal forfeiture of his or her stolen assets."

"Often, however, it may be impractical or impossible to bring a criminal prosecution against a kleptocrat. He or she may be immune from prosecution, beyond the jurisdiction of the United States, or otherwise unavailable. In these circumstances, the Kleptocracy Team can bring a civil forfeiture action to recover the stolen property. This is sometimes referred to internationally as non-conviction based confiscation."

"The Kleptocracy Team recently brought its first cases, and we expect more to come in the near future. Let me provide a specific example. Diepreye Solomon Peter Alamieyeseigha, also known as DSP, was the elected governor of the oil-producing Bayelsa State in Nigeria from 1999 until his impeachment in 2005. According to court papers, DSP’s official salary for this entire period was approximately $81,000, and his declared income from all sources during the period was approximately $248,000. Nevertheless, as governor, DSP accumulated enormous wealth through corruption and other illegal activities. He acquired at least four properties in the United Kingdom worth approximately $8.8 million, he had money in bank accounts around the world, and he also acquired property in the United States. When he was ultimately arrested at Heathrow Airport in 2005, the Metropolitan Police Service in London found approximately $1.6 million in cash in his house."

"In March and April of this year, we brought two separate civil forfeiture actions to recover over $1,000,000 in what we allege are DSP’s ill-gotten gains. In Maryland, we are seeking forfeiture of a private residence worth more than $600,000, and in Massachusetts we are seeking forfeiture of close to $400,000 in a Fidelity brokerage account."

"We were able to bring these cases, even though DSP long ago absconded to Nigeria, because the law permits us to bring a civil action against the corrupt proceeds themselves rather than against the person to whom they belong."

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A good weekend to all.

What Does The SEC FCPA Unit Chief Do?

2011-06-23T05:00:00.007-04:00

[The below post has been revised since first posted]

Wonder no longer.

Given Cheryl Scarboro's recently announced departure from the FCPA Unit Chief position (see here for the prior post), the SEC recently posted the opening for the position.

The "Major Duties" portion of the job posting is actually an interesting and informative read.

Want proof that the SEC executes "targeted sweeps and sector-wide investigations." It is in the job description.

The "Major Duties" section of the job posting states, in full, as follows.

"The Division of Enforcement assists the Commission in executing its law enforcement functions by, among other things, conducting investigations of possible violations of the federal securities laws, making recommendations to the Commission concerning enforcement actions and initiating and conducting administrative proceedings and civil actions arising out of its investigations. The Division of Enforcement's Foreign Corrupt Practices Act Unit operates on a nationwide basis, exercises the full range of the Division's investigative and law enforcement powers and focuses on actual and suspected violations of the Foreign Corrupt Practices Act (collectively, "FCPA") . The Unit is comprised of staff from the Division of Enforcement and Regional Offices. The principal functions of the Unit include developing and maintaining significant specialized knowledge and expertise in the identification and investigation of FCPA violations. Members of the Unit gain in-depth knowledge of industries and regional practices as they may relate to potential FCPA violations on a global basis. Over the course of its investigations, and from case-to-case, the Unit develops specialized insights and understanding of foreign business practices by U.S. and international public companies involving all manner of questionable payments (bribes, kickbacks, gratuitous payments etc.) involving foreign officials, U.S. and foreign executives and the agents and intermediaries through whom they may operate. The Unit seeks to expand the Commission's global reach in this area by executing targeted sweeps and sector-wide investigations, identifying systemic practices that give rise to potential FCPA violations and aggressively enforcing anti-bribery statutes. The Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA. Members of the Unit establish contacts and forge close relationships with foreign regulators and law enforcement authorities and US counterparts, including the U.S. Department of Justice and other federal and state regulatory authorities with interests in this area. The Unit communicates with staff throughout the Commission, the Division and regions and with other specialized units to disseminate information, share analysis, develop and distribute high quality enforcement leads and determine investigative strategies. The Unit performs risk assessment relating to areas within its specialty and communicates with the Division and other Commission offices and divisions concerning its findings. The Unit conducts regular and ongoing training for its staff, engages in public outreach and represents the Commission in industry meetings, conferences and other market-related events."

One has to reach far into FCPA history to discover an instance where the SEC was challenged in an adversary proceeding and put to its burden of proof in an FCPA case. Thus the following sentence from the job description was a bit amusing - "the Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA."

The position, only open to current SEC employees, has a pay range of $150,372 to $226,160.

However, the prestige of this position, the national and international platform it provides for speeches etc., and the knowledge and experience gained will allow the successful applicant (should he or she choose) a smooth transition into an FCPA private practice career at a major law firm and the ability to make several times the above salary range.

Summer Reading For Representative Conyers

2011-06-22T05:13:00.003-04:00

During last week's FCPA hearing in the House, Representative John Conyers (D-MI) had a contentious Q&A exchange with Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers). See here for the previous post regarding the hearing.

Conyers asked - "give me some examples of overcriminalization of the FCPA." He repeatedly interrupted Regon and asked "just give me some examples" "give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization." Conyers stated, "only 140 cases have been brought in 10 years -that averages 14 cases a year - is that overcriminalization to you?" Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occurred.

There should be plenty of concern regarding prosecutions that have already occurred, but given the glare of the cameras, the stress of testifying, and the disruption of being interrupted, it would have been difficult for any witness to retrieve from their memory bank specific FCPA enforcement actions.

This post provides a summer reading list of FCPA enforcement actions, commentary and analysis, and legal scholarship for Representative Conyers so that he can best seek answers to the question he posed to Regon.

For starters, what does overcriminalization mean?

To be sure, it can mean different things to different people in different circumstances. In "The Overcriminalization Phenomenon(here) Eric Luna provides this definition - "the overcriminalization phenomenon consists of: (1) untenable offenses; (2) superfluous statutes; (3) doctrines that
overextend culpability; (4) crimes without jurisdictional authority; (5) grossly disproportionate punishments; and (6) excessive or pretextual enforcement of petty violations. In this piece, Jeffrey Parker (while observing that "definitions of “overcriminalization” are a bit fuzzy and debatable") identifies the following as among the factors that may contribute to overcriminalization: "the vague, arcane, or trivial nature of such prohibitions, as undermining citizens ability to conform, and debasing the moral moment of the criminal sanction" and "the lack of adequate mens rea standards in criminal prohibitions."

Not all overcriminalization factors are relevant to this "new era of FCPA enforcement" (see here), but in the minds of many, several factors are.

Enforcement Actions

In the 2011 Comverse Technologies enforcement action (see here), the company paid $2.8 million in combined fines and penalties (and no doubt millions more in connection with the investigative and resolution process) to resolve a matter in which the DOJ did not allege that the company even knew about the improper payments at issue. The action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ's enforcement theory.

In the 2010 Alliance One International enforcement action (see here), the company paid approximately $20 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter in which it did absolutely nothing wrong. Rather, the entire DOJ enforcement action was based on a successor liability theory. Again, the action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ's enforcement theory.

In the 2010 Noble Corporation enforcement action (see here), the company paid approximately $8 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter involving the import and export of goods into Nigeria. When Congress passed the FCPA, its intent as to so-called facilitating or grease payments was clear. Senate Report No. 95-114 (May 2, 1977) states, in pertinent part, as follows. “The statute does not […] cover so-called ‘grease’ payments such as payments for expediting shipments through customs ...". The relevant House Report (No. 95-640, September 28, 1977) similarly states as follows. “The language of the bill is deliberately cast in terms which differentiate between [corrupt payments] and facilitating payments, sometimes called ‘grease payments.’ […] For example, a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity be performed in any event. While payments made to assure or to speed the proper performance of a foreign official’s duties may be reprehensible in the United States, the committee recognizes that they are not necessarily so viewed elsewhere in the world and that it is not feasible for the United States to attempt unilaterally to eradicate all such payments." The Noble enforcement action was resolved via a non-prosecution agreement meaning, again, there was no judicial scrutiny of the DOJ's enforcement theory.

And then of course there is the issue of "foreign official" and the fact that most FCPA enforcement actions in this new era are based on alleged improper payments to employees of alleged state-owned or state-controlled enterprises ("SOEs") on the theory that such business entities are "instrumentalities" of a foreign government and thus all employees, regardless of rank or position, are "foreign officials" under the FCPA. Yet, (1) During its multi-year investigation of foreign corporate payments, Congress was aware of the existence of SOEs and that some of the questionable payments uncovered or disclosed may have involved such entities. (2) In certain of the bills introduced in Congress to address foreign corporate payments, the definition of “foreign government” expressly included SOE entities. These bills were introduced in both the Senate and the House during both the 94th and 95th Congress. (3) Despite being aware of SOEs and despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, Congress chose not to include such definitions or concepts in what ultimately become the FCPA in 1977. See here for extensive reading on this issue.

Commentary and Analysis

In 2010, Forbes ran a feature article (here) titled "The Bribery Racket" - "How Federal Crackdown on Bribery Hurts Business And Enriches Insiders." Lucinda Low, a respected FCPA practitioner, notes in the article that "the scope of things companies have to worry about is enlarging all the time as the government asserts violations in circumstances where it's unclear if they would prevail in court" and that "you don't have the checks and balances you would normally have if you had more litigation." Commenting on the current era of FCPA enforcement, Joseph Covington (who headed the DOJ's FCPA efforts in the 1980's) said that the current era "is good business for law firms [...] good business for accounting firms, it's good business for consulting firms, the media--and Justice Department lawyers who create the marketplace and then get yourself a job."

Here, Michael Levy (a former Assistant United States Attorney in the District of Columbia and law clerk to U.S. Supreme Court Justice Lewis F. Powell Jr.) talks about what he calls prosecutorial common law. Levy states that "prosecutors don’t set out deliberately to interpret criminal statutes in ways that convict hundreds of people on the basis of a standard that not a single Supreme Court Justice finds supportable ...". Levy notes that "we have seen this before in connection with the interpretation of the honest services fraud and obstruction of justice statutes, and it is certainly happening today with the FCPA."

In this publication, an author group including Philip Urofsky (former Assistant Chief of the DOJ Fraud Section responsible for FCPA enforcement) and Danforth Newcomb (a dean of the FCPA bar) noted that in several recent FCPA enforcement actions "the theories used to hold parents accountable for the acts of subsidiaries and vice versa appear to be unclear." In other cases, the author group states that in many cases critical elements of the statute were not pleaded or were pled in a way "that is not consistent with established precedent and the language of the statute."

In a September 10, 2010 interview with the Corporate Crime Reporter, Mark Mendelsohn (the former head of DOJ FCPA enforcement during this era of resurgence who departed the DOJ for private practice in 2010) stated that "some of the factors" the DOJ uses to resolve FCPA cases are transparent, but "there are other factors less easy to see from the outside." Mendelsohn also noted, in connection with non-prosecution and deferred prosecution agreements (the common way FCPA enforcement actions are resolved) that the "danger" "is that it is tempting for the Department, or the SEC [to use these vehicles] to seek to resolve cases through DPAs or NPAs that don't actually constitute violations of the law."

In this Q&A exchange, Martin Weinstein (a former DOJ FCPA attorney who prosecuted the Lockheed case in the mid-1990's and is now a prominent FCPA practitioner) stated as follows. "The last decade of FCPA enforcement has seen extraordinary evolution, and I think you have to say that when Congress passed the law in 1977, they did not envision the wide reach of enforcement today and the types of things that the government gets involved in, such as transactions, joint ventures, and successor liability."

Legal Scholarship

In "Enthusiastic Enforcement, Informal Legislation: The Unruly Expansion of the Foreign Corrupt Practices Act" (here), Amy Westbrook (Washburn University School of Law) argues that the recent "transformation of the FCPA has been brought about by ad hoc enforcement actions, rather than legislation, judicial decision, or regulation" and that "in the absence of formal process or reasoned articulation, the actual scope of the law is unclear."

In "The Facade of FCPA Enforcement" (here), I argue that "the FCPA often means what the enforcement agencies say it means" and that "even though the resolution vehicles typically used to resolve an FCPA enforcement action are not subject to judicial scrutiny and [thus] the vehicles do not necessarily reflect the triumph of the enforcement agencies’ theories, in the absence of substantive FCPA case law, these privately negotiated resolution vehicles have come to represent de facto FCPA case law" which breed "inefficient overcompliance by risk averse business actors fearful of enterprise - threatening liability because of the enforcement agencies’ untested and dubious theories."

Global Financial Integrity Responds

2011-06-21T04:52:00.004-04:00

The goal of FCPA Professor (see here) is to foster a forum for critical analysis and discussion of the FCPA (and related topics) among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons.

With that goal in mind, I asked Heather A. Lowe, Esq. (Legal Counsel & Director of Government Affairs, Global Financial Integrity ("GFI")) to consider a guest post to respond to my criticism last week of certain of GFI's statements in connection with the House FCPA hearing (see here for the prior post).

I am glad she accepted and below is Ms. Lowe's guest post.

If other readers want to make their voice heard on the topic of FCPA reform as well, please consider FCPA Professor as a suitable forum.

*****

I appreciate the invitation from Prof. Koehler to provide some comments on this forum as a guest blogger.

On June 14, 2011, Prof. Koehler commented (here) on documents provided by Global Financial Integrity and other civil society organizations and GFI’s press release (here) circulated on Monday, prior to the House of Representatives’ hearing on the FCPA. Additional arguments are included in GFI’s formal submission (here) for the record at the hearing. Karen Lissakers, Director of the Revenue Watch Institute, and Corinna Gilfillan, Head of U.S. Office at Global Witness, each provided statements (see here and here) for the hearing record as well. I am sure readers will find our full submissions to be of interest.

One of the primary reasons that GFI wanted to provide a submission for the hearing was to ensure that Members of Congress were aware that (a) businesses and the Department of Justice were not the only stakeholders with views to be considered in this discussion, (b) proposed changes to the FCPA must be considered within an international context, and any changes will have international implications, and (c) there are strong economic arguments for carefully considering changes to the FCPA that might lead to a reduction in enforcement.

Anti-bribery laws are not enacted in this world without years of blood, sweat and tears from anti-corruption campaigners around the world, and I don’t expect that they will be willing to lose ground on this flagship anti-bribery legislation without making their voices heard. When I say “blood, sweat and tears” I literally mean blood, sweat and tears. There are activists around the world who have been threatened with violence, jailed and even killed over the years to achieve the progress that has been made. It would be inaccurate, therefore, to believe that corporations are the only ones with “skin” in this game.

GFI would not presume to speak on behalf of these organizations without their permission, but we did not want to miss the opportunity to provide at least one civil society submission as a place-holder for a critical group of stakeholders.

We appreciated Prof. Koehler’s comments on the documents he posted. We are trying to begin a meaningful dialogue on these issues that more civil society organizations with direct experience in the field, around the world, can join. His comments demonstrate that we have been successful in starting that conversation.

Prof. Koehler did not invite me to blog for my motivational comments, however. He would like me to respond to his post of June 14, 2011.

Apart from quoting the opinion of a former SEC Commissioner in a statement made 20 years ago

• during a hearing on bills proposing changes that the Professor considers to be similar to changes being proposed today,
• which were ultimately never adopted by Congress, and
• during a time preceding the international proliferation of anti-bribery conventions and national laws that we have to support our FCPA enforcement efforts today,

Prof. Koehler seems to be focusing on two main subjects: the proposed amendment to further define “foreign official” and the proposal to include a compliance defense in the FCPA.

The Professor refers to the UK Bribery Act Guidance to shore up his position in support of creating a compliance defense for companies. The U.S. Chamber refers to the UK Bribery Act (the “UK Act”) itself to support its position that a compliance defense is a reasonable amendment to request. The compliance defense in the UK Act should not be taken out of context, however. It must be viewed in light of the other provisions of the UK Act. The UK Bribery Act criminalizes ALL forms of commercial bribery. The FCPA criminalizes only payments made to foreign officials. The UK Act does not permit facilitation payments. The FCPA permits facilitation payments and has an express provision creating an affirmative defense for reasonable travel and lodging and other types of expenses one might incur as a “host” of a trading partner. The UK Act’s extraterritoriality provisions have been described as more far-reaching than the FCPA’s.

The U.S. Chamber’s proposals to amend the FCPA are entitled “Restoring Balance.” The UK Act’s compliance defense could conceivably be seen as an attempt to balance provisions that go well beyond those of the FCPA. A compliance defense in the FCPA would, in fact, be out of balance when viewed in full context. However, if there is a genuine move to bring the FCPA in line with the UK Bribery Act then let’s talk!

I also found it interesting that the Professor referenced the UK Bribery Act Guidance in his support of the compliance defense. The Guidance he refers to is the Guidance from the UK Ministry of Justice. At the very beginning of that document, in paragraph 4, the Ministry states, “The question of whether an organisation had adequate procedures in place to prevent bribery in the context of a particular prosecution is a matter that can only be resolved by the courts taking into account the particular facts and circumstances of the case. The onus will remain on the organisation, in any case where it seeks to rely on the defence, to prove that it had adequate procedures in place to prevent bribery. However, departures from the suggested procedures contained within the guidance will not of itself give rise to a presumption that an organisation does not have adequate procedures.”

So, what does a compliance defense actually accomplish in the UK? A company still has to prove that it had adequate procedures in place to prevent the criminal activity (which means all of the investigation into what actually took place must still be undertaken) and the matter still has to be adjudicated by the courts. Compliance in the UK is not an absolute defense that can be relied upon to avoid the cost of investigation and litigation at all, as seems to be the idea behind the U.S. Chambers’ proposal! The burden on a UK company is, in practical terms, the same as that of a company defending an FCPA violation under the current form of the statute.

Prof. Koehler characterized some of my statements as “unsophisticated” and “naïve,” so I was surprised by his argument that the real reason that companies want a clearer definition of “foreign official” is so that they can more easily determine who they can take out for a round of golf and a few drinks at the 19th without thinking too hard about it. While I do not doubt that this is something companies do have to think about, I stand by my statement that a clearer definition of foreign official can just as easily be used to determine who a company can bribe and who it can’t bribe and I am not naïve enough to think that this isn’t a frequent question. Let’s get on board with the UK on this one and just not bribe anyone.

I will say, however, that I think I have a fairly accurate view of what motivates corporations. Corporations are motivated by their bottom line and their cost/benefit analysis. There are externalities that also factor into decisions, like reputational risk, but in the end the externalities are quantified and factored in. This is not a bad thing – corporations exist to make money and are vital to support a strong economy.

For the reasons set forth in GFI’s submission, I don’t think that most companies set out to engage in bribery, unless they do not have the attributes to be truly competitive in the market they are entering in the first place (which should not be overlooked as a possible motivating factor). When faced with a bribe, however, the choice on the spot may be perceived to be one of paying a bribe or losing business worth many times the value of the bribe. A strongly enforced FCPA makes that bribe much more expensive in any cost/benefit analysis.

The perception that the choice a company is making is whether to pay a bribe or lose the business is where we should be focusing our energy, however. Many companies have created strategies, policies and outreach to governments in the countries in which they operate in order to ensure that it is understood by those with whom they do business that they are subject to the FCPA and cannot pay bribes. We are pretty sure that the whole notion of the FCPA isn’t a surprise to their business counterparts when the subject is raised.

As I stated in GFI’s submission for the hearing, “Some companies, like Newmont Mining, view the FCPA in a positive light. Newmont Mining, based in Colorado, is the second largest gold mining company in the world. Newmont’s Director Corporate & External Affairs for Africa, Chris Andersen, stated during a panel discussion at the Extractive Industries Transparency Initiative Global Conference in March of this year that,

“…Newmont’s experience, particularly in Africa, has been that FCPA has been an enormously valuable protective device for us…when you have a government person saying…‘we’ll give you that license if you buy us a car or something’…it’s not about look ‘I’m a mean guy and I don’t value our relationship, and therefore I’m not going to give it to you,’ you say ‘look, there’s a law out there that means I’m going to go to jail if I do that, I’m not going to go to jail for you or anybody else.’”

There are many more arguments to be made on all sides of this debate, I have no doubt. Let’s make sure that all relevant voices are being heard moving forward.

ICE Appeal Receives Chilly Reception At 11th Circuit

2011-06-20T05:17:00.015-04:00

It is one of the FCPA's most bizarre issues.

If bribery is not a victimless crime, then why do Foreign Corrupt Practices Act 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?

As detailed in this prior post, in May Instituto Constarricense de Electricidad ("ICE") of Costa Rica petitioned "for protection of its rights as a victim" of Alcatel-Lucent's bribery scheme. (See here for a prior analysis of the December 2010 enforcement action).

In early June, Judge Marcia Cooke (Southern District of Florida) denied ICE's petition.

On June 15th, ICE filed this petition in the 11th Circuit for a writ of mandamus "directing the District Court to recognize ICE is a 'crime victim' under the Crime Victims' Rights Act of [Alcatel-Lucent's] crimes and to afford it all rights the CVRA guarantees to crime victims, including restitution."

The two issues presented on appeal were: (i) whether the district court erred by denying ICE victim status under the CVRA; and (ii) whether the district court erred in denying ICE restitution.

Last Friday, in a short 3-page decision (here), the 11th Circuit denied ICE's petition.

After noting the clearly erroneous standard of review, the 11th Circuit held that "the district court did not clearly err in finding that [ICE] actually functioned as the offenders' coconspirator" and that the district court did not "err in finding that ICE failed to establish that it was directly and proximately harmed by the offenders' criminal conduct."

The petition for victim status was factually difficult from the start and it is not surprising that ICE did not prevail. Yet, the ICE petition did succeed in raising the victim issue and causing those interested in bribery and corruption issues to ponder the valid and legitimate question of victims a bit more closely.

Russian FCPA: The Law Has Been Signed, Will The Culture Change Result?

2011-06-17T05:03:00.003-04:00

Last month, Russian President Dimitri Medvedev signed legislation that criminalizes foreign bribery, with monetary sanctions for companies and individuals who bribe foreign public officials. Soon thereafter, the OECD formally invited Russia to join the OECD's Working Group on Bribery and to accede to the OECD's Anti-Bribery Convention (see here for the OECD release).

Max Chester (Senior Counsel at Foley & Lardner - see here) takes the stage today with this guest post. Chester, a native speaker of Russian with significant experience representing U.S. clients in commercial transactions in Russia, provides an overview and analysis of the new Russian "FCPA-like" law.

*****

Russian FCPA: The Law Has Been Signed, Will The Culture Change As A Result?

On May 4, 2011, Russian President Dmitriy Medvedev signed into law a measure that significantly increases fines for bribery in Russia and now specifically applies to bribery of foreign government officials. The new federal law (here) is entitled “Federal Law dated May 4, 2011 No. 97-FZ On inclusion of changes to the Criminal Code of Russian Federation and to the Code of Administrative Offences in Connection with the Improvement of Government Administration in the Area of Fighting Corruption.” While the Russian title of the new law is not easy to understand even for a native Russian speaker, its objective is clear: it is intended to fight corruption in Russia, one of President Medvedev’s highest stated priorities, and to support Russia’s bid to accede to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Because the new law specifically prohibits offering or acceptance of a bribe by a foreign government official, we’ll refer to the new law as the “Russian FCPA.” Because the Russian FCPA prohibits commercial bribery and both receiving and offering corrupt payments to foreign government officials, the new law appears to resemble the UK Bribery Act and can be said to have even further reach than the US FCPA.

With respect to commercial bribery, the new law changes art. 46 of the Criminal Code and imposes the maximum fine for bribery in the amount of 100 times the amount of the bribe not to exceed 500 million rubles) (approximately $17.8 million). Prior to the amendment, the maximum monetary fine for acceptance of a bribe was 1 million rubles or an amount equaling salary/other income for the previous 5 year period and the maximum monetary fine for offering a bribe was 500,000 rubles or an amount equaling salary/other income for the previous 3 year period. The monetary fines for commercial grease payments (подкуп “podkup” in Russian) were even lower: the offeror could face a maximum fine of only 300,000 rubles or an amount equaling salary/other income for the previous 2 year period, and the acceptor could face a maximum fine of only 1 million rubles or an amount equaling salary/other income for a 5 year period.

While incarceration up to 12 years for bribery/grease payments was possible prior to the amendment, according Larisa Brycheva, the chair of the Office of Legal Affairs to the President of Russian Federation, only 26% of those convicted for bribery-related offenses were incarcerated. Furthermore, most of those convicted were offering/accepting small bribes (from 500 rubles to 10,000 rubles), making it difficult for Russian judges to impose sentences of up to 12 years in prison resulting from bribes equaling the cost of an average dinner for two at a Moscow restaurant.

Given this unimpressive to-date enforcement regime, the Russian lawmakers have decided that a significantly higher monetary fine would be more effective than a possibility of a lengthy prison sentence. While the anti-corruption professionals should welcome this change in the Russian law, a big question still remains exactly how aggressively Russian authorities will enforce the new law. It may not be palatable to impose a 500 million ruble fine on a Russian bureaucrat whose official government salary is 40,000 rubles and whose only official assets are his apartment (where his family lives and thus is not subject to forfeiture) and his dacha, the title to which is likely held by his relatives. The same can not be said of foreign businesses, however, on whom it would be much easier for Russian authorities to impose and collect fines equaling 100 times the bribe. There is no indication in the Russian FCPA that it would not apply to US companies doing business in Russia. In other words, if a US company or its constituents engage in commercial or foreign government official bribery in Russia, the offenders would be subject to fines and potential incarceration in Russia.

The Specific Provisions of the New Law

Acceptance of a Bribe

The Russian FCPA now specifically prohibits bribery involving foreign government officials. Thus, art. 290 of the Criminal Code (which prohibits acceptance of bribes directly or through intermediaries) as amended applies to government officials, foreign government officials or officials of public international organizations. The new law breaks down the fines into several categories depending on the conduct at issue and the amount of the bribe. In every case, however, in addition to the monetary penalty or a prison sentence with a monetary penalty, the offender may be restricted from occupying certain positions in government or commercial entities. For example, part 1 of art. 290 of the Criminal Code now imposes a penalty between 25-50 times the bribe amount or incarceration up to 3 years with a fine equaling 20 times the bribe amount if the bribe is under 25,000 rubles and was used to have an official perform an act (or refrain from performing an act) which falls within the official’s duties and responsibilities. Part 2 of article 290 states further that if the bribe amount is between 25,000 and 150,000 rubles, then the maximum penalty for a violation is a fine between 30-60 times the bribe amount or incarceration up to 6 years with a fine equaling 30 times the bribe.

If the actions (inactions) of government officials, foreign government officials or officials of public international organizations for which they accept a bribe are considered illegal, Part 3 of art. 290 of the Criminal Code now imposes a penalty equaling 40-70 times the bribe amount or incarceration for a period of 3-7 years with a fine equaling 40 times the bribe amount.

Even stiffer penalties (60-80 times the bribe amount or incarceration for a period of 5-10 years with a fine equaling 50 times the bribe amount) apply if the bribe is accepted by a federal Russian government official or an official of an equivalent body of local government administration. Art. 290, Part 4.

If the actions prohibited by parts 1-3 above involve a conspiracy, or a threat or the amount at issue is over 150,000 rubles, the penalty is 70-90 times the bribe or incarceration for a period of 7-12 years. Art. 290, Part 5

If the actions prohibited by parts 1-4 involve an amount greater than 1 million rubles, then the penalty is 80-100 times the bribe amount or incarceration for a period of 8-15 years with a penalty equaling 70 times the bribe amount.

Giving of a Bribe

The Russian FCPA similarly amends art. 291 of the Criminal Code, which now prohibits giving of a bribe (directly or through an intermediary) to a government official, foreign government official or an official of a public international organization. The giving of a bribe in the amount less than 25,000 rubles is punishable by a fine equaling 15-30 times the bribe amount or incarceration of up to 2 years with a fine equaling 10 times the bribe amount. Art. 291, Part 1.

The giving of a bribe in the amount between 25,000 rubles and 150,000 rubles is punishable by a fine equaling 20-40 times the bribe amount or incarceration of up to 3 years with a fine equaling 15 times the bribe amount. Art. 291, Part. 2.

If the actions prohibited by parts 1-3 above involve a conspiracy or the amount at issue is over 150,000 rubles, the penalty is 60-80 times the bribe or incarceration for a period of 5-8 years with a fine equaling 30 times the bribe amount. Art. 291, Part 4.

The giving of a bribe in the amount exceeding 1 million rubles is punishable by a fine equaling 70-90 times the bribe amount or incarceration for a period between 7 and 12 years with a fine equaling 70 times the bribe amount. Art. 291, Part. 2.

Giving of a bribe to a government official, foreign government official or an official of a public international organization to secure an action/inaction which is itself deemed illegal is punishable by a fine equaling 30-60 times the bribe amount or incarceration of up to 8 years with a fine equaling 30 times the bribe amount. Art. 291, Part 3.

Aiding and Abetting Bribery

The Russian FCPA also introduces new article 2911 to the Criminal Code, which prohibits aiding and abetting bribery if the amount of the bribe exceeds 25,000 rubles. In such circumstances, the Russian FCPA imposes a fine equaling 20-40 times the bribe or incarceration for a period of up to 5 years with a fine equaling 20 times the bribe amount.

If an aider assists with a bribery for an official’s act that itself is considered illegal or if an aider uses his official position in aiding the bribery, the penalty is 30-60 times the bribe or incarceration for a period of time between 3-7 years with a fine equaling 30 times the bribe amount.

If the aiding is committed by an organized group or pursuant to a conspiracy, or the amount of the bribe exceeds 150,000 rubles, the penalty is 60-80 times the bribe amount or incarceration for a period of time between 7-12 years with a fine equaling 60 times the bribe amount.

The penalty for aiding bribery in the amount exceeding 1 million rubles is 70-90 times the bribe amount or incarceration for a period of time between 7-12 years with a fine equaling 70 times the bribe amount.

A promise or an offer to aid in the bribery is also punishable by a penalty equaling 15-70 times the bribe or incarceration for a period of up to 7 years with a fine equaling 10-60 times the bribe amount.

Definition of Foreign Government Official

The Russian FCPA defines a “foreign government official” as any appointed or elected official who has a position in any legislative, executive, administrative, or judicial branch of a foreign country or an individual who serves any public function for a foreign country or a public agency or a public enterprise. This definition seems to suggest that Russian lawmakers embrace the position taken by the DOJ that employees of government owned enterprises are “foreign government officials” for purposes of the FCPA. It would be interesting to see if Russian authorities deem employees of General Motors, AIG or other large US companies where the US government has a substantial equity position, “foreign government officials” for purposes of the Russian FCPA.

Amendments to the Code of Administrative Offences of Russian Federation

The Russian FCPA also amends several provisions of the Code of Administrative Offences of Russian Federation. Among those is amendment to article 19.28, which imposes penalties on legal entities for commercial bribery or bribery of foreign government officials if a payment of a bribe or an offer of a bribe was made on a legal entity’s behalf. In such circumstances, the penalty is 3 times the amount of the bribe but not less than 1 million rubles. If the amount of the bribe at issue is greater than 1 million rubles, then the penalty is up to 30 times the bribe amount but not less than 20 million rubles. If the amount of the bribe at issue is over 20 million rubles, then the penalty is up to 100 times the bribe amount but not less than 100 million rubles.

In addition, the Russian FCPA introduces several new protocols for Russian authorities to seek information from their foreign counterparts in connection with the investigation by Russian authorities of violations set forth above as well as protocols for Russian authorities to respond to inquiries from foreign law enforcement agencies in connection with foreign law enforcement agencies’ investigation of crimes. These provisions will undoubtedly strengthen the level of cooperation between Russian and foreign law enforcement agencies in implementing anti-corruption measures. Such efforts are already underway, as evidenced by the recent meetings between Alexander Yakovenko, the Russian Ambassador to the United Kingdom in London, with Richard Alderman, Director of the Serious Fraud Office.

Conclusion

No law by itself can change overnight or even within a short period of time the “threatening” level of corruption that exists in Russia, as acknowledged by the Russian President himself. The current state of affairs in Russia is a product of 70+ years of socialist dictatorship and the resulting mindset of many government officials. This state of affairs will change, undoubtedly, and the passing of the Russian FCPA is the step in the right direction for Russia. It is up to the Russian authorities to follow through on the provisions of the new law.

Carson Defendants Move To Dismiss Travel Act Counts

2011-06-16T05:28:00.015-04:00

The Foreign Corrupt Practices Act is not the only tool the DOJ has used to charge alleged bribery schemes. The FCPA, after all, requires a "foreign official."

With increasing frequency, the DOJ - often in conjunction with FCPA charges - charges Travel Act violations when the conduct at issue is missing a "foreign official" yet concerns allegations of commercial bribery. For a useful overview of the Travel Act and its relevance to FCPA enforcement (broadly speaking), see this recent post from the FCPA Blog.

The DOJ's use of the Travel Act is being challenged in the Carson matter pending in the Central District of California. This is the same case in which "foreign official" was and is being challenged. (See here and here for the prior posts).

Earlier this week, in a significant FCPA-related event, certain of the Carson defendants filed a motion to dismiss the Travel Act charges. As noted in the brief (here), in addition to FCPA charges, the moving defendants were charged with Travel Act violations based on alleged bribes to employees of private companies located in China and Russia.

In sum, the Carson defendants argue as follows.

"In Morrison v. Nat'l Australia Bank Ltd., 130 S. Ct. 2869, 2878 (2010), the Supreme Court explained that unless Congress has clearly indicated that a statute applies extraterritorially, it does not. The Travel Act criminalizes “bribery . . . in violation of the law of the state in which committed,” i.e., domestic bribery. Travel Act application to the foreign bribery alleged in this case violates Morrison’spresumption against the extraterritoriality of United States (“U.S.”) laws."

"While the face of the Travel Act, considered with Morrison’s presumption against extraterritoriality, shows that the Travel Act has no foreign application, the statute’s legislative history confirms it. Consideration of the Travel Act in conjunction with the subsequently enacted FCPA also demonstrates that Congress did not intend that the Travel Act extend to foreign bribery."

"Further, the Travel Act Counts are predicated upon California’s commercial bribery statute, Cal. Penal Code § 641.3 (“PC 641.3”), so the applicability of that statute to Defendants’ conduct is essential to the government’s case. PC 641.3 has never been applied to foreign commercial bribery and its legislative history shows its foreign application was never considered."

"Application of the Travel Act and PC 641.3 would also be unconstitutionally vague. Defendants had no notice that either the Travel Act or PC 641.3 would reach the alleged conduct. The government’s recent application of this fifty-year old statute against foreign commercial bribery, in the face of strong skepticism that it even applies, shows the enforcement of this statute is arbitrary."

"Additionally, the Travel Act allegations are simply defective. The Travel Act prohibits travel or the use of a facility in interstate or foreign commerce with the intent to promote unlawful activity (i.e., state-law bribery), followed by an act to promote the bribery. But the Travel Act Counts fail to allege the essential element of an act following the travel or use of a facility in interstate commerce to promote the alleged bribery. So too, Counts Twelve and Fourteen fail to adequately allege the jurisdictional element of travel or use of a facility in interstate or foreign commerce. Because the Travel Act Counts omit necessary elements, they fail."

"Finally, the Court cannot guess whether the Grand Jury would have even indicted Defendants for conspiracy had it known that the Travel Act did not apply to Defendants’ alleged conduct. Because the defective Travel Act allegations infect the entire conspiracy count, Count One must be dismissed in its entirety."

House Hearing - Overview and Observations

2011-06-14T16:42:00.003-04:00

Representative James Sensenbrenner (R-WI) today chaired a hearing of the House Judiciary Committee, Subcommittee on Crime, Terrorism, and Homeland Security titled "Foreign Corrupt Practices Act." (See here for the video).

This post provides a chronological overview of the hearing as well as observations.

Compared to the Senate's FCPA hearing in November 2010 (see here for the prior post) today's hearing (approximately two hours) was much more contentious. For instance, during the hearing Chairman Sensenbrenner noted that FCPA enforcement has become a "considerable windfall for the federal government" and he concluded the hearing by telling Greg Andres (DOJ) that it "would behoove the DOJ to realize that the statute needs updating" and that those on the Committee will be drafting a reform bill.

The hearing focused on a wide range of issues and in many ways was similar to FCPA reform hearings in the 1980's in that a common theme explored during the hearing was whether the current state of FCPA enforcement harms U.S. business.

There is clearly a push to introduce FCPA reform legislation and members of both parties appeared receptive (to at least certain) FCPA reform proposals most notably clarifying the FCPA's definition of "foreign official" / "instrumentality" and exploring an FCPA compliance defense. In fact, John Conyers (D-MI), who appeared most supportive of the current state of FCPA enforcement, stated he would support such reform proposals. The DOJ supports neither of these proposals.

Other issues explored in the hearing included prosecutorial discretion and DOJ declination decisions - including a request that the DOJ provide further information as to its declination decisions.

What happens next is a good question.

It seems like an FCPA reform bill will soon be introduced and hearings as to the specifics of such a bill may occur. Whether such a bill can get out of committee for full consideration by the House, and whether similar bills will be introduced in the Senate, is the open question. Politically, any FCPA reform efforts are likely, because of the topic at issue, to attract substantial opposition - including opposition that is less than informed as to the actual issues.

It bears noting that the last time Congress enacted significant FCPA amendments, the process took eight years and the statute was amended, not through a stand-alone bill, but through Title V, Subtitle A, Part I of the Omnibus Trade and Competiveness Act of 1988.

Opening Statement of Chairman Sensenbrenner

Sensenbrenner began by noting that when Congress passed the FCPA in 1977 the "world was a different place." In response to slush funds and secret payments to foreign governments that adversely affected U.S. foreign policy, Congress passed the FCPA and the law "sent a strong signal." (For an overview of the facts and circumstances motivating Congress to pass the FCPA - see here).

Sensenebrenner next observed that thirty-four years later, the world has turned upside down, China is a power, the nature of overseas business has changed, and many countries have some state-control over business.

Sensenbrenner noted that there has been a dramatic increase in FCPA prosecution and that last year approximately 1/2 of all DOJ criminal penalties were in FCPA cases (see here for the DOJ release) - a dynamic he called a "considerable windfall for the federal government."

In touching upon themes similar to when Congress held substantive FCPA hearings in the mid-1980's, Sensenbrenner placed the increase in FCPA enforcement in the context of the current economic downturn. Indeed a theme throughout the hearing was that the current state of FCPA enforcement may be harming U.S. business interests.

Sensenbrenner stated that "FCPA prosecutions should be effective and fair," but also "predictable" so that the "rules of the road are clear" so that "business can start moving again."

In closing his opening statement, Sensenbrenner stated that the Committee was well-suited to examine the impact of the FCPA and to ask hard questions - such as whether the FCPA was succeeding in its mission or hurting job creation.

Opening Statement of Ranking Member Scott

Robert Scott (D-VA) next made an opening statement. Scott summarized the reform proposals including providing greater clarity to the "foreign official" definition. As a potential compliance affirmative defense, Scott observed that companies are spending substantial sums - millions of dollars in some cases - on FCPA compliance - a result he indicated may often result in "overcompliance" because companies would rather be "safe than sorry." Scott stated that "punishing those companies and individuals who are operating in good faith runs counter to the basic tenets of fairness and justice." He also indicated that successor liability "runs counter" to a system of justice that should only punish the guilty party.

In closing, Scott said that effective enforcement of the FCPA is "crucial" and he applauded aggressive enforcement of the law. At the same time, Scott noted the necessity of periodically reviewing laws to make sure "they remain fair and just."

Opening Statement of John Conyers

John Conyers (D-MI) also made an opening statement. After a few sentences about unemployment figures and the Obama administration, Conyers asked the following question: will somebody explain to me how 140 cases in 10 years is "overly aggressive prosecution."

Conyers did indicate in his opening statement that he does support certain FCPA reform proposals. As to clarification of "foreign official," Conyers said he can "support this one" because it can create a problem when those subject to the FCPA do not have a clear understanding of who a "foreign official" is. Conyers also said that he can support the addition of a compliance defenses so that companies can fight imposition of criminal liability if individual employees and agents circumvent compliance measures. Conyers did not support other FCPA reform proposals - such as limiting successor liability, limiting parent company liability for acts of foreign subsidiaries, and adding a wilful mens rea requirement for corporations.

Statement by Greg Andres

Greg Andres (Deputy Assistant Attorney General) next delivered an opening statement. His prepared statement can be found here.

Among other things, Andres noted that DOJ's FCPA prosecutions involve "systemic long-standing bribery schemes" not the payment of single bribe payments of nominal sums.

Andres specifically cited the Daimler AG and Siemens FCPA prosecutions to support this point. However, the irony is that neither of these FCPA enforcement actions involved FCPA anti-bribery charges against the parent company or any related individual prosecutions.

As to a potential FCPA compliance defense, Andres stated that the DOJ already considers a company's pre-existing compliance policies and procedures pursuant to the Federal Principles of Prosecution of Business Organizations (see here).

As to providing guidance, Andres noted that the DOJ's goal "is not simply to prosecute FCPA cases" and that senior DOJ officials often speak publicly on the FCPA and highlight relevant considerations and practices companies should adopt. Andres also discussed the DOJ's FCPA Opinion Procedure program (see here for more).

In closing, Andres stated that DOJ is proud of its enforcement record and that it looks forward to working with Congress.

Statement by Michael Mukasey

Former Attorney General and current Debevoise & Plimpton partner Michael Mukasey next delivered an opening statement on behalf of the U.S. Chamber of Commerce. See here for his prepared statement.

Mukasey began by noting that no one favors bribery and that while the FCPA indeed does have merit, "more than 30 years of experience" with the law demonstrates that it can be improved.

His testimony focused on two of the Chamber's FCPA reform proposals: clarifying the definition of "foreign official" and "instrumentality" and amending the FCPA to include a compliance defense.

As to the later, Mukasey observed that statutory guidance can be found in Title VII of the Civil Rights Act which provides for something akin to a compliance defense. Mukasey stated that "dozens, if not hundreds of cases are resolved under this compliance defense" and that the defense reduces discrimination by encouraging employers to have robust compliance systems.

As to "foreign official," Mukasey referenced the recent judicial opinions on this issue (see here and here for the prior posts), yet noted that the judges did very little to clarify the limits of the "foreign official" issue other than say that whether an employee of an alleged state-owned or state-controlled enterprise could constitute a "foreign official" varied depending on the circumstances. Mukasey stated that leaving this issue in the hands of a jury in a criminal trial makes it "impossible" for companies to determine in advance who is a "foreign official" thereby increasing uncertainty and barriers to U.S. business. According to Mukasey, "majority ownership is the most plausible threshold" for whether a state-owned or state-controlled enterprise constitutes a foreign government "instrumentality."

Statement by George Terwilliger

George Terwilliger (White & Case) next delivered an opening statement. See here for his prepared statement.

Terwilliger opened by stating that he favors "fair enforcement of sensible corruption statutes" and that "leveling the playing field" is essential. He noted that the DOJ and SEC are "realizing their enforcement goal of driving companies into far greater compliance," but also noted the less desirable effects of stepped-up enforcement. He spoke of the "hidden effect" of foregone business opportunities because of FCPA enforcement concerns and noted that the current state of enforcement may hurt job creation.

According to Terwilliger, the "hidden costs" of FCPA enforcement are the result of uncertainty and that companies sometimes forego deals, take a pass on certain projects and withdraw from other projects - not because such companies are necessarily risk averse - but because of the risk-reward ratio in this current FCPA enforcement environment.

Terwilliger proposed a further FCPA reform proposal related to successor liability and that is a statutory safe harbor provision during which an acquiring company could be shielded from FCPA liability for a defined time period post-closing. During this post-closing period, the acquiring company would undertake a thorough review of the target's business operations and have the opportunity to self-disclose any FCPA issues to the enforcement authorities.

Statement by Shana-Tara Regon

Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers) next testified. See here for her prepared statement.

She observed that given the general lack of judicial scrutiny over FCPA enforcement, the FCPA says whatever essentially the DOJ says it means and that the FCPA has, in many instances, become a strict liability statute "in ways that those who created the FCPA could never have envisoned."

Regon stated that NACDL does not advocate bribery and similarly stated that advocating for reform is not akin to advocating for bribery. Her testimony was focused on two reform proposals - clarifying the definition of "foreign official" and strengthening the mens rea requirement for corporate offenses. She stated that the FCPA is "emblematic of the general problem of overcriminalization" and that FCPA enforcement has several "unintended consequences" including over-compliance.

During the hearing, Global Financial Integrity (see here for yesterday's post) tweeted as follos: " This group of witnesses is such a sham. All three non-DOJ witnesses spewing disingenuous pro-#bribery #AmChamb talking points #FCPAHearing." (See here).

Chairman Sensenbrenner reserved his questions for the end and next called on various Representatives present.

Q&A Session

Tom Marino (R-PA) asked Andres (DOJ) about the DOJ's top enforcement obstacle.

Andres stated that because FCPA violations focus on conduct abroad, the DOJ often needs to rely on MLAT requests which can take longer. He noted that the DOJ is in favor of extending the FCPA's statute of limitations given that it generally takes a long time to investigate FCPA cases. Andres further stated that while there is much discussion as to the increase in FCPA enforcement, this discussion often "fails to recognize the size and magnitude of the problem."

Robert Scott (D-VA) next asked Mukasey whether the compliance defense proposed was a total defense or an affirmative defense. Mukasey stated that the proposal was for an affirmative defense and that where there is a proved violation of the FCPA, the question should then become whether the company had a compliance mechanism in place reasonable designed to detect and prevent the conduct. Mukasey noted that this issue may be an "uphill climb" for a company, but that the FCPA ought to at least allow a company to pursue such a defense.

Scott next asked Mukasey about the mens rea reform proposal for corporate liability. Mukasey seemed to be advocating a corporate liability standard similar to the (soon to be old) U.K. standard and the current Canada law standard when he stated that a company should only be held liable if someone in a "policy making position" was involved in or condoned the improper activity.

Scott next asked Andres (DOJ) the general question of whether any de minimis cases have ever been brought by the DOJ. Andres stated "no," the DOJ has never prosecuted "cup of coffee, lunch, taxi-ride type of cases" and he further stated that because of the FCPA's corrupt intent element and the affirmative defense for reasonable and bona fide business expenditures, it is an open question as to whether such facts even violate the statute.

Even so, Andres stated that the DOJ is opposed to creating a de minimis exception to the FCPA because small, recurring payments can amount to significant bribery. He stated that the amount of the bribe is not the relevant consideration, rather the intent of the bribe is and that all bribery is inappropriate. Andres said that all the talk of taxi-ride payments and meals being in violation of the FCPA "is not reflected in our enforcement actions."

Taxi-cabs were a recurring issue throughout the hearing. Mukasey stated, in response to a question, that the taxi-cab example is real and that when "nervous counsel" found out that a company may have paid a "foreign official's" taxi-cab fare, the company disclosed the conduct to the DOJ and the DOJ requested that the company investigate its entire relationship with the "foreign official." Mukasey stated that this investigation cost the company approximately $200,000, no violation was found, and that the company could have used this money for something more beneficial than conducting in investigation as to these facts.

Louie Gohmert (R-TX) next stated that those subject to the FCPA "ought to have a clear enough line" so that people don't have to think "is it or isn't it a bribe" to make this payment. Gohmert said that Congress can define bribery so that companies "can have a clear line" so that a company does not have to spend $200,000 to figure out whehther paying for a cab is an FCPA violation. Gohmert then made an interesting observing that the FCPA allows a "young prosecutor" or an "FBI agent seeking to make a name for himself" the opportunity to pursue all sorts of enforcement actions and that enforcement then ends up being more aggressive than it should be.

Gohmert next asked Andres (DOJ) as follows: why should a company be prosecuted if a company has a compliance program set up according to the standards set forth in Chapter 8 of the U.S. Sentencing Guidelines (see here). Gohmert stated that if a company has done everything it can do, it seems like a strict liability standard if the company is prosecuted because of the act of an employee acting contrary to the company's policy. Andres stated that the DOJ "does not prosecute companies based on the acts of a single, rogue employee."

Rather, Andres stated that the DOJ looks at how pervasive was the conduct or whether the conduct involved a high-ranking employee. Andres specifically stated that the DOJ opposes consideration of an FCPA compliance defense. He stated that DOJ already seriously considers compliance programs in its charging decisions, along with other factors such as cooperation and voluntary disclosure.

Andres called a potential compliance defense "novel" and one that is not "well-defined." He said that such a defense could lead to "paper compliance." He also referenced the U.K. Bribery Act (which does contain such a compliance defense) yet stated that this defense is not yet in effect and thus there is no precedent to analyze to see whether such a defense is effective.

Given that the DOJ frequently takes FCPA enforcement position that are "novel," are not "well-defined," and are not supported by precedent, Andres response on this issue was less than convincing.

In closing, Andres stated that an FCPA compliance defense could "create a loophole" and allow for some bribery to occur. He called such a potential defense "novel and risky" and said that the "time is not right to consider it."

The floor next returned to John Conyers (D-MI). He stated that ignorance of the law is no excuse and wondered why in the case of bribery does there need to be a de minimis rule. He stated that "corporations have more lawyers than anybody else" and "why do they need to know" how low the bribery threshold should be. He said that "they don't deserve to know that."

Conyers also conducted the most contentious Q&A exchange of the hearing with Regon. Conyers asked - "give me some examples of overcriminalization of the FCPA." He repeatedly interrupted Regon and asked "just give me some examples" "give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization." Conyers stated, "only 140 cases have been brought in 10 years -that averages 14 cases a year - is that overcriminalization to you?" Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occured.

Ted Poe (R-TX) next launched into a criticism of China. He said that "China, through its government, follows a systematic philosophy of corruption" and that China will "do anything in the world to get their way" including stealing from the U.S. and paying bribes. He suggested that "any means necessary" is the Chinese way to get business. "We on the other hand," Poe stated, "believe in the rule of law." Poe stated that the "Chinese are effective in their philosophy" and he observed that he just returned from Iraq where he learned that Chinese companies are going to rebuild Iraqi's oil system and that he suspected money changed hands in order to get this business.

Poe, a former prosecutor, next said that it "disturbs" him when we give DOJ prosecutors too much discretion. Poe said that he was not advocating loosening the standards, but he did prefer "absolute certainty" about what is a violation of the FCPA as "opposed to too much discretion" by the DOJ on what something means and whether it is a bribe.

Judy Chu (D-CA) next asked Andres a series of questions allowing him to further articulate how the DOJ takes into consideration a company's compliance program and how compliance expectations are stated in public documents such as Chapter 8 of the Sentencing Guidlines and the OECD Guidelines. (See here). Andres further stated that there are situations where the DOJ does not pursue an enforcement action because of a variety of factors, including a company's pre-existing compliance program, even if these instances are not made public because the DOJ does not issue a press release. Asked by Chu for reasons why FCPA enforcement has expanded, Andres stated that the "problem is as big as it has ever been" and that "at least one reason" for the increase in enforcement is the result of SOX whereby companies have an obligation to test its internal controls - tests that often uncover FCPA issues that are then often disclosed to the DOJ.

Hank Johnson (D-GA) next asked Regon about prosecutorial discretion and whether it is fair to say that the "looser the law the more prosecutorial discretion and the narrower the law the less prosecutorial discretion." Regon stated that if the DOJ means what it says (i.e. that it targets only explicit instances of bribery and that it does not prosecute based on the actions of rogue employees), then the DOJ should not mind less prosecutorial discretion. Johnson next launched into an unusual statement about illegal crime (blue-collar crime) and legal crime (white collar crime in the sense that prosecutions of white collar crime tend to be less vigorous). Johnson said he was bothered by the fact there has not been much prosecutorial activity as to white collar crime, he said this "seems kind of fishy" and that some "folks are getting off the hook for legal crime."

Sandra Adams (R-FL) next asked Andres whether the DOJ has a definition of "foreign official" or "instrumentality." Andres said, in addition to the statute, there are now several decisions by district courts that further "amplified" the definition of foreign official. Andres stated that DOJ does not support a change to the definition of "foreign official" or "instrumentality."

Adams next Andres several pointed questions about DOJ declination decisions and whether such decisions are published or transparent. Andres stated that this is a difficult area for the government because the DOJ does not want to "penalize a company or individual investigated by not prosecuted."

I've argued before (see here for the prior post) that the DOJ should publish its declination decisions in a manner similar to its FCPA Opinion Procedure decisions. Given that most declination decisions would seem to follow disclosure by a company of FCPA scrutiny (in its SEC filings), Andres's rationale for not making declination decisions public is less than convincing.

Adams asked - in the last year, how many instances of FCPA conduct have been disclosed to the DOJ where no enforcement action resulted. Andres did not offer any specific number, but retreated to the FCPA Opinion Procedure and noted that if a company ever has a question about the FCPA, it has the ability to ask the DOJ and the DOJ is obligated to give an opinion.

Adams next asked Andres whether the DOJ is defining what the law means. Andres said that "everyone of these cases is negotiated with experienced defense counsel" and that counsel has "ample opportunity" to address any issues concerning the DOJ's enforcement.

Mukasey then answered that while resolved FCPA enforcement actions make for interesting case studies, such resolutions are not binding in other cases.

Before her time expired, Adams requested that the DOJ provide the Committee with more detail as to its declination decisions, including the DOJ's reasons and rationale for why enforcement actions did not result. Chairman Sensenbrenner then followed up and said DOJ's responses will be made part of hearing record.

Shelia Jackson Lee (D-TX) next asked Andres how many attorneys and staff are assigned to FCPA enforcement. He stated that the DOJ's FCPA unit, includes a core unit in D.C. of 15 to 20 enforcement attorneys and that assistance in trials is given by local prosecutors. Jackson Lee asked "is this an excessive amount" and Andres said "certaintly not in light of the size and magnitude of the bribery problem ... it is significant." Jackson Lee next received a tutorial from Andres as to the FCPA's jurisdiction over foreign companies.

Ben Quayle (R-AZ) next asked a question very much based on current events and that is the scrutiny of the Macau gaming industry. [Las Vegas Sands recently disclosed that it received subpoenas concerning its conduct in Macau]. Andres stated that it was not appropriate for him to comment on any ongoing investigations.

Quayle next asked Andres whethr General Motors would be considered a U.S. government "instrumentality." Andres said that in addressing this issue, the DOJ considers government ownership or investment as only one factor. Other factors include characterization of the entity under foreign law, the purpose of the entity, and that under these factors General Motors would likely not qualify as a U.S. government "instrumentality." Quayle next asked whether it is relevant if the government has communications with the company's board and the government has the ability to control or influence the entity (a presumed reference to GM's relationship with the U.S. government). Andres again stated that control and ownership is but one factor and he specifically referenced the recent Lindsey prosecution where the Mexican entity at issue was specifically addressed in the country's constitution.

Quayle next asked Terwilliger whether he has any knowledge of companies conceding markets to foreign competitors because of the FCPA. Terwilliger stated that "conceding markets" may be a bit strong, but that American companies have become much more circumspect in dealing with foreign business opportunities because of FCPA enforcement. In particular, Terwilliger said that companies may bypass "smaller opportunities" (that might become bigger opportunities) because of the FCPA in that the cost-benefit analysis and FCPA compliance are too much to worry about.

Chairman Sensenbrenner was the last person to ask questions and he began his time by stating as follows. There is "no question in my mind that we have to bring this law up to date." "No one is in favor of bribery, but there has to be more certainty." Sensenbrenner said he was "a bit befuddled" by Conyer's statement that corporations don't deserve to know what bribery is and he stated that "everyone has a right to know what is illegal."

Sensenbrenner's only question (a long one at that as he basically summarized the Chamber's FCPA reform proposals) was directed to Regon and Andres. Regon focused mostly on the corporate mens rea issue and stated that her organization is supportive of "anything Congress does" to clarify the FCPA. Tara Regon failed to see the rationale for not providing greater clarity as to the FCPA and noted that "we have many bribery statutes on the books, and some of those are written tightly and work well."

Sensenbrenner then asked Andres - which of Regon's suggestions do you agree with and Andres said "I don't agree with any of them." For instance, Andres said with the definition of "foreign official" that "one thing you need to take into consideration is that the statute covers the whole world" and that what might constitute a "foreign official" in China may be different than what constitutes a "foreign official" in Brazil or France.

Sensenbrenner grasped onto this issue and noted that this part of the uncertainty that people are complaining about.

Andres followed with two points. First, that if there is concern, companies subject to the FCPA can ask for a DOJ opinion. This only seemed to enrange Sensenbrenner further as he stated "come on, China is a communist country - they are not going to tell you what the government involvement is" in a company "they don't have the type of disclosure we have."

Andres second point was that the FCPA makes illegal paying a bribe and that if companies aren't paying bribes they have nothing to fear.

Sensenbrenner then seemed to pose a question at the end of the hearing as to whether the DOJ would support an FCPA amendment that simply makee bribery (all bribery) illegal (perhaps akin to the UK Bribery Act). Sensenbrenner did not pause for Andres to respond and he (Sensenbrenner) concluded the hearing by saying "it would behoove the DOJ to realize that the statute needs updating." Andres said that the DOJ is "more than willing to work with Congress" to which Sensenbrenner said "see you later we will be drafting a bill."

Sensenbrenner then commented that if Andres were the general counsel of a corporation advising the CEO and everyone else, he would likely be advising the company in the "most narrow way" and "exercising the greatest amount of caution." "As a result," Sensenbrenner stated, legitimate business activity is not pursued and U.S. companies are put in a significant disadvantage compared to foreign companies.

Sensenbrenner then told Andres - "get the message sir and tell that to the AG."

House Hearing - Pregame

2011-06-14T04:51:00.007-04:00

Yesterday, Global Financial Integrity ("GFI") and The Task Force on Financial Integrity and Economic Development issued identical press releases (here and here) regarding today's House Judiciary subcommittee hearing on the FCPA (see here).

The releases, titled "Foreign Corrupt Practices Act Under Attack" portray today's hearing as a U.S. Chamber of Commerce sponsored event and states as follows. "Among other things, the hearing will specifically consider amendments proposed to the act by the U.S. Chamber Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce, which FCPA-proponents charge will significantly weaken the anti-corruption legislation and undermine efforts to tackle corruption and illicit financial practices abroad. The Chamber’s proposed changes would seriously undermine one of the most important anti-corruption statues we have on the books. [...] This is a blatant attempt by the business lobby to limit accountability and reduce a company’s risk of prosecution for paying bribes. It is a real threat to global efforts to stamp out corruption and foster economic development.”

GFI legislative affairs director and legal affairs council Heather Lowe states as follows. “With the exception of [the DOJ witness - Greg Andres], the witness lineup represents commercial interests. There is no witness on the panel representing those who are working to fight corruption without a commercial interest or government policy driving their testimony. Members of Congress need to have an opportunity to hear those voices as well.”

Attached to the releases are two documents.

The first document is titled "Concerns About the U.S. Chamber Institute of Legal Reform’s Proposals for Amending the FCPA." (For a copy of the Chamber's reform proposals - see here).

The document addresses five topics: (i) limiting liability of a parent company for acts of its subsidiaries; (ii) defining "foreign official"; (iii) allowing companies with compliance programs to escape liability (compliance as an affirmative defense); (iv) limiting the liability of a successor company for the prior acts of a company that has merged into it or that it has acquired; and (v) adding a “willfulness” requirement for corporate criminal liability.

As to "foreign official," the document states as follows. "The U.S. Chamber is promoting the creation of a definition of “foreign official” so that companies have greater legal certainty. Greater certainty of what? Greater certainty of who they are permitted to bribe and who they are not permitted to bribe."

In all due respect, this is a naive statement.

As I noted in this article, because of the enforcement agencies' current interpretation of "foreign official," those subject to the FCPA are spending significant time and money investigating the ownership structure of foreign customers and potential customers for any trace of foreign government ownership or control. Such a costly investigation, often involving lawyers and other investigative firms, is not motivated by the company’s desire to make improper payments to the foreign customer or potential customer to obtain or retain business should the investigation reveal no foreign government ownership or control. Rather, the costly investigation is often motivated for the simple reason that the company wants to treat these foreign customers the same as it treats its other customers. That means hosting such customers at corporate events in which some fun may take place (e.g., golf) or inviting such customers to an industry trade show—events that often take place in tourist locations. Companies fear providing such “things of value” to a “foreign official” (under the enforcement agencies’ interpretation) even though the company is legitimately and legally providing the exact same thing to its non- “foreign official” customers or potential customers. It is highly questionable whether Congress foresaw company lawyers being involved in the simple decision of whether to invite a particular customer to the company’s golf outing or trade show.

As to a potential compliance defense, the document states as follows. "If a company is found to be in violation of the FCPA, then the existence of a company’s compliance program must not have prevented the acts of bribery. So why should the existence of their compliance program be a defense to the charge of bribery?"

Again, an unsophisticated statement.

For instance, the U.K. Bribery Act Guidance (here) states as follows. "The objective of the Act is not to bring the full force of the criminal law to bear upon well run commercial organizations that experience an isolated incident of bribery on their behalf."

"[N]o bribery prevention regime will be capable of preventing bribery at all times."

"[A] commercial organization will have a full defense if it can show that despite a particular case of bribery, it nevertheless had adequate procedures in place to prevent persons associated with it from bribing."

Similarly, in a 1981 FCPA speech (to be profiled in a future post) the SEC Chairman noted as follows. “The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”

Elsewhere in the speech, the SEC Chairman stated as follows. "If a violation was committed by a low level employee, without the knowledge of top management, with an adequate system of internal control, and with appropriate corrective action taken by the issuer, we do not believe that any action against the company would be called for.”

This speech was given during the same general time frame when Congress was last seriously considering substantial FCPA reform in the 1980's. Numerous FCPA reform bills included a specific defense which stated a company would not be held vicariously liable for a violation of the FCPA’s anti-bribery provisions by its employees or agents, who were not an officer or director, if the company established procedures reasonably designed to prevent and detect FCPA violations by employees and agents. An FCPA reform bill containing such a provision did pass the U.S. House.

In my forthcoming scholarship, "Revisiting an FCPA Compliance Defense" (to be presented at the Wisconsin Law Review symposium - see here), I argue that amending the FCPA to include a compliance defense (a defense found in the “FCPA-like” laws of other nations) will best incentivize corporate FCPA compliance and not put a company at risk of FCPA scrutiny, costly FCPA internal investigations, and the growing collateral consequences of FCPA inquiries should a non-executive employee engage in conduct contrary to a company’s pre-existing FCPA compliance policies and procedures and compliance culture.

The second document attached to the GFI releases is titled "The Foreign Corrupt Practices Act in Context." The 2 page document ends with the following in red caps. "WE HAVE SHOWN THE WORLD THAT THE U.S. IS SERIOUS ABOUT COMBATING BRIBERY, AND THE WORLD IS FOLLOWING OUR LEAD. WEAKENING THE FCPA NOW WILL SEND A MESSAGE TO THE WORLD THAT THE U.S. IS SOFT ON CORRUPTION AND OUR COMPANIES ARE DEEP POCKETS FOR BRIBE-SEEKERS. THE U.S. SHOULD FOCUS ON ENCOURAGING WORLDWIDE ENFORCEMENT, NOT CRIPPLING A STATUTE THAT HAS BEEN THE MODEL FOR INTERNATIONAL ANTI-BRIBERY LEGISLATION."

Enjoy today's hearing.

Assessing the Power of the SEC to Impose Monetary Penalties In Administrative Proceedings Charging Violations of the FCPA

2011-06-13T05:22:00.009-04:00

Foley & Lardner attorneys Kenneth Winer (here) and Manda Sertich (here) contribute this guest post regarding a little-noticed provision in Dodd-Frank and its impact on SEC FCPA enforcement.

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Assessing the Power of the SEC to Impose Monetary Penalties In Administrative Proceedings Charging Violations of the FCPA

The SEC recently imposed a civil penalty in an administrative proceeding involving payments to foreign government officials. In In the Matter of Ball Corporation, Exchange Act Rel. No. 64123, AAER No. 3255 (Mar. 24, 2011)(here), the SEC charged that Ball Corporation’s Argentinean subsidiary offered and paid at least ten bribes, totaling at least $106,749, to Argentinean government employees for favorable import/export treatment and mischaracterized the nature of the payments in the subsidiary’s books and records. In settling its administrative enforcement action against Ball Corporation on March 24 of this year, the SEC imposed a civil penalty of $300,000.00. [In a number of administrative proceedings, the Commission has ordered disgorgement and pre-judgment interest in addition to cease-and-desist orders in FCPA administrative proceedings, without additional civil penalties. See In the Matter of Avery Dennison Corporation, Exchange Act Rel. No. 60393, AAER No. 3021 at 6 (July 28, 2009); In the Matter of Westinghouse Air Brake Technologies Corp., Exchange Act Rel. No. 57333, AAER No. 2785 at 7 (Feb. 14, 2008), In the Matter of Electronic Data Systems Corp., Exchange Act Rel. No. 56519, AAER No. 2725 at 9 (Sept. 25, 2007)].

Until 2004, the SEC’s authority to impose monetary penalties in administrative proceedings was limited to regulated entities (brokerage firms, investment advisers and investment companies) and to persons who were associated with regulated entities. In 2010, as part of the Dodd-Frank Wall Street Reform Act, Congress granted the SEC broad authority to impose civil monetary penalties in administrative proceedings. Section 929P of Dodd-Frank amended the Securities Exchange Act to permit the imposition of civil monetary penalties in administrative proceedings in which the SEC staff seeks the issuance of a cease-and-desist order. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

Law360 recently published an article analyzing the implications of Congress’s recent grant to the SEC of a broad power to impose civil monetary penalties in administrative proceedings stemming from the Dodd- Frank Act. Kenneth Winer & Laura Kwaterski, Assessing SEC Power in Administrative Proceedings (SecuritiesLaw360 Mar. 24, 2011). In this post, we discuss the implications this power poses for FCPA cases.

While the SEC’s interest in imposing monetary penalties in administrative proceedings is obvious given the rapid and inexpensive nature of such proceedings compared to federal district court trials, administrative proceedings risk incorrect factual and legal decisions against respondents because respondents do not have the same safeguards present in SEC administrative proceedings as in federal court. The three bases for this concern outlined in the Law360 article also apply in the FCPA context: (1) the limited discovery available to a respondent in an administrative proceeding; (2) the expedited pace of the administrative proceeding; and (3) the fact that the initial decision of the administrative law judge who presided at the hearing is subject to de novo review by the Commission.

With respect to the first basis for concern, in SEC administrative proceedings, the parties – except in rare circumstances – cannot depose witnesses. The inability to depose witnesses has only a limited adverse impact on the ability of the SEC to obtain incriminating evidence. The Staff can obtain incriminating evidence by using its investigative powers and the information- sharing arrangements that the SEC and DOJ have with law enforcement agencies across the globe. Although a respondent, like the SEC, can ask a witness to submit voluntarily to an interview, the typical respondent has far less leverage than the SEC to persuade a witness to agree voluntarily to an interview, especially given the SEC’s subpoena power and its ability to intimidate witnesses with its enforcement powers.

This concern may be particularly troublesome in FCPA cases, where potential key witnesses are often located in other countries, with little or no incentive to appear in an SEC administrative proceeding. Because the rules of evidence do not govern administrative proceedings, the SEC will be able to introduce statements of witnesses whom the respondent has had no opportunity to cross examine.

Next, as discussed in the Law360 article, in 2003 the Commission adopted a rule mandating that administrative proceedings must be completed at the ALJ level within 120 days, 210 days or 300 days. Additionally, SEC rules provide that the ALJs and the Commission shall “strongly disfavor” requests for extensions unless the moving party makes a strong showing that denial of the request would substantially prejudice his or her case. See 17 C.F.R. § 201.161(b)(1). At least as to individuals, the requirement of expedited administrative proceedings is also particularly worrisome when considered in the framework of the normal course of FCPA cases. The record developed in FCPA investigations often is extensive. It often will be unreasonable to expect an individual to prepare an appropriate defense in less than four months, especially when witnesses are likely to be scattered across the globe.

A third basis for concern identified in the Law360 article, de novo review by a commission, applies fully to the FCPA context. Both respondents and the public often have trouble understanding how it is fair and appropriate for the very commission that authorizes the institution of an enforcement proceeding to be able to overrule the factual findings of the ALJ who presided at the hearing, and this is no different with respect to FCPA enforcement proceedings.

The broad grant of the power to impose monetary penalties in administrative proceedings is especially significant in the context of the FCPA for at least two reasons. First, the SEC’s enforcement of the FCPA has been characterized by aggressive interpretations of the statute that have not been tested in the courts. In a civil action, a defendant could test such interpretations through motion practice. In administrative proceedings, however, a respondent’s ability to file motions testing aggressive legal theories is very limited. See, e.g., In the Matter of John P. Flannery and James D. Hopkins, Order on Motions for Leave to File Motions for Summary Disposition, Administrative Proceeding File No. 3-14081 (Jan. 10, 2001). In addition, a respondent will only be able to obtain judicial review of the SEC’s aggressive interpretation by appealing to the Court of Appeals the final decision that the Commission issues upon review of the initial decision of the administrative law judge who presided over the administrative proceeding.

Second, the SEC has sought substantial monetary penalties in settling enforcement actions involving the FCPA. For example, in 2007 the SEC filed a settled enforcement action charging Baker Hughes Incorporated with violations of the FCPA. Baker Hughes agreed to pay a civil penalty of $10 million for violating a 2001 Commission cease-and-desist Order prohibiting violations of the books and records and internal controls provisions of the FCPA, in addition to a payment of $23 million in disgorgement and prejudgment interest. SEC v. Baker Hughes Incorporated and Roy Fearnley, Civil Action No. H-07-1408, United States District Court for the Southern District of Texas (Houston Division) (EW) (Filed April 26, 2007). In 2010, the SEC filed a settled civil action against ABB, Ltd., in which it charged the company with bribing Mexican government officials to secure business with state-owned utilities companies and Iraqi government officials to obtain contracts under the U.N. Oil-for-Food Program. Pursuant to this settlement, ABB Ltd. was ordered to pay $16.51 million in civil penalties, in addition to nearly $23 million in disgorgement and prejudgment interest.

Individuals have also paid substantial civil penalties in settling such enforcement actions. Most recently, in January of this year, the SEC settled an enforcement action with Innospec’s former CEO, Paul Jennings, based on allegations that Jennings played a “key role” in Innospec’s bribery activities in Iraq and Indonesia. The executive was ordered to pay a $100,000 civil penalty, in addition to disgorging $116,092 and paying prejudgment interest in the amount of $12,945. SEC v. Paul W. Jennings, 1:11-CV-00144 (D.D.C. filed Jan. 24, 2011). In 2006, the Senior Vice President of Sales and marketing for Invision was ordered to pay a $65,000 civil penalty based on allegations that he aided and abetted InVision’s failure to establish adequate internal controls to prevent the company from violating the FCPA and that he indirectly caused the falsification of the company’s books and records. SEC v. David M. Pillor, Case No. C-06-4906-WHA (N.D. Cal. filed Aug. 15, 2006). Also in 2006, three senior employees of ABB Ltd. were ordered to pay civil monetary penalties ranging from $40,000 to $50,000 for violating the anti-bribery provisions of the FCPA and the books and records and internal accounting control provisions of Exchange Act Section. (One employee was also ordered to pay $64, 675 in disgorgement and prejudgment interest.) SEC v. John Samson, John G. A. Munro, Ian N. Campbell, and John H. Whelan, Civil Action No. 06 CV 01217(D.D.C. filed July 5, 2006).

In addition to increasing the risk that innocent parties will mistakenly be found to have violated the FCPA, the broad power Congress granted the SEC to impose civil monetary penalties in administrative proceeding adds additional pressure on individuals and entities to settle with the SEC even though they have not violated the law. Before seeking larger civil penalties in the FCPA context, the Commission therefore should consider whether the efficiency it gains by bringing enforcement actions administratively warrants the risk that the innocent will wrongly be found liable and the credibility that the Commission risks losing by aggressively exercising this broad grant of power.

Friday Roundup

2011-06-10T05:38:00.012-04:00

Another FCPA hearing on Capital Hill next week, news regarding Goldmann Sachs, questioning the use of NPAs and DPAs, an informative read regarding India, and something for your "foreign official" file.

Its all here in the Friday roundup.

House Hearing

Next Tuesday, June 14th, the Subcommittee on Crime, Terrorism and Homeland Security of the House Judiciary Committee will hold a hearing titled "Foreign Corrupt Practices Act." According to this report by Christopher Matthews of Main Justice the hearing is expected to focus on the following issues: successor liability, a potential compliance defense, "foreign official," and corporate mens rea issues.

The witness list for the hearing is as follows (see here).

Hon. Michael Mukasey (Former Attorney General, Partner, Debevoise & Plimpton LLP - see here); Mr. Greg Andres (Deputy Assistant Attorney General, Criminal Division, U.S. Department of Justice); Mr. George Terwilliger (Partner, White & Case LLP - see here); and Ms. Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers - see here).

Predictably, some are blasting the very existence of the hearing. For instance, Political Correction, a project of Media Matters Action Network (a self-described progressive research and information center dedicated to analyzing and correcting conservative misinformation in the U.S. media), describes the hearing here as "Rep. Lamar Smith's Fight to Make Bribery Easier For Big Business."

The House hearing follows a November 30th Senate hearing titled "Examining Enforcement of the Foreign Corrupt Practices Act." See here for a prior post.

This post, prior to the 2010 hearing provided some guiding words, and if those were not enough, how about this statement from William Brock, U.S. Trade Representative, on April 18, 1983 during a hearing before the House Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs.

"Mr. Chairman, no one minimizes the complexity of the issue before you today. Just because the Foreign Corrupt Practices Act spotlights a sensitive subject, some people wish to turn a ‘blind eye’ to its shortcomings rather than risk being accused of being ‘soft on bribery.’ That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. Such inaction will no more eliminate the need for FCPA reforms today than it can eliminate the criticism of the Act brought over the past several years. After five and on half years experience with this law, after legitimate problems have been identified and examined, we have a responsibility to respond. Is there any U.S. law that ought to be above such review and clarification – especially one as complex as the FCPA.”

Well said.

Goldman Inquiry

Yesterday, the Wall Street Journal reported - "Eyes on Goldman-Libya Dealings" - that the SEC is "examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya's sovereign wealth fund." The inquiry appears to be focused on a "$50 million fee Goldman initially agreed to pay [but one that was never paid to] the Libyan sovereign-wealth fund as part of a proposal ... to help the fund recoup losses."

A Goldman spokesman is quoted as follows. "We are confident that nothing we did or proposed was or could have been a breach of any rule or regulation. We retained outside counsel, as is our normal practice for any transaction to ensure that we were compliant with all applicable rules."

Can the FCPA be implicated by payments never made?

Yes. The anti-bribery provisions prohibit "an offer, payment, promise to pay, or authorization of payment ...".

What about payments to foreign governments?

No. The anti-bribery provisions only apply to offers, payments, promises of payment, or authorizations of payments to "foreign officials."

However, according to the WSJ article the inquiry appears to focus on whether the contemplated payment would have been passed on to an outside adviser firm "run at the time by the son-in-law of the head of Libya's state-owned oil company."

For more on the Goldman inquiry, see here from Ashby Jones (WSJ Law Blog) and here from Samuel Rubenfeld (WSJ Corruption Currents).

NPAs / DPAs

Non-prosecution and deferred prosecution agreements ought to be abolished. I've argued here and in other places that these agreements have traded one negative externality of white collar prosecution (the much over-hyped Arthur Anderson effect) for a host of others, including the alarming lack of any meaningful judicial scrutiny to ensure that NPAs and DPAs are truly based on facts and appropriate legal theories to support the charges “alleged.”

Mark Mendelsohn, the former head of the DOJ's FCPA unit during its era of resurgence, stated in a September 2010 interview with Corporate Crime Reporter, that a “danger” with NPAs and DPAs “is that it is tempting” for the DOJ “to seek to resolve cases through DPAs or NPAs that don‟t actually constitute violations of the law.”

Asked directly – if the DOJ “did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year,” Mendelsohn stated as follows: “if the Department only had the option of bringing a criminal case or declining to bring a case, you would certainly bring fewer cases.”

Add W. Neil Eggleston, a former DOJ enforcement attorney currently a partner at Debevoise (here), to the growing list of former DOJ enforcement attorneys critical of these alternative resolution vehicles.

In this recent interview with Corporate Crime Reporter, Eggleston stated as follows. “I worry that [NPAs and DPAs] will become a substitute for a prosecutor deciding – this is not an appropriate case to bring – there is no reason to subject this corporation to corporate criminal liability. In the old days, they would have dropped the case. Now, they have the back up of seeking a deferred or non prosecution agreement, when in fact the case should not have been pursued at all. That’s what I’m worried about – an easy out.”

Well said.

India

If India is a country of concern or focus of yours, you will want to check out the most recent quarterly newsletter of the India Committee of the ABA Section of International Law. (See here).

Guest editor James Parkinson of BuckleySandler (here) provides the following articles, among others, in the newsletter: one devoted to the FCPA risks of doing business in India; another devoted to India's demand-side statute - the Prevention of Corruption Act; another focused on reducing corruption risks in India through compliance programs; and another calling for India to join the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

"Foreign Official"

And finally, because your "foreign official" file would be incomplete without it, here is a transcript of the May 9th oral argument in the Carson "foreign official" challenge. See here and here for previous posts.

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A good weekend to all.

Significant dd-3 Development in Africa Sting Case

2011-06-09T00:08:00.006-04:00

When listing reasons why FCPA enforcement has increased, the 78dd-3 prong of the FCPA's anti-bribery provisions should be on the list.

The FCPA, since its inception in 1977, always applied to "issuers" and "domestic concerns", but the 1998 amendments added a third prong providing jurisdiction as to "persons other than issuers or domestic concerns."

As to this class of persons, the FCPA provides the following jurisdictional requirement: "while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value ...". (emphasis added).

Several recent FCPA enforcement actions have been based on the dd-3 prong of the statute including the actions against the Daimler subsidiaries (see here, here, and here); SSI International Far East (see here); and others.

In the Daimler actions, the jurisdictional statements in the charging documents are as follows. "wire transfers ... sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Russian government officials;" "payments to third party agents, including shell companies established in the United States knowing that such payments would be passed on in whole or in part to Russian government officials;" " "wire transfers ... sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Chinese government officials;" and "enter[ing] into sham consulting contracts with shell companies incorporated in Delaware and Wyoming for the purpose of making improper payments to Croatian government officials."

In SSI, the jurisdictional statement in the charging document is as follows. SSI " transmitted requests to the United States for approval and wire transfer of funds for payment to managers of Schnitzer Steel's customers in South Korea and China in connection with sales of scrap metal to those customers. Accordingly, defendant SSI acted within the territorial jurisdiction of the United States."

In my recent Q&A with Homer Moyer (here) he stated as follow: "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."

Yet, as with most things FCPA related, these aggressive jurisdictional theories have generally escaped judicial scrutiny.

Until now.

In what is believed to be the first judicial ruling on the jurisdictional prong of the dd-3 prong of the FCPA, earlier this week, Judge Richard Leon (presiding judge in the Africa Sting cases) granted defendant Pankesh Patel's Rule 29 acquittal motion at the end of the DOJ's as to an FCPA substantive charge premised on his sending a DHL package - containing a purchase agreement in furtherance of the alleged corrupt scheme - from the U.K. to the U.S.

Pankesh Patel is among the first group of four defendants currently on trial and he is described in the indictment as follows. "[A] citizen of the United Kingdom and [...] a “person” other than an issuer or a domestic concern as that term was defined in the FCPA. 15 U.S.C. § 78dd-3(f)(1). Patel was the Managing Director of Company A, a United Kingdom company that acted as a sales agent for companies in the law enforcement and military products industries. As a company that maintained its place of business in the United Kingdom, Company A was a “person” other than an issuer or domestic concern as that term was defined in the FCPA. 15 U.S.C. § 78dd-3(f)(1)."

Among the charges against Patel was Count 3 - that Patel violated the FCPA's anti-bribery provisions by sending, on October 13, 2009, a DHL package from the U.K. to Washington D.C. "containing one original copy of the purchase agreements for the corrupt Phase Two deal."

At the close of the DOJ's case earlier this week, Patel's attorney, Eric Bruce (Kobre & Kim LLP - see here) moved, as did the other defendants as to other charges, pursuant to Rule 29 for a judgement of acquittal.

Judge Leon did not request briefing as to the Rule 29 motions and his decision and reasoning was not reduced to writing - thus what follows are quotes from the hearing transcript.

As to Count 3, Bruce stated that the DOJ "charged Mr. Patel in Count 3 with something that cannot be a crime under U.S. law. And here's what I mean by that. As we saw in the FCPA statute with which he's charged, 78dd-3, because he's a U.K. citizen, operating a U.K. company, he's not a domestic concern under the statute, he can only be liable under the FCPA statute for conduct "while in the territory of the United States." And that's required by statute. That's their sort of jurisdictional hook on him. And what they've done in Count 3, if you look at the language, if you go back to the indictment, Your Honor --."

At this point, the following exchange occurred.

"Judge Leon: Sending it DHL?

Bruce: Yeah from London. So in Count 3 it says on the face of the indictment, DHL from the United Kingdom to Washington, D.C., containing one original copy of the purchase agreement for the corrupt phase 2 deal. So literally they've charged him with being in London and dropping a DHL package in the mail as a substantive FCPA violation, while the statute very clearly requires that he can only be liable for something while in the territory of the United States."

Joey Lipton, on behalf of the DOJ, then stated as follow. "And under the FCPA, as long as he's taking an act as someone who's not a domestic concern, as Mr. Patel is a U.K. citizen, he falls under section 78dd-3, which Mr. Bruce said. He actually has to do less than a U.S. citizen really, because a U.S. citizen has to make use of the mails or interstate commerce. And Mr. Patel just has to take an act, any act, while he's in the United States. Doesn't have to be an illegal act, doesn't have to be anything related to the deal going forward. He has to take any act in the United States, which he clearly does. First of all, he flies over from the U.K. to the United States, which we established through his travel records. And then he meets with the fictitious official and receives a purchase agreement. He then later takes that purchase agreement and sends it back. So the deal's not done at that point, contrary to what Mr. Bruce said. But he's already taken the act, he's here in the United States, he sends it. With regard to Count 3 -- and you don't have to prove all of the elements of the offense while he's in the United States. Doesn't have to be counts or elements 1 through 6 of the FCPA while he actually travels here and does all that stuff. He just has to take an act while he's in the United States. He did take an act. In Count 3 he then sends back the purchase agreement that he gets from the official, from Mahmadou, and he's able -- and that falls under the FCPA because he's already taken an act here when he's done that. So that independently can be its own act. It doesn't have to be that each substantive count is an act while he's in the United States, as long as he takes an act while he's here. So his burden actually as a U.K. citizen is even less than what the other defendants have to do in terms of using the mail or traveling and the like."

The following exchange then occurred between Lipton and Judge Leon.

"Judge Leon: Help me understand why it doesn't have to be an act while in the territory of the United States for Count 3, whereas Count 2 [a substantive FCPA offense against Patel based on his attendance at a Washington D.C. meeting to discuss the allegedly corrupt deal], sounds like you admit that that's the case in Count 2. In Count 3, I think your rationale is since he's already taken one act within the United States, the subsequent act of mailing doesn't have to be within the United States, right?

Lipton: Correct, Judge.

Judge Leon: All right. So what's the rationale for that? Why doesn't the second act have to be within the United States too? I'm not sure I understand that.

Lipton: Well, as long as he takes an act here, then we're allowed to charge him with other acts, like a mailing or a travel that goes to the FCPA substantive offense. So it doesn't have to be that each individual act is the one act while he's in the United States that he's taking. As long as he's taking one act, he can have multiple substantive violations for other acts he's taking as long as --

Judge Leon: Outside the United States?

Lipton: Outside the United States. Correct, Judge.

Judge Leon: Has the Supreme Court said that?

Lipton: Judge, no.

Judge Leon: Has the D.C. Circuit said that?

Lipton: No.

Judge Leon: How about the 2nd Circuit, where you used to prosecute?

Lipton: Judge, there's not a lot of case law on the FCPA, as Your Honor I think is well aware.

Judge Leon: So is this a novel interpretation you want me to take?

Lipton: I don't know if it's a novel interpretation. I think it's an interpretation that's grounded in the law that's out there.

Judge Leon: Is it grounded in the legislative record?

Lipton: We can go back and we can get Your Honor more particulars about the legislative history if Your Honor wants that.

Judge Leon: I would think the more cautious, conservative interpretation would be that each act has to be while in the territory of the United States, wouldn't it?

Lipton: Well, Judge, if you read the statute, the way that I understand it and the way it's been interpreted is that you just have to take an act. And if he's traveling or if he's mailing something from outside that comes into the United States, that that on its own would be sufficient. And I also believe Mr. Patel's charged with an aiding and abetting theory as well, so, I haven't fleshed that out, but there may be an argument to be made that even less has to be done on an aiding and abetting theory. Also, there's a Pinkerton theory, which if he knows as a conspirator that acts are being taken by his codefendants or himself in furtherance of the conspiracy, then anything that's reasonably foreseeable can also be an act, a substantive count. But, Your Honor, I can go back and we can get more details and particulars. Frankly, I don't have the case law or the legislative history to the extent that that's going to be helpful. That goes to that point."

In reply, Bruce stated as follows. "I heard Mr. Lipton say that Mr. Patel only has to do an act in the United States, it doesn't even have to be illegal. If that's the government's position, I'm happy to take that to the D.C. Circuit if there's a conviction on these points. That is absurd, with all due respect to Mr. Lipton. The statute plainly requires, Your Honor, that while in the territory of the United States he has to corruptly make use of the mails or any means or instrumentality of interstate commerce or do any act in furtherance of an offer, payment, promise to pay or authorization. It's clear as day."

After a recess, Judge Leon dismissed Count 3 against Patel.

Judge Leon also dismissed Count 8 (a substantive FCPA violation charge) as to defendant Lee Allen Tolleson; and dismissed Count 10 (money laundering) as to all four defendants. In all other respects, Judge Leon denied the Rule 29 motion.

Judge Leon's ruling is a significant FCPA development as many FCPA charges (as demonstrated by the above cases) are based on similar "novel" jurisdictional theories under the dd-3 prong of the FCPA.

Branch Office Of The Prosecutor

2011-06-08T05:31:00.007-04:00

David Hilzenrath of the Washington Post recently profiled a dynamic that readers of this site know well – and that is “as the U.S. government steps up investigations of companies suspected of paying bribes overseas, law enforcement officials are leaving much of the detective work to the very corporations under suspicion.” See here for the article.

The article touches upon themes also addressed in Nathan Vardi’s “Bribery Racket” article in Forbes (see here) as Hilzenrath notes that “for the people who conduct the internal investigations – many of them former Justice and SEC employees – it is big business.” Hilzenrath notes - “The corporations, sometimes at the request of the government, hire teams of lawyers and accountants to interview employees, gather electronic records and sift through documents. The government reviews the results and decides whether further legwork is warranted – and ultimately, whether to pursue charges.”

The recent Washington Post article motivated me to read a law review article that has long been on my reading stack and that is “Branch Office of the Prosecutor: The New Role of the Corporation in Business Crime Prosecutions.” (See here).

Written by Harry First, the Charles Denison Professor of Law at New York University School of Law (see here) and published by the North Carolina Law Review, the “article describes the evolution of the public corporation's role in the criminal justice process - from potential defendant to "branch office of the prosecutor," partnering with the government in investigating business crime - and assesses the impact of this evolution on criminal justice policy."

Chamber of Commerce Blasts FCPA-Related Civil Litigation

2011-06-07T05:33:00.013-04:00

A prior post (here) discussed the rise in claims and so-called investigations by plaintiff firms representating investors as soon as FCPA scrutiny is disclosed or soon after FCPA enforcement actions are resolved.

When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted. However, these types of FCPA violations are rare – the more typical situation is where, because of respondeat superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.

I do not find myself in complete agreement with the U.S. Chamber as to all of its FCPA reform proposals (see here for those proposals), but I agree with the Chamber sponsored Congressional testimony last month on the issue of FCPA-related litigation.

*****

Last month John Beisner (a partner at Skadden - see here) testified on behalf of the U.S. Chamber Institute for Legal Reform before the Subcommittee on the Constitution of the Committee on the Judiciary United States House of Representatives. The hearing, held on May 24th was titled "Can We Sue Our Way to Prosperity?: Litigation's Effect on America's Global Competitiveness."

In his prepared statement (here) Beisner "highlighted four specific areas in which we are still seeing substantial litigation abuse" including "private lawsuits that piggyback on government investigations."

As to this issue, the bulk of Beisner's remarks focused on the FCPA and he stated as follows.

"More recently, the piggyback-litigation phenomenon has been most noticeable with respect to Foreign Corrupt Practices Act (“FCPA”) enforcement proceedings brought by the Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). These piggyback cases tend to fall into two categories: (1) shareholder class actions alleging that a company did not adequately disclose its FCPA exposure; and (2) derivative actions against officers and directors alleging that they failed to prevent a company from bribing foreign officials."

"Follow-on FCPA cases target companies at a difficult time. Companies going through DOJ or SEC FCPA enforcement proceedings often spend tens of millions of dollars, if not more, on attorneys and forensic accountants – on top of potentially multimillion-dollar criminal and civil fines and disgorgement – in order to determine whether their employees (often at a relatively low level) acted improperly. Enforcement proceedings also interrupt normal business operations, as companies make employees and documents available to lawyers, and take action against truly culpable employees. The investigations themselves are disclosable events and are almost always “bad news,” resulting in negative publicity. Shareholder suits against companies involved in enforcement proceedings threaten to further delay the companies’ ability to return to normal operations and to further damage shareholder value. These suits serve no purpose but to take money from current shareholders and transfer it to former (or other) shareholders – with a hefty slice cut out for the plaintiffs’ lawyers."

"Derivative shareholder suits are equally problematic in this arena. These suits tend to target senior officers and directors, not the employees who actually paid any bribes or condoned others paying them. The reason is simple enough: directors and officers are backed by the deep pockets of the company’s D&O insurer; culpable employees have little money to pay in private civil damages, especially if they themselves have been the target of an individual enforcement proceeding."

"Often, lawyers filing shareholder class actions against companies under investigation or derivative actions against directors and officers of a company under investigation do not even wait until the government investigation is complete. Such tactics are particularly egregious, because they necessarily involve the company and senior management in defending against a private civil suit – and in making strategic judgments regarding such defense – when their focus should be on resolving the government’s investigation. Both the DOJ and the SEC have developed leniency policies for companies that actively assist in government investigations. These policies acknowledge that U.S. government resources are limited, and that cooperating companies can materially assist the government in enforcing the law and protecting shareholders. As part of cooperating with the government, companies in FCPA investigations frequently investigate their own potential wrongdoing and self-report misconduct to the government. When companies and their senior officers and directors face personal civil liability in addition to any exposure to the DOJ and SEC, their judgments regarding what issues to investigate and what results to report to the DOJ and SEC necessarily will be affected, possibly to the detriment of the integrity of the government’s investigation."

*****

For additional reading on the rise in FCPA related civil litigation (see here from Jeffrey Johnston and Erika Tristan of Vinson & Elkins and here from Sean Griffin of Steptoe & Johnson).

What Others Are Saying About The SEC's First DPA

2011-06-06T05:30:00.033-04:00

Non-prosecution and deferred prosecution agreements have been a staple of DOJ FCPA enforcement for years. 2010 saw 15 such resolution vehicles (4 NPAs) and (11 DPAs) (see here for the prior post) and these resolution vehicles are significantly different than a corporate entity being criminally charged or pleading guilty.

Last month, the SEC used a DPA for the first time in resolving the Tenaris FCPA enforcement action. See here for the prior post.

This post collects what others are saying about the SEC's first DPA, including whether resolution via such a vehicle is all that different from traditional SEC resolution procedures.

In this publication, Shearman & Sterling noted as follows. "Prior to this settlement, the SEC had employed only two enforcement options: civil complaints seeking injunctive relief or administrative cease-and-desist orders. In both cases, even though the company could settle without admitting or denying the SEC’s allegations, the relevant adjudicator (either a judge or the Commission) necessarily made a formal finding that the company had indeed violated the law and that the injunction or order was necessary to prevent it from doing so again." Shearman notes that "in the criminal context, DPAs and non-prosecution agreements, their slightly less formal cousins which do not involve filed charges, were first used in FCPA cases beginning in 2004" and further notes the benefits of a DPA compared to criminal charges. However, the Shearman publication states as follows. "It is not clear whether the benefits afforded by a civil DPA in a SEC enforcement action confer similar benefits. With due respect to the SEC, a civil enforcement adjudication is a much less fearsome matter than a criminal conviction. Further, although the issuance of an injunction or an order undoubtedly represents some finding of wrongdoing, since they are settled without the defendant company admitting or denying the relevant facts, they do not bar the company from contesting such facts in non-SEC proceedings. Further, they do not have the automatic collateral consequences of a criminal conviction. Thus, one must question what benefits a SEC DPA really affords." As to the Tenaris DPA, Shearman states as follows. "Although the company was not required to pay a civil fine, the SEC has similarly forgone fines in some previous traditional settlements in the past, requiring the defendant company only to disgorge its illicit gains. Moreover, by tolling the statute of limitations, the company potentially extends its exposure and subjects itself to potential civil enforcement for a greater period of time than if it had settled the SEC matter in the traditional way. Finally, it is not clear that the company received any financial benefit from entering into a DPA as opposed to the usual consent judgment or administrative settlement. [...] [T]he SEC appears to have exacted the full amount of disgorgement and interest in this matter." The Shearman publication also contains an interesting discussion about the "concealed penalty" in the Tenaris DPA and states as follows. "The Tenaris DPA also reflects a disturbing development relating to the financial penalty, which may not be restricted to DPAs. Specifically, the SEC’s DPA with Tenaris provides that the company must “refrain from seeking or accepting a US federal or state tax credit or deduction for any monies paid pursuant to this Agreement.” Since the only monies paid related to disgorgement and prejudgment interest, this effectively precludes the company from recouping any taxes it might have paid on the profits it now has to disgorge, resulting in a hidden additional penalty." Finally, Shearman touches upon an issue it has frequently raised in such FCPA alerts and that is the expansive jurisdictional theories frequently used by U.S. enforcement authorities to prosecute non-U.S. companies for FCPA offenses. As to Tenaris, the Shearman publication states as follows. "The Tenaris matter demonstrates the U.S. government’s continued aggressive approach to expanding the reach of the FCPA, no matter how attenuated or de minimis a non-U.S. company’s contact with the U.S. may be."

In this publication, Gibson Dunn observes as follows. "One question raised by this case is where the SEC draws the line between use of a DPA and an NPA. Based on comments by the Commission staff in announcing the DPA, Tenaris was a DPA candidate because of its immediate disclosure and exceptional cooperation. However, it appears not to have been an NPA candidate because of the alleged underlying violation." Gibson Dunn asks - "the key question now is how a defendant benefits from receiving an NPA or DPA from the SEC over a traditional settled enforcement action" and states as follows. "Turning to a DPA, the defendant agrees to what appear to be remedies very similar to those historically obtained by the SEC in a settled enforcement action, but potential defendants need to consider the risks and benefits of a DPA more carefully. Optically, for a company that does not go on to violate the agreement, a DPA can be favorably described as the SEC's decision not to take an enforcement action against the defendant. This distinction is meaningful for a defendant's public image and reputation. [...] A second potential advantage of a DPA is avoidance of the collateral consequences. Some collateral consequences, such as disclosure obligations or disqualifications from participation in the securities industry, arise from the entry of an injunction, which a DPA avoids." Gibson Dunn further states as follows. "On the other hand, the DPA's model is untested. One reason parties settle SEC proceedings is to avoid the collateral estoppel effect of adverse findings of fact and conclusions of law in contested litigation which an adversary may use in a claim for damages or other relief. Generally, courts have concluded that they will not impose collateral estoppel based on factual recitations contained in settled SEC enforcement actions and that settled SEC complaints or administrative orders are not evidence. Because DPAs are new, there is less precedent on how courts will view similar factual recitations." Finally, Gibson Dunn observes that "companies considering a DPA may wish to consider confirming that their insurance carriers will not construe a DPA as an admission that could adversely affect coverage for a company and/or its directors and officers."

In this alert, Dewey & LeBoeuf stated as follows. "The Tenaris DPA is significant insofar as it shows the SEC’s willingness to cut a break to those companies that demonstrate “high levels of corporate accountability and cooperation” with SEC enforcement investigations. Tenaris was credited for “immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training.” These great lengths allowed it to obtain a more lenient sanction than it may have otherwise received. As companies under investigation by the SEC tend to go to such lengths in order to settle rather than litigate SEC cases, it is likely that we will see more DPAs from the SEC in the future. This is especially true with respect to SEC cases involving allegations of FCPA violations, which are routinely settled rather than litigated."

In this alert, Debevoise & Plimpton states as follows. "... [T]he nature and circumstances of the settlement call into question how beneficial the settlement overall, and particularly the SEC’s novel form of resolution, actually was for Tenaris. The company, even by the government’s account, did everything right after discovering potentially improper conduct: It immediately and voluntarily disclosed the conduct at issue, retained outside counsel to conduct a worldwide investigation, cooperated extensively and in “real time” with the SEC and DOJ, and implemented substantial remedial measures and compliance enhancements. Yet Tenaris still had to pay millions in disgorgement and fines, adopt wide-ranging compliance requirements (including certification by all directors and members of management regarding compliance with a revised code of conduct) on top of the extensive reforms and enhancements the company had already implemented, commit to notify the DOJ during the two-year term of the NPA of any conduct by any Tenaris employee that violates U.S. federal or state criminal law or any non-U.S. fraud or anticorruption law (or even any investigation of such conduct) that comes to the attention of the company’s senior management, and, perhaps most significantly, agree not to dispute detailed accounts of the company’s conduct that include express statements that the conduct was “illegal” and “improper.” For example, although the DPA includes a pro forma recitation that Tenaris was not “admitting or denying” the SEC’s allegations, Tenaris agreed not to dispute a statement of facts that describes the payments as “illegal payments to OAO officials” and identifies those OAO employees as “‘foreign officials’ within the meaning of [the FCPA].” The SEC’s resolution of the Tenaris investigation by means of a DPA reflects the adoption by the SEC of aggressive techniques and practices employed by the DOJ in criminal matters – a trend that may continue as the SEC increases the vigor of its FCPA enforcement efforts."

In this alert, Foley & Lardner noted as follows. "The agreement also does not contain an injunction or an order of a court, which reduces the risk of collateral actions (securities class actions, shareholder breach of fiduciary duty actions). Undoubtedly, Tenaris’s full disclosure and cooperation played a major role in SEC’s deciding to use a deferred prosecution agreement for the first time."

In this alert, Bryan Cave noted as follows. "It is telling that the SEC’s first use of a DPA occurred in an investigation involving alleged violations of the Foreign Corrupt Practices Act (“FCPA”). Such investigations, which typically require reviews of detailed financial records, e-mails and other documents in numerous jurisdictions, often in languages other than English, present substantial challenges to the SEC and other authorities. In these situations, what the SEC describes as “extraordinary cooperation” on the part of a corporation has particular value."

In this alert, Dechert stated as follows. "It is noteworthy that the SEC chose to offer a DPA to Tenaris but an NPA to Carter’s. The SEC has offered no public explanation why it used different cooperation tools, and in fact the instructions in the SEC manual for the use of the two types of agreements are similar. The SEC press releases for both use similar language to describe the cooperation from the respective companies. One explanation for this different treatment may lie in the seriousness with which the SEC views FCPA violations. While NPAs are typically reserved for those viewed by the charging agency as witnesses with little or no criminal exposure, DPAs are often accompanied by a formal charging document, are filed with a court, and generally include a rigorous set of corrective measures that the cooperating company must undertake in order for the prosecution to remain deferred. Thus, the DPA is likely to remain a favored agreement in the FCPA context, where there will invariably be additional measures for the corporate defendant to undertake in the area of compliance and/or monitoring. Moreover, there are potentially additional adverse consequences if the DPA is violated, so it is a more rigorous enforcement tool."

In this alert, Cahill Gordon & Reindel note as follows. "Significantly, the DPA does not require Tenaris to make an admission of wrongdoing, or admit to a statement of facts detailing the misconduct, as is common in agreements of this type in the criminal context. Such admissions can be used against a company by criminal authorities or by private plaintiffs, neither of whom are bound by the DPA."

Scarboro to Simpson Thatcher

2011-06-03T05:25:00.010-04:00

Earlier this week, law firm Simpon Thatcher announced (here) that Cheryl Scarboro, Chief of the SEC's FCPA Unit, will join the firm as a partner in its Government and Internal Investigations Practice.

The firm's release notes that "[a]s head of the SEC’s FCPA practice, Ms. Scarboro played a role in all of the SEC’s recent major FCPA cases and acted as the SEC liaison with the Department of Justice (DOJ) and regulators around the world."

Pete Ruegger, Chairman of the firm’s Executive Committee stated that Scarboro's "extensive experience in high-profile SEC investigations and enforcement actions, particularly involving the Foreign Corrupt Practices Act, will enhance our talented Government and Internal Investigations Practice Group" and Paul Curnin, Co-Head of the firm's Litigation Practice added as follows. "In recent years, the SEC and other regulatory bodies have increased their focus on identifying violations under the FCPA. Cheryl’s experience and insight developed over her 19 year tenure at the SEC will be extremely beneficial to our clients.”

Scarboro's departure is the latest in a clear trend of high-profile SEC or DOJ FCPA enforcement attorneys, who enforce this niche law in often aggressive and novel ways, depart for high-paying jobs in the private sector to provide FCPA defense and compliance services - a niche legal practice that has expanded in response to enforcement - as noted by Simpson's release. For other recent examples see here, here, and here.

So will say this is just how Washington works, others will say this is a pressing public policy issue deserving of attention. As explained in this piece, I fall into the latter camp and expressed my concerns (as noted in the article) when interviewed by the Government Accountability Office in March in connection with its Congressionally mandated study examining issues related to employees leaving the SEC to work for related private sector entities.

Dionne Searcey at the Wall Street Journal Law Blog (here) notes as follows. "When Scarboro joined the SEC 19 years ago the FCPA was barely a twinkle in enforcement authorities’ eyes. But in recent years amid an uptick in FCPA investigations as well as a huge increase in fines for offenses, Scarboro has had a hand in every major FCPA investigation the agency carried out and has worked closely with the Justice Department’s FCPA team."

Samuel Rubenfeld at the Wall Street Journal Corruption Currents blog (here) notes as follows. "Scarboro is the latest SEC official to leave the enforcement world for private practice, marking a practice known as the “revolving door” that has received harsh criticism from activists and others."

Joshua Gallu at Bloomberg notes (here) that "under Scarboro’s watch, the SEC focused corruption probes to look across industries and regions it considered more prone to bribery, instead of targeting individual firms."

Luke Balleny at Trustlaw (a Thompson Reuters on-line publication) recently let me play U.S. Attorney General in a Q&A (here) and asked me how I would change FCPA enforcement. One suggestion I had was to require all FCPA Unit enforcement attorneys to sign a pledge whereby the enforcement attorney agrees, post-DOJ employment, not to provide FCPA defense or compliance services for a five-year time period - a suggestion I would also extend to SEC FCPA enforcement attorneys.

Survey Says ...

2011-06-02T05:25:00.012-04:00

KPMG Forensic recently released (here) its 2011 "Global Anti-Bribery and Corruption Survey." KPMG "surveyed 214 executives in the U.S. and U.K. to identify their most vexing anti-bribery and corruption ("AB&C") compliance challenges and to understand how companies are preventing, detecting and responding to AB&C risk." In summary form, the KPMG survey found that "despite a greater awareness of the business and legal imperatives for well-developed AB&C compliance programs among survey respondents, many compliance programs lack sufficient depth and breadth to effectively mitigate AB&C risk around the world."

According to the survey, "the three most significant AB&C compliance challenges cited by both U.S. and U.K. respondents are auditing third parties for compliance, difficulty in performing effective due diligence on foreign agents/third parties, and variations in country requirements and local laws on issues such as data privacy and facilitating payments."

Some survey results that caught my eye.

Nearly 60% of survey respondents said it was "not at all challenging" to "continue to run business while managing investigations."

Even though third-party (agent, distributor, joint venture partner, etc) risk ranked high in the survey results, only approximately 60% of respondents actually distribute AB&C policies and procedures to third parties and 60% of respondents said that most third party agents are not required to take AB&C training (in 2008 the U.S. response was 93%). Of further interest regarding third-parties, nearly 60% of respondents have "right to audit" clauses in contracts with third parties, but approximately 65% of respondents indicated that they have not exercised their "right to audit."

Even though facilitating payments are exempted under the FCPA (they are not under the U.K. Bribery Act or the OECD Convention) only 13% of U.S. respondents allow such payments (in 2008, 24% of U.S. respondents said they allowed such payments).

"More than 70% or respondents (73% in the U.K. and 70% in the U.S.) agreed there are places in the world where business cannot be done without engaging in bribery and corruption."

"To mitigate the risk of doing business in countries in which bribery and corruption is perceived to be endemic, respondents' favored strategy was to provide additional training (43% of UK and 49% of US respondents), with enhanced internal controls, more closely monitoring operations, conducting due diligence on third parties, and obtaining compliance certifications all following closely."

"An additional risk mitigation strategy - selected by 32% of U.K. and 25% of U.S. respondents - was to not do business in certain countries." The survey results do not breakdown this response in any detail, but it would be interesting to know which countries the 25% of U.S. respondents were not willing to do business in because of corruption concerns. My guess is that these countries are not high-growth, high-potential markets.

The KPMG survey was conducted via telephone between October-November 2010 and included 214 executives (106 in the U.S., 108 in the U.K.) who identified themselves as "one of the most senior persons in charge of day-to-day AB&C matters at their company."

KPMG Forensic assists "clients in achieving the highest levels of business integrity through the prevention, detection, and investigation of fraud and misconduct ...".

How Do Your Goods Get Out Of China?

2011-06-01T05:34:00.011-04:00

A few years ago, I would have read this recent New York Times article "Weak Link in an Export Chain" and not thought much of it.

But then in November 2010 there was a $236 million joint DOJ/SEC enforcement action involving numerous companies (one I have called CustomsGate). See here for a prior post of all the enforcement actions. The enforcement actions were mostly about use of freight forwarding and logistics services, expediting delivery of goods and equipment into a country, local processing fees, express courier services, and the like.

The New York Times article is about the trucking industry in China that takes goods from the factory floor to China's seaports. The article depicts a highly disorganized, inefficient ... and yes corrupt ... industry. According to the article, logistics firms usually hire small Chinese trucking companies and these companies routinely "pay bribes to ward off highway inspectors" and to "avoid heavy fines and transportation restrictions."

The article states as follows. "Corruption is also a major problem. Chinese truck drivers say highway and port inspectors routinely demand payoffs or bribes."

What does this have to do with "obtain or retain business?"

Point taken, yet this is the same question raised in connection with the CustomsGate enforcement actions as well. See here.

So the question remains - how do your goods get out China?

Bribery And The But-For World

2011-05-31T05:29:00.016-04:00

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

2011-05-27T05:45:00.008-04:00

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.

*****

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."

*****

A good weekend to all.

The Final Act In The BAE Circus?

2011-05-26T04:58:00.013-04:00

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!

2011-05-25T05:25:00.020-04:00

“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

2011-05-24T05:09:00.003-04:00

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

2011-05-23T05:26:00.008-04:00

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

2011-05-20T05:29:00.016-04:00

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"

2011-05-19T00:02:00.026-04:00

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."

*****

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

2011-05-18T00:02:00.006-04:00

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

2011-05-17T05:27:00.002-04:00

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.

*****

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

2011-05-16T05:28:00.006-04:00

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.

*****

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).

*****

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

2011-05-12T05:54:00.004-04:00

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.

Guilty Verdicts in Lindsey Case

2011-05-11T00:03:00.015-04:00

This past October, I asked (here) what will happen to Lindsey Manufacturing Company?

The company (a privately held manufacturer of electrical transmission towers and related products that employs approximately 100 individuals) was indicted along with its President, Keith Lindsey, and its Chief Financial Officer, Steven Lee. [Others outside the company were charged as well in connection with the case].

The case represented a rare instance of a criminal indictment of a company in the FCPA context.

Yesterday, after a five week trial in federal court in the C.D. of California, a jury returned guilty verdicts.

As noted in this DOJ release, Lindsey Manufacturing, Lindsey and Lee were convicted of one count of conspiracy to violate the FCPA and five counts of FCPA violations. The conduct at issue focused on commission payments made by Lindsey Manufacturing to Enrique and Angela Aguilar (directors of Grupo Internacional de Asesores S.A.) that "would be used to pay bribes to Mexican officials in exchange for [Comisión Federal de Electricidad (CFE), a state-owned utility company] awarding contracts to Lindsey Manufacturing." As noted in the DOJ release, Angela Aguilar was convicted of one count of money laundering conspiracy and the court entered a judgment of acquittal prior to the jury’s verdict on one substantive count of money laundering against her. Enrique Aguilar is currently a fugitive.

Sentencing for Lindsey Manufacturing, Lindsey and Lee is scheduled for Sept. 16, 2011. Angela Aguilar’s sentencing is scheduled for Aug. 12, 2011.

Reacting to the guilty verdicts, Assistant Attorney General Lanny Breuer stated as follows. "“Today’s guilty verdicts are an important milestone in our Foreign Corrupt Practices Act (FCPA) enforcement efforts. Lindsey Manufacturing is the first company to be tried and convicted on FCPA violations, but it will not be the last. Foreign corruption undermines the rule of law, stifling competition and the health of international markets and American businesses. As this prosecution shows, we are fiercely committed to bringing to justice all the players in these bribery schemes – the executives who conceive of the criminal plans, the people they use to pay the bribes, and the companies that knowingly allow these schemes to flourish. Bribery has real consequences.”

The Lindsey case attracted much interest as it was one of the "foreign official" challenges. See here for the full briefing and here for the written decision.

Prior to the jury verdicts, on Monday, Jan Handzlik (here - attorney for defendants Lindsey Manufacturing and Keith Lindsey) and Janet Levin (here - attorney for defendant Steve Lee) filed a motion to "Dismiss the Indictment with Prejudice due to Repeated and Intentional Government Misconduct." Handzlik is quoted in this story by Samuel Rubenfeld at the Wall Street Journal as saying "we continue to believe in our clients' innocence and will pursue our motion to dismiss the indictment on grounds of prosecutorial misconduct." A hearing on that motion is set for June 6. Aguilar's attorney, Stephen Larson (here) reportedly intends to seek a motion of acquittal as to the one charge his client was found guilty of.

Another case concerning alleged payments to CFE is pending in the Southern District of Texas against John Joseph O'Shea. See here for more.

So the question remains - what will happen to Lindsey Manufacturing?

As a small privately held company, Lindsey Manufacturing was able to aggressively mount a legal defense that publicly traded companies are unwilling, or some would say are logistically unable, to mount. Whether one agrees with certain of the judge's pre-trial rulings or not, or whether one finds arguments about prosecutorial misconduct persuasive or not, the fact is, the Lindsey case, unlike the majority of FCPA enforcement actions, was subject to an adversary proceeding in which someone other than the enforcement agencies weighed in on the issues - and that is a good thing!

Oral Argument in Carson "Foreign Official" Challenge

2011-05-10T06:11:00.007-04:00

Jaime Guerrero (Foley & Lardner - here) provides a first-hand account of yesterday's oral arguments in the Carson "foreign official" challenge.

See here for a prior post, including links to the briefs.

*****

On Monday afternoon, May 9, 2011, United States District Judge James V. Selna heard oral arguments on defendants’ motion to dismiss the indictment on the “foreign official” issue in the Carson case in the Central District of California. In their moving papers, the defendants made three separate arguments in support of their motion to dismiss Counts One through Ten of the Indictment. Specifically, the defendants argued that: first, as a matter of statutory interpretation, employees of the state-owned companies identified in the indictment fall beyond the scope of the FCPA’s definition of “foreign official;” second, to the extent there is an ambiguity in the statute, the rule of lenity mandates that the motion be resolved in defendants’ favor; and third, to the extent the FCPA could be construed to proscribe payments made or promised to employees of state-owned companies, the statute is unconstitutionally vague as applied to defendants.

During the hearing, counsel for the defendants focused the majority of their arguments on the FCPA’s purported lack of definition for “instrumentality” within the term “foreign official.” Defendants noted that Congress did not define “instrumentality” within the statute and that the government’s position created a definition that was unworkable and overbroad. Moreover, the defendants argued that it was impractical to wait for the trial to decide the factors that the jury would consider to determine whether the employees of state-owned companies were “foreign officials.” The defendants also argued that the Supreme Court’s recent decision in Skilling v. United States, 561 U.S. ___, 130 S. Ct. 2896, 2933 (2010), was the proper framework for deciding the FCPA “foreign official” challenge. Thereafter, the defendants argued that the FCPA statute was “vague as applied,” as there was no way for the individual defendants to have done anything more to determine if a state-owned entity was an “instrumentality.” The defendants argued that there was no rhyme or reason to the government’s determination of whether a state-owned entity was an “instrumentality,” and, as such, the statute was vague. Finally, the defendants argued that the rule of lenity mandated that the Court dismiss the indictment, as the statute was unconstitutionally ambiguous and that, if it was a tie between the government’s position and the defendants’ position, that the tie should go to the defendants.

The government responded first by noting that the defendants’ ignored the standards the Court had to apply when deciding a motion to dismiss the indictment, as the issues presented in the motion raised factual issues that had to be resolved by a jury. Citing Hagner v. United States, 285 U.S. 427 (1932), the government argued that because there were factual issues outstanding related to whether the state-owned entities were “instrumentalities,” the Court could not grant the motion to dismiss. The government also argued that the statute was not void for vagueness, as the statute’s mens rea or scienter requirement served to defeat the defendants’ claim that they did not know what they were doing was wrong. In particular, however, the government noted that the statute did not require a specific intent, but instead the government need only prove that the defendants knew that what they were doing was wrong.

District Judge Selna permitted the parties to argue their respective positions, interjecting on few occasions. During the defendants’ arguments that the definition of “instrumentality” in the Foreign Sovereign Immunities Act (FSIA) could not be used as a reference point, or definition, for “instrumentality” in the FCPA statute, District Judge Selna asked whether the Court could infer whether Congress intended for the term “instrumentality” to have the same definition in the FCPA as the FSIA. District Judge Selna also inquired whether a finding that a state-owned entity was an “instrumentality” was self-evident, as the nature of the entity would be before the jury.

Ultimately, after hearing all arguments on defendants’ motion to dismiss, District Judge Selna took the motion under submission and reserved a final ruling on the motion for a later date.

All About Monitors

2011-05-09T05:25:00.003-04:00

If you ever have had a question about monitors in the FCPA enforcement context, chances are it is addressed in "Somebody's Watching Me: FCPA Monitorships and How They Can Work Better." (See here).

Authored by Gibson Dunn & Crutcher attorneys Joseph Warin (here), Michael Diamant (here), and Veronica Root (here), the article was recently published in the University of Pennsylvania Journal of Business.

Below is an abstract.

"This article explores the rise of the corporate compliance monitor as a condition for settling violations of the U.S. Foreign Corrupt Practices Act (“FCPA”)—a setting in which federal prosecutors routinely impose monitors. From 2004 to 2010, more than 40 percent of all companies that resolved an FCPA investigation with the U.S. Department of Justice (“DOJ”) or Securities and Exchange Commission (“SEC”) through a settlement or plea agreement retained an independent compliance monitor as a condition of that agreement."

"If U.S. enforcement authorities maintain their current approach, the reality is that companies facing liability for violating the FCPA are likely to have a monitor imposed on them as part of a settlement agreement. From the U.S. government’s perspective, monitorships make sense for companies that violate anti-bribery laws, making it important for offending corporations to learn how to deal with monitors. Pulling from the authors’ extensive experience with three major FCPA compliance monitorships, as well as their work assisting clients operating under an FCPA monitorship, this article aids in that process. It also hopes to help monitors themselves, as well as the prosecutors who appoint them, in making the monitorship a more constructive feature of an FCPA settlement."

"Part I provides some basic background on the FCPA and discusses the use of compliance monitors as a term in settlement agreements with federal regulators. Part II examines why some companies receive a monitor as a term of an FCPA settlement, while others do not. Part III discusses what FCPA monitorships most commonly entail. Part IV identifies best practices for FCPA compliance monitors: what they should and should not do in their quest to help mold an ethical organization. Finally, Part V advises how companies can utilize their role in the selection, retention, and management of the monitor to help make the process anodyne and the results valuable for the organization."

For more on monitors, see here, here, and here (discussing a November 2009 GAO report) for certain prior posts.

Recent DOJ Statements At Issue In Carson "Foreign Official" Challenge

2011-05-06T00:07:00.007-04:00

On Tuesday, Nathaniel Edmonds (Assistant Chief, DOJ Fraud Section who is specifically involved in the Carson "foreign official" challenge) participated in a webcast sponsored by the Conference Board titled "Enforcement of The Foreign Corrupt Practices Act: A Dialogue with Regulators" (see here).

According to a May 4th article authored by Christopher Matthews and published on the Just Anti-Corruption page of the website Main Justice, during the webcast Edmonds "warned defendants facing charges under the foreign bribery law against contesting that definition."

The article states as follows.

[“It’s not necessarily the wisest move for a company,” Assistant Chief Nathaniel Edmonds said Tuesday during a webcast on the FCPA sponsored by The Conference Board. Edmonds reiterated the Justice Department’s belief that employees of state-owned or controlled companies can be considered foreign officials under the FCPA, which prohibits bribes to foreign officials to obtain or retain business. “Quibbling over the percentage ownership or control of a company is not going to be particularly helpful as a defense,” Edmonds said.]

Yesterday, in a supplement to its reply brief (here) the Carson defendants brought the article to the attention of the court and stated as follows.

"Defendants respectfully submit that Mr. Edmonds’ comments supplement at
least two important points made in Defendants’ Motion and Reply. First, there is a reason the Government’s maximalist position on the definition of “foreign official” has avoided serious judicial scrutiny for so long, and the reason is that individuals and companies are reluctant to challenge the Government’s interpretation for fear of the consequences. Second, the Government does not have a definition of “instrumentality” that can withstand judicial scrutiny because, among other things, it is unable to say what would make one state-owned enterprise, but not another, an “instrumentality” under the FCPA."