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Armor Holdings Resolves Enforcement Action / BAE Avoids Successor Liability

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

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

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

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

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

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?

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

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

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

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

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.”